Sunday, December 12, 2010

What Keeping Confidence in the U.S. Dollar is all About

Even the outside world (countries outside of the U.S.) have vested interest in keeping confidence in the U.S. dollar high. The main reason is that "at the moment the bulk of the monetary reserves of central banks across the world consist mainly of dollars and US Treasuries."

Because of decades of exporting our inflation to other countries, we have merely pushed off a total decline in the value of our currency. So what is keeping confidence in our dollar now?

Dr. Sander O. Boon explains:
The dollar reserves retain their value as long as the American economy keeps on performing well enough. But when confidence in the American economy crumbles, so does the value of dollar denominated assets, once investors start selling some of them off. The world fears losing its confidence in the dollar, as it would be a very costly affair for the holders of these assets. You could also try to describe the situation as follows: as long as your neighbour keeps his job, the value of your own house remains intact. This is the very fragile basis on which our entire monetary system has been built.

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