Crisis Could Weaken the Almighty Dollar
SAN FRANCISCO (Oct 11) The U.S. dollar is the world’s reserve currency of choice. It’s the currency that most of the planet’s business is conducted in, and it’s what most nations hold in their central banks, in addition to national currencies, in case of catastrophe. The idea is that since the U.S. government is always good for it’s money, and always pays its bills, the dollar and U.S. treasury bills are the safest bets around. But what if they aren’t? What happens if thanks to our repeated debt ceiling debacles and threats to go into default, people stop trusting in the dollar? That’s the question that Joe Nocera, Charlie Herman and I discussed on this week’s episode of WNYC’s Money talking; you can listen below.
If you look at foreign purchases of treasury bills before and during debt ceiling fights over the last three years, it’s a legitimate question to be asking. A recent Goldman Sachs research report shows that during the last standoff in August of 2011, purchases went down significantly and rebounded only after Congress had come to an agreement to raise the ceiling and honor US debt. At some point, if we keep making markets nervous, it’s reasonable to think that central banks around the world will get fed up and start moving to a different balance of reserve currencies—perhaps putting more in euros, especially given that Europe is now in better shape than it was two years ago, or, eventually, into emerging market currencies like the RMB.
To be fair, we’re a long way from the dollar’s position being usurped. But it’s worth remembering that even before this crisis, economists around the world have been advocating for a new reserve system based on a basket of global currencies, rather than just the dollar, for financial security reasons.
After all, the fact that we have such a privileged borrowing position is one of the reasons that we can rack up so much debt, run a huge current account deficit and make the global financial system as unbalanced as it is. If the dollar lost some of its street cred, it would make borrowing a lot more expensive for the US and throw the markets into short and possibly even medium term chaos—but it might ultimately lead to a more balanced monetary system.
