Prof. Thomas Appleby
What would happen to dollar? Dumping the gold standard and creating the dollar one resulted in the world financial system becoming dependent on the US? currency. This move was great for the United State, but it was also more than convenient for the so-called export countries. Gold reserves in the import countries were, of course, limited, whereas reserves of US dollars, at least in the United States, turned out to be inexhaustible. This, in effect, allowed the export countries to grow rapidly. We are talking here about China, several Persian Gulf and Latin American countries and recently Russia. Regardless of commodity prices (think of oil prices, for instance) there were always enough dollars to buy what the export countries had to offer.
In the nutshell, the US was printing money and the export countries were registering profits. The point was that in order to achieve a steady growth, the export countries were compelled to form dollar reserves. At present these reserves amount in China to almost 4 trillion dollars, in Japan to 1.3 trillion dollars, in Russia . The US gets the dollars back selling short-term bonds at 1% and 10-years bonds at a bit more than 2.5%, one of the lowest rates in the world. The flow of dollars is also converted into investments in the American economy and real estate. Annually the US purchases about 400 milliard dollars? worth of imports (commodities and services) and receives more or less 400 milliard dollars of investments from abroad.
In essence, what China and other export countries earn from their exports (not only to the US since dollar is a global currency) they return to the US by virtue of credits and investments. Therefore, they help the US offset current balance account (in other words they finance the trade deficit) and even fix a US budget deficit which reaches 3% of the country?s GDP.
The export countries are afraid of selling out dollars as it may cause appreciation of their own currencies and, therefore, decline of export competitiveness, which eventually may even result in becoming net-importing countries instead of net-exporting ones as they are at the moment.
The US is not alone in creating the conditions in the world financial system similar to the described above. The European Union?s euro is playing a role akin to dollar though not on the same scale, as does Swiss? frank or the UK?s pound. Whether the US? dollar will maintain its role of the main world currency is something we may learn in a short time than we expect. The additional, even more thrilling question, is what the consequences of a changing status of the US? dollar may be?
Just a brief remark: a substantial alteration of the current international financial system is unlikely because of several reasons. One of them is the following. Many rich people from the export countries come to the West and buy houses here, invest, purchase bonds, etc. They treat these investment as reliable deposit of their capital. Just think of London and of what Arabs and Russian do there. Such a situation is beneficial both to the developed countries and to the ruling classes in the countries that have much to export. Whether, in a long run, this situation is good for both types of countries is a moot question.