The World’s Most Powerful Reserve Currencies

When we think of network effects, we’re usually thinking of them in the context of technology and Metcalfe’s Law.

Metcalfe’s Law states that the more users that a network has, the more valuable it is to those users. It’s a powerful idea that is exploited by companies like LinkedIn, Airbnb, or Uber — all companies that provide a more beneficial service as their networks gain more nodes.

But network effects don’t apply just to technology and related fields.

In the financial sector, for example, stock exchanges grow in utility when they have more buyers, sellers, and volume. Likewise, in international finance, a currency can become increasingly entrenched when it’s accepted, used, and trusted all over the world.

What’s a Reserve Currency?

Today’s visualization comes to us from HowMuch.net, and it breaks down foreign reserves held by countries — but what is a reserve currency, anyways?

In essence, reserve currencies (i.e. U.S. dollar, pound sterling, euro, etc.) are held on to by central banks for the following major reasons:

• To maintain a stable exchange rate for the domestic currency
• To ensure liquidity in the case of an economic or political crisis
• To provide confidence to international buyers and foreign investors
• To fulfill international obligations, such as paying down debt
• To diversify central bank portfolios, reducing overall risk

Not surprisingly, central banks benefit the most from stockpiling widely-held reserve currencies such as the U.S. dollar or the euro.

Because these currencies are accepted almost everywhere, they provide third-parties with extra confidence and perceived liquidity. This is a network effect that snowballs from the growing use of a particular reserve currency over others.

Reserve Currencies Over Time

Here is how the usage of reserve currencies has evolved over the last 15 years:

Over this timeframe, there have been small ups and downs in most reserve currencies.

Today, the U.S. dollar is the world’s most powerful reserve currency, making up over 61% of foreign reserves. The dollar gets an extensive network effect from its use abroad, and this translates into several advantages for the multi-trillion dollar U.S. economy.

The euro, yen, and pound sterling are the other mainstay reserve currencies, adding up to roughly 30% of foreign reserves.

Finally, the most peculiar data series above is “Other”, which grew from 2.0% to 8.4% of worldwide foreign reserves over the last 15 years. This bucket includes the Canadian dollar, the Australian dollar, the Swiss franc, and the Chinese renminbi.

Accepted Everywhere?

There have been rumblings in the media for decades now about the rise of the Chinese renminbi as a potential new challenger on the reserve currency front.

While there are still big structural problems that will prevent this from happening as fast as some may expect, the currency is still on the rise internationally.

What will the composition of global foreign reserves look like in another 15 years?

Global Attitudes Towards Retirement

There’s a reason retirement is often referred to as the golden years.

Many view retirement as a welcome reward following a successful career. The transition, however, is not always easy. An enjoyable retirement is often dictated by the amount of money people have set aside.

Today’s infographic from Raconteur visualizes attitudes towards retirement around the world, comparing expectations and actualities for retirement income.

Does reality meet their expectations?

Income Expectations Vary by Country

A global survey by asset manager Schroders—looking at 22,000 investors from 30 countries—highlights that retirement income often falls short of expectations.

Here’s what non-retirees (55+ in age) expect to make in retirement as a percentage of their salary, compared to the actual incomes generated by retirees:

*Denotes countries with small sample sizes.

Not having enough money at retirement is a nearly universal issue, and 51% of employees with a workplace pension are worried that they won’t make enough to live their ideal retirement life.

Of course, there are always notable exceptions to every rule.

In India, for example, the reality of retirement is often better than anticipated. Non-retirees expect that 71% of their annual salary will provide what is needed to live comfortably in retirement, but in practice they get 96% of their salary in retirement—far higher than they thought.

Most Important Aspirations

The world is divided when it comes to working into retirement. The majority of people want to spend their retirement doing non-work related activities:

• Traveling: 60%
• Spending more time with friends and family: 57%
• Pursuing new hobbies: 49%
• Volunteer work: 27%

That said, 59% of employees in Italy, the U.S., and Australia expect to continue working while retired, while only 32% in the Netherlands have the same expectation. This may be partially due to the strength of the Dutch pension system, which is rated as one of the best in the world.

A Changing Retirement Landscape

The reality of retirement continues to evolve by country and by generation.

Today, only 15% of the population in developed countries is above 65 years of age—but by 2050, the proportion will more than double. People between the ages of 40 and 50 are known as the “Sandwich Generation” because they are simultaneously supporting their retired parents and their own children.

While increasing life expectancy affords people the luxury of spending more time with loved ones, will we be able to afford to live longer?