Advantage US?

There is a lot of talk about how the US economy is in a bad shape. Many big corporations have been bailed out by the government or have got government funding. The US investment banking business has been badly hit and now the big-3 carmakers are facing the heat. The economy is in a recession and unemployment is rising. The trade deficit is ballooning. Some people are even predicting the end of US economic dominance.

However, given all the bad news, there is one fact that is firmly favoring the US – the US dollar.

The global financial crisis has caused a massive liquidity crunch (shortage of money) and there is a real threat of deflation (deflation is the opposite of inflation – i.e. prices going down, although this may sound good; deflation is in reality very bad). The way to address both these issues is to pump liquidity in the economy, or in other words to print and distribute more money. Ben Bernake, the Federal Reserve Chairman is nicknamed ‘Helicopter Ben’ because he had once said that the way to deal with deflation would be to simply print money and drop it from a helicopter.

Normally when a country increases money supply, the value of the country’s currency goes down. If any other country printed money at the rate at which US is doing, other countries will sell the currency in haste. This will lead to a dramatic fall in the country’s currency and effectively ruin its economy.

So how will the US be able to print more money and get away with it? The dollar happens to be the global reserve currency. At the end of 2007, more than 60% of the identified official foreign exchange reserves in the world were held in US dollars. China has it $2 Trillion of foreign exchange reserves and any significant drop in dollar will lead to a huge erosion of wealth for China. Similarly for Japan’s $1 trillion reserves and India’s $250 million. Oil is traded primarily in dollars, and a fall is dollars, will effectively lead to skyrocketing of oil prices and another oil-shock like 1973.

Thus the entire world has a vested interest in making sure that the dollar does not lose value. Hence even though the US keeps printing dollars, the value of the dollar does not go down.

All this is not to say that US can go on printing money forever. Eventually, there could be an alternate global currency that could replace the dollar - maybe the Euro or the Yen. How soon that happens is anyone's guess. But till then US will be the only country in the world that will not have to worry about printing more money to deal with the financial crisis.




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This post presents a point of view which differs from conventional wisdom. Apart from being a good read (hopefully), it can also be a good starting point to help readers, preparing for CAT (IIM) or other MBA interviews, think differently. Since the data / facts for these posts are derived from a host of sources and websites, readers are advised to cross-check the authenticity before using them anywhere.