Economic nationalism is a key tenet of the present U.S. administration. Could that doctrine have an impact on the reserve currency? Jacob Hogan, a PhD candidate in history at the University of Toronto, says that the discussion about reserve currency “may be framed as a debate between national sovereignty versus global international stability.”

Reserve currency is held in significant quantities by governments around the world because it’s commonly used both in international transactions and in international investments. As of the first quarter of 2017, the currencies of the foreign exchange reserves system were allocated chiefly to the U.S. dollar (64.5%), with the euro running a distant second (19.3%).

“All economic decisions are political decisions, whether it’s determining a budget or figuring out how much of a tip to leave when you go out to eat,” Hogan says. One U.S. faction wants that country to take a “hands-off” approach to world affairs, saying that “what goes on in a nation-state should be the business of that state.” Another faction believes the U.S. and other powerful nations have a duty to intervene in extreme cases such as genocide, natural catastrophes, and climate change. Within this mindset, global challenges and global issues—not to mention monetary stability, finance, and capitalism—transcend national borders.

The special drawing right (SDR) is a synthetic reserve currency that was created through the International Monetary Fund (IMF) in the 1960s. The U.S. and Western Europe (specifically, the Group of Ten) used the asset to help the IMF alleviate balance-of-payments deficits through nation-member states. “The SDR is neither a currency nor a claim on the IMF. Rather, it’s a potential claim on the freely usable currencies of IMF members,” the IMF has stated.

“The [SDR] has largely been dormant,” Hogan says. “But after the 2008 financial crash there was a credit crunch, so in April 2009, the IMF announced the release of $250 billion in the form of SDR to its member-states.”

In 2009, Russian president Dmitry Medvedev proposed a new “world currency” at the G8 meeting in London as an alternative reserve currency to replace the U.S. dollar. In 2010, the United Nations Conference on Trade and Development called for abandoning the U.S. dollar as the single major reserve currency.

Mohamed A. El-Erian, chief economic advisor at Allianz and author of The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse, doesn’t think the rise of SDRs is farfetched. “The rise of anti-globalization political movements and the threat of trade protectionism have led some people to wonder whether a stronger multilateral core for the world economy would reduce the risk of damaging fragmentation,” he has written on Project-Syndicate.org.

However, choosing a reserve currency is not a simple matter. The reason the U.S. dollar is the world’s reserve currency is because the U.S. has the deepest capital markets in the world. There’s no other market that compares to the size of the U.S. T-bill market, and that market is difficult to replicate, regardless of the political ambition to do so.

“It’s unlikely the U.S. is going to cede power without a struggle,” Hogan says, adding that the U.S. is $19 trillion in debt as a “welfare–warfare state.” Moreover, the spending is projected to increase as the population continues to age and retire over the next 10 to 15 years.

The U.S. might stagger under a huge debt, “but it has the advantage of the dollar being the world reserve currency, so it can print as much money as it wants and no one can do anything about it,” Hogan continues. “But, when the U.S. does that, it exports inflation to the rest of the world.”

In October 2016, for the first time ever, the SDR included the Chinese yuan. The basket now includes five currencies in the proportions: USD (41.73%), euro (30.93%), yuan (10.92%), Japanese yen (8.33%), and British pound (8.09%). The inclusion of the yuan signals “more political confidence and clout” to the Chinese economy, Hogan says.

A GREATER SHARE

The foreign exchange reserve is money that must be held by a central bank so that it can pay its liabilities, such as the currency issued by the central bank, as well as the various bank reserves deposited with the central bank by the government and other financial institutions. A common use of foreign exchange reserves is for intervention, to stabilize or affect a country’s own currency level. The world’s need for dollars has led to several benefits for the U.S., including reducing the likelihood that the country will face a balance-of-payments crisis (as it exports and imports in U.S. dollars) and creating demand for its liquid assets, which pushes down the interest rate.

Developing nations—China, India, Brazil, and South Africa—view the U.S. and Europe as controlling the IMF and the World Bank. They view their stake, in terms of their voting share, to be unjust and unequal. So they want a greater share of the system and less reliance on the U.S. dollar.

El-Erian is not impressed with the SDR to date. He sees a “substantial gap between the SDR’s potential and its performance.” He cites legal and practical factors, weak institutional infrastructure, inadequate branding, and failures in information and markets, as well as “political resistance to delegating economic governance to multilateral institutions.”

“A ‘big bang’ approach to reinvigorating the SDR is highly unlikely. Even an incremental approach, starting with practical low-hanging fruit that does not require amendments to the IMF’s Articles of Agreement, would face political challenges,” he writes. “But it would be worth considering.”

Hogan is more philosophical in outlook. “It took the Great Depression and World War II to produce Bretton Woods. It took the U.S. balance-of-payments deficit to lead to the SDR creation, and it took the 2008 financial crisis for the SDR to come back in vogue.

“The only way the SDR will emerge into a global currency—or the IMF will emerge into a world central bank—is if there’s another crisis on the level of 2008, like a derivatives collapse or a debt collapse,” he says. “Crisis is a catalyst for change.”