The Dollar

THE REGIME OF THE DOLLAR

The world economy has become extremely contingent on the Dollar. In fact dollar has not just been able to amass the confidence of its jaded investors but also has attained the significance of donning a new role as the world’s reserve currency. The U.S dollar is the world’s premiere currency, with approximately two thirds of the world’s official Foreign exchange holdings being dollars. Countries are willing to run trade with the U.S in return for additional dollar holdings Why actually are we reluctant enough to exchange valuable resources for these paper IOUs representing a form of tribute to the Dollar?
Before we excavate deep into this topic, a term which needs premonition is balance of payment. It means the summary of the international transactions of a country over a period of time including commodity and service transactions and gold movements. This is a major factor revolving around the economic policies of other countries. The balance of payment considerations constrain other countries to run tight economic policies, thus U.S appears to be free from all the constraints. U.S also gains the special advantage of having surplus trade deficits without apparent market sanctions. This gives Dollar a noteworthy edge over other currencies.
Notching up the status as worlds reserve currency increases the demand for U.S financial assets, thereby driving the prices of stocks and bonds, lowering the interest rates and a fillip to the household wealth of the nation. The U.S government also gets an interest free loan from the hundreds of millions in dollar bills held offshore. Increased demand for its assets makes US manufacturing less competitive internationally because an overvalued dollar makes US exports more expensive and imports cheaper. In order to generate high inflation, certain countries over-issues their own money which encourages foreign citizens to protect themselves by converting and keeping in hand dollars than the domestic currency. U.S owns the world’s largest share of output and trade is tantamount to their assertion on being the world’s military power. This criteria authenticates their big brother attitude thereby a security to protect the global market system also. Thus investor’s tendency to rush to dollars in times of uncertainty buds out of this concept.
Consumption and internal demand also percolates deep into the currency market. Certain countries fail to develop and adequate internal demand or consumption of their produced goods. This forces such countries to rely on the American consumer. The inadequacy in consumption may be due to poor income distribution or bad domestic economic policies. Countries riding high on due to their industrialization generating employment lack adequate internal demand. China is one such example. In order to keep their factories operating they have to depend on their exports which indirectly attracts foreign direct investment and advances development .China has been particularly willing to run trade surpluses with U.S because of its export attributed growth and increase in their foreign direct investment. Thus certain East Asian countries have converted their trade surpluses into dollars, thereby continuing strong demand for dollar and its dominance in official foreign exchange holdings. Industrialization leading to full scale employment has to have the demand. Inadequate internal demand forces such countries to depend on American consumers thereby an overvalued dollar. BMWs and Mercedes Benz manufactured by Germany is supplied in return for paper dollar IOUs as a result of lower internal demand and no noteworthy consumers.
Dollar’s regime can be toppled. When the countries that run trade surpluses with U.S becomes saturated with their dollar holdings, they cease buying. In fact they may even start selling. This will let the currency fall. But this would certainly destroy their countries export market and its associated growth.
The development of consumption markets could also topple the totalitarian regime of the Dollar. The concept of consumption market and a common currency associated with it is a possibility only if a group of countries manage to set aside their economic imbalances and develop their own consumption markets. Countries in the Euro zone are capable of doing this but they are gripped by inefficiency in decision making as a result of the inflation and its associated economic calamities. China’s totalitarian regime fears the presence of Unions and other organizations which are quintessential elements to improve the income distribution. The dearth of such systems inculcates ambiguity in the minds of consumers. The Middle East can be an alternative to this. The oil rich nations can metamorphose the dollars affidavit of security and stability by focusing on oil dominated trade surpluses. Energy deficit nations would flaunt their new trading partners and this would overvalue their currency. As a result, this currency riding on the waves of potential reserves would be a shot in the arm for countries disparaging the apparent market sanctions U.S dollar is betrothed to thereby a situation of endurance for the giant. But the political atmosphere prevailing in this region thwarts a concordance between the nations, which deliberately is an American ploy to destabilize the regions security thereby keeping the dollar consummate and unparallel.
The rest of the world has to develop an alternative to the US consumer. As long as other countries fail to generate sufficient demand in their own markets, they will be compelled to rely on the US market thus an overvalued Dollar. While US workers face stiff competition and job pressures from imports that are advantageous to Dollar, the long term economic prospects of the US economy is open to discussion. The rest of the world, in order to stabilize the world economy, should take up this opportunity encourage more consumption in the European or east Asian markets, improve the wages of the developing economies and thereby resurrect the global financial imbalances widened due to overdependence on the US Dollar.





Shereen Vijayan Kottikkal