US may lose primacy as No: 1 currency

US may lose primacy as No: 1 currency
The US has the largest debt in world history and the dollar might lose its status as the No: 1 currency in the world. This was an opinion articulated by Jim Rogers at...

The US has the largest debt in world history and the dollar might lose its status as the No: 1 currency in the world. This was an opinion articulated by Jim Rogers at the St Petersburg International Forum (SPIEF).

Jim Rogers is an American businessman, investor, traveller, financial commentator, and author based in Singapore. He is the co-founder of the Quantum Fund and creator of Rogers International Commodities Index (RICI).

Background

The United States is the largest economy in the world in terms of nominal GDP. The US GDP was estimated to be $18.46 trillion in 2016. The US dollar is the currency most used in international transactions and is the world's foremost reserve currency.

The IMF has raised the US growth forecast from 2.3% to 2.7%in 2018, and from 1.9% to 2.5% in 2019. The US administration headed by President Donald Trump has maintained that the growth rate for the economy will be 3% in 2018. The US hopes to give a boost to its economy through expected tax cuts and federal spending. The IMF had ruled that US’s projection was unlikely as the labor market is already at a level consistent with full employment. It also critiqued the US administration’s ever evolving policy plans as a source for uncertainty.

The US stock market has enjoyed a bull market since 2009. For the first time since 2007, the market closed above 14,000 in February 2013. The market has been rising since the US presidential elections in 2016. In August 2017, for the first time in its 121-year history, the Dow Jones Industrial Average broke the 22,000 barrier. 

While the economy has continued to recover from the 2008 economic crisis, experts have also begun sounding the alarm that a number of factors including rising global debt could ultimately threaten the world economy. According to the Institute of International Finance (IIF), global debt hit an all-time high of $233 trillion (£169 trillion) in the third quarter of 2017.

The United States has the largest sovereign debt in the world. The debt is greater than what America produces in a whole year. In March 2018, US debt exceeded $21 trillion. Two thirds of this is debt held by the public, which is debt that that government owes to individuals, companies, and foreign governments, while the remaining third is intragovernmental debt.

Analysis

 The US dollar is becoming less appealing to investors as American debt continues to soar and the greenback is printed to cover it, investor Jim Rogers said at the St. Petersburg International Economic Forum (SPIEF). American currency will lose the status of main reserve currency much sooner than 2030, Rogers said at the Valdai Club’s discussion session, held as part of SPIEF.

On March 15, 2018, US national debt exceeded $21 trillion. This is more than America's annual economic output as measured by its gross domestic product. The last time the debt-to-GDP ratio was more than 100% was in 1946, when the nation had to pay for World War II.

To arrive at a country’s debt-to-GDP ratio, compare the national debt by year to its GDP or size of the economy. This should tell you a country’s ability to meet its obligations by how much it has produced or earned.

A true debt crisis occurs when a country is in danger of not meeting its debt obligations. The first sign is when the country finds it cannot get a low interest rate from lenders. Why? Investors become concerned that the country cannot afford to pay the bonds and will default on its debt. That happened to Iceland in 2008, throwing the country into bankruptcy.

The federal budget deficit of 5% of GDP this year is almost unprecedented at a time of full employment, and the Congressional Budget Office recently forecast that similar deficits will, on unchanged policies, remain in place for the whole of the next decade. 

“Over the next decade, we'll spend around $7 trillion - $55,000 per household - just servicing our debt. That's hardly the best use of our scarce tax revenue. People will look at what Brazil, Russia, China, India, Iran and other developing countries are doing,” Rogers said. “They are forming a competing currency right now,” he added. So, the dollar alternative will come from the countries that “have been bossed by the US, and they don’t like it, but have enough power to do something about it.”

A metals futures contract denominated in Chinese currency may soon be launched at the London Metal Exchange (LME), according to the exchange chief executive, Matthew Chamberlain. Earlier this year, China, the world’s biggest crude importer, rolled out a yuan-denominated oil contract that attracted nearly 27 billion yuan ($4 billion) during the first trading session. The contract saw interest from both domestic and foreign investors. The European Union is considering switching payments from the US dollar to the euro after Washington threatened to target European firms working in Iran, according to reports.

The measure may help the EU to retain one of the world's largest markets, which was opened for trade after the historic nuclear deal signed by Tehran and the P5+1 powers (China, France, Russia, UK, US, plus Germany) in June 2015.

Assessment

Our assessment is that US interest payments will quadruple, topping $1 trillion per year in as little as a decade. The mammoth deficit is because of the tax cuts and increased expenditure by the government. We feel that the fragility in US relationship with its allies and trade sanctions could also prompt some countries to look at alternate currencies to trade.

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