Quote from misterno:
You misunderstood
USA can print as much money as it wants and not cause inflation at all.
Why?
Because %80 of the money is overseas. USA is 315MM people and printing money but 7BN people are using it as if it is their own money. This is why it is called reserve currency. Don't forget that 7BN people and 193 countries can easily absorb any money that is printed.
If USD were not to be used anywherelse other than USA then every penny to be printed would cause inflation.
In other words, USA is enjoying a HIGH STANDARDS OF LIVING not because of its good schools or superior technology or being No1 in certain industries but because it can and is printing money WITHOUT CAUSING INFLATION. And the whole world is paying for this expense by selling goods in exchange of some printed paper that says $100 on it.
This is how USA is abusing the whole world financialy. The day that the world stops using USD in global trade, that is the day USA will turn in to a 3rd world country.
Until then enjoy life like I am doing. But just know that this is an illusion not a wealth earned by hard working. Just an illusion.
+1
see this FT.com ARTICLE ..
"Printing the worldâs reserve currency has given the US a free lunch of sorts. Around $500bn worth of dollar bills circulate outside the US. Strong demand for US assets has resulted in lower long-term rates. America also earns a higher return on its overseas investments than it pays to foreign holders of US assets. The trouble is that America has abused this âexorbitant privilegeâ â a phrase first coined in the early 1960s by Gaullist finance minister and future French president Valery Giscard dâEstaing."
What to do with a recalcitrant dollar
By Edward Chancellor
Published: May 8 2011 10:52 | Last updated: May 8 2011 10:52
The global financial system continues to operate in a dysfunctional manner. New economic imbalances and credit booms are popping up around the world. At the heart of the problem lies a global reserve currency that derives from a country with negative real interest rates, negative savings rates and a dubious commitment to price stability. Is there no alternative to the dollar standard?
The dollarâs history as the global reserve currency is chronicled in Barry Eichengreenâs excellent new book Exorbitant Privilege: the Rise and Fall of the Dollar and the Future of the International Monetary System.
Although currencies were nominally pegged to gold under the Bretton Woods agreement of 1944, in reality they were fixed against the dollar. Only foreign central banks were able to turn dollar bills into bullion.
In the decades that followed global foreign exchange reserves greatly expanded. It wasnât long before international claims on dollars far exceeded the stock of gold in Fort Knox.
Many expected that the collapse of Bretton Woods in 1971 and the ensuing inflation would spell the end to the dollarâs role as a global reserve currency. As it turned out, the share of dollar assets in foreign exchange reserves actually increased during the 1970s. As currency instability rose, central banks decided they needed more reserves. Their appetite was further enhanced by the 1997 Asian crisis. Since 2000, the stock of international reserve assets (excluding gold) has increased tenfold. Today, the percentage of reserves held in dollars remains greater than under Bretton Woods. More than 50 countries peg their currencies to the dollar.
Printing the worldâs reserve currency has given the US a free lunch of sorts. Around $500bn worth of dollar bills circulate outside the US. Strong demand for US assets has resulted in lower long-term rates. America also earns a higher return on its overseas investments than it pays to foreign holders of US assets. The trouble is that America has abused this âexorbitant privilegeâ â a phrase first coined in the early 1960s by Gaullist finance minister and future French president Valery Giscard dâEstaing.
Strong demand for global reserves during the past decade enabled the US to run massive trade deficits. Lower long-term rates helped fuel the credit bubble. Years of easy living have weakened the US economy and its post-crisis recovery has been slow.
Paradoxically, the dollarâs recent weakness in an era of zero interest rates has stimulated demand for dollar-denominated assets.
Dollar-pegging countries have been forced to buy dollars to prevent their currencies appreciating. Notwithstanding concerns about US sovereign indebtedness and Ben Bernankeâs shaky commitment to combat inflation, foreign central banks have been on a wild buying spree of US bonds. Global foreign exchange reserves have increased by $3,000bn or more than 40 per cent, since Lehmanâs collapse. This represents a huge demand for dollar-denominated securities.
Unless the central bank issues bonds to sterilise its foreign exchange intervention, the accumulation of reserves serves to loosen domestic credit conditions. This is happening in Asia today. Asian foreign exchange reserves have soared by a record $500bn over the past six months, according to Brad Jones of Deutsche Bank*. Across much of Asia real interest rates are negative. The annual rate of private sector credit growth in India, Indonesia, Hong Kong, Thailand, and China is above 20 per cent.
A number of housing bubbles are inflating. According to Deutsche Bank, real estate prices are elevated in a number of Asia-Pacific countries. In Latin America, foreign exchange reserves are also exploding and credit growth is strong. We may not have to wait long before the dollar standard wreaks yet more mischief on the global economy.
Whatâs to be done? Some yearn for a return to the strict discipline of the gold standard. But there is not enough of the precious ****l and it would be absurd to restrict global growth to the rate of future gold extraction. There are no clear alternatives to the dollar.The euro is not a candidate since it is a âcurrency without a stateâ, in Mr Eichengreenâs words. China hopes to challenge US financial supremacy, but its capital account remains closed and the banking system is state-controlled.
Perhaps the notion of a global reserve currency is outdated. In the electronic age, there is no good reason for trade between two countries to be invoiced in the currency of another. Nor is it clear that central banks need such massive foreign exchange reserves.
A world of freely floating currencies wouldnât require a dollar standard or any other dominant reserve currency. Central banks would be free to conduct monetary policy according to domestic economic conditions. And the US would be rid, at last, of the accursed âexorbitant privilegeâ.
