The U.S. Dollar is losing its reserve currency status
The U.S. dollar is under attack! Some European central bank officials are bad-mouthing it. Russia is trashing it. The Chinese are selling it. What gives?
Simple. The demand keeps waning and the supply keeps growing. And according to Econ 101, when demand falls and supply grows, prices go down. Not wonder the world is shunning the dollar. But wait, the dollar is not like some products we study in microeconomics, such as milk or widgets, so why should the law of supply and demand apply here. After all, a dollar is a dollar… isn’t it?
A dollar is indeed a dollar, but the actual value of that dollar can change over time by two different measures: Versus another currency (spot rate), or versus itself (inflation erodes purchasing power).
Value Erosion versus Another Currency: Hypothetically, let’s say that 2 British pounds now get you a Big Mac, which require 3 U.S. dollars. One year later 1 pound gets you the same Big Mac, which still requires 3 dollars. The dollar just lost value against the pound. To a U.S. dollar-denominated asset holder/investor, the dollar is still worth as much as before… until you talk to your friends in the U.K., and then you realize that you’ve been left behind. Holding pound-denominated assets/investments would have served you better.
Value Erosion by Inflation: In a different scenario, the same Big Mac that used to cost either 2 pounds or 3 dollars a year ago now cost either 4 pounds or 6 dollars. Guess what, you and your U.K. friends have both been scr… pardon me... short-changed by inflation, or the devaluation over time of paper (fiat) currencies. Neither the pound nor the dollar had been a good investment; the Big Mac had been the better store of value, assuming that burger was properly preserved.
So, a currency that goes down in value over time versus either other currencies or versus its prior self is a bad currency to hold. Given the fact that the dollar has declined to a multi-year low versus the Canadian dollar, the yen, the Malaysian ringgit, Brazil real…. and is at an all-time low versus the Swiss franc and Singapore dollar… a vicious cycle in that new lows begets new lows. Is it any wonder that investors are diversifying away from dollar-denominated assets?
While inflation appears to be rather tame in the U.S. right now, U.S. government’s dollar printing, a.k.a. quantitative easing, floods the world with supply of new crisp dollars, figuratively speaking, debasing the dollar and heightening the probabilities of future inflation.
Simple. The demand keeps waning and the supply keeps growing. And according to Econ 101, when demand falls and supply grows, prices go down. Not wonder the world is shunning the dollar. But wait, the dollar is not like some products we study in microeconomics, such as milk or widgets, so why should the law of supply and demand apply here. After all, a dollar is a dollar… isn’t it?
A dollar is indeed a dollar, but the actual value of that dollar can change over time by two different measures: Versus another currency (spot rate), or versus itself (inflation erodes purchasing power).
Value Erosion versus Another Currency: Hypothetically, let’s say that 2 British pounds now get you a Big Mac, which require 3 U.S. dollars. One year later 1 pound gets you the same Big Mac, which still requires 3 dollars. The dollar just lost value against the pound. To a U.S. dollar-denominated asset holder/investor, the dollar is still worth as much as before… until you talk to your friends in the U.K., and then you realize that you’ve been left behind. Holding pound-denominated assets/investments would have served you better.
Value Erosion by Inflation: In a different scenario, the same Big Mac that used to cost either 2 pounds or 3 dollars a year ago now cost either 4 pounds or 6 dollars. Guess what, you and your U.K. friends have both been scr… pardon me... short-changed by inflation, or the devaluation over time of paper (fiat) currencies. Neither the pound nor the dollar had been a good investment; the Big Mac had been the better store of value, assuming that burger was properly preserved.
So, a currency that goes down in value over time versus either other currencies or versus its prior self is a bad currency to hold. Given the fact that the dollar has declined to a multi-year low versus the Canadian dollar, the yen, the Malaysian ringgit, Brazil real…. and is at an all-time low versus the Swiss franc and Singapore dollar… a vicious cycle in that new lows begets new lows. Is it any wonder that investors are diversifying away from dollar-denominated assets?
While inflation appears to be rather tame in the U.S. right now, U.S. government’s dollar printing, a.k.a. quantitative easing, floods the world with supply of new crisp dollars, figuratively speaking, debasing the dollar and heightening the probabilities of future inflation.