There are tangible and intangible benefits to a country whose currency serves as a reserve currency. In addition to the prestige conferred by this status, it also means access to cheap financing in the country’s domestic currency and the benefit of seigniorage revenue—the difference between the purchasing power of money and the cost of producing it—which can be extracted from both domestic and foreign holders of the currency.
Other major advanced economies either have much smaller financial markets or, as in the case of Europe and Japan, have relatively weak long-term growth prospects and already high levels of public debt. As a result these currencies are unlikely to return to their former glory anytime soon. But because of the benefits that have accrued to the dollar from its reserve currency status, there should, in principle, be new competitors seeking a share of those benefits.
One putative competitor to the dollar, which has been the subject of considerable attention, is the Chinese renminbi. China’s economy is the second biggest in the world and is on track to become the largest over the next decade. The Chinese government is taking many steps to promote the use of the renminbi in international financial and trade transactions. These steps are fast gaining traction given the economy’s sheer size and prowess in international trade. As restrictions on cross-border capital mobility are removed and the currency becomes freely convertible, the renminbi will also become a viable reserve currency.
However, the limited financial market development and structure of political and legal institutions in China make it unlikely that the renminbi will become a major reserve asset that foreign investors, including other central banks, turn to for safekeeping of their funds. At best, the renminbi will erode but not significantly challenge the dollar’s preeminent status. No other emerging market economies are in a position to have their currencies ascend to reserve status, let alone challenge the dollar.
Of course, the dollar’s dominance as a store of value does not necessarily translate to continued dominance in other aspects. The dollar’s roles as a medium of exchange and unit of account are likely to erode over time. Financial market and technological developments that make it easier to conduct cross-border financial transactions using other currencies are reducing the need for the dollar. China has signed bilateral agreements with a number of its major trading partners to settle trade transactions in their own currencies. Similarly, there is no good reason why contracts for certain commodities, such as oil, should continue to be denominated and settled only in dollars.
By contrast, because financial assets denominated in U.S. dollars, especially U.S. government securities, remain the preferred destination for investors interested in the safekeeping of their investments, the dollar’s position as the predominant store of value in the world is secure for the foreseeable future.
Why the Name of This Blog?
The whole land is in desolation…there is mourning everywhere–all because the the Fisher King is wounded. (1)
Parsifal stumbles upon the Fisher King but stays quiet and misses his first opportunity. His mom or his mentor had told him: “don’t ask too many questions.”
After being raked over the coals by the “hideous damsel”, whacking his way through forests for forty years, and berated by the Hermit, Parsifal again finds the castle of the King. This time he’s got enough experience, courage and wisdom to ask a question: “Uncle, what ails Thee?” (2) In some versions, “Whom does the Grail serve?”
I can identify. I once served in a war that I didn’t believe in and did so because I was partially ignorant and also fearful of rejection by family and society.
1)Our land and rulers are wounded. Many activists are strong on this point.
2)Each of us carries the wound, too. Many spiritual and psychological folks are strong on this point.
3)It’s the approach of this weblog, following the guidance of Erich Fromm, R.D.Laing,M.L.King, Thich Nhat Hanh,Starhawk, David Edwards, and others, that “liberation”, whether individual or societal, needs work on both fronts.
Finally, not irrelevant, Parsifal, a Christian knight, has a Muslim brother, Feirefiz, whom he does not know.
(1)Johnson, Robert. He. Religious Publ. Co., 1974, p. 8.
(2)Campbell, Joseph. Creative Mythology. Viking Press, 1968, p. 561.