The most important emerging nations are abandoning the dollar, slowly but surely. The next international reserve currency will be bitcoin.
Greenback
The dollar has been the world’s primary means of exchange since the end of World War II.
It is the international reserve currency par excellence.
A reserve currency is a foreign currency that a central bank holds as part of its country’s official foreign exchange reserves. The dollar represents the majority since it predominates in international trade.
Central banks generally hold their reserves in the form of government bonds. US Treasury bonds in the case of the dollar. U.S. debt is by far the largest and most liquid bond market in the world. Its size assures nations that they will be able to access their money at any time.
The International Monetary Fund recognizes eight major reserve currencies. The Canadian and Australian American dollars, the pound sterling, the Chinese yuan, the euro, the Japanese yen and the Swiss franc. The US dollar represents 59% of global foreign exchange reserves.
China has the largest foreign exchange reserves with the equivalent of more than 3 trillion dollars. The exact composition of these reserves is confidential information. However, we know that the Middle Kingdom holds approximately $800 billion in American public debt.
We also know that Beijing is gradually reducing its dollar reserves. The latter went from 59% of the total in 2016 to 25% in 2023. They represent 10% of the total dollar reserves held by central banks around the world.
China is the second largest holder of American public debt after Japan. India, Russia, Saudi Arabia, Switzerland and Taiwan also have large reserves, as do all major exporting countries.
How did the dollar become the world’s reserve currency?
The dollar came into its own following the Second World War. The key event was the Bretton Woods conference of 1944 at which forty-four countries created the IMF and the World Bank.
We choose a system of fixed exchange rates. Each country had to peg the value of its currency to the dollar which was convertible into gold at the rate of $35 per ounce. This was a safeguard so that the United States would not take advantage of it to finance its imports with its printing money.
The threat was carried out in the 1960s when European countries began converting their greenbacks into gold. For two reasons. The first is that at that time, the gold of Fort Knox was already no longer sufficient to cover the dollars in circulation abroad.
The second is less told. The old continent knew that peak oil in the United States was imminent. It was predicted in 1956 by the geophysicist Marion King Hubbert for 1970. The event actually took place in 1971.
It was therefore written in advance that the United States would begin to import large quantities of oil which would inevitably worsen their trade deficit.
It is no coincidence that President Richard Nixon suspended the convertibility of the dollar into gold in 1971, the year of peak American oil. The order of things would then have been that gold would once again become the international reserve currency par excellence. This was obviously not the case.
Another little-told story is that Washington forced Saudi Arabia (and all of OPEC) to sell its oil exclusively in dollars. A dirty story…
Oil being the lifeblood of the economy of any industrialized nation, European countries had no choice but to continue using the imperial currency. And There you go..
Other factors caused American debt to become the international reserve currency. The size of the American economy and the geopolitical weight of Washington are certainly not unrelated.
“US Treasuries can be considered the world’s premier reserve asset”explains Brad W. Setser in a recent paper from the American think tank Council of Foreign Relations (CFR). “It is difficult to compete with the dollar if we do not have a market similar to that of Treasury bills ($22.5 trillion). »
What are the advantages of “exorbitant privilege”?
The status of main reserve currency was described as an “exorbitant privilege” by President Valéry Giscard d’Estaing.
This privilege is due to the fact that the United States is the only nation in the world that can run a chronic and abysmal trade deficit without its currency collapsing. For what ? Because rather than converting their dollars into their own currency, countries with trade surpluses place them in American debt.
Some would argue that nations are free to sell the US debt they hold. But go tell that to the Russians, the Iraqis, Iran or the Afghans. The United States disconnected Russia from the SWIFT network and “frozen” $300 billion that the Russian central bank kept in reserve.
Who is next on the list? China ? Emerging economies have received the message and are now seeking to get rid of the dollar. “Dedollarization” is clearly underway.
For example, the yuan has become the most traded currency in Russia. All BRICS countries now have a strategy of trading in their own currencies. It is even rumored that a return to the gold standard is in the cards.
“The dollar is finished as the world’s reserve currency”said financial markets veteran Dick Bove at NY Times this week.
President Putin, interviewed by Carlson Tucker, declared:
“The world understands very well that no matter how many dollars are printed, they are quickly dispersed throughout the world. [Il en résulte] minimal inflation in the United States. […]
But look at what is happening in the world. Even US allies are reducing their dollar reserves. The fact that the United States is sanctioning certain countries through restrictions on transactions, freezing of foreign exchange reserves, etc., raises serious concerns and sends a signal to the entire world. Everyone starts looking for ways to protect themselves. […]
Other countries, including oil producers, are already considering and agreeing to sell their oil in yuan. Do you realize what is happening? »
Bye Bye Dollar, Welcome Bitcoin
More than 20% of oil is traded in currencies other than the US dollar. A figure expected to increase given that the BRICS control 45% of the world’s oil reserves following the arrival of Iran, Saudi Arabia and the United Arab Emirates. Knowing that Russia – which chairs the BRICS club in 2024 – has reaffirmed its objective of dedollarization.
However, the alternatives are not legion. The euro is the second most used reserve currency. It represents around 20% of global foreign exchange reserves. Europe has all the assets to compete with the United States on a monetary level. Unfortunately, our vassalization is such that we refused the Russian offer to pay our gas bills in euros. We even sell Airbus in dollars…
The yuan? China is trying to use it more and more in bilateral trade. However, “China has neither the intention nor the capacity to dethrone the dollar,” according to Zongyuan Zoe Liu, a member of the CFR.
There remains gold, which China and Russia have been accumulating without counting for years. This trend bodes very well for bitcoin, which is gold, but better. For two main reasons:
-The quantity of bitcoin is capped at 21 million units. Conversely, the quantity of gold that comes out of the ground continues to increase year after year. This distinction is crucial!
-Gold is very expensive to move. Bitcoin is a currency as well as an international payment system. Two in one. It is possible to instantly send the equivalent of tens of billions of dollars for a few tens of cents in transaction fees to the four corners of the world.
Sooner or later, Russia, China, Saudi Arabia and others will realize that bitcoin is the stateless, uncensorable, anti-inflationary currency they have always hoped for. Not the Barbarian Relic. Hodl!
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