This week, the World Bank published a report predicting the demise of the US dollar as the major reserve currency by 2025. The transition will be driven by emerging market growth rates of 4.7% a year, compared to only 2.3% for developed countries. Six countries, Brazil, China, India, Indonesia, Russia, and South Korea, will account for half of the world economy by then.
The greenback will be replaced by a multi-currency system made up of the dollar, the euro, and the Chinese renminbi. The evolution will be driven by a sharp rise in third party international trade, direct investment, and mergers and acquisitions. Global multinationals based in the developed world will play a diminishing role on the world stage.
While I agree with the report’s growth assumptions, its conclusions are a mile off. It assumes that Chinese growth continues at its blistering, double digit rates. It won’t. I see Chinese growth peaking out in five years, when its population pyramid starts to invert as a result of the “one child” policy. It also assumes that the Chinese float the renminbi, which they have been so far been loath to do. The rudiments of a domestic Chinese bond market have yet to develop.
As for the Euro, it would not exactly be my first choice for a reserve currency these days. It might not even exist in 15 years, at least in its current form.
Reports like this have been spewing forth from international agencies for at least the last four decades, and I immediately file them in the wastebasket where they belong. By the time the dollar really loses its reserve status, my main concerns in life will be what flavor the Ensure is that day, and whether my Depend’s are getting changed on time.
By. Mad Hedge Fund Trader