Summary:
What is the world reserve currency? It is a status earned by a country's currency because it is the most relied on for trade, savings, and economic transactions. Currently, the U. S. dollar holds the status of the dominant world reserve currency, against other competing currencies, including the euro, yen, pound, renminbi, Canadian dollar, Swiss franc, and the Australian dollar. The U. S. has held the status of the dominant world reserve currency since 1944.
The flawed system has led to an insolvency problem in the U. S. because of the continuous accumulation of debt and the payment of the interest on the debt by issuing more debt. The entire American enterprise is bankrupt, morally, ideologically, spiritually, and economically. Few will talk about it because they are the beneficiaries of the radically skewed system that benefits the top tier of financial interests. At the other end of the economic system lies a gigantic welfare and redistribution system that the unproductive and the parasitic class gladly feast on, operated by profiteers, while acting as a downward drag on the economy overall. 50% of the national budget is allocated to social services, welfare, and the redistribution system.
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This status is deserved but is also transitory without systemic changes. It can be replaced at any given time for failure to manage the full faith of the currency properly. BRICS is the current bundle of currencies competing against the dollar. It is arguable whether competing currencies are good or bad. Still, one thing is clear: deficit spending would cease if no one wanted to finance the U. S. deficit spending extravaganza. Inflation would cease.
The currency includes those held on deposit by the US central bank and large regulated financial institutions, which are intended to be used for investments, international trading transactions, and settlement of international debt obligations, and those currencies held by ordinary people around the world. Reserve currency serves to influence/affect the domestic exchange rate with currencies from other countries. The U. S. currently has the status of the world reserve currency because of prior agreements and the continuing strength of the dollar.
Competing for the position of the world's dominant reserve currency:
Groups of countries are constantly competing to disrupt the reserve currency status and replace it with one that they and their partner countries control. Brazil, Russia, India, China, and South Africa formed BRICS. Twenty-two countries have applied for membership.
https://en. wikipedia. org/wiki/Reserve_currency
https://en. wikipedia. org/wiki/Member_states_of_BRICS
Historically, the status of the holder of the primary world reserve currency at an international level may come and go, be shared with top competing currencies, or be replaced entirely witha different one. For example, the International Monetary Fund, an international organization that was created at the same time the Bretton Woods Accordwas implemented, established a system referred to as special drawing rights, where the participant members could borrow, like how US-regulated lenders could borrow from the Federal Reserve.
The (SPR) basket is determined by predetermined formulas from currencies of the U. S. Dollar, Euro, Chinese Yuan, Japanese Yen, and Pound Sterling. The fixed number of units contributed by each currency is reevaluated every 5 years. The IMF was established initially by 29 participating countries at the Bretton Woods Conference, and the SDR basket is a key component of the international monetary system, providing a benchmark for the value of different currencies.
Today, its population has grown to about 183 countries. Any new currency standard could be negotiated between the stakeholder participants or forced upon them, depending on the form of government involved.
https://www. investopedia. com/terms/r/reservecurrency. asp
https://en. wikipedia. org/wiki/Reserve_currency
https://home. treasury. gov/system/files/206/Appendix1FinalOctober152009. pdf
The Bretton Woods Accord: The gold standard
How did the USA attain the status of the world reserve currency holder? After World War II, a new international financial system was created at a meeting by a formal agreement that became known as the Bretton Woods System. Participants who consisted of world leaders included representatives from 44 different countries in 1944. The USA negotiated that the dollar should be held as the world reserve currency standard because the U. S. agreed that Gold would back the dollar. At that time, the U. S. had the largest supply of gold and was a significant industrial power that ran a trade surplus. Gold was pegged at $35 per ounce. The U. S. negotiated the anchor status because it guaranteed to other central banks that it could sell its gold reserves for settlement purposes. Many conflicts arose between the economic interests of short-term domestic objectives and long-term international objectives.
At the same meeting in 1944, the World Bank was created with significant input from the U. S. , solidifying its role as an essential source of financial aid for developing nations. The goals were to provide financial resources to make a path of stable, sustainable, and equitable growth to lift countries out of poverty. The World Bank is an independent organization of the United Nations, and the U. S. has a tremendous influence onits operation and success.
The Bretton Woods Accord and the gold standard fell apart:
Today, there is significant pressure from financial stakeholders around the world that suggests the U. S. is about to lose its status as a world reserve currency holder.
