In the 1950's, the UK's currency lost reserve currency status. The process was painful economically and lead to lower standards of living. The same would occur in the USA if the USD is no longer the reserve currency of the world.
The introduction here briefly explains some of the history of the pound sterling as a reserve currency.
https://sites.hks.harvard.edu/fs/jfrankel/EuroVs$-IFdebateFeb2008.pdf
UK economy was far more trade-dependent at that time than US economy is today.
Don't you think this will result in significant differences in how this will play out in the US?
I don't expect the USD to lose reserve currency status anytime soon. But if it was to - then I'm trying to think exactly how that will impact US Domestic economy.
There is almost 1.7Trillion in currency notes in circulation, presumable a large chunk outside the US. Much of this is likely used for illegal activities.
Worst case, let's assume all 1.7Trillion is outside and comes back to the US. How exactly will it come back? US has to export something that outsiders will buy and give us cash. If so - there will be an increase in exports and decrease in imports. Disruptive - sure. Will it be as bad as the UK? I don't think so.
The other mechanism for dollar to come back is USD denominated assets - bonds, t-bills etc. The primary impact they will have is on the asset bubble. There is a real possibility that we will get another episode of the too-big-to-fail and asset losses are socialized if this does happen.
Any other mechanism it will impact the US economy?
Good reply. Yes, you are correct that the UK is more dependent on trade than the USA.
It's
hard impossible to know exactly what choices USD holders in the future will make when they change their USD for other assets. But it's a good thought exercise to come up with a laundry list of items they liquidate and items they purchase to 'cash out' of USD.
Governments: Presumably will no longer wish to hold US debt or currency as a reserve. This means the value of the USD will drop as they sell current holdings and avoid creating new holdings. USD will drop vis a vis the currency they are swapping into. EUR? JPY? CNH/CNY? Gold? (don't laugh, there're gold bugs here).
The US government will not get the funding they need as old lines of credit are not rolled over, so in order to compensate and attract new money, they will have to raise interest rates, cut spending or raise taxes just to keep operating, irregardless of where we are in the business cycle. Most likely it will be a combination of all three. This will be extremely painful--think stagflation of the '70's type of pain- as the pain of higher taxes is exacerbated by less government spending; higher interest rates attract capital but squeeze out marginal businesses. These type of changes would most certainly bring about a recession. In theory, any recession would be mitigated at the USD return home to roost, as
@ctuser1 correctly suggests. This is the mechanism through the pain of readjustment and realignment will ripple through the economy.
The drop in the USD will make goods produced in the USA cheaper vs. rest of world and thus more attractive. Potential items overseas buyers could scoop up at fire sale prices with a newly depreciated dollar:
1) Real estate (either providing a price support or driving new prices higher), presumably both commercial and residential
2) Stocks (of world class companies that rely on exports, not the domestic market) or even companies swallowed whole. If there's a recession, the value will be even greater, but then if the economy is going through structural change some companies might no longer be viable.
3) Manufactured items (cars, computers, expensive man-toys, etc)
4) Vacations in the USA (hotel stays, restaurants, typical tourist stuff)
5) Educations: If we still have world class universities, selling seats in class rooms will continue to be a lucrative business that attracts hundreds of thousands (millions?) of foreign university students annually.
6) Other tradable goods? MMM type forums and websites? :)
If they're spending USD that they've held for awhile then the exchange rate will be meaningless to them. It will be mainly about liquidating dollars for another asset that they can then take home with them. If the USD falls far enough, it would attract new buyers into the market. The question is would it be enough to offset the outgoing capital of foreign governments and I believe the answer here is 'no'. YMMV.