From Financial Sense
By John Butler
''Is reserve currency
status an economic blessing or a curse? The answer might seem obvious,
as reserve currencies have been shown to confer lower borrowing costs on
their issuers. But what of the borrower who, enticed by low interest
rates, borrows more than they can pay back? Naturally the result will be
a default. However, for the issuer of a reserve currency that is
unbacked by a marketable commodity, such as gold, in the event that they
borrow too much, they can just print more currency. While this avoids
default indefinitely, it also hollows out the economy, erodes the
capital stock, reduces the potential growth rate and, eventually, leads
to a dramatic devaluation of the currency and loss of reserve status.
History has not been kind to countries that have followed this path. In
my view, the grave investment risks associated with the US dollar’s
inevitable and potentially imminent loss of reserve status are not
priced into financial markets.''
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