End Of Empire (IV)

From Barry Eichengreen’s essay on the declining appeal of the dollar as a global reserve currency in the September issue of Foreign Affairs:

It would be no surprise if the dysfunctionality of U.S. financial markets diminished the appetite of central banks for U.S. debt securities. A process of financial deglobalization has already begun, and it will mean less foreign financing for the United States’ budget and balance-of-payments deficits. Meanwhile, the U.S. government will emit vast quantities of public debt for the foreseeable future. Together, these trends in supply and demand are a recipe for a significantly weaker dollar.

Eichengreen, an economist at the University of California (Berkeley), goes on to examine three alternatives that might take the place of the greenback as a global reserve currency — the euro, China’s renminbi, and International Monetary Fund instruments. Fortunately for America, he finds none of the alternatives is likely to replace the dollar anytime soon. But his analysis makes clear that the dollar’s near-term supremacy is due more to America’s past achievements than anything positive that the Bush or Obama administrations have accomplished.