PHA-Exchange> A dollarized world economy

[Aviva]

> > The dollar and the deficit
> >
> > Why the dollar still rules the world-and why the world should be
grateful
> >
> > THE dollar is looking vulnerable. It is
> > propped up not by the strength of
> > America's exports, but by vast imports of
> > capital. America, a country already rich in
> > capital, has to borrow from abroad al-
> > most $2 billion net every working day to
> > cover a current-account deficit forecast to
> > reach almost $500 billion this year.
> > To most economists, this deficit repre-
> > sents an unsustainable drain on world
> > savings. If the capital inflows were to dry
> > up, some reckon that the dollar could lose
> > a quarter of its value. Only Paul O'Neill,
> > America's treasury secretary, appears un-
> > ruffled. The current-account deficit, he
> > declares, is a "meaningless concept",
> > which he talks about only because others
> > insist on doing so.
> > The dollar is not just a matter for
> > America, because the dollar is not just
> > America's currency. Over half of all dol-
> > lar bills in circulation are held outside
> > America's borders, and almost half of
> > America's Treasury bonds are held as re-
> > serves by foreign central banks. The euro
> > cannot yet rival this global reach. Interna-
> > tional financiers borrow and lend in dol-
> > lars, and international traders use dollars,
> > even if Americans are at neither end of
> > the deal. No asset since gold has enjoyed
> > such widespread acceptance as a medium
> > of exchange and store of value. In fact,
> > some economists, such as Paul Davidson
> > of the University of Tennessee and Ron-
> > ald McKinnon of Stanford University,
> > take the argument a step further . They argue that the world is
> > on a de facto dollar standard, akin to the
> > 19th-century gold standard.
> > For roughly a century up to 1914, the
> > world's main currencies were pegged to
> > gold. You could buy an ounce for about
> > four pounds or twenty dollars. The con-
> > temporary "dollar standard" is a looser
> > affair. In principle, the world's currencies
> > float in value against each other, but in re-
> > ality few float freely. Countries fear losing
> > competitiveness on world markets if their
> > currency rises too much against the
> > dollar; they fear inflation if it falls too
> > far. As long as American prices remain
> > stable, the dollar therefore provides an
> > anchor for world currencies and prices,
> > ensuring that they do not become com-
> > pletely unmoored.
> > Eventually, however, growth in the
> > world's economies translates into a grow-
> > ing demand for dollar assets. The more
> > money central banks print, the more dol-
> > lars they like to hold in reserve to under-
> > pin their currency. The more business is
> > done across borders, the more dollars
> > traders need to cover their transactions. America's
> > external deficit means an extra $500 bil-
> > lion is going into circulation in the world
> > economy each year.  Hence America's deficit is not a
> > "meaningless concept". It is an indispens-
> > able source of liquidity for world trade.
 China added $60
> > billion to its reserves in the year to June
> > by ploughing most of its trade surplus
> > with America back into American assets.

 Paul  Davidson. Edward Elgar 2002. Ronald
> > McKinnon 2001.