U.S. dollar currency and economic impact

¶ … macroeconomics, the U.S. Dollar appears to be the currency holding the greatest global power. Indeed, it is the dominant reserve currency (Liu), now comprising 68% of global reserves, while just a decade ago the dollar accounted for 51% of global currency reserves. Because it is so globally prominent, even minor changes in the economy influences the power and performance of the dollar. It appears that recent market influences and fluctuations have in fact influenced the value of the currency negatively. Below such influences as imports, exports, markets and inflation are examined in terms of the American currency. It is interesting to note that some critics are somewhat gloomy regarding the future value of the dollar, as well as the American economy, while others see the recent decrease in dollar value as a positive trend.

Heinberg for example points towards the recent decline in the value of the dollar, and the apparently steady faith of the global community in the dollar. This faith now appears to have been somewhat misplaced, especially if opinions such as those of Liu are taken into account. According to the latter, there is a discrepancy in the historically inflated value of the dollar that, according to the author, in reality has little of its increased value over the last ten years. To understand this decline, it might be interesting to examine some of the macroeconomic effects influencing the dollar from a historical viewpoint.

Historically, the extreme strength of the dollar was gained after World War II, when there was a decline in the value of the currency holding power until this event, the British pound sterling. At the verge of becoming a globally accepted standard currency, the Second World War decimated Britain in terms of power and economy, while the United States readily stepped in to fill the gap (Heinberg). The first major influencing factor on the dollar thus appears to be the decline of the then major currency in the world.

The establishment of the International Bank of Reconstruction and Development, and the International Monetary Fund in 1944 led to fixed exchange rates in terms of gold. At this time the United States had the largest gold reserves of all the nations, which once again contributed to the growth of the dollar currency. Another factor is the fact that America was the world's largest producer of energy and exporter of goods, thus maintaining the existing gold reserves, influencing global prices such as that of oil and petroleum favorably (Heinberg).

Political factors, including foreign and domestic policy, further influenced the success of the American currency. Liberalism for example brought relatively stable economic equality within the nation, while in terms of foreign policy, the United States were able to maintain only the minimum of barriers relating to trade with Western Europe, Japan and South Korea (Heinberg). This in turn brought valuable allies as well as power for the United States in the Cold War. Furthermore the power of the United States translated to elements such as leadership by consensus through GATT trade negotiations and geostrategic Bilderberg meetings. These strategies eventually led to the ability of the main Western powers to economically and politically control most of the rest of the world (Heinberg).

According to Heinberg the factors bringing an end to the fairly benign power thus far exercised by the U.S. economy included the decline of oil production in the United States, the debt related to the Vietnam War and increasing economic strength for Europe and Japan. This is the basis for Liu's assertion that the United States used its powerful position rather than its economic strength to inflate the value of the dollar.

The basis for this view is the fact that, in 1971, president Richard Nixon abandoned the application of the gold standard as determined by the Bretton Woods Conference. This marked a more aggressive manipulation of the economic power of the dollar. In the words of Liu, the current economic relationship between the U.S. And the rest of the world is that the U.S. produces dollars, while the rest of the world produces goods that dollars can buy. There is no longer a comparative balance of advantage in terms of trade, but rather competition in terms of exports to capture dollars for the sustenance of domestic currency values. Critics like Liu thus hail the decline of the dollar as a much-needed reestablishment of economic balance between the United States and the rest of the world. Others however see the decline of the dollar as a path towards local economic growth and prosperity within the United States' borders.