McTag wrote:Well I wonder if there any other opinions on that.
You rang, sir?
The dollar was originally accepted as the world's reserve currency mainly because America flooded the world with low-cost, high-quality manufactured goods (being convertible into gold also helped). In America, the words "it's imported" were synonymous with "it's expensive." If a product malfunctioned, a common expression was "it must have been made in Japan." In fact, the Japanese had such a hard time overcoming this stereotype that they actually name a city in Japan, USA, so they could label their product "made in USA." Today the exact opposite is true, as imports are inexpensive, while domestically produced products are high cost. Japanese manufactures now enjoy the reputation for quality that American manufactures lost.
The main reason America was so competitive was that it had a comparative advantage in freedom. American business incurred lower taxes and faced fewer regulations than business in any other country. Further, Americans themselves were among the world's most frugal, with high domestic savings financing capital investments. Limited government and high savings combined to allow American business to pay the highest wages in the world while still producing the least expensive products. Today America is just as highly-taxed and regulated as most other countries, and more so than many, and Americans themselves are now among the world's most profligate.
For a time, America has been able make up for its lack of exports by offering its trading partners the promise of greater financial returns on their dollars investments. However, since America now has the lowest real interest rates in the world (they are, in fact, negative) and the most over-valued stock and real estate markets, private foreign investors have no compelling reason to accumulate dollars. Not surprisingly, the principal buyers have been foreign central banks, who after all are spending taxpayer's money. There can be no question that panicked foreign central banks, which bow to political expedience, not rational self-interest, are the buyers of last resort, and that the dollar's days as the world's reserve currency are numbered.
The main reason that the US dollar is still the world's reserve currency is that few understand how completely the fabric of the American economy has been rewoven. In fact, the US economy functions in a manner which would be completely impossible were it subject to normal market forces. However, by issuing the world's reserve currency, it has been immune to these forces, and thus its economy has evolved in a most unnatural way. Recent trial balloons launched by various Asian central banks, concerning diversifying their foreign exchange reserves; indicate that the dollar's reserve currency status may already be at risk. Once that status is lost, the process of returning to economic viability will be quite painful, and will involve substantial austerity from both the US government and its citizens. Whether America is up to the task still remains to be seen.
