E New Global Reserve Currency?

Politicians and investors regularly claim that “this time it’s different”. But history shows us repeatedly that rarely things are truly or fundamentally different. The power of the Roman Empire two thousand years ago was established by military means. Over time, its government undermined that empire by continuing military campaigns and lavish spending. This ultimately required that their money, the silver Denarius coin, be diluted with other metals which brought its purchasing value down. This in turn reduced people’s trust in the empire’s money and eventually brought the empire into decline. Since then, this history has been repeated many times – only the name of the country and its currency have changed. It is a lesson which neither kings nor politicians have been willing or able to learn – to this day. And this time it is no different.

Starting in the 15th century, Portugal, geographically bounded by the Atlantic Ocean rapidly developed shipbuilding and maritime exploration. Discovering new lands (Brazil) and routes for the spice trade (India) and other commodities (Africa), and by expanding military incursions into Asia, their empire flourished as one of the world’s major economic, military, and political powers. When its king died in battle in Morocco, King Phillip of Spain seized the Portuguese crown, and Portugal was subject to military adventures from the Netherlands, France, and England – who were hostile competitors to Spain.  Unable to protect its lands and a vast global network of trading posts, its empire started a long and gradual decline.  

This little sketchy outline of Portugal’s rise and fall as a world power could be a template for its successors. Their history demonstrates that this time it is no different as subsequent world powers arise from military power and decline from continuing military campaigns and expenditures that no country can long sustain.  

The following chart shows the era during which a particular country had the leading empire of the world. It is likely that the Spanish empire lasted longer than the average because of their discovery of real money (gold and silver) used for jewelry or as artifacts by the indigenous people in South America (which the Spanish pillaged), and the British Empire lasted longer because of their discovery of a new kind of money through a fractional reserve paper currency system in banking. The United States advanced the British monetary system by eliminating any gold backing to that currency by reducing the fractional reserve percentage to zero. 

This is an important chart, which includes the actual length of an empire where their money served as a reserve currency. We can see that just by looking at the average length of time for the supremacy of an empire, one could conclude that the United States should be near the end of its dominance. Of course, there is much more fundamental evidence that such a transition should be happening. Since its ascension to global eminence, the United States has been almost constantly involved in wars, the cost of which has bankrupted every previous empire.  

For example, according to a study by Watson Institute of International and Public Affairs at Brown University, U.S. wars in Iraq, Afghanistan, Syria, and Pakistan have cost $5.9 trillion since they began in 2001. So, what exactly have these wars accomplished? In addition, America maintains over seven hundred military bases globally that are expensive. By comparison, annual taxes collected in 2019 were $3.5 trillion. We can see that America has practiced a modern version of “clipping coins” - by emitting currency with the attendant growth in national debt currently at $27.9 trillion (which excludes the current additional $1.9 trillion program proposed by President Biden), all at rates not supported by collected taxes. This empire, like all the others before it, is substantially overextended, and like its predecessors, it is ready for a successor.  

The Triffin Dilemma

Since the end of WWII, the dollar has been the global reserve currency of the world. For a country to have its fiat money to become accepted as a global reserve currency – quite logically it must emit enough of that money to service the trade requirements of the world. Over years, the United States has emitted trillions of dollars in order to satisfy global trading and financing needs.  

A monetary dilemma was first postulated by economist Robert Triffin when in 1960 he testified in Congress stating that because debt is the basis of currency creation, and since money for international trade requirements could only be produced by the issuance of debt, the United States as the possessor of that global reserve currency would become the world’s largest issuer of debt. His conjecture has been proven as the U.S. has become the largest debtor in the history of the world. Yet despite the record volume of dollars held by foreign central banks, there still appears to be a shortage of dollars – a foreign liquidity shortage. To be the global reserve currency does require an astronomical mountain of debt and currency issuance. This acceleration in the growth of debt, and therefore also money supply, is depicted in the table below. Note the persistent acceleration in debt since 1996.

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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and ...

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William K. 1 month ago Member's comment

Quite interesting, and as an American firmly invested in America, it is also rather depressing.

I have spent some time in China and paid attention to the people, and certainly it will become a huge world power, unless some incredible calamity arises. And there is no possible way that the USA can prevent it, unless somehow all of the factory workers can be unionized and all of the youth can have their attention span reduced to less than two heartbeats, like so much of our younger folks.

Based on this reality it does seem that our government should place far more value on not starting any fights with China.

Certainly the assertion that "there is no entity so grand and successful that mismanagement can not destroy it" is correct, as history has demonstrated. And that more current statement that "You Can't Fix Stupid" may also be shown to be accurate.