I ran across an NYT Op-Ed piece written by Nouriel Roubini. He thinks that the days of the US Dollar as a world reserve currency might be numbered because, as he writes
Traditionally, empires that hold the global reserve currency are also net foreign creditors and net lenders. The British Empire declined — and the pound lost its status as the main global reserve currency — when Britain became a net debtor and a net borrower in World War II. Today, the United States is in a similar position. It is running huge budget and trade deficits, and is relying on the kindness of restless foreign creditors who are starting to feel uneasy about accumulating even more dollar assets. The resulting downfall of the dollar may be only a matter of time.
In looking what could replace the dollar, Roubini continues (highlighted by me):
But what could replace it? The British pound, the Japanese yen and the Swiss franc remain minor reserve currencies, as those countries are not major powers. Gold is still a barbaric relic whose value rises only when inflation is high. The euro is hobbled by concerns about the long-term viability of the European Monetary Union. That leaves the renminbi.
First, I never thought of that: The Swiss Franc as the global reserve currency but thought at one point that this might happen by accident if the Swiss National Bank kept buying all the dollars the Fed prints with freshly printed and minted Swiss Francs just to not let the Swiss Franc climb to high in value. Like sort of a ‘he who printeth faster, wineth’ type of competition.
Roubini is arguing by referring to historical precedent and if you follow that, then the Renminbi seems indeed well placed to become a global reserve currency. However, it might be time to look a bit closer here.
The dominance of the countries mentioned, i.e. the UK and now the US is indeed at least partly based on the fact that their currencies have been or are the global reserve currency. It seems to me that this places them at an unfair competitive advantage over other countries.
It might thus be the right moment to have a look at this question. Would it not be more beneficial if the global reserve currency were handled and managed in a small country that does not have a major industrial base, many natural resources and a huge population?
I am not sure whether this would be a blessing or a curse for lil’ Switzerland. Fortunately, Roubini is not giving up on the Dollar just yet:
Now that the dollar’s position is no longer so secure, we need to shift our priorities. This will entail investing in our crumbling infrastructure, alternative and renewable resources and productive human capital — rather than in unnecessary housing and toxic financial innovation. This will be the only way to slow down the decline of the dollar, and sustain our influence in global affairs.
Phew, there goes Switzerland’s chance at world domination. Missed it by THAT much!
This post is available in German.