The two primary reasons are:
#1: In 1971, President Richard Nixon unilaterally canceled the gold standard conversion option. This meant that all future transactions backed by or pegged to the dollar would no longer be supported by gold, but only by the full faith and credit of the U. S. Government. At that point, the Bretton Woods system effectively fell apart. The potential shift away from the dollar is a pressing issue that could reshape the global economic landscape, leading to potential inflation and financial hardship.
Historic Deficit Spending Since the creation of the Federal Reserve System in 1913.
#2: The US has historically financed its deficit spending by continually issuing new debt instruments that international financial participants have been forced to purchase, whether willingly or not. This historical context is crucial to understanding the current economic situation. Other countries have effectively been forced to finance US deficit spending and remain quiet about excesses and wastefulness. The reliability that other countries will continue to invest in our debt has come to an end. Understanding this historical context is key to grasping the current economic challenges the US is facing. And, just like China, the U. S. operates a one giant Ponzi scheme.
The U. S. takes in about $5 trillion in taxation and spends roughly $7. 5 trillion on all government programs and debt service on the books, including accrued direct debt. That means that the government creates new debt instruments of between 2. 5 trillion annually. That has compounded to approximately 40 trillion dollars in direct debt, which is expected to be paid back by the U. S. taxpayers. Additionally, the U. S. has off-balance-sheet accrued debt obligations, including unfunded pension obligations, Medicare, Medicaid, and other unfunded financial obligations of approximately $150 trillion. All the above direct debt and accumulated unfunded future obligations are accelerating at an alarming rate.
The world financial participants are increasingly expressing their dissatisfaction with being forced to use the dollar to complete business transactions and settle their obligations. This growing discontent is a clear sign of the changing global economic landscape and the urgency for the US to address its fiscal policies, as it indicates a potential power shift in the international monetary order.
Spoiled Children Always demand preferential treatment:
Many see the U. S. as a spoiled child, having used the negotiated superior status of the dollar to gain additional unearned toys. Many of the world's economic participants believe the U. S. standard of living is financed on the backs of non-beneficiaries and operates from a false status of privilege. As stated above, the major economic powers, including China, Russia, India, Turkey, Brazil, the EU, and others, are currently attempting to replace the dollar-reserve exchange system with a different one. They will most likely use a combination of national currencies to create the new reserve system. They intend to circumvent and make the U. S. system just another competing currency.
Most Americans have grown accustomed to the U. S. having a strong dollar and a good standard of living as a result. The government has financial tools available to prop up the strength of or weaken the dollar as desired. But what will happen one day when the U. S. wakes to find that its privileged status has been circumvented? What happens when world economic participants refuse to buy any more of the U. S. compounding debt? This may occur over an intermediate time frame, such as 3 to 5 years. Some will argue that the end is closer. The spoiled rotten kids are going to be knocked down quite a few notches. The potential loss of this privileged status is a stark reality that the US must prepare for.
Injection of Fiat Currency causes Inflation, which causes the erosion of purchasing power, which keeps ordinary people on a financial treadmill:
The value of the dollar will drop like a rock. The US government only has so many financial methods to prop up the dollar. Suddenly, the U. S. would be forced to get serious about eliminating deficit spending and to cut up the unlimited credit cards. You can imagine the day when our leaders must tell the population the ugly truth that the U. S. will cut spending by 25% across the board. You have heard the term squealing pigs.
All the false entitlements, unearned freebies, corporate crony handouts, tax preferences for friends of the system, and free lunches will cease to exist. Since about 2/3rds of the population currently look forward to government transfer payments and redistribution benefits in multiple forms, there could be riots on the street. You can't take away what I am entitled to, even though I didn't earn it.
All products, goods, and services will cost more because the value of each dollar will go down. We are experiencing that daily. How much-depreciated value will occur in the dollar's purchasing power remains to be seen. I guess that our purchasing power could go down by 40% to 50% in a 3 to 5-year time frame. The question remains when. Also, if nothing is done, hyperinflation will eventually erode the quality of life in America, except for the top 1% who will continue to make money on financial repression.
The question remains when? Also, if nothing is done, hyperinflation will eventually erode all quality of life in America to a peasant status, except for the top 1% who use high-leverage strategies, while governments around the world continue down the path of systematic financial repression.
The key for the public is to use their resources to increase their skill set, so they earn more, and not to accrue debt.