Those that despise the U.S. around the world wish nothing more than the demise of our natural monopoly on the numeraire, and its place as trade reserve extraordinaire. Dollar denominated global transactions account for roughly 60 percent of reserves, with the euro falling a distant second at 20 percent of reserves, dwindling down to a few rubbles and yuan from there.
In addition to control, bragging rights, and utter financial dominance, the U.S. can use the greenback to levy sanctions against those that don’t play fair on the international stage. Iran would be an academy award winner here. The U.S. pulling out of the Obama friendly 2015 nuclear-weapons deal was the genesis of the end-run around the dollar.
The rhetoric being thrown around the White House and Beijing now makes it difficult to determine what actually is controlling the domestic and international markets. Regardless, at this point in the game, the international world relies on the dollar. “Trading in dollars is much less expensive and more convenient than using other currencies,” says Craig Pirrong, a University of Houston professor who studies payment systems.
But one feels there is much more to it than transaction costs. Europe couldn’t stop kissing the feet of Obama for putting together the Iranian nuclear deal. The lemmings of the U.K., Germany and France are now concerned with Iranian threats and ultimatums regarding nukes. That really sucks for them. Perhaps they can lean on their new open-borders immigrant base to solve the dilemma.
Attempting to gain advantage in international markets by devaluing your currency is ostensibly a zero-sum game. The Trump administration continues to pound on the Chinese for this. Hence, Trump has put unrelenting force on Powell and the Fed to lower rates, effecting making aggregate demand the same on both sides. Most experts and scholars agree that for the time being, the world cannot live without the dollar’s dominance. “The rest of the world can’t do without the U.S. dollar,” says Daniel Drezner, a Tufts University professor who used to advise the U.S. Treasury. Here’s the deal in a nutshell.
It can be summed up in one word. Stability. The euro is handcuffed by turmoil with Brexit and other issues as sovereign debt and massive illegal immigration. I’ll pass on the euro, thank you. No one outside a one hundred mile radius of China would be insane enough to consider the yuan as a global reserve. The end will be near when the U.S. Treasury is holding yuan in reserves. As every major player on the global stage holds dollars in reserve, it is in their interest to allow for stability.
Circumventers and alternatives will always be present, from Europe’s Instex system to Facebook’s asset-backed cryptocurrency. And you thought cryptos were dead? Only time will tell. Succinctly put by Marc Chandler, political economist and NYU professor, “There cannot be a compelling alternative to the dollar until there is a compelling alternative to the US Treasury market. Europe may fiddle around the edges, but it is not anywhere close to a bond market that can rival the US. Russia and China are even further behind. ”
As for national end-arounds, it is highly unlikely for all the reasons stated. At the end of the day, if a comrade offers you a ruble, a yuan, or a dollar, which one are you going to take?