The era of the dollar may be coming to an end sooner rather than later. For years U.S. Treasury notes have been a safe place for world governments to park their foreign currency. But now all of a sudden, the U.S. is running up trillion dollar deficits and other world powers are questioning whether the dollar has the stability it did in past times.  

China is raising concerns about the U.S. dollar’s dominant position in the world economy. The head of China’s central bank this week said the world should consider creating a new international reserve currency. Russia this month took a similar position and so did a United Nations panel.

A former chief economist at the International Monetary Fund, says it’s no coincidence that China, Russia and other countries are getting nervous. They all have come to the conclusions that our Treasury bills might not be worth so much five or 10 years from now. There is a strong chance of inflation and therefore the countries like China and Russia are starting to rethink whether there should be an international reserve currency run by an organization like the International Monetary Fund.  

The Chinese government earns massive reserves each year with its exports, and it has for years tied its own currency to the U.S. dollar. If the U.S. dollar were to be displaced as the international currency, Chinese export earnings could suffer but that is a chance they may be willing to take. How funny is it that an average annual income in the U.S is $48,000 and in China it’s $2,100. Is there a better example of the poor bailing out the rich than this?   China is now a creditor, a major creditor, and it will start to think about its interests globally more as a creditor and less as just an exporter. 

Other countries have reasons for backing the idea of a new international currency. They’ve noticed that as long as the dollar is the major safe haven, the United States can borrow hundreds of billions from the rest of the world at low interest rates. That’s a big advantage for the U.S. Right now, world governments buy U.S. dollar assets because they seem like they are the best investment. Economists point out that just because the world creates an international reserve currency doesn’t mean governments would actually use it unless compelled to do so.  Some experts believe that a second currency option should be created so that countries could invest in as an alternative to the dollar if they so choose.

Could this be the path the world financial markets will take in the years to come? One thing is for sure, the U.S lost a lot of credibility with the recent “almost” collapse of the banking system.  No longer can the U.S. say we have a model financial system.  It appears the world is catching up to us and they could very well not need the U.S. dollar in the years to come as much as they did in past years