Q&A of the Day – What Happens if China’s Yuan Replaces the US Dollar?
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Today’s Entry: @brianmuddradio What would the impact be to us if China’s currency replaces the US Dollar as the top currency?
Bottom Line: Nothing good. That’s the shortest answer. As for the getting to the not good result... That requires taking a couple of steps back to talk about what the US Dollar represents around the world, what China is actively doing to attempt to replace it, and then what the real-world implications would be. So, let’s get to it.
The US Dollar is the world’s Reserve Currency. What does that mean? How did it happen? This is an official economic declaration which was ratified by what was known as The Bretton Woods Agreement during World War II. Preceding this accord across 44 Allied countries during the second world war, gold was the reserve currency around the world. However, the limited quantity available, and the need for countries to focus on the war effort independent of mining efforts, created a need for a more efficient payment system to prevent commodity shortages during the war. Upon the conclusion of the second world war, with the Allies victorious and the United States emerging as the world’s leading superpower, all countries, including those not allied during the war were compelled to recognize the supremacy of the US Dollar as the world’s new reserve currency. So that’s the back story as to how we got here. As for what it means...
The US Dollar, as the world’s Reserve Currency, results in any commodity that’s purchased by wholesalers, anywhere in the world, is purchased in US Dollars. The term for this is US Dollar denominated. The implications for us are significant...especially given our spending habits personally and as a country. Commodity prices from eggs to oil are already highly volatile as we’re all very well aware. But then imagine adding a whole other layer of volatility to the commodities we purchase. If the US Dollar is no longer the standard, Dollars would have to be converted into the new reserve currency, meaning that the Dollars’ relative strength would be paramount in determining the cost of goods. An easy real-world example of this, that many are familiar with, is with foreign travel. If you travel to Canada or Mexico, you’re aware the Dollar goes further because their currencies are much weaker. If you travel to Europe, you’re aware your dollar doesn’t go as far making it much more expensive to buy the same stuff as in the states. What we would be looking at is the latter.
Due to our spending habits in this country, and thus all of the debt spending and money printing (or digitizing of new currency as the case often happens to be), it’s not just the British Pound and Euro the Dollar is weaker against. There are currently nine currencies which are stronger than ours, and if China’s Yuan became the reserve that’d almost certainly be the case with the Yuan as well. In other words, the cost of everyday life would become even more expensive – permanently. But that’s just half of the cost consideration. Because the US Dollar is the Reserve Currency, US debt has been the go to standard for sovereign governments around the world. We heavily rely on foreign governments buying our debt to finance our relentless spending, which now far exceeds the total annual output of our country’s economy. You’ve likely heard that the US is nearly $32 trillion in debt. Well, nearly $14 trillion of the debt is held in US Treasury’s purchased by foreign governments. That’s 44%.
If the US Dollar were no longer the standard, it’s a given US debt would no longer be as attractive to foreign governments. If that were to happen, you could potentially see a crashing of the value of the US Dollar along with the necessity to dramatically cut federal spending. The bottom line would be a devastating impact to US stability and the economy. The implications of the decoupling of the US Dollar would obviously have significant implications regardless, however given how levered our country and economy are to endless mountains of rising debt, the impact would most likely be catastrophic. It’s that big of a deal. And of course, wouldn’t China just love to bring us to our knees while simultaneously taking our place on top, benefitting from our demise. So that’s what we’re up against.