Of course, the US Dollar isn’t the only currency that nations maintain reserves of. The Euro is also a major reserve currency and the Yuan is fast becoming a major reserve currency. But since the USA produces 22% of all world output it happens to play a particularly special role in the global economy. By virtue of being the largest economy in the world the accumulation of US dollar denominated financial assets happens to dominate the global financial system. It’s sort of like being the top market share producer of a particular product in a particular industry. Other entities accumulate your products because you’re the top producer. And that changes over time. Market shares change and regimes shift with the evolving economy.
So, will the USA lose its reserve currency status at some point? Yes. In fact, it’s already starting to lose its reserve status to Europe and China. Will it be the end of the world and will it cause everyone to suddenly ditch the dollar? Probably not. It just means the USA will produce a lower proportion of global output and therefore, as a matter of accounting, the rest of the world will hold a lower percentage of US dollar denominated financial assets as a percentage of global output. It’s not the end of the world. It’s just a sign that market shares change and when you’re #1, well, there’s only one direction to go.
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