[jvm]

I keep hearing this business about the US being a reserve currency and it makes no sense.

First off, lots of other currencies are valuable without being reserve currencies. Swiss franc, Japanese yen, etc. Being a reserve currency probably boosts USD a bit but it's not the only pillar holding the thing up that people imply. If you disagree show your model: You have to believe that value for the euro, GBP, JPY, Swiss Franc is determined by thing X, USA does not have thing X and instead depends on being a reserve currency.

Second, what's the alternative reserve currency? Bitcoin? Don't make me laugh. RMB? Even more ridiculous. Euro? Probably the most realistic contender but seems to have major governance problems. As with democracy, the USD is the worst reserve currency, except for all the alternatives.

[omnicognate]

The first point makes no sense. Nobody's saying the dollar would become worth zero. Central banks around the world have huge reserves of USD. The dollar ceasing to be their reserve currency en masse (which I agree is highly unlikely) would involve them selling those reserves, which would affect the dollar's value. Falling value of USD implies rising prices in the US.

To the second point, yes for most countries there's no plausible alternative to USD. However, there's no law of nature that says the world has to have a single reserve currency. AIUI rather than the entire world switching away from the dollar the real risk is of fragmentation. Yes, most countries aren't going to suddenly stop using USD as their reserve currency. But Russia has had its USD central bank assets frozen. Their reserve currency is the currency of its biggest geopolitical opponent, who have demonstrated they are willing to use that fact as a weapon. Against that, RMB isn't necessarily so bad an option. That could be the beginning of establishing RMB as a global alternative reserve currency.

Edited to add: Firstly, AFAIK this picture of RMB becoming an alternative reserve currency isn't seen as all that likely, just a possibility, and secondly I'm the exact opposite of an expert on this stuff - just disagreeing with specific points based on what I've read.

Another edit: I also agree that the idea of bitcoin as a reserve currency is completely ridiculous and insane. Everything about bitcoin is ridiculous and insane, though.

[nradov]

Chinese currency is already considered a reserve by virtue of being one of the five in the IMF special drawing rights basket. However it can never overtake USD or EUR for that purpose so long as currency controls remain in place.

[vmception]

USD has a variety of “thing X’s” to drive demand as well as being a destination when things seem uncertain, driving further demand.

When people move their money out of monetary unions, there are only a few places and assets to purchase in large amounts. Everything has already been stretched to insane valuations, so USD is it.

I think your pragmatic look is refreshing, but too willing to reject a notion just because its popular, you’re right on the money just incorporate the demand drivers instead of excluding them.

[nradov]

GBP, JPY, and CNY are less important than USD but they're all considered reserve currencies and are included in the IMF XDR basket.

[AnthonyMouse]

It's not that the dollar would have long-term instability, it's that the act of going from reserve currency to non-reserve currency would see people in other countries dumping dollars for whatever the new thing is. There would be a short period of hyperinflation in the US.

That doesn't mean it's going to happen, but if it did happen, it wouldn't be nothing.

[nradov]

Hyperinflation is a monetary phenomenon. USD sales by foreigners wouldn't be sufficient to cause hyperinflation. Who are they selling to, and for what?

[AnthonyMouse]

Foreigners hold a large number of US dollars, as reserves. If the dollar stops being the reserve currency they want to stop holding it as reserves, so they trade dollars for something else. The new reserve currency, other hard currencies, real estate, stocks, whatever they can get. The market gets flooded with dollars and the dollar drops against other currencies.

Americans with mortgages and other debts are happy to take US dollars they can use to clear their debts and foreign buyers are happy to get US exports for their declining dollar holdings, so the foreign dollars would end up in the domestic market and cause hyperinflation.