Princeton Economics professor and New York Times columnist Paul Krugman says there's not really anything to be concerned about in changes to the use of the US dollar as an international reserve currency. His opinion is that the dollar's reserve currency status doesn't really have much effect on the US. The number of dollars going into central bank coffers as reserves is tiny compared to GDP:
Well, then, you may say, surely the international role of the dollar forces people out there to hold dollars for transaction purposes. Yes, but not so you'd notice. When Daewoo repays a dollar loan from Sanwa, it writes a check on its account with some international bank. True, that bank itself surely maintains an account in New York, backed in part by non-interest-bearing reserves held at the Fed. So the U.S. does in effect get a zero-interest loan out of the dollar's international role--but it probably amounts to only a few billion dollars, small change for an $8 trillion economy.
More significant than currency reserves, Krugman says, is the use of US cash worldwide as a medium for illegal transactions:
Where the U.S. does get a significant free ride is from the willingness of foreigners to accept our currency--actual bills. Foreigners hold more than $200 billion of American money. Guess what kind of business requires payments of large sums in cash, by people unconstrained by official restrictions on possession of foreign exchange? That's right: the dollar is the world's premier medium of illicit exchange. Every year the U.S. ships foreigners $15 billion in cash (about 0.2% of GDP), and gets real goods and services in return. Better not ask what kind.
But still, he says this is a tiny proportion of GDP.
Is he right that the small proportion of GDP of these transactions means that there is naught to worry about?
I wonder, what is the total value of US dollar currency reserves worldwide, and what is the total value of US currency in circulation abroad? What proportion of GDP are we talking about then? What proportion of the total amount of US dollars worldwide are we talking about?
No answers yet, just lots of questions.
My understanding is that 50% of dollars that come out of the federal reserve circulate outside the USA.
It's uncertain to me what would happen if the Euro displaced the Dollar as the World's reserve currency.
The current conspiracy theory is that the neo-cons attacked Iraq to ward off threats to price in oil in Euros. That explained Franco-German opposition to the war who are pushing for a more aggresive Euro policy. Where I struggle with this is that the USA picked up support from Spain and Italy (both use the Euro) to prosecute war in the Middle-East. Can anyone explain the logic here if this is a currency driven conflict?
Joe
Posted by: joseph | 2004.01.11 at 14:40
It's not a conspiracy theory at all. It's nearly a direct quote from Karen Kwiatkowski, a recently retired Lt. Colonel who served in the DOD's OSP. Euro-denominated oil trade out of Iraq was a reality under the food-for-oil program, and, she says, as sanctions were due to come off in the near future, Bush admin didn't want this to continue. Try a search on her name.
Posted by: Gene | 2004.02.20 at 18:14