World leading economy cycle part 2. Reserve currency

 Although the reserve currency is the most important and easiest indicator of a leading economic country, it is one of the laggard indicators. Currencies act as a medium of exchange. Reserve currencies are the largest single components of the world's central banks and other financial institutions in their reserves and the most important individual trading instruments. Now the US dollar is the most important. It accounts for about 60% of the reserve currencies. The second most important reserve currency is the euro, which accounts for about 20%. Others come far behind in single-digit positions. If you count gold as your reserve currency then it is the third most important. The position of the dollar as the main reserve currency is the result of World War II and subsequent international agreements.

There are three requirements for a reserve currency: it must retain its value in the eyes of the people, it must be an accepted trading currency around the world, and it must be accepted by governments, central banks and other financial institutions. Currencies retain their value better as central banks retain them as additional reserves. There should be enough, but not too much, reserve currency in circulation. Its position may be lost if the latter occurs. Mainly a large-scale war or a failed repair of the destruction of a long debt cycle can lead to the loss of the position.

The values of the trading currencies must not fluctuate excessively as they move between the parties. The less the value of a currency fluctuates, the more suitable it is for trading. A currency is only suitable for trading if its value is believed by both parties to the trade. Large fluctuations erode credibility. When credibility is lost, the currency is mainly suitable for wiping the back if it does not have real estate in the back. Confidence can be lost without a warning or little by little. Large fluctuations occur when there is not enough currency in the market.

Regulatory approval is required. This means, among other things, that it is up to the central banks to increase and decrease the money supply. It means that the reserve currency acts as an instrument of power for the authorities that govern it. Therefore, Bitcoin or any other privately managed virtual currency will never achieve reserve currency status. This will never be said out loud by any central bank or government. Cryptocurrencies will be banned if they threaten the status of the former. The reason given is something else such as use as an instrument of crime or environmental damage. The increase in the market share of virtual currencies will lead to bans.

The world's largest economic power is practically always found in the country that dominates the most popular reserve currency. For example, the United States may choose to exclude any actor that uses their dollars in trade. In addition, the country has the most decision-making power, e.g. At the World Bank and the IMF. The reserve currency cycle usually has three stages:

1. Extensive agreement on new reserve currency + coupling to real assets like gold
2. Decoupling and switching to a free currency
3. Depreciation compared to the new reserve currency

The change in the reserve currency requires a global crisis or a massive debt crisis in the country administering it. They may cause the value of the reserve currency to collapse. In most cases, this has been the first situation. In most cases, it requires a massive debt crisis. The global crisis is almost always a major military conflict. It does not always mean a loss of reserve currency. In a war, the ruler of the previous reserve currency goes into war with another major country, causing the new ruling country to become the most powerful country in the world. An agreement on a new reserve currency often allows for the largest share of votes in global economic organizations. For example, the United States has the largest share of votes in the IMF.

An agreement often initially involves tying money to real assets, such as precious metals. A certain amount of money equals a certain amount of them. Money may not be in circulation more than an equivalent amount of precious metal. In the first phase of the current cycle, one ounce of gold was equivalent to 35 US dollars. The good thing about the arrangement was that it was harder to produce inflation because it was difficult to increase the amount of gold and thus the amount of money. The downside, again, was that the amount of gold could not be increased enough compared to the growth rate of working-age people. In other words, more people entered the market than money. The solution is problematic in the long run and may limit economic growth.

The previous solution lacks sufficient flexibility in terms of the value of the currency. Before long, the state managing the reserve currency will move to the second stage, i.e. scrap the link to real assets. The United States did so in 1971. This increases long-term inflation and may cause short-term inflation to accelerate. In addition, the price of real estate pegged to the reserve currency will increase because the price used for pegging is likely to lag behind its real value. Stock prices will also rise, at least in the long run, as the amount of money grows even faster and some of it is transferred to shares.

Inflation rose in the 1970s, but that was not the only reason for it. It was also affected by OPEC's actions. The money supply is based on a decision by a central bank or other financial authority to print the amount it deems necessary for the reserve currency. The price elasticity of the reserve currency is increasing. This is the best way to act in theory. It works for a long time, but not indefinitely. It's easy to go too far. In the end, the result is the loss of reserve currency status.