Reserve Status and Long-Term Currency Concerns

The US dollar has been tumbling for the past six-years; down about 40%. For ten-times as long, six-decades, the US dollar has been the reserve currency for the world. While this may not change dramatically any time soon, the change is already underway and the consequences spell dire forecasts for the US economy.

The short-term pains already felt by Americans as a result of the low dollar have topped headlines for some time already. Exporters are suffering. Interest rates have fallen quickly to help avoid an inevitable recession causing further devaluation. This pales in comparison to what would happen if the US dollar is no longer seen as a store of wealth by our trading partners.

Here's a great quote from this bloomberg article I just read:

Official reserves equal 33 percent of global imports, according to UBS AG. If a company in country A trades with a company in country B and the transaction is invoiced and settled in the currency of country C, that third currency will have reserve status. That's because both companies are likely to keep cash balances in that currency.

The US has had the privilege of being country C for the better part of the last century and has, as a result, enjoyed what amounts to an interest-free loan from the countries that trusted the greenback as their safety net. As countries begin to trade (i.e. sell) their US dollars for better stores of wealth, there will be even greater downward pressure on the currency - just like any other commodity demand and supply market. This spells greater future pain for the American economy.

As other currencies take the place of the US dollar as the most desired reserve currency, Americans will be asked to pay for foreign goods in those other currencies more often. This means greater transaction costs and higher prices. Similarly, as fewer investors want to hold the greenback, interest rates will need to rise to make the dollar more attractive; this results in higher borrowing costs and further slowing of economic growth. So what do we do about it?

It's quite simple actually. Americans need to start living within their means. Americans need to borrow less and save more. When this new thinking begins to sink-in among the populous, then fewer dollars will need to flow across the nation's borders. As this occurs, Americans will be less dependent on foreign financing of their spending and the currency will begin to regain some of the value its already lost. I said it was simple, not easy...