The concise story of global reserve currencies throughout time

Michael Pettis, a senior fellow at the Carnegie-China centre, challenges the claim that the US dollar is just another reserve currency that will eventually be replaced by one or more currencies. He argues that the role of the US dollar in the global trade and capital flows is unique due to the unprecedented role played by the US economy. Unlike the past, where trade was ultimately settled in gold or silver, the US dollar dominates the global trading system. This is because the US deep and flexible financial system, and its well-governed asset markets, make it the preferred location into which surplus countries dump their excess savings. Nearly 70-80 per cent of all the excess savings are directed into the wealthy anglophone economies, which run corresponding deficits. Pettis discusses how this creates major economic distortions for the anglophone economies. He argues that the end of dollar dominance would mean the end of the current global trading system and the end of mercantilist policies that allow surplus countries to become competitive at the expense of foreign manufacturers and domestic demand. Pettis believes it will require a massive transformation of the structure of global trade which is likely to be a very disruptive transformation.


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