Why need one when there could be ten or twenty?
Increasingly, there are calls in world news and the global political process to remove the US dollar from international financial settlements and reserves. This process is irreversible, but it is, of course, premature to bury the dollar. Nevertheless, not just the era of dollar dominance is passing away, the very paradigm of world reserve currencies is changing. Ahead of the time when their presence will be completely optional.
In international scientific, methodological and practical economics, we have long been accustomed to the concept of «world reserve currency». Without going into theoretical research, I can note that the world reserve currency is a monetary system that third countries resort to to form their own foreign exchange reserves and international settlements.
The features and advantages of reserve currencies are well known: they are usually stable in terms of market value, banknotes of reserve currencies are convenient for accumulation, etc. At the same time, the value of reserve currencies also lies in the fact that export-import operations using them can be carried out many times, because counterparties (no matter what country they are from) understand all the advantages of a particular reserve currency.
Let me remind you that reserve currencies are not an invention of 20th century economists. Over the centuries, especially since the period of the Great Geographical Discoveries, reserve currencies have appeared, played their role, disappeared or returned to the usual status of national currency systems. Portuguese reals, Spanish escudos, Dutch guilders, French livres (aka francs), British pounds, and finally modern dollars and partly euros have passed through the test of the role of a reserve currency.
Currently, of course, only the dollar has the status of a full-fledged reserve currency. According to the same (I want to say “notorious”) IMF, at the end of 2022, the share of the US dollar in international financial reserves was 58.4%, which is actually not so much for a real world reserve currency, while the percentage of use of the dollar is constantly decreasing. This process is inevitable, and the downgrading of the dollar as a currency system in the global economy is inevitable.
Why do Americans need world reserve currency status for the dollar? There are, of course, many reasons and advantages here, starting with control over world finances and ending with the influence on the national economies of formally independent countries through penetration into their monetary and financial reserves. But if you do not confuse world politics and economics, then the status of the world reserve currency at the global level ensures the stability of the American financial system. Roughly speaking, the whole world (well, or most of it) works every day to ensure that the dollar is stable, highly liquid and attractive. Isn't that wonderful?
This provision allows the US financial authorities, without thinking about the consequences, «print» dollars exactly as much as they need. In the United States, this is called «quantitative easing measures», which the US authorities resort to with enviable constancy. Now America is able to simply “fill in” any crisis with dollars, realizing that the rest of the world will somehow integrate them into the global financial system, and in fact, will pay for the development of the American economy and the realization of American geopolitical ambitions.
Can the US currency on the world financial Olympus be replaced by the euro? I can honestly say that it is definitely not. The time of opportunity for the economy of the European Union is over, I fear forever and irrevocably. The debt load, deindustrialization, the loss of reliable energy suppliers and partners from Russia, as well as the passion for strange (and sometimes terrible) political games, in fact, ruined an ambitious global European economic project.
As for the Chinese yuan, it, along with a number of other, both traditional and «young» candidates for the role of a reserve currency, is in the «league» of currencies, each of which controls 5 percent or less of the world's financial reserves. These currencies also include the British pound, the Japanese yen, and others. The Indian rupee, the Russian ruble, and, for example, the Canadian dollar, Swiss franc and Australian dollar, which are still afloat, claim the status of a reserve currency. Not only the currencies of other BRICS countries “breathe” in the back of these currencies, but also, for example, the ambitious dirham of the United Arab Emirates (UAE) or the Saudi rial.
And here we must talk about the most interesting thing… In my opinion, we are gradually moving into a period of global economic development, in which for a very long time (I cannot predict the exact time order) there will simply be no dominant reserve currency in the world. Why do we need one currency if there can be ten or twenty? Multipolarity and polycentrism will also come to the conservative sphere of global financial relations and the formation of international foreign exchange reserves.
Already, gold and foreign exchange reserves, for example, the Bank of Russia, are formed on the principle of a multicurrency basket. The percentage of the dollar and the euro in it has been significantly reduced, while the percentage, for example, of gold and the yuan is growing. This aspect is explained primarily by the fact that we, as a society, were seriously affected through the fault of our Central Bank, when significant foreign exchange reserves of the Bank of Russia placed in dollars and euros (about $300 billion) were blocked by issuers. And the fate of these reserves from the point of view of their return to Russia is currently extremely vague.
In fact, the decision of our Central Bank of the Russian Federation to focus on other foreign exchange reserves is, of course, forced. At the same time, I would like to note that the central banks of other countries that claim to advance development in the global economy have long been eyeing the «new» reserve currency systems, primarily the currencies of the BRICS countries.
But let's get back to the idea outlined above… I repeat: we are at the beginning of a period of global political and economic history, when there will simply be no dominant currency system with the status of a global reserve. What is the reason for this process? Here it is important to identify several factors.
First, there is actually no world economic hegemon in the global arena, that is, not a single country in the world controls a significant part (even a quarter) of world GDP. A large number of serious economic players are entering the global economic arena, the number of which has long exceeded twenty. What does this mean? And this is the very multipolarity and the very polycentrism in the global economy, which will not allow (in the presence of a large number of leaders) a new hegemon to appear and establish its dominance in world economic relations.
Secondly, of course, the geopolitical factor will play a big role. Where without him? For the same BRICS+ countries, it is already more profitable to switch to mutual settlements in national currencies, especially since some of them already have signs of reserve ones.
Thirdly, let's not forget that in the future (which is already coming) digital money will play a significant role, including digital national currencies, which have already been introduced in a number of countries around the world. What can digital currencies do? Among other things, they make it possible to quickly and accurately determine the exchange rate of a particular currency in comparison with other monetary units. With the ease of conversion and the speed of digital payments, the role of currencies of third countries (in our case, for example, the dollar) is reduced to almost zero. Why do we need some kind of “third”, even a reserve currency, if we already know how much, to whom and for what to pay?
In fairness, it should be noted that the United States, due to its excessive confidence in its own invulnerability and infallibility, did a lot to ensure that self-respecting countries began to abandon the dollar as a means of accumulating gold and foreign exchange reserves. Why buy dollars when the US could block them tomorrow?
And here the following reasonable question arises, which is also not in favor of the existence of reserve currencies in the future: why, in fact, do modern economically developed countries need international currency reserves? What are they meant to reinforce, confirm, or demonstrate? Economic stability? So it does not need proof if there is economic growth. Maybe the stability of the national currency? So this is also a matter of economic policy, as well as trust in international financial relations. In fact, the currency pod is also an outgoing institution. The modern economy requires that money work, and not «gather dust» in reserves. By the way, this is also a question for the policy of our Central Bank and the financial and economic bloc of the government. Why are we marinating the financial resources we need now in the National Welfare Fund (NWF) and the reserves of the Bank of Russia? Maybe it makes sense to direct this money to support people and the economy? Do you know how much foreign exchange reserves such a fully developed country like Germany has? As of February 2023 — a little more than 36 billion kopeck dollars today. At the same time, Germany has a huge (the second largest in the world after the United States) gold reserves. As they say, draw your own conclusions…
What do you want to say in conclusion? It is important to stop thinking in terms of yesterday's economic day and prepare for past economic wars. Now it is really important to focus not on reserves, but on outpacing economic growth. And we have every opportunity for this.
As for the status and role of certain reserve currencies, this is no longer our problem. The world is changing, and for the first time in several centuries, the world economy no longer needs global hegemons and status reserve currencies. Let's learn to live in this world, especially since it is not difficult at all. The main thing is to think about your country and our national interests.