Will the United States lose its standing as the World’s Reserve Currency and its impact on the market?

In July of 1944 the US established itself as a world superpower after winning WWII and with the affirming of the Bretton Woods agreement. This agreement pegged the US dollar to gold and many foreign currencies to the dollar cementing our place as the world’s reserve currency.

A lot has happened since then. In 1973 we left the gold standard and moved to fiat money. This is money that is backed by the willingness of people to accept it rather than a commodity or reserves of some sort. By leaving the gold standard, our government has been more free to spend and boy have they:

As result of the United States climbing debt, some have started to question the standing of our currency as the world’s reserve currency. It’s tough to analyze something like this.

Again, its backed by the faith people have in it. Henry Ford, not known for his currency analysis, once said a quote that rings true for fiat currencies, “Whether you think you can or you think you can't, you're right.” Put differently, “Whether the world thinks the US dollar will stay the world’s reserve currency or not, they’re right.”

While this is complicated, there is a far more practical way to look at it. What can we expect the impact on your portfolio to be should such a situation occur? To review this, I brushed off an all-time classic book, Stocks for the Long Run by Wharton Professor Jeremy Siegel.

In that book Jeremy plots the return of the stock market from 1802 through 2006. I am concerned with the period of 1802 through 1943, why? This is the period of time the US was not the world’s reserve currency. Take a look at the chart below:

 

While not a deep analysis by any means, do we see a trend difference in stocks returns? Nothing apparent. As you might expect, the value of the dollar has decreased a little bit more precipitously since we left the gold standard.

What’s the takeaway? Stocks through three different currency regimes have done well, I would expect, but cannot guarantee, that should we lose our status as the reserve currency, stocks will still climb over time. Why? Will a customer stop going to McDonald’s as a result of currency changes? What about upgrading to the next iPhone? Streaming on Netflix? Shopping at Costco? You go down the list and what happens to our currency is not likely to disrupt those trends directly.

What would likely change is the pricing we see. Should our currency weaken as a result from being displaced, our purchasing power will fall meaning prices would likely rise. From a societal view, this sadly means those without access to investments and generally on the lower end of the income scale will generally be hit the hardest. As companies raise their prices to adjust for increasing costs, their earnings are likely to grow leading to higher prices over time. We just went through surging inflation in the post-covid environment and have seen firsthand this dynamic as companies raised prices to keep pace with increasing costs. While inflation is painful to many, stocks historically have been a great hedge to keep and outpace inflation.

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Sources:

https://www.investopedia.com/terms/b/brettonwoodsagreement.asp#

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The information contained herein is for informational purposes only and is developed from sources believed to be providing accurate information.

Forecasts or forward-looking statements are based on assumptions and the author's opinion only, may not materialize, and are subject to revision without notice.

 

This commentary reflects the personal opinions, viewpoints, and analyses of Wooster Corthell Wealth Management, Inc. “WCWMI” employees. The information presented should not be viewed as a comprehensive analysis of the topics discussed but instead is general in nature.

The views reflected in the commentary are subject to change at any time without notice. WCWMI makes no representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information presented.

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