What Will Happen if U.S. Dollar Loses Reserve Status?
Based on a few factors, the U.S. dollar could lose its reserve status. It’s the king currency for now, but it may not remain so in the coming years. Beware if you hold U.S. dollars or U.S. dollar-denominated assets.
Will we see an outright dollar collapse? No, at least not right away.
Know this: the U.S. dollar is currently like an elephant, and it could take several years to lose its large status. At first there could be a very gradual and consistent decline in the value of the dollar. Rigorous selling would come in the later stages.
As this happens, the biggest losers are going to be Americans. As the U.S. dollar loses value, Americans will find themselves paying more for things, and their wealth will diminish significantly.
If you think things are expensive now, prices could skyrocket in the coming years.
Why Have Such A Bearish Outlook on the U.S. Dollar?
Here’s what everyone fails to understand: the U.S. dollar holds reserve status in the global economy because it’s perceived to be a strong currency, and there’s a lot of trade denominated in U.S. dollar terms.
However, in the background, the fundamentals of the U.S. dollar have been diminishing very quickly.
On the flip side, we have been seeing currencies like the Chinese yuan rise in status. Yuan trading hubs have been popping up in major countries, and the European Union (EU) literally built a new system to avoid the U.S. dollar and to trade in euros.
Furthermore, the U.S. government has been spending without remorse; the U.S. national debt has soared and continues to balloon.
And the list goes on.
Things are so bad, even big U.S. banks have been talking about it. Keep in mind, their assets are based in U.S. dollars. They could be hurt a lot by a decline in the U.S. dollar. Usually you don’t hear this sort of thing from them.
Recently, JPMorgan Chase & Co. (NYSE:JPM) wrote an essay called “Is the dollar’s ‘exorbitant privilege’ coming to an end?” It says the following:
In other words, in the coming decades we think the world economy will transition from U.S. and USD dominance toward a system where Asia wields greater power. In currency space, this means the USD will likely lose value compared to a basket of other currencies, including precious commodities like gold.
(Source: “Is the dollar’s ‘exorbitant privilege’ coming to an end?” JPMorgan Chase & Co., July 10, 2019.)
The bank is literally telling clients to diversify out of the U.S. dollar. JPMorgan Chase said, “At this stage of the economic cycle, we believe this exposure should be more diversified. In many cases, our recommendation would likely be to place a higher weighting on other G10 currencies, currencies in Asia and gold…” (Source: Ibid.)
Pay Attention to Gold if U.S. Dollar’s Value Tumbles
Dear reader, I can’t stress this enough: if you hold U.S. dollars, be very careful.
If you look back in history, you will find that currencies don’t remain dominant forever. They eventually lose their “king” status. Before the U.S. dollar, the British pound was the reserve currency.
As the U.S. dollar loses its reserve status, looking at gold wouldn’t be a bad idea. Gold is one of the best hedges against currency devaluation. It could preserve wealth.