Monday, March 06, 2006

How to make the World pay your Expenses

Running to over 700 bn. dollars. Who pays for that? Why are the Chinese so good?

The US has a record balance of payments deficit. It is hovering about 6 per cent of GDP, and it has been increasing lately. In dollars the deficit is some 7-800 bn. How is it possible to run such a huge deficit for years? It would correspond to an individual not paying the grocery bills.
The answer is that the USA can run such a deficit because a lot of investors around the world still feel confident about investing money in the USA. They buy treasury bond, stocks, real estate etc.
Furthermore, the USA has the dominant reserve currency. Everybody accepts dollars as the preferred payment in international transactions. That means that the US can play the role of central banker of the world. It can print money to cover the deficit. Of course this is not without problems: It may increase the global price level, and with that interest rates, to the detriment of global investment and economic development.
How much importance does the US leadership attach to the dollar's status as the international reserve currency. Is that the reason for striking against countries that work against US interests, like Iraq and Iran. Both countries were categorized as "axis of evil" countries. Both countries took measures to drop the dollar in favour of the euro as preferred currency in oil trade.
If the dollar's status as global money is dropped, it will mean a fatal blow to American ability to uphold its power around the world. The huge military budget and bases around the world can no longer be financed by running this enormous current account deficit.


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