The U.S. dollar's status as the world's reserve currency stems from the Bretton Woods system after World War II. The United States, with its protection of property rights and support for oligarchs, has built a strong economy. This has made the United States an economic superpower internationally, especially after the collapse of the Soviet Union in 1991. However, the inability of those in power to effectively maintain their legacy has led to the gradual decline of the United States over the decades. I**, by 2040, the hegemony of the dollar will cease to exist, and the United States will be reduced to a little brother in a multipolar world.
The history of the dollar is closely linked to the rise and fall of **. From the Spanish silver dollar during British colonization, to gold and silver coins after independence, to the depreciation of paper money during the Civil War and World War I, the dollar has undergone many transformations. In the post-World War II Bretton Woods system, the dollar became an international currency and was marginalized. However, the war spending of the United States and the indiscriminate issuance of currency led to the termination of the exchange between the US dollar and ** and the entry into a floating exchange rate system. The reckless monetary policy of the US authorities and the US Federal Reserve has put the dollar at risk of collapse and shaken the dollar's international standing.
The depreciation of the dollar is a long-term trend, not a temporary phenomenon. In order to give you a clearer picture of the true state of the dollar, I will analyze the data from three aspects.
First of all, the fact that the dollar is the hegemon of the "global reserve currency" is unshakable.
According to the International Monetary Organization, in 2022, the US dollar accounted for 58% of total global foreign exchange reserves, well ahead of the euro's 21%. This means that central banks and authorities choose the dollar as nearly three times as much of their reserve assets as the euro. The U.S. dollar's status as a reserve currency reflects its leading role in international**, financial and investment development.
The dollar's position in global foreign exchange reserves has been declining, from a peak of 71% in 2000 to 58% in 2022, a staggering 18%. At the same time, the euro held firm in second place, rising from 18% to 21%, showing strong competitiveness. The dollar is depreciating at an alarming rate, and if this trend continues, it will lose more than half of its advantage by 2040.
Second, it is necessary to pay attention to the changes in the demand for the dollar in the United States and abroad. This reflects the degree to which global investors prefer dollar-denominated assets.
Foreign holdings of U.S. Treasuries grew rapidly from the mid-1990s to the eve of the 2008 financial crisis, far outpacing domestic holdings. According to statistics, foreign ownership soared from 20% in early 1995 to an all-time high of 49% in the second quarter of 2008.
However, after the financial crisis, the demand for US bonds surged, but foreign holders began to **. U.S. and domestic and international Treasury holdings have risen sharply, but the gap between the two has remained largely stable. It wasn't until around 2013 that foreign holders showed a clear back-down.
At the same time, the United States continues to issue new debt. In fact, it is buyers in the United States, including the Federal Reserve, who are taking over the new debt. By the end of 2022, foreign holdings of U.S. debt had fallen to 30%.
U.S. interest rates should have made U.S. bonds more attractive to foreign investors, but the total amount of U.S. debt has also increased. According to the Congressional Budget Office, the U.S. public's share of GDP has skyrocketed from 39% in 2008 to 98% this year and is expected to reach 119% by 2033.
The United States is facing a long-term fiscal crisis, not a one-off shock. The Congressional Budget Office's mid-term** shows that federal debt will triple from 40% to 80% of GDP between 2008 and 2033. This is not due to a recession or financial crisis, but to an aging population and an imbalance in the budget structure. Significant tax increases and cuts in spending such as social security are needed to avoid runaway debt, but these measures are difficult to implement. Foreign investors' confidence in U.S. Treasuries is likely to decline, leading to higher borrowing costs.
Third, the U.S. dollar is facing strong competition for its status as a reserve currency. The depreciation of other fiat currencies has masked the dollar's decline in prestige. Central banks have increased physical** inventories, reflecting distrust in the management of unsecured funds in the US dollar.
Over the past two decades, the United States and some of its economically powerful allies have slashed their physical reserves. In stark contrast, the reserves of the BRICS countries (Brazil, Russia, India, China and South Africa) have continued to increase in all countries except South Africa. This suggests that the global economy is gradually moving away from the hegemony of the dollar.
In purchasing power parity (PPP) terms, the BRIC Group accounted for 31% of global GDP in 2022, far exceeding the 156%。Among them, China is the largest economy, accounting for 185%, followed by India (7.).3%), Russia (29%) and Brazil (2.)3%）。
These data raise the question: how do the economies of China and the United States compare?It depends on which method we use to measure the value of a currency. One method is purchasing power parity, which adjusts the exchange rate based on the purchasing power of each currency in its respective region. Following this approach, China has overtaken the United States to become the world's largest economy. Another way is to use the official exchange rate, which reflects the demand for the currency in the market and**. According to this approach, the United States is still much ahead of China. However, this approach may underestimate China's true power because it ignores China's influence in areas such as global**, investment, technology, and military.
Therefore, we can draw conclusions. The global economy is shedding the shackles of dollar hegemony. More than one-third of countries and regions are promoting the process of currency diversification for economic and strategic gains. The United States and its allies have taken advantage of the dollar's privileges to impose sanctions and financial repression on their competitors, which has instead accelerated this trend.
The United States will lose both its economic power and monetary influence, and it will not be able to maintain its global leadership. In the next 20 years, the world will enter a new pattern of multipolarization, and various interest groups will cooperate or compete around different issues. Other currencies, such as the renminbi, will play a more important role in this diverse world.
The end of the American empire was inevitable. The American advantage of the postwar era has been squandered. Uncle Sam's repeated mistakes in economic and military policy led to a deep crisis in the American machine. The comfort and forgetfulness of the Americans masked the decline of the empire.
The collapse of the dollar's position will put an end to Uncle Sam's profligacy. Americans, by virtue of the reserve currency status of the dollar, enjoy the "privilege" of exchanging cheap paper money for a wide range of goods around the globe, just as counterfeiters have money printing machines. Even in the midst of a financial crisis caused by the Fed's disastrous policies, U.S. Treasuries remain a "safe haven" for global investors. The status of the dollar has brought great benefits to the US authorities and the population, but it has also buried hidden dangers.
The loss of the hegemony of the dollar means that the myth of the United States has been shattered. The United States will no longer be able to sustain its high-consumption lifestyle with the printing press, but will have to create wealth or borrow to meet its needs. At the same time, the United States will also face pressure on interest and principal repayments, as well as the risk of a depreciation of the dollar and a debt crisis. The United States will have to adapt to the new normal of the global division of labor, acknowledging its declining relative position in the international world. Americans will enjoy normal international**, but will also pay the price of higher import costs and fiscal austerity. In the event of an economic crisis, it will be difficult for the US authorities to provide large-scale stimulus because more domestic financing is needed instead of relying on external borrowing.
Historically, all empires have risen and fallen, and the United States is no exception. The United States has passed the peak of its national power and is now facing a crisis of accelerated decline. U.S. authorities, businesses, and households must lower their expectations and set more reasonable budgets to adapt to the challenges ahead. This painful adjustment is a necessary process for the United States to return to reality.