Dollar diplomacy

No one has enough of it, everyone wants more of it, but is it getting harder these days to get some?  I’m referring to money — and specifically, United States dollars. 

America is such a big country and the dollar so important that it is easy to forget that the dollar is but one of many currencies.  For the past 60 years, it has been the primary currency for the entire world:  everybody from central bankers to South American drug lords have relied on the dollar to buy and exchange goods and services.

In fact, the dollar is one of America’s main exports and provides a huge boost to the United States economy.  Because everyone uses dollars, it’s like the world has given America an interest free loan to the tune of hundreds of billions of dollars.  This, in turn, allows Americans to consume more than they produce.  There is probably some direct connection between the strength of the American dollar and levels of obesity, which some pioneering statistician should measure and publish.  

Like gold in the old days, countries today use dollars as a “reserve currency.”  This means that hundreds of billions of dollars are kept in bank vaults all over the world, to be used as cash in cases of emergency.  

The current global recession/depression is a time of great economic uncertainty, and more and more countries are beginning to question whether using the dollar is a good thing.  Russia has been leading calls for a reserve currency other than the dollar.  But both China and India — two rising powers who are eager to expand their influence on the world stage — are joining Russia’s position and want a strong debate on whether countries should be using the dollar as a de facto global currency.

Calls for other currencies have serious consequences for the United States and its economy.  If countries the world over traded their dollars for other currencies (for example, putting euros in their bank vaults instead of dollars), hundreds of billions of dollars would flood the market, cheapening the dollar and probably causing inflation in the United States.  Just like any other expert, a decline in demand for dollars would make American debt that much more daunting — and creditors the world over would probably start demanding repayment on the debt as soon as possible.  Currently, America has $11.4 trillion in debt, or about 80% of gross domestic product.  

As other countries become more powerful, they will form new alliances to counter American influence.  Russia, China, and India are sending strong messages that the days of the dollar as a global currency may soon be over.  If this is true, American influence faces a powerful challenge, one that it may not survive.  If countries are set on ending the power of the dollar, a multi-polar world filled with roughly equal nation states — the United States, Russia, China, India, the EU, and Brazil — may be only a decade or so away.

This entry was posted on Sunday, July 5th, 2009 at 10:05 am and is filed under Imperial Decline, International Relations, Structure and System and tagged with america, china, decline, dollar, india, russia. You can follow any responses to this entry through the RSS 2.0 feed.