Irregular Challenges and the Emerging Defense Debate

[tequila]

It is not written in stone anywhere that the US Dollar must be the world reserve currency. It replaced the British Pound. It will be replaced, itself, if current trends are not reversed. THEN, things will get interesting. Some states have already broken the dollar peg.

Agreed. However it took quite a bit for the pound to fall from grace even after its industrial preeminence had ended. Comprehensive battlefield defeat in Europe, a forced rescue both military and economic by the United States, and the stripping of its colonies --- in other words, the cataclysm that was the 20th century. It will take something at least as total and shattering for the USD to be replaced in most nations' reserves, not least because the world system (both political and economic) is built upon U.S. predominance and few nations are willing to undergo the upheaval that would come if the U.S. fell from that perch, especially with no replacement in sight. The Gulf Cooperation Council, for instance, would be quite smart to divest away from the USD in its holdings, but chose not do so at its most recent meeting despite recommendations on the part of its more intelligent economic advisors. Why? Because the Saudis, who are the 800-lb. gorilla of the GCC, know that to part ways with the USD would constitute a major rupture in its alliance with the U.S. and alienate the GCC's security guarantor. Thus the GCC will glumly watch their dollar holdings fall by billions in value, while inflation skyrockets in their homelands, in return for keeping the U.S. relationship functioning smoothly.

Supply and demand. They get paid in US dollars. They have billions to invest and we will pay more for them than anyone else. (To convert to Euros, you need to find someone whose selling Euros and wants a billion US dollars in exchange. It can be done, but you end up with less money than if you buy US bonds.)

Quite wrong. Investments in the US have returned far less than investments in Asia, especially, for years. U.S. assets have been losers, relatively speaking, for quite awhile. It is the USD's status as the reserve currency and its key role in the world financial system that keeps central banks and investors coming, not because the U.S. is a particularly profitable place to invest.