When this article was originally published, a frequent news subject was whether the dollar could remain the world’s principal currency, especially as foreign governments pursued currency swaps and commodity-trade arrangements intended to reduce dollar use. There was little dispute that, in the years leading up to publication, the dollar had lost some appeal amid the Federal Reserve’s extraordinary quantitative-easing programs, a major expansion of the Fed’s monetary base, and record annual deficits and national debt. Its value had also declined against other major currencies during those years. Viewed broadly, U.S. financial health—or the absence of it—appeared far from reassuring. At the time of publication, on-balance-sheet debt had moved beyond annual GDP, reaching 103.2%, a condition that may have helped produce the slow growth reported after the Great Recession ended. It also created greater exposure to higher future interest rates, which would direct a larger share of the annual budget toward debt-service payments. On those points alone, the dollar’s role as the world’s currency could have seemed close to ending. A closer look, however, suggested that reports of the dollar’s demise may have been overstated. This article examines why the dollar did not appear to face an immediate loss of reserve-currency status and what signs could indicate that such a transition had begun.
Foreign Debt Holdings Reached an All-Time High
If the dollar were genuinely in danger of losing its position as the world’s currency, a meaningful drop in foreign countries’ Treasury holdings would be one expected signal. Yet, despite the unfavorable coverage the dollar had received during the year or so before publication, foreign ownership had risen rather than fallen over that period. The original article cited This chart from the U.S. Treasury, which reported that foreign holdings of U.S. debt increased by $318 billion during the one-year period ending in May of 2014. Japan and Belgium accounted for much of that increase. Russia’s reduction of $30 billion over the prior year was the clearest example of a nation diversifying away from the dollar, presumably because of the conflict in Ukraine and sanctions imposed by the United States, the EU, and NATO. A sharp foreign selloff of Treasuries would have warranted concern; until then, the article advised readers to view sensational headlines cautiously.
Reasons Foreign Nations Held U.S. Debt
Readers may have wondered why foreign governments held such a large share of U.S. debt—nearly one-third of the Treasuries issued by the U.S. Treasury at the time. Those holdings helped support the dollar’s strength relative to the holder’s domestic currency. That relationship made goods exported from the foreign country to the United States more attractive and affordable. Because the United States consistently operated a trade deficit with most nations, the theory was that, without using excess reserves to support the dollar, exports to the United States would become more costly. It was therefore unsurprising that the top trading partners of the U.S. also ranked as the largest U.S. debt holders. A substantial decline in trade with countries holding considerable Treasury positions could have been a reason for concern, since such countries would have less motivation to keep their currencies weak against the dollar. Unless that occurred, however, the article’s view was that major U.S. trading partners would probably remain among the largest holders of U.S. debt.
China’s Gold Holdings
At publication, During the year before this article was published, China had modestly reduced its Treasury position by approximately 2%, while reports indicated that it was accumulating gold at a rapid rate. Because China did not disclose its official holdings regularly—the last report referenced was from 2009—its actual gold reserves were difficult to confirm. Financial experts nevertheless estimated its holdings at gold reserves to be as high as 5,000 tons, which would have placed China second in gold reserves behind only the United States. Some financial-media commentators speculated that China intended to establish the Yuan as the world’s currency and ultimately make it gold-backed, a step that would, in their view, make it the preferred global currency. The article noted, however, that the People’s Bank of China, like the Federal Reserve, was known for accommodative monetary policies. It would therefore have been surprising for the PBOC voluntarily to restrict the currency’s flexibility through a gold standard. Put another way, the article did not expect the Yuan to replace the dollar soon. The Euro was the only other currency identified as a possible contender, but with many European countries then in, or near, recession, the near-term prospect was described as extremely unlikely.
Summary
In closing, the original article recognized legitimate concerns about the U.S. dollar’s strength and its role as the world’s currency, but foreign Treasury holdings pointed in the opposite direction. Even if Russia continued selling its remaining Treasury position, the article reasoned that the effect on the dollar would likely be very small. Another major U.S. trading partner would likely absorb those reserves. Confidence can of course disappear quickly and prompt a large Treasury selloff, although the article considered that outcome somewhat unlikely in the near term. So long as the United States continued running trade deficits with major trading partners and meeting its debt-service payments, the article regarded a gold-backed Yuan as the only short-term dollar risk—and considered that scenario unlikely. It also expressed the view that every fiat currency would ultimately fall to its intrinsic value, meaning zero. For that reason, Atlanta Gold & Coin historically advocated investing in gold.
