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Will a Default Risk the Dollar’s Status as the World’s Reserve Currency?

I have a question for anyone who might be able to answer it. Will a default risk the dollar’s status as the world’s reserve currency? I know very little about this, but it is my understanding that central banks hold not only dollars, but also dollar denominated assets. I take this to mean that they are probably holding Treasuries. If we have a default, what impact will it have on the dollar as the world’s reserve currency? I’m genuinely curious.

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About Robert Prather
Robert Prather formerly blogged at the now defunct Insults Unpunished and, unlike his co-blogger Dodd, can not kill a mime using only his thumb. Follow him on Twitter.

Comments

  1. Murray says:

    It seems to me that for the immediate future the “reserve currency” status of the dollar is secure precisely because so many institutions have assets in dollars and also because of the current euro crisis.

    In the long run however, it is perfectly plausible that international pressure will grow to use other currencies (or the Official Foreign Exchange Reserves currency composition used by the IMF) as reserve currency and for the pricing of commodities such as oil and raw materials.

    As the world economy grows and the relative size of the US economy shrinks, it makes less and less sense for our currency to be so dominant.

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  2. @Murray: That sounds about right to me. I have heard that other countries, particularly China, have been pushing to use the IMF’s Special Drawing Rights as a substitute for the dollar as a reserve currency. Over the long run I wouldn’t be surprised, as you say, if the dollar loses its privileged status. I just don’t want it to occur as a result of the foolishness going on these days.

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  3. Dave Schuler says:

    I don’t think so, if only because there’s no other ready candidate. The U. S. is still the largest economy in the world (for the moment). The euro is shakier than the dollar, if anything. The yuan isn’t convertible and its banks are both state-owned and too opaque. The Japanese economy has had unsteady legs for nearly two decades and its fiscal situation is worse than ours if anything. I think that however badly we manage things the world is stuck with the dollar. For the moment.

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  4. @Dave Schuler: I’m in complete agreement, though it doesn’t exactly give me a warm and fuzzy feeling that we’re only the world’s reserve currency because there are no good alternatives.

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  5. Ben Wolf says:

    There’s no reason the U.S. has to default even if the debt ceiling isn’t extended.

    Think of ti this way:

    The government wants to fund a given project which requires more revenue that it currently takes in. It has two choices for doing so. It can print a $1 bond and pay interest to the person or organization which buys it, or it can print a $1 bill. Now before anyone objects, first understand these two options are fundamentally the same. Each creates new money. Each is inherently inflationary because they both result in expansion of the supply of money. The only difference is one pays interest as a financial investment vehicle, the other does not.

    Yet the dominant thinking continues to be that rolling the printing press is somehow much too dangerous; in fact we appear ready to embrace default rather than use the tools we have available to us. Even more strange is that the same neo-classical economists who oppose rolling the presses to pay bills were entirely supportive of creating money so long as it went to the Too Big To Fail Banks in the form of loans, guarantees and quantitative easing.

    This makes no sense to me.

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  6. JohnMcC says:

    In a related thought, how long would OPEC price crude in dollars? And wouldn’t their pricing it in another currency or a ‘market basket’ of currencies make us much more vulnerable to ‘oil shocks’?

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  7. Nickolas G. says:

    @Ben Wolf: Sorry to be a pest but the government doesn’t print it’s own dollar bills, it gets them from The “Federal” Reserve and has to pay interest which has accumulated into what we call “The National Debt”. Yet there are a few things that are wrong with this picture, The Federal Reserve is not a government organization. It is a corporation owned by The United State’s 13 biggest banks. Secondly, we will never pay this interest off because we owe them the borrowed amount plus interest, and their the only ones creating the bills. So to pay them we must borrow more, and more. It’s a scary cycle that only has one outcome, and that is debt to the american people. While I’m at, it your Federal Tax’s sole purpose is to pay off this debt. Yet every american over the age of 18 that isn’t retired could pay there whole years salary and it would only amount to about 90% of that years accumulated debt. We owe more US dollars than there is in circulation throught the world, and most US dollars are circulated outside the US which is why it’s the world reserved currency. I believe the us dollar should default, more importantly I think we should get rid of The Federal Reserve all together and let the states govern themselves as intended by the Fathers of America.

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