These six are used in these amounts because of both historical reasons and the fundamentals that affect their
relative appeal. As explained and shown in charts earlier in this study, a reserve currency’s usage, like a
language’s usage, lags the fundamental reasons for using it by many years because the usage of currency is not
easy to change. Right now the four most used reserve currencies—the US dollar, the European euro, the Japanese
yen, and the British pound—are of the old leading empires of the post-1945 period though they have limited
fundamental appeal. They came from the G5 countries and are about as anachronistic as the G5 is.
As for the fundamental appeal of each of these currencies:
The dollar was discussed so I won’t repeat the picture.
The euro is a weakly structured currency made by countries that are tenuously held together by a currency
union that is highly fragmented on most issues and economically and militarily weak.
The yen is a currency that is not widely used internationally by non-Japanese people and suffers from a lot of
the same problems that the dollar does, including having too much debt that is increasing quickly and being
monetized so that it is paying unattractive interest rates. And Japan is only a moderately powerful country, not
a leading power in any important way.
The British pound is an anachronistically held currency that has relatively weak fundamentals, and the
country is relatively weak in most of our measures of a country’s economic/geopolitical power.
Gold is held because it has worked the best for the longest time and, like the British pound, because it was
held from a past time—i.e., before 1971 when gold was at the foundation of the world’s currency system. It
has appeal because it doesn’t have the previously described weaknesses of the fiat currencies being
overprinted. At the same time the size is limited because the gold market is limited in size.
The Chinese RMB is the only currency to be chosen as a reserve currency because of its fundamentals—
China has the largest share of world trade, its economy is roughly tied for the biggest, it has managed its
currency to be relatively stable against other currencies and goods and services prices, and its reserves and its
other strengths are large. Also, it doesn’t have the 0% interest rate, negative real interest rate, and the printing
and monetization of debt problem though it does have a lot of domestic debt that has to be restructured. Its
drawbacks are that it is not widely used, it doesn’t allow the free flowing of capital and a free-floating
exchange rate, its capital markets and its financial center have to be better developed, its clearing system is
undeveloped, and it has yet to build world investors’ trust.
History has shown that whenever currencies are not desired they are sold off and devalued with the capital
finding other investments (e.g., gold, silver, stocks, property, etc.) to go into, so there is no need to have an
attractive alternative foreign currency market to go into for the devaluation of a currency to occur. In other
words the US could see its reserve currency status reduced without there being an alternative reserve currency
to go into.
Without the US disrupting China’s currency and capital markets they will likely develop quickly and
increasingly compete with the US currency and credit markets. You won’t see this all at once, but you will
see it evolve that way at a shockingly fast pace over the next 5-10 years. As shown in the Dutch, British, and