Dollar Reserve Status Unwinding: A Gradual Shift in Global Markets

The reserve currency status of the US dollar is being quietly unwound, and this shift has significant implications for global markets. According to an economic model, a full loss of reserve currency status would result in almost $30 trillion in wealth depreciation, equivalent to one year's national output. This is not a sudden collapse but rather a gradual shift that has already begun.

The model shows that the effects of this shift are threefold: the dollar weakens as foreign investors stop flowing money into it; interest rates rise as domestic investors absorb debt previously held by foreigners; and national wealth falls due to the loss of income from reserve status. This scenario does not require a crisis or war, but rather a slow decline in demand for the dollar.

The numbers already support this prediction: the dollar's share of global currency reserves has fallen from 72% to under 57%, while foreign holdings of US government debt have dropped from 45% to 30%. Central banks are also buying gold at an unprecedented pace, with over 1,000 tonnes purchased in each of the past three years.

This shift is not a sudden event but rather a gradual process that has been building for decades. Historically, reserve currency status was lost gradually, with the British pound being overtaken by the US dollar in the 1920s and the Spanish peso losing its dominance after the Battle of Trafalgar.

This development is not a call for panic or complacency but rather a reminder that the income built into reserve status is real and worth one percent of GDP every year. Losing it would be a gradual process, with decisions already visible in the data today.