For over half a millennium the world has always had a ‘reserve currency’.
That shouldn’t really come as much of a surprise. As long as choice exists, people will always value one currency over another. Be it for the simplest or most complex of reasons.
However, what is truly interesting is the pattern that can be seen throughout history…
From 1450 to 1530 (80 years), Portuguese currency dominated trade. Largely thanks to their zealous role in the Age of Discovery. Charting across the world for riches and glory.
That is, until the Portuguese succession crisis brought an end to their reign. Forcing them to form an alliance with Spain in what was known as the Iberian Union.
And it is thanks to this union that Spanish currency took over the reserve status. Dominating trade from 1530 to 1641 (111 years) — the longest legacy of any modern reserve currency.
As they say though, all good things must come to an end. So, when the Iberian Union fell apart, so too did Spain’s reserve currency status.
In their place we saw the rise of the Dutch Empire. Led by the dominance of the infamous Dutch India trade company. A feat that saw the Netherlands currency claim reserve status from 1642 to 1720 (78 years).
This was, to date, the shortest period of any modern currency/empire. Though it was easily one of the most transformative. With the Dutch becoming one of the first powers to introduce paper bills.
Time is running out
By 1720, and during a bitter war with Britain and France, the Dutch Empire quickly came to an end. Giving way for the French to claim victory and take the mantle of the world’s reserve currency.
From 1720 to 1815 (95 years) they bitterly held onto that title. With Napoleon doing his darndest to ensure France would remain a vital power.
As you may know though, his eventual defeat at the Battle of Waterloo would be his downfall. Giving way for the British Empire and its ‘Pound Sterling’ to dominate trade.
Just like the Dutch, the British East India Company would become an important figurehead. Securing the pound’s reign from 1815 to 1920 (105 years). An era that saw global trading explode like never before as modern shipping and insurance outfits took shape.
Then, came the First World War — a fight that upended Europe and many of its vying kingdoms. Followed by the even bloodier and far more damaging Second World War.
The pound simply couldn’t withstand the battering. Leaving the US in the best position to seize power away from Europe for the first time in hundreds of years.
And ever since (1920 ‘til today), the US dollar has become the centre of global trade. A 100 years of dominance that has seen more changes to currency trading than any other era.
But, the question the US now faces is, when will it end?
Because if history is any guide, then the US dollar’s days are numbered. The average lifespan of every other dominant currency was 95 years. With a slim variance of just 10 years.
With that in mind, logic dictates that the USD should give way to a new currency by 2025 at the latest. Just five years, for the world’s superpower to lose its most important economic tool.
At the start of the year, that would have sounded crazy.
In fact, even now some people would scoff at the idea.
Who knows, maybe they’re right. Perhaps the US will set a new record for currency dominance. Holding onto their title for many years or decades to come.
But, right now, there are plenty of signs that history has got it right once again…
This week we saw gold climb to a new all-time high of US$2,031. A rally that has raised eyebrows and plenty of questions.
Now, whether this surge is sustainable or not is certainly up for debate.
I know, I personally wouldn’t be jumping into gold right now. But that doesn’t mean it can’t run further either.
However, what I am interested in is the reason behind this rally. Of which opinions are heavily and widely divided.
Whether it’s COVID-19, Beirut, QE, inflation, deflation, or any other ‘factor’ — there are a lot of potential possibilities behind the gold rally.
However, in my view (and many others), the big reason is debt.
This pandemic has exacerbated what was an already troubling problem. The crazy amount of debt that the US — and other nations — are taking on to keep their economies afloat.
It seems to be working for now, but every time it happens it chips away at the USD a little bit more. Gradually eroding its value and basis as a reliable reserve.
For instance, the USD is currently down 9% from its March highs. Recording its worst monthly performance in over 10 years during July. That should tell you that something is very wrong.
And I know this isn’t the first time people have claimed the USD is at its end.
We’ve seen plenty of recent calls saying the same thing. All of which have proved wrong so far.
But, the fact that those calls continue to be made is worrying. Contrarian or not, concerns over the US dollar are growing.
Arguably, the only reason it hasn’t succumbed to history already is because there is no good alternative. As Reuters notes:
‘The main challenger, the euro, has struggled in the face of existential crises and years of subpar growth in the euro zone.
‘Indeed, during the throes of the coronavirus panic in March, the dollar’s dominance was on full display, with investors and governments scrambling for the greenback as they looked for a haven against extreme volatility and uncertainty.’
I can’t see a future where the euro replaces the dollar…it has just as many if not more problems than the greenback.
Which begs the question, what could replace it?
China is the only other notable sovereign contender. But right now, there is a snowball’s chance in hell the yuan will become the reserve currency.
But that doesn’t mean there aren’t other alternatives.
I imagine any major power willing to peg their currency to gold again could be a contender. Not that that would be an easy task to achieve.
Or we could even see cryptocurrencies or some variant of them play a major role. A similarly left-field contender, but one that has a better claim than most.
My point is no one knows what will end up replacing the US dollar.
But a lot can happen in five years. So don’t be surprised if the end of dollar is nigh.
Editor, Money Morning
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