Your US Dollars Are Safe
🚀 The quick version: We have seen lots of headlines lately questioning the status of the U.S. Dollar as the world’s reserve currency, and we have gotten quite a few questions from you guys on this topic… so let’s break it down.
For some quick history, the greenback (another term for the dollar) was first officially established as the world’s reserve currency at the end of WWII (1944 to be exact). At the time, the U.S. had the most gold reserves in the world, so other countries decided it would be easier to peg their currencies to the U.S. Dollar vs. the lessor amounts of gold they had within their own borders.
Nations everywhere began using the U.S. Dollar to facilitate global trade and this has continued right up to today (as an aside, this is part of the reason the U.S. government is able to issue so much debt - because that debt is bought by countries who need U.S. dollars to transact and grow).
Now, speculation seems to be popping up left and right that the U.S. Dollar may lose this status with people pointing to certain countries making one off deals using other currencies or potentially the recent spending by the U.S. government causing too much debt.
As usual, traditional media has swooped in trying to scare people everywhere with little understanding for the actual nuances involved or how the system works.
👪 How it affects your family: The short version is we don’t think you should spend any time worrying about this.
The dollar isn’t going anywhere as the world’s reserve currency anytime soon and the all the hard work you have put in to earning those dollars won’t be affected (aside: if you have younger kids and are looking for some simple games to start to teach them about money we have a free resource here).
For a currency to be considered for reserve currency status, it needs to meet three main criteria. Let’s discuss:
Size. The global reserve currency must exist in massive volume around the world to be able to meet demand for trade (think lots and lots of printing presses). This narrows the field immediately to major currencies (the Dollar, Yen, Yuan, and Euro). Cryptocurrency mostly is only available in limited quantities making this not an option right now.
Access. To be a reserve currency you need to be able to get access to a nearly unlimited supply of it at the drop of a hat to facilitate global commerce. Once again this rules out cryptocurrency and it would be hard pressed to say there is a currency other than the Dollar that offers this ability.
Trust. Maybe most importantly to be the world reserve currency you need to have confidence that it is a safe store of value and that the government will not intervene into the system. If a country tries to micro manage the value (like China’s Yuan) or the underlying system is less stable (think countries leaving the Euro), this will not work. Here again, there is really no better option than the US Dollar.
Having said all of this, it does not mean that the U.S. government can continue to be reckless with spending (there comes a point where trust is broken), but for now this is not a worry for families and you should dismiss headlines that make you think so.
