By Jeffrey Arsenault of Old Greenwich, CT Liu Chang of China’s official news agency Xinhua wrote that “…it is perhaps a good time for the befuddled world to start building a de-Americanized world.” Forbes’ Bill Conerly, in his article October last year, wrote that this statement may have prompted people to show interest on the role of the dollar as the world’s primary reserve currency, especially in the face of the budget crisis, debt ceiling crisis and the credit rating downgrade that the U.S. economy had suffered. What is the significance of the dollar’s position as the world’s primary reserve currency? According to Conerly, the dollar’s position “triggers [a] substantial demand for…securities. About 30 percent of U.S. debt outstanding is owned by foreign countries in their currency reserves. Without that demand for…treasury bonds, the interest rate that the U.S. Treasury pays would be significantly higher.” If this were to happen, the private sector will be affected as well, increasing the borrowing costs as “consumer and corporate debt compete with public debt for investors’ holdings.” “Countries all over the world hold financial reserves, in bonds or money market instruments denominated in some other currency. They also hold gold and Special Drawing Rights issued by the International Monetary Fund. The reserves protect the country’s currency against speculative outflows,” wrote Conerly. He pointed out that the position of the U.S. dollar as the most common currency for international reserves is due to the fact that there are “plenty of dollar-denominated securities available” due to the size of the economy. He goes on to describe the U.S. Treasury securities as both liquid and deep – two features that are desirable in foreign reserve currency. Earlier this year however, CNBC’s Asuya Harjani reported on a new poll of institutional investors. The poll found that the “yuan will eventually supersede the dollar as the top international reserve currency.” 200 institutional investors participated in the survey; half of them headquartered in mainland China while the other half outside of it. According to Harjani, the report accompanying the survey said that: “As China’s economic influence grows, the global importance of the Renminbi will become magnified. Indeed, while for decades it has been a ‘greenback world’, dominated by the US dollar as the world’s primary reserve currency, many think a ‘redback world’, in which the Renminbi enjoys premier status, is increasingly a possibility.” Harjani reported that European Central Bank Executive Board member Yves Mersch agrees, stating that the yuan might come to challenge the U.S. dollar’s position as top reserve currency as it gains importance in international trade and investment. “Despite being a closely-managed currency, the Renminbi’s global clout has been rising steadily,” noted Harjani. “By the end of 2013, the Renminbi had become the second most used trade financing currency and ninth most used currency for payments globally.” In an interview with David Barboza for The New York Times’ Economix Blog, Eswar S. Prasad, former head of the International Monetary Fund’s China division and now professor of trade at Cornell University, when asked about the prospect of China’s currency becoming a global reserve currency, stated that: “If China moves ahead with financial market reforms and liberalizes capital flows so foreign investors can acquire RMB-denominated assets, China’s Renminbi could become a major reserve currency. But that wouldn’t be enough to make the Renminbi a safe haven currency that would challenge the dollar.” Prasad pointed out that “[f]or that to happen, China would have to undertake significant reforms to its political, institutional and legal frameworks. That is needed for foreign investors to invest with confidence in China’s markets, for safety rather than just high yield.” Prasad noted that the world is stuck in what economists called the ‘dollar trap’. The world is “trapped into buying dollars because the United States market is big, liquid, and reliable as a safe haven. And America is trapped in an addiction to cheap credit, with foreign demand for the dollar allowing the nation to spend well beyond its means.” He explained that, the “dollar’s prominence is a mixed blessing for the U.S. [since a] strong dollar and low interest rates mean… cheap goods from the rest of the world and cheap financing. But a strong dollar hurts U.S. exports and job growth. A more fundamental problem is that this reduces U.S. fiscal discipline.” When the global financial crisis began in 2008, the dollar was expected to weaken, but the opposite happened much to the economists’ surprise. “The dollar, if anything, gained slightly in value,” said Prasad. “Contrary to all expectations, the U.S dollar’s position as the world’s dominant currency has been strengthened by the crisis. The world became even more dependent on the dollar than it had been before the crisis.” He pointed out that “[t]here are no good alternatives to the dollar. Any time you think of the dollar losing its dominance, you have to ask yourself: if not the dollar, then what? … Emerging markets need foreign exchange reserves to protect themselves from volatile capital flows. And private investors and financial institutions want safe and liquid assets – assets expected to at least hold their principal value and that are easy to trade. These are typically government bonds.” In 2013, Conerly predicted that “[t]he dollar will continue to be the most popular world reserve currency. Its share of total reserves may decline, but the absolute number of dollars held by foreign countries will continue to rise.” So far, Conerly’s prediction has held true this year, but whether or not it will continue on in the years to come, only time will tell for certain.