No. of Recommendations: 10
My long term concern is that US dollar may not be reserve currency of the world. Gold price more than doubled in the past two years is an indication the world is looking for alternative.
There are lots very good reasons why lots of people are motivated to use something other than the dollar. Despite the risks, I don't think the dollar is going away any time soon, and I don't think it will matter a whole lot to most Americans if it does.
A huge fraction of international trade is denominated and settled in dollars. Some of that is tradition, but a lot of it is convenience. Let's say you have two countries that don't trade a lot with each other, like say South Korea and Brazil. It is a whole lot easier if the transaction is conducted in a more liquid, third currency like the USD. But to support international trade, that third currency needs to be really, really liquid. The US is really the only player with capital markets big enough to do the job. The EU is a distant second. China has tight restrictions on its capital markets, so the yuan isn't really a player although China is trying to nibble around the edges. Lots of countries have been yammering about moving away from the dollar for decades, but in a practical sense it is hard to do more than yammer.
Because everyone is using dollars, central banks try to at least weakly peg their currency to the dollar, even if they say they don't. So they kind of need to hold dollars. China doesn't have much of choice. We're their largest trading partner and everything we buy is denominated in dollars. So they have giant stacks of dollars whether they want them or not.
But let's look at a country that doesn't control the world's reserve currency, like say Australia. They do fine. Their borrowing costs are about the same as ours. Their economy does fine. It is nice to have the reserve currency, but it isn't mission critical.
