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Two Myths About the U.S. Dollar

A CGS Capital Flows Quarterly

Author: Francis E. Warnock

Two Myths About the U.S. Dollar - two-myths-about-the-us-dollar

Publisher Council on Foreign Relations Press

Release Date September 2010

16 pages

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Overview

In this Center for Geoeconomic Studies Capital Flows Quarterly, the second in the series, Francis E. Warnock investigates two factors that could substantially alter the long-run value of the U.S. dollar: the dollar's reserve status and the sustainability of U.S. international debt. The longer-term prospects for the dollar's reserve currency status, while uncertain, are promising as long as the United States is able to provide the world with both a stable currency and deep and transparent markets. The sustainability of the U.S. current account and net international debt position are more worrying. The United States cannot rely on an 'exorbitant privilege'--the outsized returns from its foreign portfolio--to help service its external debt. To prevent the U.S. dependence on foreign finance from ending painfully, the United States must be more cautious in its borrowing, particularly where that borrowing finances consumption rather than investment.

More About This Publication

Francis E. Warnock, adjunct senior fellow for international finance at CFR, is Paul M. Hammaker associate professor of business administration at the University of Virginia's Darden Business School, research associate at the National Bureau of Economic Research, senior fellow at the Federal Reserve Bank of Dallas's Globalization and Monetary Policy Institute, and research associate at Trinity College Dublin's Institute for International Integration Studies.

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