Friday, March 26, 2010
Dollar's reserve status is what keeps it weak, not strong!
Most economists have this totally wrong. They believe that if the dollar loses its role as the reserve currency, then it will collapse. In fact, it's exactly the opposite.
The dollar's reserve currency status is part of what keeps it weak. It MUST supply the currency to those around the world who wish to hold it or use it for transactional purposes. Therefore the U.S. runs trade deficits--not by its own design--but as a consequence of other nations exporting to America to acquire dollars. (They need dollars to pay for oil, for example.) On balance the U.S. imports more than it exports because there is a desire by the rest of the world to "net save" in dollars. Were that not the case the dollar would be scarce and, therfore, fetch a higher exchange rate.