China and Brazil have caused a stir by revealing their intentions to sever ties with the US dollar, giving rise to conjecture that the world’s leading reserve currency is no longer sustainable. This revelation has prompted policymakers and individual investors alike to ponder how they should prepare for an impending financial crisis and whether a new reserve currency will come to the fore.
The US dollar’s decline
According to Ray Dalio’s Changing World Order, reserve currencies go through three stages: rising, topping off, and declining. In the past 80 years, the US dollar has been the dominant reserve currency worldwide. Nonetheless, in the current dynamic world economy, it could soon relinquish this status to a challenger.
There are several reasons why the dollar’s star could be waning. Firstly, many investors believe that the US government’s quantitative easing measures, employed to combat the pandemic recession, have severely impacted the dollar’s credibility. Secondly, the US’s fast-growing debt is instrumental in the currency’s fragile state. Finally, we cannot ignore the shift in the global economy towards emerging nations like China, which could craft a new product or currency more convincingly than the exhausted US dollar.
Economic cycles and reserve currencies
Economic cycles have a direct impact on a given country’s debt. In times of trouble, governments tend to print money to pay debts and fund their economies, leading to inflation, devaluation, and ultimately a loss of faith in the currency. This fragility exposes the currency to challenges from emerging economies, which often view the world’s dominant reserve currency as inadequate.
Since the onset of the coronavirus pandemic, many countries have wrestled with massive debts. The prospects of inflation, and deteriorating economies have caused people to doubt the US dollar’s exceptionalism. This shift prompted authorities in a few countries to reduce their reliance on the dollar in international trade, making China and Brazil’s recent decision to trade bilateral deals bypassing the dollar significant.
China and Brazil’s recent deal
On March 29th, 2023, China and Brazil reached a trade deal to conduct transactions in their currencies instead of the US dollar. However, even though this approach deals a significant blow to the dollar’s prestige, it’s crucial to note that it remains the world’s dominant reserve currency. Instead of worrying about whether the greenback will remain the world’s reserve currency, it’s crucial for investors to seek avenues to diversify their investments and reduce the risks involved.
Moreover, gaining exposure to different countries and currencies is a viable means of dealing with uncertainty in the global economy. Diversifying investments is imperative in minimizing one’s risk and spreading it across different asset classes. In addition, it’s prudent to view sudden market swings as opportunities to profit.
Focusing on what can be controlled
It’s essential to focus on what we can control and not on the things we can’t. As an example of this principle, the video mentions YouTubers striving to grow their channels even though YouTube’s algorithm is always changing. Similarly, in today’s uncertain economic climate, focusing on what we can control is noteworthy. This could mean taking advantage of sound financial advice or leveraging tools like apps to cut unnecessary costs and set budgets. Focusing on one’s controllable money issues like reducing debts, cutting costs, and creating more income streams is essential in today’s uncertain world.
Preparing for a potential downturn
Regardless of the state of the world’s reserve currencies, it’s essential to be prepared for an impending crisis. This requires an astute risk-reward management strategy that focuses on preserving capital or achieving stable returns. Investors should avoid imprudent risks, follow personal financial goals, and avoid the allure of quick profit-making ventures.
Creating a well-diversified portfolio is crucial for minimizing risks and navigating any downturn effectively. This approach often involves seeking low-risk assets to ensure a more stable investment and securing supplementary income streams. Additionally, reviewing one’s goals periodically is essential to ensure they align with changing global economic prospects.
Historical context and future outlook
Understanding the historical context of reserve currencies is equally important when making investment decisions. Take the sterling, for example. Before the US dollar, the sterling was the world’s leading reserve currency. Following the sterling’s decline and eventual displacement by the US dollar came a period of peace and prosperity that followed.
While no one can predict the future with certainty, it’s clear that we could be moving towards a new era of economic growth and innovation as new players emerge in the global economy. As the world undergoes profound changes, investors should prepare to become more international with their investments.
The benefits of competition
Shifting from a single dominant reserve currency offers several advantages, including introducing competition into the world economy. The dollar’s decline offers opportunities for emerging economies to blossom as they create new products to challenge the dollar’s reserves status.
Competition offers an avenue for nations to improve their ease of doing business, translate into cheaper transaction costs and lower credit risks, and increased efficiency. In addition, competition inspires innovation and invention.
The importance of personal financial planning
Personal financial planning is critical, regardless of what transpires with world reserve currencies. Avoiding high-interest-rate debts, creating an emergency fund, and diversifying one’s investment portfolio are measures that minimize risks associated with market volatility.
Re-evaluating investment strategies, cutting costs, and generating income streams will create invaluable financial peace of mind, ensuring that any economic turbulence encountered is weathered successfully.
In conclusion, China and Brazil’s recent announcement creates a much-needed debate on the future of world reserve currencies. While it’s impossible to predict what will happen, investors need to focus on personal financial planning, which is critical in navigating the current era’s uncertainties. As the global economy shifts, so does the need to diversify one’s portfolio, create income streams, reduce debt and cut costs, the only controllable factors. As new players emerge in the global economy, it’s critical to broaden investment horizons and adapt to the changing times, ensuring financial prosperity for the long-term.
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Caroline wrote this article after watching the video ‘Its Over: China Just Broke The US Dollar’. All the images above are screenshots from the original video. Source: Youtube.