No reserve currency can exist forever. Perhaps the time of the dollar is drawing to a close, and JP Morgan believes that the dollar will lose its dominant power very soon.
Almost eight years ago, Michael Kembalest of JP Morgan first introduced a chart that clearly shows that no reserve currency can maintain its status forever, therefore, in the near future, the US dollar will also cease to be the most important world currency.
The destructive monetary policy of the largest Central Bank and the US Federal Reserve, applied after the crisis of 2008, dragged on for many years, so it is logical to draw an analogy with the statement of Mr. Dornbusch.
However, few people except JPMorgan's Private Bank are now wondering if the end of the "exorbitant privilege" of the dollar is coming.
Bank experts not only express concern over the possible loss of reserve currency status by the dollar, they directly say that this can happen quite soon, which will lead to its depreciation.
How the dollar has become a reserve currency
The growth of the dollar in the world market, in turn, was caused by the creation of the Federal Reserve System a little over a century ago and the emergence of the US economy after the First World War.
The Federal Reserve has helped create more mature capital markets and a nationally coordinated monetary policy — two important pillars of reserve currency countries.
Being the unit of account in the world, the United States gave what the former French finance minister, Valerie d'Estaing, called “exorbitant privilege” —the ability to pay imports and issue debt in its own currency and have a constant deficit.
Nothing suggests that dollar dominance should remain forever. In fact, the dominant international currency has changed many times throughout history.
After the end of World War II, the United States accounted for the largest share of world GDP – more than 25%. Since then, the main driver of economic growth has moved towards Asia.
Over the past 70 years, China has quadrupled its share of global GDP and brought it up to about 20%.
In addition, there are a lot of other fast-growing economies around China, which also have a high population. All these factors will lead to the fact that the share of settlements in dollars will gradually decrease.