The U.S. dollar is currently the world’s undisputed world reserve currency. It is estimated that the global share of foreign exchange reserves kept in U.S. dollars has been consistently hovering around 64% for several years. This is extraordinary, considering that the U.S. economy only constitutes about 25% of global GDP.
One side effect of U.S. dollar hegemony is that greenbacks are accepted in exchange for goods and services all over the world. Couple this with the United State’s history of low inflation and strong economic growth and it is easy to see why the dollar became the de facto global reserve currency in the post World War II era.
In fact, in some countries U.S. dollars are considered far superior to the prevailing local currency. Average people in countries as diverse as Argentina, Venezuela, Vietnam, Greece, Zimbabwe, Egypt and Nigeria all hoard U.S. dollars in an effort to preserve the purchasing power of their savings. It is much better to have a wad of $100 bills stashed under the mattress, rather than a pile of rapidly devaluing Argentinean pesos, Venezuelan bolivares, or Egyptian pounds.
But U.S. dollar hegemony has also conferred what the French Minister of Finance, Valéry Giscard d’Estaing, referred to in the 1960s as America’s “exorbitant privilege“. This is the ability of the country that issues the global reserve currency to run persistent current account deficits, allowing it to consume resources far in excess of those that it produces.
U.S. dollar hegemony has manifested itself in some surprising ways. For example, in 2016 it is estimated that the United States consumed 7,230 metric tons of silver, or more than 26% of global mine production. This is all the more shocking when one realizes that the population of the United States is only 4.3% of the world’s population.
A similar story unfolds for other luxury goods. U.S. diamond demand is estimated to be over 35% of the global pie. U.S. platinum demand is around 17.5% of global mine supply. I could not find data on colored gemstones, but you can bet that the trend is the same. With the exception of silver, the United States is not a significant producer of any of these materials – only a major consumer.
Gold is one of the few luxury raw materials where the U.S. does not take the lion’s share of global production. It only consumes about 193 metric tons of gold per annum – a mere 6% of total mine supply. But the U.S. is still the 3rd largest consumer of gold in the world. It is only surpassed by China and India, two nations that are absolutely obsessed with gold.
All of these statistics paint an alarming picture, especially considering that the global supply of luxury raw materials is slowly drying up. A world where the U.S. buys whatever it wants, regardless of its industrial production or GDP, does not seem like a very sustainable economic system. And when we examine U.S. dollar hegemony closely, we see the first signs of cracks beginning to appear.
After the 2018 tax cuts passed under the Trump administration, the United State’s budget deficit is projected to balloon to $1 trillion. That is disquieting enough by itself, but it doesn’t even contemplate the possibility of a recession or other systematic economic problem. If the U.S. does enter a recession, you can expect the budget deficit to rapidly inflate to a staggering $2 trillion.
Of course, I’m not a hyperinflation alarmist. Even these stupendously large deficits will not end U.S. dollar hegemony by themselves. But they might just signal a shift towards the eventual unraveling of our current economic system.
One way or another, the United States will one day no longer be able to grab an outsized portion of the earth’s bounty. A single country laying claim to 1/4 of the world’s silver or 1/3 of the world’s diamonds is patently ridiculous. It cannot continue and will not continue, even if the exact timing and mechanism by which U.S. dollar hegemony will unwind is unknown.
Even now, the world’s sole superpower status is being challenged by China. India is also on the horizon as an eventual economic competitor. Either the U.S. dollar is destined to fall in value or competing currencies will strengthen considerably.
Of course, the gradual decline of U.S. dollar hegemony begs a very simple question. If the rest of the world saves in U.S. dollars, then what should U.S. citizens save in? I will give you a hint here. The answer isn’t dollars.
Instead, I believe that it would be wise to invest in tangible assets, such as fine art, antiques, gemstones and bullion. These hard assets will help preserve and grow the purchasing power of your money during market crashes, currency crises and other major economic dislocations that are sure to come. This is especially important as the global financial system evolves and the United States inevitably loses its exorbitant privilege.
Perhaps most importantly, holders of U.S. dollars still have access to cheap hard assets today. People like you and I should take advantage of this fleeting strong dollar opportunity to add tangible investments to our portfolios while we can. Although U.S. dollar hegemony is clearly in decline, investing in fine art, antiques and bullion can help you avoid the worst fallout from the changing of the economic guard.
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