So Long Dollar, Hello Renminbi
When Will the Renminbi Overtake the Dollar?
by Simon Black
Without a doubt, the existing global financial system depends on the widespread use of fiat currencies issued by insolvent governments. The wealth of the world’s large financial institutions requires that there be currencies with sufficient size and circulation to absorb massive capital flows.
The current system is based primarily on the dollar; with a $14 trillion economy, the United States was for years the only country in the world with a sufficient money supply and financial infrastructure to take in the preponderance of the world’s wealth.
It is for this reason commercial loans, commodities contracts, international reserves, and cross border settlements have traditionally been denominated in US dollars.
Competing reserve currencies arose with the advent of the euro and Japan’s post-war rise; while the dollar has continued to remain dominant, these three are the only currencies which have the necessary supply and credit rating.
With trillions of dollars floating around the global financial system, managers are constantly making capital allocation decisions, moving funds in and out of various instruments. The reserve currencies play a big role in this because unallocated capital is frequently parked in their bond markets.
For example, large corporations or banks that are sitting on billions of dollars in cash typically purchase short-term US or European government bonds because the low default risk.
The dollar, euro, and yen have bond markets of such size that getting liquid is never a problem, even for billions of dollars. There is always a market for treasury securities, hence they are considered “cash equivalents.”