Disclosure: I've never taken a macroeconomics class, so maybe this is all common knowledge for those of you who did, but I learned a lot from this overview of how and why the dollar has been the world's reserve currency, and why it's unsustainable:
I'm now wondering why it took me this long to learn all this; it feels like essential knowledge of the architecture of the economic container we live in.
The essay is relatively approachable, though if you have no idea what terms like "quantitative easing" mean you'll want to look them up as you go.
Of particular interest:
- In the 1930s, the US government made it illegal to own gold so that they could devalue the dollar after collecting everyone's gold at "fair market" price.
- After we went off the gold standard in the early 1970s, we struck a deal with Saudi Arabia in which we provided global military protection for their oil shipments in exchange for them requiring that anyone who buys oil from them pays them in dollars, thus creating continued international demand for dollars.
- The US needs to continue to run a trade deficit in order to ensure an adequate flow of dollars out to the other countries so that these countries can make energy purchases and buy dollar-denominated US debt. This has become more acute as developing countries' economies grow faster than ours and thus require more dollars. The American political elite had to sell out the US manufacturing base in order to enable this.
- In the 2000s-2010s China subverted this cycle of [trade deficit -> reinvestment in US debt] by reinvesting their dollars as loans to African countries as part of the belt-and-road initiative. This led to decreased international demand for US government debt, which became an acute issue during the pandemic when the US government started running especially massive budget deficits.
- The dollar spiked early in the pandemic because other countries no longer were receiving the regular flow of dollars via international trade that they needed in order to service dollar-denominated debts and energy purchases. It has weakened somewhat since then as the US has been printing historically unprecedented sums of money. (It's so remarkable that "money printer go brrrrrrrrr" has become a mainstream meme)
- The US will likely need to devalue the dollar significantly in order to remain economically competitive. This means assets like real estate, commodities etc will likely perform well over the next decade.
- The world will need to shift to having a mix of reserve currencies as there's no good viable alternative to the dollar right now.