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What Would It Take to Dethrone the Dollar?

No reserve currencies last forever. So what would it take to end dollar dominance?
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What Will Displace the Dollar

Thought Experiment

The US dollar Index has nothing to do with it. 

Try this thought experiment instead. What Would It Take For the Yuan to Displace the Dollar?

China Would Have To

  1. Float the yuan
  2. End capital controls
  3. Respect property rights
  4. Have a bond market big enough (China has virtually no gov't bond market)
  5. Have global trust 
  6. Be willing to have trade deficits
  7. Stop export priority mercantilism 
  8. Have a currency market big enough 

Perhaps China meets condition 8. It flunks the first 7.

Look closer and those are general requirements, not China-specific requirements.

How many requirements does the Eurozone meet? 

The Eurozone meets conditions 1, 2, 3, 5, and 8.

Germany and the surplus states will not easily or willingly give up on points 6 and 7.

The biggest holdup against the Euro is lack of a bond market. 

The individual countries have sovereign bonds but they trade at different rates due to different risks. There are no euro-denominated bonds to speak of.


There are no alternatives. To be an alternative, a county has to meet those 8 conditions. 

This is why talk of the yuan replacing the dollar is complete silliness. Wake me up when it meets the requirements.

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Moreover, and despite periodic talk, China's actions speak louder than words. Given points 6 and 7 I do not believe China would want to be the reserve currency holder, even if the other requirements could be magically waived. 

Political Conditions 

Political conditions are such right now that there will not be any alternatives soon. That could change if politics in the US, EU, or China changed, but don't hold your breath on China.

The Euro may not even survive. It is a fatally flawed currency yet it is 1 of only 2 possible alternates that meets condition 8.

Stable Wagon

The only other thing that could derail this very stable wagon is if the US went totally insane politically.

What if the US went whole hog on AOC's global warming plan and also gave away $1,000,000 annually indexed to inflation to everyone in the US to fix income inequality?

Yep, something like that would do it.  

In the general sense, a political event that caused hyperinflation would suffice.

Faith in Central Banks 

Meanwhile, faith in central banks is weakening. For discussion, please see More Gold Hype: No Escape for Shorts.

Monetary Demand and the Price of Gold

Over the long haul, it's monetary demand that sets the price, not short squeezes, not jewelry, not Martians.

Monetary demand is a function of faith in central banks.

I commented on monetary demand on June 1 in Speculators Dump Gold But Price Goes Up Anyway.