The US Dollar Will Continue as the World’s Reserve Currency

By Richard E. Caroll

Despite the current glut of article’s questioning the status of the currency of the United States and its role as the global reserve currency, the US dollar will continue to be the world’s reserve currency for an indefinite period of time.

Even though the People’s Republic of China is promoting changing its currency to the E-Yuan, the basic fundamentals of economics will still apply.  Along with China’s reluctance to allow monetary capital flight from China, the overall state of the Chinese economy, its lack of an impartial judicial system, the drift back to an economy reminiscent of the Mao Zedong era, the lack of intellectual freedom necessary for a vibrant and growing economy, and the ongoing demographic crisis in China; the Chinese economy is not capable of assuming the role of the United State as the major reserve currency of the world.

The Fundamentals of the Chinese Economy

Since the opening of the Chinese economy to the world in 1978, the economy of China has boomed, and is currently regarded as the 2^nd largest economy in the world.  One of the main reasons for the white-hot growth of the Chinese economy was the status of the Chinese economy when the Chinese Communist Party (CCP) opened up the economy and allowed its economy to flourish.  In December of 1978, China’s GDP was $149.5 billion.  In December of 2020, China’s nominal GDP was $14.72 trillion.  This type of growth was to be expected due to the constraints placed on China’s economy by the CCP under Mao Ze-Dong.  While impressive, this type of growth can only happen once.  Now that the economy has reached a saturation point, the natural laws of supply and demand will emerge, and the Chinese growth rate will be subject to world-wide market-place fluctuations.  Interference by the Chinese government into the market, which it frequently does, only serves to distort the true status of the economy, and inevitably will exact a heavy monetary price when the market finds its natural equilibrium point. One of the characteristics of a strong economy is the ability by investors to transfer funds from one country to another and to allow unrestricted inflows and outflows of capital.

China maintains strict capital outflow restrictions, making it difficult, if not impossible, for investors in China, both foreign and domestic, to take their capital out of China if the situation warrants it.  China began restricting capital outflows in 2016 after losing $1 trillion USD defending its currency.  The Chinese loosened up, but in 2018 tightened again at the beginning of the U.S. and Chinese trade war.  By maintaining capital controls, China restricts the free flow of financial intermediation, and imposes controls on a free market economy.

While the Chinese economy has a nominal GDP of $14.72 trillion, this does not show the true state of the Chinese economy.  The Chinese economy is divided into two distinct parts; the State-Owned Enterprises (SOEs) and the private enterprise aspect of the Chinese economy.  The SOEs are solely to provide jobs and income for the Chinese population.  The SOEs are not subject to the ebbs and eddies of a free market economy, and are more concerned with providing jobs than making a profit.  While the SOEs only account for 25% of the Chinese economy, they are given lower interest rates on loans, and are backed explicitly by the Chinese government.  Twice, the bad loans made by SOEs have been bailed out by the Chinese government.  While private market firms make up some 87% of employment in China, the SOEs account for 85% of the 109 Fortune 500 Companies in China.  SOEs continue to be a drag on economic growth in China and carry immense loads of debt.

While China may have an economy of over $14 trillion, it also has a debt level of 290% of its GDP; this would translate to over $40 trillion. Unlike the West, where contract law in non-partisan and subject to written law and enforced by courts and state-owned police, the judicial system in China acts as an arm of the CCP, and law is subject to change arbitrarily without prior warning or comment from the public.  A public commission undertaken by Senator Jeff Merkley and co-chair Congressman James P. McGovern found that:

“China’s judiciary continues to be subject to a variety of internal and external controls that significantly limit its ability to engage in independent decision making. Several internal mechanisms within the judiciary itself limit the independence of individual judges. A panel of judges decides most cases in China, with one member of the panel presiding at trial. Despite recent reforms to enhance the independence of individual judges and judicial panels, court adjudicative committees led by court presidents still have the power to review and approve decisions in complex or sensitive cases. Finally, judges in lower courts frequently seek the opinions of higher courts before making decisions on cases before them. Some legal reformers in China oppose this practice, arguing that it undermines the right of appeal. China experts differ on whether the practice has become more or less frequent as reforms have progressed in recent years.”

With intellectual property rights more of a joke than a reality, the incentives for ground- breaking research are absent in China.  Without any type of incentive for the expense and time needed for the creation of new technology, no currency can have a solid foundation.

China is facing an unprecedented demographic crisis.  An outgrowth of the one child policy has left China with a rapidly aging population, with fewer younger being able to fill the factories, and its armed forces.  The one child policy implemented by the Chinese Communist Party in September of 1980 has left China frantically trying to jumpstart birth rates in China, with little or no success.  The demographic chart below graphically demonstrates this crisis:

The population crisis in China works against the Chinese in establishing its currency as a replacement for the US dollar.  While it is fashionable amongst those writers schooled in political science and social sciences to argue that the E-Yuan will soon replace the US dollar as the world’s major reserve currency, the above economic and mathematical facts argue against any such outcome, specifically given the natural resources of the United States, coupled with the strong independent and non-partisan judicial system in the United States as to real property and intellectual property rights.

The Fundamentals of the United States Economy

In sharp contrast to the fundamentals of the People’s Republic of China, the fundamentals of the United States are strong and vibrant.

The United States is blessed with fertile ground and can not only feed itself, but in fact is one of the major breadbaskets of the world.  With the Mississippi and Missouri river systems, the agricultural richness of the United States has a cheap way of transporting its bounty to the coasts of the United States, but also to the rest of the world in general.  While there are many pretenders to the throne, there is only one champion, and that is the United States of America.

The modern judicial system of the United States is one of the oldest and most stable judicial systems in the world.  The law does not change from day to day based on the political whims of political parties, both Republican and Democratic, but on the rule of written law.  While the law may be changed, modified of eliminated altogether, it is done so under the rule of democratic guidelines, with the public being given ample time to weigh in on changes to the law, and the either approve or disapprove attempts by lawmakers to change the judicial system.  With strong protection for individual real property and intellectual property rights, the United States provides a fertile ground of innovation and the creation of wealth.  This provides for a stable and safe environment of investors, both domestic and foreign.

The demographics of the United States compares favorably for the environment of economic growth and internal domestic consumption.  The following demographic pyramid shows the continuing dynamics of population growth in the United States:

There are currently two major research projects proposing the E-Dollar backed by the United States Federal Reserve Bank.

There is the Digital Currency Initiative at MIT in collaboration with the Federal Reserve Bank in Boston.  There is also the Digital Dollar Project with the backing of 5 of the 7 Federal Reserve Banks in the United States.

While the United States does face challenges in the world in relationship to a changing political world landscape, the fundamentals of its economy is not one of them. The United States monetary unit, the United States Dollar is the world’s reserve currency and will continue to be so into the future.

Speculative articles based more on rumor and innuendo’s are exactly that, speculative and not grounded in fundamental economic or in reality.