http://researchcommons.waikato.ac.nz/ Research Commons at the University of Waikato Copyright Statement: The digital copy of this thesis is protected by the Copyright Act 1994 (New Zealand). The thesis may be consulted by you, provided you comply with the provisions of the Act and the following conditions of use: Any use you make of these documents or images must be for research or private study purposes only, and you may not make them available to any other person. Authors control the copyright of their thesis. You will recognise the author’s right to be identified as the author of the thesis, and due acknowledgement will be made to the author where appropriate. You will obtain the author’s permission before publishing any material from the thesis. Will the US Dollar Remain the Sole Key Global Reserve Currency in the Future? The Implications of Rising Debt, Unorthodox Monetary Policy and Emergence of Alternative Currencies. Brenden Merrill 11/5/17 Economics Thesis 158 Abstract This thesis studies two key risks that have the potential to dethrone the US dollar’s position as the dominant global reserve currency. Specifically, it contends the first risk stems from a future loss of confidence in the US dollar’s value from excessive indebtedness and unintended consequences from the implementation of unorthodox monetary policies. The second risk could come from other major states circumnavigating the US dollar by utilising and facilitating the rise of other reserve currencies. To examine these two risks, an interpretive methodological approach is utilised to study a wide variety of relevant qualitative and quantitative data. Based upon this, the thesis seeks to answer the following question: will the US dollar remain the sole key global reserve currency in the future? It finds that the US dollar is in danger of being dethroned and is unlikely to retain its position as the sole key global reserve currency. Yet, if managed properly by elected leaders, excessive indebtedness will not significantly affect the US dollar’s status. However, the rise of other currencies, most notably the Chinese Yuan and the inherent potential of new gold backed and cyber backed currencies, is a risk that cannot be completely mitigated. Therefore, in the future, the US dollar will likely lose its monopoly as the key reserve currency and have to be content with the US dollar being the first or second most important currency in a duplicity/multiplicity key reserve currency world. 1 Table of Contents Appendix List_________________________________________________________ PG 3-5 Introduction___________________________________________________________ PG 6-8 Methodology_________________________________________________________PG 9-13 Literature Review_____________________________________________________PG 14-19 Chapter 1: The Evolution of Global Reserve Currencies______________________ PG 20-36 Chapter 2: Economic Theory___________________________________________ PG 37-48 Chapter 3: The Rise of Sovereign Debt____________________________________PG 49-63 Chapter 4: Unorthodox Monetary Policies_________________________________ PG 64-84 Chapter 5: Responding to Excessive Indebtedness__________________________ PG 85-105 Chapter 6: The Rise of Potential Future Reserve Currencies_________________PG 106-131 Conclusion _______________________________________________________ PG 132-135 Reference List_____________________________________________________ PG 136-157 Appendices________________________________________________________PG 158-206 2 Appendix List Table 1) Currency Distribution of Global Foreign Exchange Market Turnover (Percentages)__PG 34 Table 2) International Bonds and Notes Outstanding (Selected Currencies)__________ PG-35 Figure 1) Countries GDP as a Percentage of World GDP (2016)___________________ PG 8 Figure 2) The Value of Gold in USD's During the 1970s_________________________PG 33 Figure 3) Long Term Effective Fed Fund Rate__________________________________PG33 Figure 4) United States Annual Inflation Rate in the 1970-80s_____________________PG 33 Figure 5) Total Foreign Reserves (Valued In US dollars)_________________________PG 33 Figure 6) Allocated Reserves Valued in US dollars (Allocated Reserves)____________PG 34 Figure 7) Share of the U.S. Dollar as a Percentage of Allocated Reserves____________PG 34 Figure 8) Long Term United States Debt to GDP Percentage___________________PG 49, 56 Figure 9) United States Long Term Budget Deficits/Surplus___________________PG 50, 56 Figure 10) United States Sovereign Debt Breakdown____________________________PG 51 Figure 11) Foreign Ownership of US Sovereign Debt____________________________PG 52 Figure 12) Annual United States Real GDP Growth Rate Percentage (2010 Prices)_PG 53, 93 Figure 13) US