💀 What if the Dollar Was Dead?
Last week we talked about a possible end to the dollar-backed economic system. This week we're looking at who or what might replace this.
We ended last week on a huge cliffhanger.
What if the dollar was no longer the currency that ran the world?
What if the world returned to the gold standard?
And today we're finally answering these questions.
The Dollar Problem
But why did we start asking these questions?
For two reasons:
Firstly, Russia's central bank fixed a buying price for gold, which could be a step toward the Gold standard (you can read all about Russia's move here and all about what the Gold standard is here).
Secondly, because of the declining faith of countries in the US dollar, which has been the dominant global currency since 1944 (here's how that happened).
And faith, my friend, is everything.
It is what makes gold a safe haven, a must-have-in-your-portfolio kind of asset.
It is what takes a meme coin like Dogecoin, which has no intrinsic value, to crazy highs.
It is what moves the stock market.
Yes, it is our faith that adds value to these commodities.
And if the world no longer has faith in the dollar, well, the dollar will be worthless.
But why are countries losing faith in something that has been a constant in the world economy for so long?
According to the IMF, the sanctions that the has been issuing on Afghanistan, Iran, and now Russia, have made the rest of the world fearful.
These sanctions basically froze these countries' dollar reserves stored in foreign banks, making them useless.
Other countries now fear that the US could do the same to them at any time. That the money they have amassed so painstakingly could be worth nothing.
So, dollar reserves held by countries (the number of dollars a country has) have declined from 70% in the 1990s to 59%: a 25 year low.
And that's not all. The US' tendency to print more and more money and constantly increase its debt, could lead to fluctuations in the dollar, making it a poor long-term store of value.
Huh?
Well, a commodity is considered a store of value if it remains stable and useful over a long period of time. This is why gold is considered a good store of value.
What's worse, the US' economic growth has slowed down since 2001. Though 2021 was a blockbuster year for the economy, 2022 is probably not going to be that good, with the predictions of a recession floating around.
Even after all those troubles, it will take something very serious to shake up the current world order, to make countries denounce the USD.
But if it does happen…
Kaun Banega Next Global Currency?
Gold: Yes, we could go back to reliable old gold. How? By linking the currency of each country to its gold reserves. This could stabilise the entire world economy and lead to much lower long-term inflation rates. According to a 1998 study by economist Stephen Harmston, gold's purchasing power has remained mostly the same since 562 BC. One ounce of gold could buy 350 loaves of bread in 562 BC and also in 1998. Its purchasing power remained the same for so long (at least where bread was concerned).
That's not all. Central banks won't be able to print money as and when they want. They will only be able to print money equivalent to their gold reserves. So, with no extra money chasing goods and services, we can say goodbye to hyperinflation.
And if we did go back to the gold standard, India would be one of the richest economies in the world. After all, we have the 13th largest gold reserves.
As you can see from our survey, most people favour gold as the next global currency.
But there is a reason we left the Gold standard behind. Gold can't be mined too fast. And a growing economy needs a steady supply of money. If we cannot ensure that then our economic growth will slow down. Also, countries like India and China have very little gold reserves, so even though it would make us some of the richest countries it would limit our economic growth in the long run.
Yuan or digital yuan: One of the currencies that most countries picked up while dumping the dollar is China's yuan. The country, which is one of the US' biggest nemeses, now wants its currency to rule the world. So, it has been pushing for the adoption of the yuan, even giving out major loans to developing countries to build their infrastructure. What's more, it has also been in talks with Saudi Arabia to price oil in yuan. If that happens, the dollar's importance will go way down, with the yuan becoming the new “it” thing.
Also, China has been developing its very own central bank digital currency (a centralised cryptocurrency) for years now. It is one of the most advanced CBDCs out there. So, if the world decides it wants its new reserve currency to be digital, the yuan still has a major shot.
But the problem is that yuan only makes up 2.5% of global foreign exchange reserves. This is because of China's earlier policy of tightly controlling the currency.
Bitcoin: Talking of a digital future, Bitcoin is also a serious contender for the global currency. It is decentralised, meaning no one country can control it. It is limited in number, which means no unlimited printing or hyperinflation (here’s our detailed write-up on inflation). And it is blockchain-based, giving transparency to all transactions.
But so far the coin has been super volatile. Very few countries have accepted it and that too begrudgingly. Though the coin may have won the people's favour, it will probably take a long time to win over our policymakers and economists.
Other worthy contenders include the Euro (the second-most traded currency), the Japanese yen (the third-most traded currency), and the British pound ( the fourth-most traded currency).
Another potential contender that the world is yet to see is a global stablecoin: one coin to rule them all. This has the potential to transform not just our payments system but in fact our entire financial system. We could completely do away with intermediary banks and just connect directly to the central bank of each country. No more bank frauds, no more worrying whether your money is safe.
However, despite there being so many strong contenders, the dollar probably won't be fizzling out any time soon. Yes, people's faith in the currency is shaking but the US is still the world's largest economy and holds immense influence.
Let us know which currency you think has the potential to be the next global reserve currency.
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