The US Dollar Will Stay the World’s Reserve Currency

A file photo of U.S. currency. Luis Robayo/AFP via Getty Images

Commentary

There has been a lot of worry about the burgeoning partnership between Russia and China. Russia’s economy is very small, and it cannot afford to fight the continuing war in Ukraine. It needs China to help, and China is more than willing to buy energy products from Russia. The trading is being executed in Chinese yuan. Of course, Russia needs what China is selling and is happy to sell the Chinese oil at a huge discount to the world market price. This development scares a lot of people, and their fears are fanned by reporters on television that breathlessly report that the U.S. dollar is in danger of losing its status as the world’s reserve currency. What happens, however, to Russia when it runs out of U.S. dollar reserves? How do the Russians buy goods on the world wide market at a competitive price? They are going to have to ask the Chinese to be their banker.

Instead of worrying if the sky is falling, we ought to welcome the competition! Americans used to be competitive. The United States has a lot going for it, despite the problems we have. In many cases, the problems are caused by our own doing and not because we lost a competitive race with another country.

Below is a chart showing the volume that the United States exports in goods and services. Those exports aren’t going to dry up anytime soon. The United States is the most innovative country on earth, with the most powerful economy on earth. People from outside the United States want and demand U.S. stuff. China puts up good numbers, but the Chinese engage in almost all commoditized manufacturing with no value added. For an example, compare a Chinese refrigerator to a U.S.-made SubZero. Sure, the Chinese one is cheap and keeps your food cold, but the odds are really good that it will not last nearly as long as the SubZero made in Wisconsin. You will have more problems with it over the lifetime of the refrigerator, too.

One huge mistake people look at is simply the gross numbers the United States imports and exports. They assume that if the number is negative, a trade deficit, it’s bad. However, that isn’t necessarily the case. If the United States is exporting high-quality value-added goods, and importing cheap commoditized goods, that’s usually a net positive for the pocketbooks of U.S. citizens. Why should you spend more money on something that can be produced and imported somewhere else? We should take our resources and apply them to manufacturing goods and services that bring the highest margin for our economy.

The rest of the world also knows that there is no transparency in China. They know that China is a communist country, and you cannot entirely trust a communist country. Other countries will use Chinese yuan around the edges, but when push comes to shove, there are only a few currencies that they will hold and put their faith in. The U.S. dollar is their number-one choice, along with the British pound, Japanese yen, the euro, and the Swiss franc next in line. The United States is the only country in the world with a large enough supply, or float, of currency to support the world’s trading operations. That’s not going to change anytime soon.

At the same time, the United States should think about using its economic might as a weapon against our enemies. We shouldn’t use tariffs, however, because those get passed down directly to consumers. However, we could change tax policy and go to a so-called Fair Tax system that would increase domestic investment by building new plants and buying equipment. We should think about redoing our oppressive and bureaucratic system of regulation to make it easier and cheaper to innovate and employ people. Currently, the system pays no mind to opportunity costs, and we over-regulate everything. We do need to think hard about helping U.S. companies and people defend their intellectual property. We also need to think long and hard about how we keep international students who complete graduate degrees in STEM (science, technology, engineering, math) programs inside the United States working for U.S. companies rather than going home and taking their intellect with them.

China is certainly competing head to head with the United States both economically and militarily. But the flip side for China is their demographics make sustained domination difficult. They don’t have enough people. When the United States doesn’t have enough people, we rely on immigration to bring them in. You never hear stories of people marching to illegally cross the Chinese border to work in China, because no one wants to immigrate there. They want to leave instead.

Another advantage the United States has is intellectual capital. The United States has the best college and graduate schools in the world, despite the problems they are having with discrimination these days. The world’s best engineering, medical, business, and science schools are in the United States. Hopefully, the move toward equity instead of merit in our colleges and universities is a passing phase. Slowly but surely the school choice movement is taking hold in K–12 education across the country, and that will have big ramifications for our educational systems. They should get significantly better with school choice since it will bring competition into the education market.

The U.S. medical system is the best in the entire world. It has problems for sure, but where else would you want to go if you were really sick? People don’t go to China for cancer operations. They come to the United States. The United States develops and innovates more drugs and medical devices than any other country in the world. The demand for those kinds of goods is going up, not down, and they are paid for in U.S. dollars.

Here is a test for you: Go to a merchant in a third-world country anywhere. See if you can buy what they are selling with a U.S. dollar. Then see if they will take Chinese yuan. My guess is that you will be able to spend dollars anywhere you go. It will be a challenge for you to spend Chinese yuan.

According to World Bank data, in 2021, China had a GDP of $17,734,062 trillions, and U.S. GDP was $23,315,080 trillion. For what it’s worth, Russia’s 2021 GDP was $1,778,782 trillion. The entire world had a GDP of $92 trillion. China’s economy will grow, but the United States isn’t sitting still. The only positive export Russia has is hard assets, like minerals, oil, and vodka. New York, California, and Texas all have larger economies inside their state than Russia, and Florida is close. Because the U.S. economy is so incredibly dynamic, it can grow more quickly than other world economies. China’s economy is nowhere near as dynamic.

Every time China exports something to the United States, it gets paid in U.S. dollars. It has to take those dollars and either converts them to another currency in the foreign-exchange market or recycles them into U.S. Treasury debt. It pays for China to hold a lot of U.S. Treasurys and U.S. dollars since we are China’s largest trading partner by far. When the Chinese trade with other countries, in most cases the export/import currency used is U.S. dollars. Vietnam doesn’t want Chinese yuan and the Chinese don’t want the Vietnamese dong. China might try and tell Vietnam to do the trade in Chinese yuan, but because China mostly exports commoditized goods that could be manufactured anywhere, Vietnam can tell the Chinese to go pound sand. Given time, India, and Mexico can replicate what China has.

It is not a stretch to imagine a future in 20–30 years where Mexico produces a lot of the commoditized goods China currently produces because the supply chain will be shorter.

The advantage China has set up for itself is that it built huge, focused, centralized manufacturing hubs that produce a lot of commoditized goods cheaply. That centralization combined with cheap labor makes them very competitive. On the flip side, China has a billion people, so it is a big market. They will consume a lot of goods, but, interestingly, China needs to import the ones that are most essential to keeping its people happy, like food. China cannot grow enough food inside its own borders to satisfy the appetite of its people. China also cannot produce enough indigenous energy to satisfy the needs of its economy.

You know who can do both of those things? America.

At the end of the day, if a world war started similar to the one that started Sept. 1, 1939, ask yourself which country’s passport you’d like to have in your hand if you were trapped and needed to get out. The country you picked is going to have a strong world currency that is accepted anywhere. My guess is that, if given a choice, 99.9 percent of the world would be happy to be holding a U.S. passport. They’d want to have that country’s currency in their pocket, too.