"The Dollar is our currency, but its problems are yours"
This is what US thinks!!


By

Vikram Mehrotra
Management Graduate
Batch 2006
ICFAI Business School
Ahmedabad
 


We have seen gold prices rising from $460 to $731 and tumbling down to $541 with in the span of one year only. Every one is chasing gold; all most all the Asian countries are trying to built up its reserves in gold and sell the US dollars and the simple reason for this is "The US current account deficit has reached 7% of its GDP. Its fiscal deficit is at over 4% which is really a alarming signal for US and its "Great currency US Dollar".

Now US must able to attract $7bn dollars every day for the rest of the world in order to finance its current account deficit. In case the inflows to the US slows down or stop, the green back is doomed to fall in value very steeply.

The claim on the US globally accounts to a whopping $12 tn . Even a partial sell off these claims could cause dollar depreciation and such depreciation will certainly cause the inflation in the US economy and will depreciate the US dollar globally against all the major currency.

Well if this situation arouses with any other nation so that nation would certainly collapsed but US is still able to survive under these condition and the only reason behind that is its "Currency Status; as Reserve Currency of the World".

Oil and all the major commodities in the world are dollar denominated and this is the reason why dollar enjoys this status of reserve currency as if any country pays of its foreign debts he has to pay in US dollar thus the demand for US dollar remains steady.

We all believe that attack on Iraq and current threats to Iran is due to terrorism or stock pilling but I think the reason is not really this but its due to the retaliation by Islamic countries as they desire to invoice the Oil exports in Euro or other major currencies and not in US dollar.

Well, when US abolish the Gold Standard in 1971, the dollar became the most powerful currency and to gain more strength it enters with an agreement with Saudi Arabia that all the oil trade will be dollar denominated. Thus gained the ultimate power.

This was the very strategic move from the US as oil is demanded across the world and we have a very limited resource. This position is very aptly define by one analyst" When the rest of the worlds must toil hard to earn dollars, which are needed to buy goods internationally, or to pay off international debts, the US just needs to print dollars". Living on credit has just become the credo of the US, evidently largest debtor nation.

Thus very soon we may see that major commodities including oil will be invoiced in some other currency rather that dollar and this is the reason why majority of central banks are chasing gold and off loading the US dollar. This way, US forced to correct its macro economic policies sooner or later but again for this world has to get united to oppose the military adventure else we have to pay high prices for oil and other major commodities including "GOLD".
 


Vikram Mehrotra
Management Graduate
Batch 2006
ICFAI Business School
Ahmedabad
 

Source : E-mail September 22, 2006

 

     

 

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