If you don't know what a "world reserve currency" is, allow me to explain it in terms of non-economists (ie-normal people who have sex).
Not all countries are created equal. Many are corrupt, either through their leaders, their people, or both. And so if other countries, people or businesses would like to conduct business with one such country (say, Greece or North Korea or some other unreliable crap hole) you would like to receive payment not in Drachma/Euros or North Korean Won, but something more stable. This gives rise to demand for a third party's currency, a third party whose currency is reliable and trustworthy.
Enter in the US dollar.
After WWII it was pretty apparent that the United States was "the last man standing." Yes, many countries on the Allied side of the war "won," but their economies and infrastructures were devastated. It was only the US that had the economic productive capacity to make their green pieces of paper valuable (not to mention the Ward Cleaverly-Dwight Eisenhowery-US was infinitely more reliable and trustworthy than the murderous Stalin). And so the US dollar became the world's "reserve currency" which allowed international commerce to be conducted in a reliable and trustworthy medium of exchange.
Fast forward many decades later and you might ask, "Now that all these countries have recovered, why do we even have a global currency?" And that is a good question. Nearly all the participants of WWII have recovered, rebuilding their infrastructures and economies, producing economic value that provides their pieces of paper worth, so why not let all countries' respective pieces of paper trade against each other on the international currency markets?
Which they do, but, there are two things that keep the US dollar as the world's reserve currency.
1. There is still demand for international transactions to be made between two different countries in a currency that is largely deemed reliable. The US dollar (more or less) has and continues to more or less fit this bill. Countries trust it, view the United States with confidence and believe our green backs have intrinsic value.
2. Habit. Though I am not a huge international traveler, it is amazing how many countries accept US dollars. Cut across the border to either Canada or Mexico, they take US dollars. Take a boat to nearly any Caribbean island, they take US dollars. The Jamaicans at the (only) tropical resort I ever visited, very happy to take dollars.
But just try the reverse.
No Canadian can buy anything with their "fancy schmancy" "plastic" currency here in the US.
I don't even know what a Jamaican dollar looks like, let alone would be willing to accept one.
And Mexican Pesos I view as a novelty that I can more or less assume will lose value as what few I've collected sit and inflate away in my desk.
Now most people (both Americans and non) don't think twice about this. They merely accept it as fact that "yes, my US dollar will likely be accepted in most countries" and "hell yes, I'll take that dirty, filthy Yanqi money off of your hands Americano!"
But if you think about it, the economic ramifications of this agreement are immense (if not, outright insane). And if you figure out what these ramifications are you will not only more thoroughly understand what a "reserve currency" is, but be able to understand a lot of what is going on with the US economy.
The primary "epiphany" you should realize from this is that through mere TRUST, through mere RELIABILITY one currency can replace all others. But infinitely more impressive than that is that in replacing all other currencies you exponentially improve that currency's purchasing power (and thus the lives of the people who live in the country that is home to the world's reserve currency).
In other words, each "normal" countries' respective currency can only buy goods and services within that country.
Jamaican dollars can only purchase what is made in Jamaica.
Japanese Yen can only buy what is made in Japan.
And Australian dollars can only buy what's made in Australia.
But US dollars can buy nearly everything in the world.
In other words, if you can get your currency to become a world reserve currency, your purchasing power goes from the mere domestic production of your lowly, single country to that of the entire world. And all without lifting a finger or providing the slightest bit of additional economic production.
In the case of the US dollar, this means Americans (or anybody holding a US dollar) can not only buy the $17 trillion in US made goods and services, but (more or less) the $76 TRILLION in world GDP.
Did Americans work harder?
Are Americans smarter?
Did "The Lord Our Savior Jesus Christ" look favorably upon us?
All that happened was 60 odd years ago millions of US soldiers came over to Europe and Japan, helped destroy what remained of the majority of the world's economic producing countries, while the US homeland remained relatively unscathed, giving us and the US dollar the much-coveted "world reserve currency status."
And now, instead of just being able to buy goods in these here United States of 'Merica, we can and have bought whatever we damned well pleased simply because "we're Americans."
However, there is an additional benefit to being the world's reserve currency. Not only do we get to buy everything in the world, but nearly all of our financial sins are bought and paid for by the work and toil of others.
Consider two countries - Greece and the United States.
Both have unsupportable debts.
Both run chronic deficits.
Both have increasingly lazy and slothful people.
Both support their parasites over their producers.
And both are headed up by spoiled socialist children incomprehensibly ignorant of economics.
So how is it Greece is going through tumult and chaos, while the US is enjoying is getting away scot-free?
Well, perhaps a chart will help.
Below is the M2 money supply of the US dollar divided by US GDP and World GDP.
What this essentially shows is how much money there is relative to the amount of stuff that money can purchase. Normally you would compare the US dollar to US economic production (the red line), however, since the US dollar is the world reserve currency, it pays to compare it to what it can really buy - the world's economic output.
This results in an interesting divergence between the two numbers. The red line shows what most Americans are concerned about. An increasing amount of money being printed against a stagnating amount of economic production. There was roughly 51 cents for every dollar of GDP circulating, while now it's 65 cents - fears of inflation and a run on precious metals expected. However, the blue line shows something quite different. Almost an "ideal" increase of the money supply along with the economic production that said currency can buy, resulting in practically no change and no inflation. And when you consider that the US dollar is the reserve currency of the world and that it is not solely affected by domestic production (but fear of other countries' inferior currencies) then a lot of other things make sense in this seemingly economically insane world.
One, this is why the United States can behave like Greece, but not suffer the consequences. Americans are by all means just as spoiled and petulant as the Greeks. We just happen to have the world's reserve currency...so nanny nanny boo boo on them.
Two, this is why our deficits and debts seemingly don't matter to anybody. If the US was an individual applying for a loan, no bank, even the crappy ones I worked at, would touch him. But since it's the "US" and we have the magical currency, every other country out there is more than happy to lend our insolvent and irresponsible government money.
Three, this is why precious metals haven't gone up (as much as was anticipated anyway). By every sane, reasonable, and empirical logic, gold and silver should be rocketing against the US dollar. But this would, once again, assume the US dollar could only purchase US goods. It also assumes nearly every other country out there sucks even worse than the United States. Ergo, with things looking worse in other countries, combined with the US' already-established world reserve currency, it is just too convenient for people to pile into the dollar, giving it more purchasing power, and driving precious metal prices down against it.
There are other economic phenomena that having the world's reserve currency explains (and masks). But there is one thing I do want to point out about it. It moots and obsoletes nearly every form of traditional (and sane) economic analysis. One of the things I loathe about leftists and Keynesians is the intellectual dishonesty they flagrantly display proclaiming their policies (which have failed in nearly every other country) works here in the US. While marginally true, it's completely contingent on an incredibly lucky economic technicality - we have the world's reserve currency. You take that away and the US would be no different than Greece, Japan, Spain, Portugal, or any other heavily indebted, non-producing nation. The truth is modern day Keynsian economics and the leftist faux-economists it has spawned are miserable failures that owe the delay of their demise to millions of WWII soldiers and two very large oceans that blessed the US with a world reserve currency. And to stand there, hiding behind this fact, while having the audacity to claim they know what they're doing, while the rest of the world proves they don't, is the epitome of cowardice and hypocrisy.
Aaron Clarey is a normal guy who just happened to become an economist. He does not have his doctorate in economics which makes him superior to most others. He has authored several books about finance and economics that are actually interesting, insightful, and digestible by the average person. You can find his rantings and tirades on his You Tube channel as well as is "whenever he feels like it" podcast. You may also contract his services by visiting his consulting division Asshole Consulting.