The U.S. dollar has been the world's "reserve currency" for decades. Say two nations trade with each other, whose currency do they use? What is Zambia going to do with currency from Yemen? The seller demands payment in U.S. dollars instead of the currency of the buying nation. This creates a vast global demand for dollars. That makes our currency stronger than it otherwise would be, and that's good for us right?
Well, who is "us"? If you are close to the printing presses and you can just print up dollars at will that most of the rest of the world trades their real goods in services for, then its great. You have a magic money machine. Even if you are a regular consumer it means that you can buy products from overseas cheaper. But this short term benefit contains the seeds of economic destruction. Like so many things, what is good in the short term is bad in the long term.
The flip side of what I described above is that it practically mandates that over time production will shift from your economy to other economies. All you are exporting is currency. And because your currency is artificially strengthened other nations can manufacture things at a lower cost than you. In addition, a global reserve currency must be held in very large amounts by other nations to be available to trade. How does this happen? Well, we have to run massive trade deficits.
We buy stuff from foreigners and our currency piles up in their treasury. What do they do with it? Since it is the global reserve currency they can buy things from anyone with it, it does not have to be us. And since we bought things from them and they did not buy things from us we had to borrow the money into existence to cover the difference. So they also buy debt from us- a claim on even more future dollars. That is another way of saying that we are exporting dollars to balance out the trade deficits.
Any currency issued without the gold to back it up is a claim on the future economic production of its citizens. In 1971 France called our bluff, we were issuing dollars without adequate gold backing and we were forced to either quit issuing so many dollars or de-link from gold. The ruling class was not about to give up their magic money machine. From henceforth a dollar would not be a specific amount of already-created value (as it is in for example a gold or silver coin). Instead it would be a promise of a claim on the future production of U.S. citizens. It would be a debt-instrument.
So our ruling class turned dollars into a pure debt instrument and then issued them like mad. There was an initial shock in the 1970s as nations doubted that a dollar backed by promises of the U.S. government to extract wealth from its citizens in the future was as good as a dollar backed by gold. This resulted in crippling inflation. We got past that hurdle by raising interest rates and by making a deal with the woefully corrupt House of Saud. They would only accept dollars in payment for oil and we would defend them militarily. In essence, the oil-rich Arabs hired us to be their body guards.
That tough medicine and hard bargain produced some boom times- but they were increasingly debt-fueled boom times. The long-term consequences of these moves is an economy where good jobs are increasingly difficult to be had as all goods and services which can be produced cheaper elsewhere (due in part to our artificially valued currency) fled the country. So if you were one of those who made a living working capital and were big enough to work that capital anywhere in the world, you won, whether you were good enough or not. If you made a living selling your labor, you lost. If you made a living working capital but you were small so that your capital was bound up in America, you lost. All of this is on average of course.
In the short run having the dollar as the world's reserve currency helps everyone who earns dollars. It helps those who earn a few dollars a little, and those who earn large amounts of dollars a lot. That is easy to see. In the long run though, it hurts those who earn dollars by selling their labor domestically. Those very few who are big enough to earn dollars by hiring people to work capital anywhere in the world are not hurt. They get most of the gain, and basically none of the pain. The pain is born with the working-class and middle-class citizens of the United States. Even the wealthy-but-not-rich and the "barely rich" share in the pain if they have too much of their earning/assets tied up domestically when the blow-back plays out.
Most of us are on a playing field which has been tilted against us by policies which favor global corporations and billionaires over the rest of us. Despite the temporary gain consumers got from these policies, they long term result of them is destructive to our economy and we are now seeing that play out. An orderly and slow withdrawal of the dollar as the world reserve currency is in the interests of working Americans, though not the elites who run the country.
