We observed a USD free fall for a considerable period of time and we are all observing the consequences. The rise in crude oil prices, capital exodus through investments in gold and precious metals. We have observed various countries shifting foreign exchange reserves to sovereign wealth funds (e.g. Saudi Arabia, China …). We have also observed alternate currencies like Euro appreciate in value and various businesses demanding payments in alternate currencies.
Are the days of glory over for USD and is it giving way to the Euro? Most of the pundits / economists / analysts etc. try to seek the answers by forecasting the future. Yet, in my opinion, history tells a story that may be likely or unlikely to repeat itself.
It was the British pound that led the first era of globalization in the 19th century. The GBP was the legal tender across the British Empire. It served as the unit for measurement, medium of exchange and a store of value that allowed trade and commerce across the colonies.
The first and the second world wars changed the playing field. Britain had to incur large debts to the United States and GBP lost significant value and in 1940, the pound was pegged to the USD, effectively signaling its end as the world’s reserve currency. Many other countries followed up in 1945, after the Bretton Woods System established an obligation for each country to adopt a monetary policy that required the exchange rate of its currency within a fixed value in terms of gold i.e. pegged system (in principal as the "reserve currency" was USD, this meant that other countries would peg their currencies to the USD). The system collapsed in 1971, following the United States' suspension of convertibility from dollars to gold. From this point onwards USD continues to be a currency backed by “faith”. The world continues to keep faith in USD as the "trade and reserve currency" as it believes in the continued pre-eminence of the US in the political, military and economic spheres resulting in the continued leading role for the USD.
The basic idea of bringing history into perspective is that GBP enjoyed, and the USD enjoys unparallel dominance. The shift from GBP to USD had not been liner. Major international events took place, like collapse of empires, world wars, independence of new nations, new financial systems and new trade and monetary disciplines. In the current state of affairs, the most notable events comprise the fall of the Soviet block, progress of the emerging markets, the formation of the Eurozone and the financial crisis of 2008. These events can probably tilt the balance of power in favour of Euro. This is a conclusion that we hear on tv, we read in news papers and we discuss in tons and tons of meetings. However, in my opinion, the Euro is still years away to give competition to the USD.
My opinion is based on the following facts relating to USD and USA:
1. USA is still 1/5th of world economy (GDP based on PPP is c.$14bn of the worlds c.$70bn)
2. The American citizens are still the biggest consumers
3. USA still leads the world in innovation and formation of new business ventures (ipod, iphone, google, and just about anything that resulted in major consumption and wealth creation)
4. USA consumes almost 12% of oil production of the world. This makes the oil producers not only sell oil in USD terms, but also maintain their currencies pegged to USD.
5. USA influences world politics more significantly than any other country.
(I will keep on adding to the above list)
The Eurozone is a bunch of countries with decreasing population, decreasing consumption, almost no innovation, decreasing production of goods and services, collapsing economies (Greece, Spain and others), social unrest (like in France), corruption at state level in various countries and migration. The Union or its central bank never take a leadership position in any matter and are not proactive in any world level issue. Other than Germany, none of the countries in EU produces anything that the world really needs (probably France can say that their fashion products, perfumes and military supplies are essential and Nokia produces mobiles). [I will update my thoughts on Europe later].
Conclusion
The increase in debt of USA will surely lead to fall in value of the USD, but by no means does it mean that Euro will automatically rise. Euro will surely have movements against the USD, primarily due to speculators, traders, bankers and market makers etc. who manipulate markets for their own benefits. However, due to structural issues in EU, I do not foresee Euro rising in status as a reserve currency or a medium of exchange.
If an alternate currency was going to evolve, then it would most likely be the Chinese Renminbi (RMB), but this is a discussion for a later stage.
Are the days of glory over for USD and is it giving way to the Euro? Most of the pundits / economists / analysts etc. try to seek the answers by forecasting the future. Yet, in my opinion, history tells a story that may be likely or unlikely to repeat itself.
It was the British pound that led the first era of globalization in the 19th century. The GBP was the legal tender across the British Empire. It served as the unit for measurement, medium of exchange and a store of value that allowed trade and commerce across the colonies.
The first and the second world wars changed the playing field. Britain had to incur large debts to the United States and GBP lost significant value and in 1940, the pound was pegged to the USD, effectively signaling its end as the world’s reserve currency. Many other countries followed up in 1945, after the Bretton Woods System established an obligation for each country to adopt a monetary policy that required the exchange rate of its currency within a fixed value in terms of gold i.e. pegged system (in principal as the "reserve currency" was USD, this meant that other countries would peg their currencies to the USD). The system collapsed in 1971, following the United States' suspension of convertibility from dollars to gold. From this point onwards USD continues to be a currency backed by “faith”. The world continues to keep faith in USD as the "trade and reserve currency" as it believes in the continued pre-eminence of the US in the political, military and economic spheres resulting in the continued leading role for the USD.
The basic idea of bringing history into perspective is that GBP enjoyed, and the USD enjoys unparallel dominance. The shift from GBP to USD had not been liner. Major international events took place, like collapse of empires, world wars, independence of new nations, new financial systems and new trade and monetary disciplines. In the current state of affairs, the most notable events comprise the fall of the Soviet block, progress of the emerging markets, the formation of the Eurozone and the financial crisis of 2008. These events can probably tilt the balance of power in favour of Euro. This is a conclusion that we hear on tv, we read in news papers and we discuss in tons and tons of meetings. However, in my opinion, the Euro is still years away to give competition to the USD.
My opinion is based on the following facts relating to USD and USA:
1. USA is still 1/5th of world economy (GDP based on PPP is c.$14bn of the worlds c.$70bn)
2. The American citizens are still the biggest consumers
3. USA still leads the world in innovation and formation of new business ventures (ipod, iphone, google, and just about anything that resulted in major consumption and wealth creation)
4. USA consumes almost 12% of oil production of the world. This makes the oil producers not only sell oil in USD terms, but also maintain their currencies pegged to USD.
5. USA influences world politics more significantly than any other country.
(I will keep on adding to the above list)
The Eurozone is a bunch of countries with decreasing population, decreasing consumption, almost no innovation, decreasing production of goods and services, collapsing economies (Greece, Spain and others), social unrest (like in France), corruption at state level in various countries and migration. The Union or its central bank never take a leadership position in any matter and are not proactive in any world level issue. Other than Germany, none of the countries in EU produces anything that the world really needs (probably France can say that their fashion products, perfumes and military supplies are essential and Nokia produces mobiles). [I will update my thoughts on Europe later].
Conclusion
The increase in debt of USA will surely lead to fall in value of the USD, but by no means does it mean that Euro will automatically rise. Euro will surely have movements against the USD, primarily due to speculators, traders, bankers and market makers etc. who manipulate markets for their own benefits. However, due to structural issues in EU, I do not foresee Euro rising in status as a reserve currency or a medium of exchange.
If an alternate currency was going to evolve, then it would most likely be the Chinese Renminbi (RMB), but this is a discussion for a later stage.
I am sure our Turkish friend would have said that you would need to change your paragraph on Eurozone, if Turkey was part of EU.
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