"Threats to the dollar" are just scare stories

BRICS, petrodollars, alternative currencies, and other things you shouldn't worry about

Photo by Clint Patterson on Unsplash

One of the most common questions people ask me is some variant of: “Is the U.S. dollar going to lose its dominance?” Variations on this include:

1. Will the BRICS overthrow the dollar?

2. Will the end of the petrodollar spell the end of dollar dominance?

3. Will alternative currencies replace the dollar?

4. What if countries diversify their reserves away from the dollar?

The answers to these questions are: 1) No, 2) No, 3) No, and 4) That would be a good thing.

Lots of people seem to think of international finance as a sort of power struggle — whoever’s currency is dominant, or strong, wins. Thus, when Americans read stories alleging that some new threat is about to overthrow the dollar, they worry that this spells the decline of the U.S. as a country, or at least of U.S. economic strength.

In fact, this is just not how things work. The U.S. does derive some benefits from the fact that countries tend to hold a lot of dollar-denominated reserves, but it also pays some very important costs. It’s likely that both the U.S. and overall global stability would benefit from a more balanced international financial system. But that having been said, it’s also the case that most of the “threats to the dollar” that get discussed in the financial press are vastly overhyped.

So let’s talk about each of these scare stories, and why each of them is highly implausible. And then at the end I’ll talk a bit about why the U.S. should want to see other countries diversify their reserves away from the dollar to some degree.

The BRICS are not really a thing