US dollar may be stripped of international dominance by 2025

According to a World Bank report released on May 17, 2011, the US dollar is expected to lose its sole dominance in the global economy by 2025. By that year, the euro and the remnimbi will be established on an equal footing in a new ‘multi-currency’ monetary system.

The World Bank considers that this momentous change will be driven by the increasing market strength of emerging market economies – Brazil, China, India, Indonesia, Russia and South Korea – accounting for more than 50 percent of global economic growth in the next 14 years. These economies, in aggregate, are expected to grow at an annual rate of 4.7 percent between 2011 and 2025, more than double the rate of 2.3 percent per annum predicted for the advanced economies.

The implications of this adjustment in relative economic balance and consequential shift in the international reserve currency system are immense. Investment flows will move significantly in favor of countries that drive global economic growth. Multi-national corporations will regroup and relocate to reflect such dominance. The lagging ‘advanced’ nations will reflect rust-belt characteristics as they suffer from the economic sclerosis of excessive indebtedness and institutional decline.

In my assessment, three factors may protect the United States from the adverse consequences of such an evolution. First, and most important, is the political will to address the US federal debt crisis swiftly and efficiently. If federal spending can be brought down to 18.5 percent of gross domestic product and federal revenues also held to that rate, the US economy will have a fighting chance of emulating the economic growth rate of the emerging nations. Unfortunately, unless President Obama undergoes a political -economic transformation of immense proportions, the secular equivalent of Saul on the road to Damascus,  the issue will not be addressed until the problem is insoluble.

Second, unless the euro-zone demonstrates a ruthless willingness to eject non-conforming members – the PIIGS – it will remain a non-optimal monetary union. A non-optimal monetary union cursed with the absence of centralized political authority, cannot promote a major international reserve currency .

Third, unless the People’s Republic of China renounces autocracy in favor of some form of limited democracy the remnimbi will never become more than a regional reserve currency. Asset holders rightly cannot trust an autocracy to honor its commitments. For any autocrat is just one bullet away from a radical coup d’etat.

Tags: future of the dollar is in the balance, public choice issues may invalidate this expectation, World Bank predicts end of dollar as sole reserve currency