Sunday, February 25, 2024

The Mighty Dollar: Why Warren Buffett Believes USD Will Stay On Top For Decades

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Source: AI

The US dollar has reigned as the global reserve currency for decades, but could its dominance soon come to an end? Many countries are trying to move away from the dollar and reduce its status, but renowned investor Warren Buffett believes the greenback will remain king for a long time to come.

In 2015, Buffett made a bold 50-year prediction that the dollar would maintain its position as the premier international currency until at least 2065. He stated, “We are the reserve currency. I see no option for any other currency to be the reserve currency.” The Oracle of Omaha stressed, “I think the dollar will be the world’s reserve currency 50 years from now. I think the probabilities of that are very high.”

When pressed about his confidence level, Buffett didn’t hesitate: “Nothing certain. But I would bet a lot of money on that one.” He emphasized that neither the Chinese yuan nor any other contenders like the Indian rupee or Russian ruble have a real shot at supplanting the almighty dollar. “I think it’s extremely unlikely that any currency supplants the U.S. dollar as the world reserve currency for many decades, if ever,” Buffett declared.

What’s behind Buffett’s bullish dollar prediction, even as rivals try to chip away at its status? And could he be proven wrong?

The BRICS Countries Are Leading the Anti-Dollar Movement

Buffett made his forecast just as the BRICS alliance — Brazil, Russia, India, China and South Africa — was ramping up efforts to undermine dollar dominance in global finance and trade. The group has pushed for years to conduct more business in local currencies, bypassing the greenback.

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According to a Forbes report, the BRICS countries account for around 40% of the world’s population and over 25% of global GDP. They have the clout to potentially shift the international monetary order. Their first major salvo was creating the BRICS Development Bank in 2014 as an alternative to the Western-led IMF and World Bank.

The alliance has also developed its own alternative to the SWIFT global payment system, called CIPS, which has already attracted hundreds of banks and companies. And in 2022, BRICS launched a joint payment network to let members pay for exports in local currency rather than dollars. According to CNBC reporting, this system will “cut reliance on the U.S. dollar for international trade.”

The bloc’s central banks have drastically reduced their dollar reserves while stockpiling gold. As dilawar Syed, President of the BRICS Chamber of Commerce and Industry, told Financial Post, “Trade and business ties between the BRICS are expanding exponentially each year.” He said total trade between BRICS countries could reach $500 to $600 billion annually within the next five years, up from around $350 billion now.

Clearly, the once-overlooked BRICS heavyweights are now flexing their muscles to chip away at the dollar’s global dominance. Could they succeed in dethroning the buck within a few decades?

Why Warren Buffett Believes the Dollar Will Stay on Top

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Despite the BRICS’ anti-dollar efforts, Buffett remains highly confident the greenback will be the world’s go-to currency for the next 50 years and probably much longer. What underpins the billionaire’s bullish view?

Economic fundamentals. The U.S. boasts the largest economy and stock market in the world with a GDP of $23 trillion. It represents about 25% of total global GDP. Even with China’s rapid growth, its $17 trillion economy remains significantly smaller. Furthermore, the U.S. dollar accounts for 60% of central bank reserves.

Political stability. The dollar is backed by the full faith and credit of the U.S. government and its long track record of stability. This provides global credibility and trust. Emerging economies like Brazil and India face more volatility and uncertainty.

Strong institutions. Robust, transparent institutions like the Federal Reserve and U.S. Treasury boost faith in the dollar’s value. Many developing nations lack mature, trusted institutions.

Capital markets. The U.S. hosts the world’s deepest, most liquid capital markets which support the dollar’s strength. For example, over 40% of the world’s investment capital flows through U.S. asset managers.

Network effects. The more a currency is used globally, the harder it is to displace. The dollar’s entrenched status creates inertia.

Military supremacy. The U.S. military helps enforce dollar predominance. Unlike BRICS, America has hundreds of military bases worldwide projecting hard power and influence.

Overall, the dollar benefits from a powerful mix of economic, institutional, financial and geopolitical strengths that combine to make it the world’s go-to currency. Rivals like China lack many of these enduring advantages. While the dollar’s share of global reserves could fall somewhat, it remains better positioned than any competitor to be the dominant global currency for the next 50 years.

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The BRICS countries, representing 40% of the world’s population, may slowly chip away at its supremacy. But it will be difficult for others to match the depth and breadth of America’s capital markets and financial infrastructure. As Buffett said, “I think it’s extremely unlikely that any currency supplants the U.S. dollar as the world reserve currency for many decades, if ever.”

Still, some warn that runaway U.S. debt and deficits — which widened the budget gap by $1.9 trillion in 2021 alone — could eventually debase the currency if unchecked. Former Morgan Stanley Asia chairman Stephen Roach cautioned, “The U.S. economy has never been more dependent on, or stood more exposed, to a potential loss of foreign investor confidence.” If overseas investors pulled back from dollar assets, it could jeopardize its reserve status.

Others believe cyber threats or the rise of cryptocurrencies could displace traditional fiat money. While these factors merit monitoring, the greenback still seems better positioned than the yuan, rupee or other national monies. As the saying goes, “currencies may come and go, but the dollar is forever.” Based on Buffett’s prediction, the almighty buck should continue reigning for another five decades.

Mezhar Alee
Mezhar Alee
Mezhar Alee is a prolific author who provides commentary and analysis on business, finance, politics, sports, and current events on his website Opportuneist. With over a decade of experience in journalism and blogging, Mezhar aims to deliver well-researched insights and thought-provoking perspectives on important local and global issues in society.

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