It was in 1971 that President Nixon declared drugs "America's Public Enemy Number One". After more than four decades, we want to know if the war on drugs was working?
In December 2015, the International Monetary Fund welcomed the Chinese Yuan to its elite club of global currencies. This means that the yuan, also known as the renminbi, will include the US Dollar, Euro, British Pound, and Japanese Yen as the world's most reliable and freely usable denominations.
What makes a strong currency?
Well, the strength of a currency is usually measured by its purchasing power, which is the number of services or services a unit or a penny buys. Since modern currencies are not supported by collateral like gold, their value is entirely dependent on external factors. This would include such things as how much control the government has over a currency, whether it has a reasonable exchange rate and long-term stability. All of these contribute to public confidence in the value of the currency.
For example, in 2005, the Turkish government eliminated six zeroes from its lira overnight. It essentially turned 1 million lire into a lira, and people quickly accepted it because they had faith in the economy that was supporting it.
The number of bills did not matter. Overall, people tend to place more trust in currencies that are widely used and accepted internationally. In this way, the value of a currency is not only based on what you can buy with it but also how much the world uses it.
Internationally the currencies that are trusted are often referred to as hard currencies. The US Dollar, Euro, British Pound, and Japanese Yen all fall into this category because, again, governments and economies that look back on them are considered strong and stable. Many countries have abandoned their domestic currency in favor of hard currency.
More than a dozen countries and territories have adopted the US dollar as their own, a process commonly known as "dollarisation". Also, both average citizens and investors prefer hard currencies during political unrest or global economic instability.
When rapid inflation hit Latin America in the 1980s, many people there temporarily turned to the dollar, fearing that their domestic currencies would go down in value. Because of their consistency and reliability, currencies such as the US Dollar and Euro are held in large reserves by countries with smaller currencies. These nations use their reserve currencies for international trade or to borrow foreign money. US dollars are the most popular reserve currency, accounting for about 60 percent of all global foreign exchange reserves. What's more, about 90 percent of all international transactions involve dollars.
How has the Chinese Yuan made its way into this specific set of currencies?
Well, the Chinese government has recently lost some control over its currency and created trading hubs in other countries. As a result, market forces will play a greater role in establishing the value of the yuan, and the currency will be more tradable, and susceptible to government manipulation.
The newly powerful yuan is already gaining ground on the euro, and China hopes to one day rival its dollar as a reserve currency. However, that possibility remains in the distant future.
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