Forget the worries about America's economy, its credit rating, and its debt. The United States has one sure thing: the dollar. The primary international trading and reserve currency since World War II is likely to keep that status for decades.
Why? A review of history since ancient times reveals six characteristics of a dominant global currency. The dollar shines in five of them:
1.Growth. History's first criteria is rapid growth in a nation's gross domestic product and its GDP per capita. With robust productivity growth, the US has excelled among developed countries – 2.2 percent annual productivity growth in the past decade versus Japan's 1.6 percent and the eurozone's 0.8 percent. America's emphasis on entrepreneurial activity and its superiority in new technologies suggest this lead will persist.
2. Size. A dominant global currency is typically found in a large economy, often the world's biggest. With rapid productivity growth and relatively open immigration, America will probably continue in this role. Last year, China surpassed Japan to become the world's second-largest economy, but still had GDP of only 40 percent of America's. The per capita GDP gap was even bigger: China's $4,393 was only 9 percent of the $47,184 in the US. China has a lot of catching up to do.
3. Market development. The depth and breadth of financial and other markets will continue to favor the US. American stock market capitalization is four times that of China, Japan, or Britain and is over three times that of the eurozone. In terms of net government debt in the hands of individual and institutional investors, and therefore available for foreign traders and investors, the US also dominates. Note that second-place Japan, with huge government debt after years of deficit spending in attempts to revive the economy, has only 5 percent of its debt owned by foreigners. The rest is held internally – hardly an earmark of an international currency. In contrast, 46 percent of US Treasurys are owned abroad.
4. Open economy. America's free and open financial markets and economy also favor the dollar. China will probably continue to control tightly her financial markets and currency, anathema for an international trading and reserve currency.
5. Few alternatives. Lack of substitutes is also likely to keep the greenback on the international currency throne for many years. The rigidly controlled Chinese economy and financial markets eliminate the yuan as a rival to the dollar for the foreseeable future. Export-dependent and inward-looking Japan does not want the yen to be a primary global currency. The eurozone crisis has eliminated the euro for at least a number of years. The Indian rupee is another possibility but not for the many, many years it will take the Indian economy to achieve world-class status.
6. Credibility. There can't be major concerns about devaluing or otherwise debasing a currency. This is a vulnerability for the dollar, which has been falling since the 1985 Plaza Accord to push down what was regarded as an overly robust buck. Further attempts to devalue it, however, seem highly unlikely unless it strengthens fantastically. Attempts to debase the buck and lighten the load of federal debt by deliberately promoting inflation is something I've never heard mentioned, much less seriously discussed, in Washington.
Despite the credibility factor, the dollar clearly fits the other five criteria necessary for it to remain the world's primary trading and reserve currency.