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What is the validity of the "high privilege of the dollar"

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What is the validity of the "high privilege of the dollar" Empty What is the validity of the "high privilege of the dollar"

Post by claud39 on Thu May 09, 2019 9:55 am

[size=36][rtl]What is the validity of the "high privilege of the dollar"[/rtl][/size]


Wednesday, 08 May 2019





What is the validity of the "high privilege of the dollar" 980-Alsabbaq








Does the US dollar's dominance of the global financial system really represent a "high reward" for the rest of the world and for the United States? Reality suggests that this theory may not be entirely correct.
An analytical view published in the Financial Times suggests that the US dollar is not a huge advantage, and that the United States is already paying the price of having the world's first reserve currency.

Under the exchange-rate regime set out in the Bretton Woods Convention, Europeans spent decades complaining about the freedom of the United States to record a persistent balance of payments deficit.
The French minister of finance at the time, Valery Giscard d'Estaing, concluded that Washington had a "high privilege" because of the role of the US dollar as the main reserve currency in the world, giving it the freedom to borrow and record a trade deficit for its ability to print the dollar and pay its obligations at the lowest cost.
 
The value of the dollar


But in the post-Bretton Woods era, concerns over the US's ability to win a competitive advantage by devaluing the dollar were more focused.
More recently, most critics of emerging-market politicians and central bankers have warned that the Fed's focus on local priorities could create currency and financial instability, especially when banks and companies in these countries have large loans 


In dollars. However, foreign governments and central banks with official US Treasury reserves must acknowledge a very strong fact that even after the recent rise in bond prices that drives returns to the downside, US government debt offers higher returns than most other governments Advanced world except
 Greece.
 
Purchases


This fact shocks the view that the role of the dollar as a reserve currency gives the United States access to cheap capital due to large foreign purchases of treasury bonds.
If US government bonds and other developed countries are compared, the first gives investors around the world a bargain
Indeed.


As for the source of the other dissatisfaction with the dollar in terms of currency duties - the profit earned by governments on the difference between the nominal value of the currency and the costs of its production - it is generally recognized as not having 
Importance.


But the interesting question is how long will the lucrative US Treasury deal last? In the light of US President Donald Trump's tax cuts and the need to fund a large budget deficit for years to come.
 
Debts of governments


According to the International Finance Institute, the United States accounts for nearly a third of global government debt of $ 65 trillion.
If debt reaches 104 percent of GDP, as in the United States today, it would be a crisis for any country 
Other.


However, there is no immediate problem because the United States is in a good position to pay interest rates on its government bonds which are below the rate of GDP growth
nominal.


The IMF is currently forecasting a real growth of 2.3 percent for the year 2019 plus 2 percent inflation. Taken together, this would significantly increase the interest rate on US bonds, which is about 2.6 percent.
Assuming that all variables are unchanged, this opens up the possibility that the US government will be able to issue debt and reduce the debt to GDP ratio without the need to increase taxes at a time 
Later.


But what if investors' perceptions change? Let's look at Italy, whose debt-to-GDP ratio is 132 
percent.
Lower returns


Although Italy's 10-year government debt yields lower yields than US Treasury bonds, the interest rate exceeds the growth rate of the Italian economy, which according to IMF forecasts for 2019 consists of real growth of 0.1 percent and inflation of 0.8 percent, The state is in real trouble. Of course the United States is not Italy, and the belief that US Treasuries are the safest assets in the world is deeply entrenched.


The dollar's survival as a primary reserve currency despite the shrinking US share of global gross domestic product reflects the extraordinary liquidity of the Treasury market and the success of the Fed since the mid-1980s in keeping inflation under control.




The financial crisis provided evidence of the depth of this belief in the strength of the dollar and in US government bonds.
 
Heart shock


Despite the fact that the US was at the heart of the shock that posed a serious threat to the financial system and the global economy, investors sought to ensure safety in the dollar and Treasuries as a haven
 security.


This was a cynical irony: the country with the world's first reserve currency was rewarded with foreign money for mismanaging its financial system and causing the financial crisis.
 
Most vital


In the end, the conditions for the creation of the world's most important reserve currency are available. The US economy is the most dynamic among the big developed countries, with large banks having the best capitalization.


 When the Fed faced a financial crisis in 2008-2009, it acted as a lender of last resort internationally, providing the dollar through currency swaps with other central banks that could then be lent to banks that were badly in need of dollar financing. It follows that the dollar franchise may not be high, but in return it will not end 
coming soon.




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claud39
claud39
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