posted on Jan, 24 2012 @ 01:20 PM
reply to post by 1947flxible
If the US dollar does lose its reserve status, not only will the US lose a number of advantages, logically a lot of US dollars currently sitting as
reserves in foreign central banks and currently being used in international trade transactions will no longer be needed and will flow back to the US
looking for something to buy
This will presumably have a number of effects
(1) An increase in the US domestic money supply will cause inflation of a greater or lesser magnitude.
(2) Foreign holders of US dollars will buy up US assets, meaning more of the US is foreign owned and controlled.
(3) Selling of US dollars by foreign holders of dollars to purchase foreign currency will reduce the value of the US dollar in comparison to other
currencies. This will help US exports and make imports more expensive (a positive effect) but will also reduce the USA's power in the world.
(4) The US government will find it much more difficult to sell its bonds, meaning the US government will need to raise the interest rate it offers on
its borrowing. This will result in US banks raising their lending rates, resulting in increased cost of capital for firms and domestic borrowers
(including house purchasers), at least somewhat offsetting the advantage for exporters due to the drop in the dollar's value.
So the upshot of the dollar losing its status as reserve currency is on the whole significantly negative.
- More expensive borrowing costs for the US government, US consumers and US business.
- Increased inflation.
- Reduced international purchasing power of the US dollar.
- Sale of US domestic companies to foreign buyers.
On the positive side, a weaker dollar will reduce foreign imports and increase US exports. This advantage however will be negated in part or entirely
by increased borrowing costs and hence cost of production for US domestic producers.