The Dollar’s Replacement Is Already Here – You Will Never Guess What It Is

With the Fed taper officially underway, you’ll be hearing a lot about a dollar revival over the next year.

Don’t buy into it.

At the end of the day, the dollar is still a flawed currency. It’s not backed by anything other than the word of a government that’s proven frivolous at best and incompetent at worst.

The United States has racked up so much debt, it’s practically unpayable. We’ve reached the point where, even if the government doesn’t default outright, it’s still lost credibility.

No one believes in the United States anymore.

And can you blame them?

When we’re not meddling in the Middle East, launching drone strikes, arming rebels, or toppling governments, we’re spying on our allies…

It’s only a matter of time before our currency is shunned.

The dollar is doomed, that’s a fact.

The question now is: What replaces it?

Special Drawing Rights

Some experts — notably those from China, our largest creditor — have suggested global monetary authorities adopt the Special Drawing Right (SDR) as the new world reserve currency.

The SDR was created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system. Its value is based on a basket of four key international currencies, and it can be exchanged for freely usable currencies.

For a long time, its only function was to facilitate global trade.

However, back in 2009, the governor of the People’s Bank of China, China’s central bank, nominated the SDR as a replacement for the dollar.

Basically, China is beginning to realize that the United States is more interested in inflating its debt away than it is in actually paying it off…

With each passing year, the trillion-plus dollars China holds are worth less and less. It’s being debased. And worse, the United States has twice teetered on the brink of default, as Congress held the debt ceiling hostage.

The IMF understands this as a threat to the global financial system, and in 2010 it released a report on the subject.

In the report, the IMF basically agreed that while there would be some “technical hurdles,” an increased role for the SDRs could help correct global imbalances and shore up the global financial system.

In addition to serving as a reserve currency, the IMF proposed creating SDR-denominated bonds, which could reduce central banks’ dependence on U.S. Treasuries. The Fund also suggested that commodities, like oil and gold, could be priced using SDRs as opposed to U.S. dollars.

Finally, the IMF is also seeking to include China’s currency, the renminbi, in the SDR basket — which may be what it really wanted after all.

The Renminbi

Make no mistake; China is out to kill the dollar.

More than that, the Middle Kingdom seeks to position its currency as the heir apparent.

Indeed, China is the number one exporter on the globe — and soon it will have the world’s largest economy, as well.

The Chinese would like to see global currency usage reflect this shift in global economic power, and so they are  aggressively taking steps to internationalize the renminbi or the yuan.

The main way China is doing this is through currency swaps. Currency swaps allow countries to use their native currencies in trade, rather than first converting to dollars.

This is an effective way to erode the dollar’s prominence, as it means countries no long need to store dollars to trade.

Over the past few years, China has signed nearly two trillion yuan worth of currency swap deals with 20 countries and regions.

As recently as October (while Uncle Sam was busy playing games with the debt ceiling), the PBOC and ECB opened up a three-year swap line worth 350 billion yuan ($57 billion) when Chinese currency is provided to the ECB, and 45 billion euros ($61 billion) when money is given to the PBOC.

It’s a slow process, but the strategy is succeeding.

Earlier this year, a survey from the Bank for International Settlements showed the renminbi entered the list of top 10 most-traded currencies for the first time.

And earlier this month, a report from financial-services firm SWIFT revealed that the renminbi had overtaken the euro as the second most used currency in global trade finance. Its share has leapt from a mere 1.89% in January 2012 to a respectable 8.66% in October.

No doubt, there’s still much work to be done. The value of the yuan is still heavily influenced by the government, and it’s not permitted to trade freely. At some point, China will have to clear these restrictions and give more power to the market in determining the value and flow of its currency.

Still, it’s making noteworthy progress. And if the dollar collapses, China will look to fill the void with the renminbi.

A Universal Digital Currency

There is a third option.

It’s entirely probable an overhaul of the global financial system would give rise to a new currency, one that isn’t tied to any one specific country.

That is, if the dollar goes down, the international community won’t be eager to make another fiat sovereign currency its replacement…

It’d look for something more stable, more predictable. It wouldn’t be gold or silver, either; it would be something digital, something befitting the modern era.

We’re talking about so-called “cryptocurrencies.”

These are currencies that are digitally mined, and thus, impossible to counterfeit.

They’re also limited in supply, so there’s no concern about inflation or excessive printing.

And because they’re not backed by a single country, they’re immune to sovereign debt crises.

By: Jason Simpkins

Jason Simpkins is a seven-year veteran of the financial publishing industry, where he’s served as a reporter, analyst, investment strategist and prognosticator. He’s written more than 1,000 articles pertaining to personal finance and macroeconomics. Simpkins also served as the chief investment analyst for a trading service that focused exclusively on high-flying energy stocks.