Will The Dollar Be Replaced?

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Will The Dollar Be Replaced? 

Is the dollar going the way of the dinosaur? One question I’ve gotten more than a few times in the last few months is “Will the dollar be replaced as the reserve currency of the world.” The short answer is, yes…but not in our lifetimes” Let me expound on that a little bit. When we say “reserve currency” what that means is that the dollar is the favorite currency in the world to hold. It is seen as the most stable and the least susceptible to volatility. Someone may counter, “But the dollar is losing value everyday with inflation. That is absolutely true, but so is every other government currency in the world. That leads me to my thesis for why I think the dollar will remain the reserve currency of choice for the foreseeable future – there are no better alternatives. In today’s podcast I’m going to explore three alternatives that some propose may replace the US Dollar and why I don’t think they will do so anytime soon.

First of all, what other world currency would be a better option? The Yuan? You might think the U.S. government is involved in manipulating the value of the dollar, but that doesn’t hold a candle to China’s role in its currency. China is a hands-on nation in every way – and that includes them not allowing the Yuan to truly float in its value against the dollar. Indeed, China is the second largest economy in the world, and it may even become the largest in the near future. But that does not mean that the world will have more confidence in the stability of its currency than that of the U.S. The ability for China’s leaders to change monetary policy on a dime with no accountability or rotation in leadership is what will keep them from becoming the world’s reserve currency anytime soon. The U.S, however, has both accountability and rotation of leadership affecting its currency. On the accountability front, if bad monetary policies persist in the U.S., the electorate will have something to say about it in the next election. Likewise Federal Reserve Chairs are not lifetime appointments – they rotate. It is this level of accountability and rotation engrained in our political system that I believe gives the dollar an longer term edge.

What about a cryptocurrency like Bitcoin? Could it supplant the U.S. Dollar? Although I think Bitcoin has a lot of advantages and will be one of the Cryptocurrencies to survive and have a very real role in our monetary system, I do not think it will replace the U.S. Dollar anytime soon. The primary strength of the dollar is that the U.S. Government is standing behind it. There is nothing standing behind Bitcoin other than the confidence of those who own it. It is true that there is a limited supply of Bitcoin, and that is one strong characteristic it has in its favor. But the determining factor of whether Bitcoin is worth $30,000 or $20,000 per Bitcoin is simply determined by the demand for it. Now admittedly, another advantage of Bitcoin is as people become disenchanted with all world currencies that are printing more money, Bitcoin could look more attractive, again, because it has a finite supply. But there will be certain panic and deleveraging cycles – certain recessions or mini-recessions where Bitcoin gets hurt when people want to convert their bitcoin to the most usable form of currency – pure cash. The U.S. Government, with all its flaws and weaknesses still retains the most confidence of any nation in the world to repay its debts. To put it bluntly, we are the least bad option on the table – and that’s good enough to keep the dollar at the top of the pack for now.

A third suggestion for what could replace the U.S. Dollar is a Central Bank Digital Currency (CBDC). Now this is broadly misunderstood, particularly by certain media outlets that are more interested in scaring their readers/viewers than informing them. This has led to speculation among some that the U.S. Government will create a new type of digital currency to replace the U.S. Dollar. The Federal Reserve recently printed a paper that clarifies what a CBDC is and what it would do (read full paper here). It would not replace the dollar, but simply be another form of the dollar. It would be a liability of the Federal Reserve, but instead of residing in a bank account or in cash, it would be digitally stored on a blockchain. Blockchains are a new form of technology that creates immutable ledgers that are verified and available for anyone to see. There are many pros and cons to this, and they are well outlined in the paper. Yes, there really are some advantages. But I think the disadvantages outweigh them.

One of the biggest drawbacks of a Central Bank Digital Currency is that it removes money from the banking system. Now I fully admit as a banker, I am biased, but banks truly serve an incredible role in the U.S. economy. Remember that banks borrow from the public in the form of deposits and then put that money to work in the form of loans in their communities for houses, business, development, and other consumer needs. Banks act as financial intermediaries that help put people’s savings to their highest and best use. If dollars are held directly with the Fed through a CBDC, it makes those dollars essentially dead dollars in the sense that they are not being repurposed elsewhere in the economy. The bank lobby is powerful, so for this reason I foresee an uphill climb for a CBDC. A big fear on main street is the fear that a CBDC would make cash obsolete. I don’t think that fear will be realized. There will always be a place for cash – even if a CBDC is implemented, it would more likely come alongside cash, rather than replace it.

That leads me to my best guess as to what will happen with a Centralized Digital Bank Currency. I think it could be implemented further down the road, but as a complement to the banking system and cash rather than a replacement. There will be many individuals with privacy concerns that will prefer to have their money in a bank or in cash. Back to my argument about the role of accountability – it would not be in politicians’ best interest to replace the forms of the dollar that the general public has an interest in keeping. So, in summary, I don’t think the dollar, or your cash, is going to become extinct anytime soon. We know that world governments cycle in their influence and in their dominance, so it is possible that some time way down the road there will be a better form of currency for the world to hold, but I think that is a development long in the making. In our lifetimes we are going to continue to be able to see the way we interact with dollars could change, but the primary vehicles of those dollars is likely to stay fairly constant.

At MBC and Foundation Bank, we can help you be better stewards of your dollars. Did you know that we have an interest-bearing checking account that earns 2.15% APY and has a host of benefits including cell phone protection, roadside assistance, credit monitoring and additional discounts? Certain requirements and restrictions apply, so visit our Accounts Page or contact your local branch to start your financial conversation and to learn more. If you’ve found this podcast helpful, we hope you’ll subscribe to it in your favorite podcast app and share it on social media. And until our next episode, God bless you.

-President Chad P. Wilson, CFP

Today’s episode of “Money Matters” was written and recorded by President Chad P. Wilson of McKenzie Banking Company / Foundation Bank on April 18, 2023. This episode does not constitute financial advice. Please consult a financial professional to discuss your specific needs. MBC/Foundation Bank is an Equal Housing Lender, Member FDIC.