But, as we will see, foreign purchases also automatically increase the supply of dollar debt. government borrowing costs. An otherwise excellent 2009 report by the McKinsey Global Institute claims “the United States can raise capital more cheaply due to large purchases of US Treasury securities by foreign governments and government agencies.” This seems reasonable at first: More demand for government bonds should drive prices up. These four are the most widely discussed: These costs have become that much greater as a result of the June 23 Brexit vote, which saw the dollar strengthening as frightened money poured into the United States.īefore discussing the costs, it might be useful to consider the purported benefits. government actually receives very little economic benefit and pays a substantial economic cost for having the dollar as the world’s reserve currency. While many complain about the “exorbitant privilege” Washington enjoys from the dollar’s hegemonic status, the U.S. A reduced reserve role for the dollar would, in fact, make China’s already difficult economic rebalancing - shifting its economy away from investment and toward domestic consumption - costlier than ever. To do otherwise would have undermined China’s economic development. Whatever Beijing may think it is doing, its economic policies since the 1990s have, in fact, enhanced the reserve role of the dollar. Marsh, like many other analysts who have repeated the popular but confused story about the rise of the renminbi and the decline of the dollar, may have misunderstood the role of reserve currencies within the global balance of payments. Within days, Hong Kong’s South China Morning Post warned that the bank’s latest move confirmed its strategic goal to “end the US dollar’s hegemony” and “forge a new global financial order.” In an article for the financial publicationMarketWatch, research analyst David Marsh tried to suggest a wider strategy: “The world’s second-largest economy is embarking, pragmatically but steadily, toward enshrining a multicurrency reserve system at the heart of the world’s financial order.” The announcement raised eyebrows among many central bank watchers. Pettis, an expert on China’s economy, is professor of finance at Peking University’s Guanghua School of Management, where he specializes in Chinese financial markets.
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