the visible hand

it is the theory which decides what can be observed – einstein

Stiglitz on the deficit and the dollar…

Posted by ecoshift on August 29, 2009

Joseph E. Stiglitz — Farewell to the Dollar as the World’s Currency of Choice

…international markets understand that the United States may face strong incentives to reduce the real value of its debts through inflation, which makes each dollar owed worth less. If market players are worried about inflation (or even if they are worried that others might be worried) that is bad news for the dollar. Holding dollars today represents risk without reward: The returns to U.S. Treasury bills are near zero, and even those most confident in the Federal Reserve must acknowledge the chance that things will not go smoothly.

For decades, other nations have held dollars in their central bank reserves, seeking to give confidence to their country and currency. But in a globalized economy, why should the entire financial system depend on the vagaries of what happens in America?

The current system is not only bad for the world, it is bad for the United States, too….

Like it or not, out of the ashes of this debacle a new and more stable global reserve system is likely to emerge, and for the world as a whole, as well as for the United States, this would be a good thing. It would lead to a more stable worldwide financial system and stronger global economic growth. The current system entails developing countries putting aside hundreds of billions of dollars a year — only weakening global demand and contributing to our economic difficulties. Also, there is something a little unseemly about poor countries lending the United States trillions of dollars, now at an interest rate of close to zero.

Discussions on the design of the new system are already underway. The United Nations’ Commission of Experts on Reforms of the International Monetary and Financial System …described a number of alternatives.

The United States has resisted these changes, but they will come regardless, and it’s better for us to participate in the construction of a new system than have it happen without us. The United States has seen great advantages with the dollar as the world’s reserve currency of choice, particularly the ability to borrow at low interest rates seemingly without limit. But we haven’t seen the costs as clearly: the inevitable trade deficits, the instability, the weaker global economy. The benefits to us are likely to shrink, and rapidly so, as countries shift their holdings away from the dollar.

read more…


2 Responses to “Stiglitz on the deficit and the dollar…”

  1. Bad link in your post.

  2. ecoshift said

    Thanks Mathew…
    The “read more” link was correct.
    The “title” link has been fixed at the top…

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