At this time, China has the world’s largest reserves. The United States, while not having large reserves, has
the power to print the world’s reserve currency. The ability to print money and have it accepted by the world,
which is an ability that only a major world reserve currency country (especially the United States) has, is the
most valuable economic power a country can have. At the same time, a country that does not have sizable
reserves (which is the position the US is in) is highly vulnerable to not having enough “world money.” That
means that the US is now very powerful because it can print the world’s money and would be very vulnerable if
it lost its reserve currency status.
What types of money and credit have been and now are most important? The chart below shows the percentages of
reserve assets that are held in all countries’ reserves combined. As shown, gold’s share of total reserves has fallen
from 65% in 1945 to about 10% today, though devaluation of the dollar and the surge in gold’s price led gold’s
share of central bank reserves to be the largest until the early 1990s, after which its share of world reserves
declined to only 10%. The US dollar accounts for over 50% of reserves held and has unwaveringly remained
the primary reserve currency since 1945, especially after it replaced gold as the most-held reserve asset after
there was a move to a fiat monetary system. European currencies have remained steady at 20-25% since the late
1970s, the yen and sterling are around 5%, and the Chinese RMB is only 2%, which is far below its share of world
trade and world economic size, for reasons we will delve into in the Chinese section of this book. As has been the
case with the Dutch guilder and the British pound, the status of the US dollar has significantly lagged and is
significantly greater than other measures of its power. That means that if the US dollar were to lose its reserve
status and significantly depreciate in value it would have a devastating effect on the finances of those
countries holding those reserves as well as private-sector holders of dollar-debt assets. Who would be the
winners? Those with dollar-debt liabilities and those with non-dollar assets would be the big winners. In the
concluding chapter, “The Future,” we will explore what such a shift might look like.

The next chart shows shares of world production for the US, UK, Russia, and China. It is shown on a purchasing
power parity basis, which means after being adjusted for differences in prices of the same items in different
countries. For example, if an item in one country was twice the price of the same item in a different country, it
would be counted as twice as much production even though it’s the same thing if counted on a non-purchasing
power adjusted basis and it would be counted as the same amount of production if counted on a purchasing power
parity basis. As shown the United States produced many times as much as the other major countries
produced in 1945, and though its share declined, it remained much higher than any other country until
recently when it was surpassed by China. In non-purchasing power parity terms China’s output is about
70% of the US output and growing at a significantly faster pace. Let’s not split hairs over small differences in
imprecise measures. The most important headline is that the United States was the dominant economic
producer in 1945 and didn’t have a comparably sized economic competitor anytime in the last 100 years up
until recently and now it does in China, which is of comparable size. China is also growing significantly
faster, so if this continues, it will soon be as dominant an economic power as the United States was in 1945.
Where the US Is in Its Big Cycle
I think we know roughly where it is.
As previously explained the Big Cycle of rising and declining empires and their reserve currencies is a cycle that
begins with a new world order that comes after a war in which a) there is an environment of peace, prosperity, and
productivity in which debt growth is allocated well and sustainably (i.e., most debts are used productively to
produce incomes that are greater than debt service so most debts are paid back), equities do well, and the society
gets rich with individuals benefiting from the prosperity, though they benefit disproportionately, which eventually
leads to b) excessive debt growth to finance speculation and over-consumption, which results in incomes being
inadequate to service the debt, which leads to c) central banks lowering interest rates and providing more credit,
which produces greater wealth gaps and more over-indebtedness, until d) over-indebtedness becomes so large and
central banks lose their ability to create credit growth that produces self-funding debt growth (i.e., in which debts
don’t accelerate relative to the incomes needed to service them without central bank subsidies), which e) produces
severe economic downturns with large wealth gaps that lead to internal conflict and leads to f) lots of printing of