What is in this article?:
- Is U.S. losing world economic clout?
- Status of U.S. dollar
• At the top of the list are questions about jobs and growth in the economy. Next is concern about specific prices, such as gas and food prices.
• In particular, I’m asked two questions. Can foreign owners of our debt use it as a form of economic blackmail? And is the U.S. dollar about to lose its status as the No. 1 currency in the world?
Status of U.S. dollar
Now, on to the second question, about the status of the U.S. dollar. Since World War II, the dollar has been considered the “reserve currency” of the world. This means that many international transactions are done in dollars, and that dollars are usually accepted for payment anywhere in the world.
This has been the case for two reasons. First, the U.S. economy has been by far the largest in the world, so more economic exchanges are made in dollars than in any other currency. Second, the dollar has traditionally maintained its value against other currencies, so users know they won’t lose purchasing power by holding dollars.
Have these two advantages of the dollar changed in recent years? The U.S. economy is still the largest in the world — twice the size of the No. 2 and No. 3 economies, China and Japan. Also — perhaps surprising to many — the U.S. economy has maintained its share of the world economy at close to 25 percent over the past four decades. The rise of Asia in world commerce has come at the expense of Europe, not the U.S.
However, the dollar’s value against foreign currencies has slipped, on trend, in recent decades. As an average against major world currencies, the dollar’s value is half of what it was in the early 1980s and one-third lower than a decade ago.
Some experts predict a replacement of or at least a sharing with the dollar as the reserve currency at some future point, but not soon. The most likely alternatives would be the euro or the Chinese yuan. While not disastrous for the U.S., this would mean somewhat higher costs for U.S. businesses and perhaps higher interest rates on dollar-denominated investments.
Should you be worried about these international trends? If you answer yes, then the next question is, where should you focus your concern? I recommend two areas: U.S. economic competitiveness and federal fiscal affairs. You decide if I’m right.
EDITOR’S NOTE — Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of North Carolina State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The College of Agriculture and Life Sciences communications unit provides his You Decide column every two weeks. Previous columns are available at http://www.cals.ncsu.edu/agcomm/news-center/tag/you-decide
Related audio files are at http://www.ncsu.edu/waldenradio/