Why the Dollar Rules the World — And Why Its Reign Could End

This is a long article from the Mises Wire about why the dollar rules (and how that could end). I have written about these topics often; this article agrees with me, but goes into much greater detail.

rump is right. The American dollar is overvalued. According to the latest version of the Economist’s “ Big Mac Index,” for example, only three currencies rank higher than the US dollar. Yet the main reason for this is not currency manipulation but the fact that the US dollar serves as the main international reserve currency.

This is both a boon and a curse. It is a boon because the country that emits the leading international reserve currency can have trade deficits without worrying about a growing foreign debt. Because the American foreign debt is in the country’s own currency, the government can always honor its foreign obligations as it can produce any amount of money that it wants in its own currency.


Yet the international reserve status comes also with the curse that the persistent trade deficits weaken the country’s industrial base. Instead of paying for the import of foreign goods with the export of domestic production, the United States can simply export money.


American Supremacy

The performance of the US economy in the 20th century owes much to the predominant role of the US dollar in the international monetary system. A large part of attaining this role was the result of the political and military supremacy that the United States had gained after World War I. Still today, the position of the US dollar in the world of finance represents a major underpinning of the prosperity at home and provides the basis for the expansion of the US military presence around the globe.


After each of the two world wars in the 20th century, the United States emerged as the largest creditor country, while the war had ruined the economies of the war-time enemies along with that of the major allies. After the end of the Cold War, this pattern would experience a repetition. The United States, so it seems, has been, since then, the only remaining superpower.


In the 1990s, the dollar experienced a new flourishing, and the US economy went through magical rejuvenation. However, this time the economic and political fundamentals gave much less support to the assumed role of the dollar in the world. In contrast to the time after World War II, the basis for the dollar's global expansion in the 1990s was not economic strength, but debt creation. The public debt ratio, which had been falling since the end of the war began to turn-around in 1982 and has been rising ever since (Figure 1).
There is much more at the link.