State and Local Government Debt______________________________PG 54 Figure 14) Total Sovereign Debt as a Percentage of GDP_________________________PG 57 Figure 15) Japan's Total Sovereign Debt as a Percentage of GDP___________________PG 57 Figure 16) General government net lending/borrowing (Percent of GDP)____________PG 57 Figure 17) Bank Nonperforming Loans to Total Gross Loans (%)__________________PG 59 Figure 18) Percentage Change in Real GDP Compared to 2008 Levels______________PG 59 Figure 19) Total Value of Liquid Reserves (Valued in US Dollars)_________________PG 61 Figure 20) Total Reserves as a Percentage of Total Debt________________________PG 61 3 Figure 21) 1 Year US Bond Yield (Historical)_________________________________ PG 64 Figure 22) 1 Year US Bond Yield___________________________________________PG 64 Figure 23) 10 Year US Bond Yield (Historical)________________________________PG 65 Figure 24) 10 Year US Bond Yield__________________________________________PG 65 Figure 25) Interest Payments Expense as a Percentage of Federal Tax Revenue_______PG 65 Figure 26) 1-Year Bond Yields (Historical)___________________________________PG 65 Figure 27) 1 Year Bond Yields__________________________________________PG 65, 82 Figure 28) 10 Year Bond Yields (Historical)___________________________________PG 65 Figure 29) 10 Year Bond Yields_________________________________________PG 65, 82 Figure 30) Federal Reserve Funds Rate_______________________________________PG 66 Figure 31) European Central Bank Interest Rates____________________________PG 67, 68 Figure 32) Bank of Japan Interests Rates___________________________________PG 67, 69 Figure 33) Bank of England Prime Interest Rate________________________________PG 67 Figure 34) Inflation Rates in the Post GFC Era_________________________________PG 68 Figure 35) Federal Reserve Balance Sheet_________________________________PG 72, 73 Figure 36) Bank of Japan Balance Sheet (In Trillions of ¥)_______________________PG 75 Figure 37) ECB Balance Sheet (In Trillions of €)_______________________________PG 77 Figure 38) Central Bank Balance Sheet Value as a Percentage of GDP______________PG 79 Figure 39) United States Adjusted Monetary Base______________________________PG 79 Figure 40) United States M2 Money Supply___________________________________PG 79 Figure 41) United States Velocity of M1 Money Stock__________________________ PG 79 Figure 42) United States Velocity of M2 Money Stock__________________________PG 79 Figure 43) Future Population Projections_____________________________________PG 90 Figure 44) United States Future Population Projections__________________________PG 90 4 Figure 45) Median Age of Population (Years)_________________________________PG 90 Figure 46) Governments Ownership of Gold (Tonnes)__________________________PG 120 Figure 47) China and Russia’s Government Ownership of Gold (Tonnes)__________ PG 120 5 Introduction According to Investopedia (2017), a reserve currency is a “currency held by central banks and other major financial institutions as a means to pay off international debt obligations, or to influence their domestic exchange rate.” In effect, it is the global currency that nations use to trade with one another. Since 1944, the US dollar has been the sole key global reserve currency. In addition to the United States’ (US) economy being globally the biggest by a large margin, what has helped the US dollar remain as the key reserve currency is that virtually all main commodities, such as oil, natural gas, gold, etc., are traded globally in US dollars. Before the 2008 Global Financial Crisis (GFC), it was almost inconceivable to think that the US dollar’s role as the key global reserve currency was in any risk of being dethroned. This was due to the fact, that at the beginning of 2008, US dollars made up 64% of all global reserves (IMF, 2017). More importantly, there was no other alternative that had any credibility in challenging the US dollar as the key global reserve currency. The euro, yen and pound, while very important supporting reserve currencies, were just too small to challenge the US dollar’s role of being the sole key dominant reserve currency. While a large currency, the Chinese yuan, in 2008, was in no position to rival even the euro, pound or yen. This is because the Chinese financial system and economy was, and still is, relatively closed. Finally, at the time of the financial crisis, gold was on the whole seen as a relic and cyber currencies did not exist. As a result, virtually all market commentators believed the US dollar’s role as the sole key reserve currency was going to remain unchallenged for the foreseeable future. However, in the aftermath of the GFC, there was some emerging signs that some world leaders have