I recently listened to a portion of The Glen Beck show on AM Radio. During this portion, Beck opined that the days of the US dollar’s status as World Reserve Currency are coming to an end, which will lead to soaring inflation in the US since products (such as oil) will no longer be paid for in Dollars but in some other (unnamed) security or basket of securities. Beck says the reason for the demise of the Dollar is the US Federal Reserve and their policies for the last several years, especially with the explosion in Fed activity since the onset of Covid. Citizens can protect themselves, says Beck, by buying Gold. By the way, Beck is compensated by a Gold brokerage company. Beck is not alone in this belief: it has been out there since the US removed itself from the Gold standard nearly 50 years ago and it gained new traction 12 years ago during the last Financial Crisis.
There is some evidence to support this thought. Since before Covid, the US Dollar Index has fallen about 6-7% and the price of Gold has risen about 25%. Investors in the Futures of these assets believe that higher inflation as a result of the recent expansion of the US money supply is in the offing and that the US Federal Reserve’s target of 2% expected inflation is too low. A 6% decline in the value of the Dollar is equivalent to 6% inflation of the cost of goods purchased using other currencies. Anecdotally, prices in the grocery stores are up as are prices in restaurants, whether to eat in or to take out. Of course, these are unusual times, which could explain these price increases. Dormant for many years, inflation may be making a comeback, which could cause the Fed to raise interest rates with the thought that a rate increase could address higher inflation. The point is, there may be some supporting evidence to this “End of the Dollar World” theory.
My problem with the theory is and always has been, What will replace the US dollar as the Reserve Currency? The Euro is the second most-used currency in the world, but the Euro zone has its own issues with Covid and with lagging economic growth. In addition, the Euro has only been in existence for 21 years, so now is not the time to switch the majority of global payments to such a young currency during such uncertain economic times. What about the Chinese Yuan? No way the Yuan, controlled by the Chinese Communist Party will become the World Reserve Currency, no matter how large the Chinese economy continues to grow. In short, there are no other currencies currently circulating in the world that can come close to matching the value and the stability inherent in the US dollar, even after a 6% decline in the Dollar Index.
One interesting theory is that the Dollar will be replaced by Gold as the Reserve currency. That would mean the the US would have to use Dollars to buy Gold in order to pay for oil, among other products. Alternatively, the US could re-adopt the Gold Standard for its currency that was jettisoned during the Nixon administration. President Trump’s latest nominee to the Federal Reserve Board, Judy Shelton, is an advocate of the return of the Gold Standard, and her nomination is considered controversial as a result. My take: A change from the Dollar to Gold as World Reserve Currency would only widen the gulf between the haves and the have-nots during a time when social engineering thought is heading in the opposite direction. Keeping the Dollar as the reserve currency, with all that it entails, still helps with the issue of wealth and income inequality, at least more so than would a Gold standard. While I believe there are some arguments that have merit with respect to the US returning to the Gold standard, especially that it helps to maintain fiscal and monetary discipline, perhaps at the cost of limiting economic growth, I don’t believe that there is the political consensus here in the US to return to the Gold standard. If Beck and others who fear Weimar- or Argentina-like inflation turn out to be right, then perhaps the consensus will shift. A 6% decline in the Dollar Index is not enough to tip the scale.
Like it or not, I don’t side with Beck and the others who the US economy is about to collapse due to runaway inflation. Perhaps higher than 2%, but not runaway inflation. I see the Dollar remaining as the World Reserve currency because there are no good alternatives out there. Everybody everywhere, not just the US, is affected by Covid and the economic shutdown. Vaccine or not, Covid will be with us for many months or years. Despite its higher case count, the US economy remains the world’s strongest, and the US is best positioned to lead the world to economic recovery. As I believe World Reserve Currency status is a proxy for World Economic leadership, so to do I believe that the crown will continue to remain on the head of the USA. The almighty Dollar will remain almighty.