Global | What if the world runs out of money?

Summary

A global reserve currency is not just a symbol of power: it is the functional backbone of the international financial system. It is used to set prices, settle transactions, issue debt and, above all, provide liquidity. So what would happen if it didn’t exist?

Key points

• Key points:
• After almost a century of undisputed dominance, the dollar’s leadership is beginning to be questioned — and in Europe, aspirations are emerging to take its place.
• The consensus view is that the dollar is unlikely to be dethroned as the cornerstone of the global financial architecture, largely because of a powerful network effect: with everyone using it, walking away would be extremely costly. However, its lead is far from guaranteed.
• In theory, the euro is the natural heir (the yuan is left out as long as China maintains capital controls, which are central to its current development model). The ECB has prestige, the euro area is large and the euro is not being mired down by the political chaos unfolding in Washington.
• However, a reserve currency needs more than good domestic monetary policy: it needs a deep capital market, necessarily underpinned by safe fiscal assets, and the political space to act as the ultimate provider of global liquidity when the need arises.
• This leaves us with a major risk: extreme volatility and the amplification of global crises if confidence in the dollar is eroded and there is nothing viable to take its place.

Geographies

Topics

Tags