from Greenberg Center for Geoeconomic Studies and Renewing America

Two Myths About the U.S. Dollar

A CGS Capital Flows Quarterly

September 28, 2010

Report

More on:

Monetary Policy

Budget, Debt, and Deficits

United States

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.