Financial Leaps: World Currency Reserve Status through the Lens of Collegiate Football

Get Ready for Leaps and Bounds

Dear Readers,

Another college football season is in the books—the last championship season with “only” a four-team format concluded last night. Next year, we move to a twelve-team bracket, which got me thinking about the global economy.

Stay with me here.

In the rhythmic dance of the global economy, nations take leaps, sometimes into prosperity, other times into the abyss of economic reconfiguration. We stand at the precipice of a significant jump within the foreseeable future. The world reserve currency status of the United States— through Ray Dalio's criteria — is ripe for a reckoning. Dalio is best known as one of the world’s most strategic financial thinkers and founded Bridgewater Associates, one of the world’s most significant hedge funds.

I’m not an advocate for or desire to catalyze this possibility. As US citizens, we’ve benefitted tremendously from the USA’s status as the World Reserve Currency. It’s just worth knowing that we’re edging up on the concept of “history repeating itself.”

The Current Leap: Reserve Currency Status and the USA

Dalio's perspective on economic cycles offers a valuable framework for understanding the United States' current position as the holder of the world reserve currency. His analysis suggests that such statuses are not permanent but rather subject to the ebb and flow of economic might, political stability, and fiscal responsibility.

The Historical Context

Here are a few of the countries that benefited from their status as the world’s reserve currency:

• Portuguese Real — thanks to maritime trade in the 15th Century

• Spanish Dollar — via a vast colonial empire

• Dutch Guilder — The Golden Age with dominant economic and maritime implications

• French Franc — Political and economic influence

• British Pound Sterling — As the world’s financial center at the time

The world reserve status conveys certain powerful benefits. Like lower borrowing costs, more liquidity options, and greater leverage in international policy discussions.

Historically, shifts in reserve currency have been about, of course, the money AND the countries that back them. With each transition, the change in currency status has been marked by the following eight comparatively measurable criteria within countries:

1. Economic Output

2. Share of Global Trade

3. Military Strength

4. Power of their Financial Center

5. Education Levels

6. Competitiveness in Global Markets

7. Inventiveness and Technology Development

8. Strength of the Currency

When the US moved into its current status, a pivotal juncture occurred during the 1970’s Energy Crisis. As part of an agreement between the U.S. and Saudi Arabia, Saudi Arabia agreed to price all of its oil exports in U.S. dollars in exchange for U.S. military assistance and equipment. This agreement was crucial, as Saudi Arabia was —and remains — a dominant player in global oil markets. More on this in a moment.

Another key concept is that nation-states that have lost their status suffered from two key conflicts before the transition often at the same time: external wars and internal wars.

1. External Wars - Way, way back. Even before the Portuguese Real. The Denarius from Rome was likely the first reserve currency since they were the first superpower to create coins. At the edges of the Roman Empire, they were fighting wars to expand and protect their influence, yet this helped dilute their dominance in many ways. Today, the US is engaged in multiple foreign wars, and with dynamics at our US borders, it’s at least a “battle” of some sort. Still, we seem to tick this box for this predictive characteristic of impending change.

2. Internal Wars - I’m willing to characterize “internal wars” more broadly to include significant internal conflicts, divisions, or challenges. Down that path, look no further than the political polarization that’s engulfed America in the past few years. With social media engagement stirring the pot, many—if not most—candidates have gone to further extremes to get noticed and get votes. Why not make promises you can’t keep when it’s your only shot at getting the attention needed for the job? Suffice it to say the cauldron of conflict boils each day in so many ways.

That should be enough to recognize the Wars we’re facing. I’ll even go so far as to NOT elaborate on the social and racial unrest, economic inequality, abortion rights, gun rights, free speech issues, LGBTQ+ dynamics, and many other issues in the (are we still United, right?) United States . . . but wait, there’s more.

Ray, tell them what they could be giving up for all the strife, turmoil, and conflict.

The United States Trajectory

The US dollar has enjoyed unparalleled dominance since the mid-20th century, underpinning global trade and finance. However, with increasing debt levels, political polarization, and the rise of other economies that want to move away from dependence on the US dollar, questions arise about the longevity of our current status.

The Ray Dalio Lens

According to Dalio, every currency's strength is built on trust and utility. The USA's leap into unprecedented fiscal stimulus and debt during recent crises may jeopardize the dollar's position. He warns of the "beautiful deleveraging" necessary to balance the scales without toppling the economy.

The Leap Ahead: Preparing for Change

As we pivot into a new economic era, how can investors and policymakers prepare for the possible shifts in currency hegemony? Or better yet, how will today’s leaders work to delay? Strategic international relationships will be essential.

Factions are already in play. In one corner, you have the BRICS nations. Brazil, Russia, India, China and South Africa. As if that weren’t enough, Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates will officially join the group in January 2024.

Yes, Saudi Arabia.

I mentioned we’d come back to this. The country that effectively kept us at the table of World Reserve Currency Status in the 1970s is looking for new, better—if not different—options.

Which brings us back to college football.

There’s been enough college football conference expansion to know you can move to a new situation when you don’t like your current environment. Or if the current group doesn’t seem to help you live up to your standards, it’s time to move on, regroup and re-establish. That’s true of players in the NIL (Name, Image, Likeness) era—especially with the transfer portal. It’s true for coaches. But when contemplating world reserve currency status, the best comparison comes at the University level when considering conference realignment.

We’re beyond the pioneer phase—think Texas A&M and Missouri to the SEC-and now we watch the settlers come in and take the land — think blue-blooded Texas and Oklahoma a decade later.

This occurs just as the college football playoff moves from 4 to 12 teams, akin to nation-states printing more money. The abundance comes from the availability, not improved performance; however, the point here is that more is more—for almost everyone.

Even though Texas made it this year, in future years A&M, Missouri, Texas, and Oklahoma all have a better chance of reaching the promised land because the opportunity increased by 300%.

Perversely, though, too much may NOT be enough.

Nation states, to keep those in power in power, will be willing to take on calculated leaps of faith to retain or gain political stature and secure financial opportunities. What suffering nation-state wouldn’t want the promise of a better future?

The PAC-12 boasts two remaining member teams going into 2024—Oregon State and Washington State. What will become of them, much less the conference?

TCU represents what can happen over time. In the last twenty-five-plus years, they’ve moved from the Southwest Conference to the Western Athletic Conference to Conference USA to the Mountain West Conference to now the Big 12.

All that realignment for TCU to become the first Texas team to play in the college football playoffs and to make the championship game.

If college institutions make this many moves to realign sport, consider what leaps politicians will be willing to take to move the electorate and retain their power. The power of world reserve currency. In a Venn Diagram of Politics and Competition, money is key—as it is with world reserve currency status.

World reserve currency status is crucial for anyone interested in economic leaps.

The USA's position is being challenged, creating unintended consequences as doors open to new possibilities in various financial sectors. The tokenization of assets and the technological capabilities to establish multi-currency reserves already exist.

Nation states are rapidly moving into new alignments where even the most seasoned politico’s (and university presidents, ironically) will blush. Once the changes start with currency status, not unlike college football realignment, it will be hard for it to stop.

Here’s to Navigating a Complex Future,

Jim Flint