Part II: The USD reserve currency status is not a binary question

We have all read many articles on the topic of the USD’s reserve currency status where the conclusion is something along the lines of “...the USD is not in great shape, but at the end of the day there is no viable alternative”. To me this conclusion seems off in two key aspects:

i)            It’s not a binary question – the reserve currency status is not an on/off switch, rather its a % allocation question (i.e. how much of global central banks' reserves are allocated to USD/US treasuries and what % of global trade is paid for in USD).

ii)           There is no need for a single viable alternative asset to take over the USD’s global reserve currency status over night – it might equally well (and probably even more likely) be a mix of currencies (and other assets, like gold) that gradually will eat into the USD's 'reserve currency market share'.

 Some background to this view:

 - In the incumbent currency system, the idea has basically been to have US treasuries play the role of gold (i.e. the role that gold played prior to 1971 when Nixon closed the gold window or even prior to 1933 when US president, FDR, gave up the full gold standard).

- This works ok as long as a) the major trade flows in the world are denominated in USD and b) the world can trust in the US' discipline in terms of not printing too many USDs. In order to achieve (a), the "petrodollar system" was set up where Saudi-US-OPEC agreed to denominate oil trading in USD (oil trading is basically the world’s largest trade flow), in exchange for massive oil purchases by the US and military protection by the US.

- As you might have read in my previous post on the topic, the trust in (b) is and will continue to be steadily fading (unless there is a radical change of path in US fiscal and monetary policies, which for political reasons in my view remains highly unlikely). Meanwhile, a lot of interesting things are happening in the world's trade flow denominations as China and Russia seem to actively getting be pushing to get out of the USD:

That's exactly what declining market share looks like. Hence, from my perspective, its not so much a question of if the USD's global reserve currency status is fading - the more interesting question is: how fast is it fading and is it accelerating?

Above shift is especially interesting as China recently has become a bigger client of Saudi Arabia than the US. Also, China has some years back launched a new oil contract in Shanghai that effectively prices oil to gold via the Chinese Yuan, now rapidly gaining global oil market share.

Also in terms of central bank reserves % allocation, the USD/US treasuries have been steadily losing market share over the past decades. According to the IMF, the % of official central bank currency reserves allocated to the USD has declined from ca. 85% in 1975, to ca. 70% by the year 2000, and all the way down to 61% by 2019 (granted, there have been ups and downs on the way).

=> At the end of the day, I think its fair to seriously question how the world could keep the USD/US treasuries as its primary reserve asset when the US is likely to have to run radical and accelerating QE (quantitative easing) and MMT (modern monetary theory -basically give away printed money wherever you can until you get inflation) programs for the foreseeable future. Consequently, the USD is set on an accelerating path of losing % of global trade flows and central bank reserve assets over coming years and decades . The 'viable' alternatives are already there right in front of us, albeit unlikely to be a winner-take-all kind of shift. Rather its likely to be a mix of other currencies/assets increasing 'market share' - e.g. the EUR, JPY and, over time, the Chinese Yuan (as their capital controls loosen up) + a neutral reserve asset like gold + potentially government backed/global government backed crypto currencies. In my view, its unlikely to be any of the currently popular cryptocurrencies, eg. BTC, as governments are not going to relinquish the control over the central reserve assets (don't get me wrong, I still believe BTC has a role to play, but just not that role).

 Additional sources: Bloomberg, IMF, fftt-llc.com, principles.com