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Originally Posted by tblake
Grey Wolf- The US Dollar isn't the reserve currency of the world? WTF? Can you please justify.
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Not sure which post your question rises from Travis... Is it:
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The idea that the country with the world's largest economy and the world's reserve currency of choice is going to become a third world country
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If so, sure, the dollar is the top currency reserve and hopefully, will remain that way. Nobody else appears willing to print paper - eg the EU have expressed no interest in promoting the euro as a global reserve currency.
Was looking more to the foundation as to why it is a prime reserve currency and what is supporting it. Appears very little, other than a confidence factor and where US "money managers" are willing to allow the dollar to be used this way.
There are obvious benefits for the US when the dollar is used as a reserve currency - elements such as the ability to borrow higher and at fractionally better interest rates etc.
But... and therein lies the potential achilles heel
Borrowing is fine as long as it's managed and a fiscal policy exists. There is no doubt that "USA Inc" is over-stretching itself beyond a sustainable borrowing level and, in turn, causing minor earth tremors resulting in dumping of dollars and questions to why it should be used as a reserve currency.
Always keep referring to this doc, but it was stunning :-) The Treasury did a very extensive revue of the US economy and presented their findings/recommendations in early 2002. It had taken them 15 years to prepare. It's too detailed to discuss on a chatboard, but a few economists did an analysis and the simplified version mean't eg "94% of the value of all homes and the contents in them is debt". Obviously home values have changed since 2002 and there is an increase in debt. The Treasury solution, which they appeared to regard as urgent at the time, was to recommend "an immediate increase in taxation to a level of 60% for the foreseeable future". This report was unpalatable for the administration and hidden within the week - another unfortunate administration will have to deal with it in the future.
Another example of debt, prob going beyond a prudent level for any currency reserve country, can be found in the Current Account balance... example is here:
Current Account Balances By Country
In reality, the Current Account Balance at the moment is around $900 trillion deficit and that is not the full story. It's safe to say (least up to 2005), you can add approx another $300 trillion which are items not included already in a Current Account, - so, around $1.2 trillion deficit.
It is kinda hard to view the dollar (even forgetting it has dropped recently), as a safe global currency when you look at the overall picture and realize the country has never had a trading surplus in 40 years. But, at the same time, it's highly unlikely there will be a massive global shift from the dollar in the short term - it always seems to take much longer, - so doubt dollar holdings by other countries will change much, tho can see enormous pressure on the govt to act and put their house in order and meantime, would expect further reductions in dollar value.
OK.. Gotta rush *lol*
