America’s Superpower Act
China’s currency peg to the U.S. dollar prevents correction of the U.S. trade imbalance and imperils the U.S. dollar’s role as the international reserve currency. As the reserve currency, the U.S. dollar is guaranteed a high level of demand.
In the post World War II period, the dollar took over the reserve currency role from the British pound, because the supremacy of U.S. manufacturing guaranteed U.S. trade surpluses. The British pound lost its role due to debts from two world wars, loss of empire, a run-down industrial base and a socialist attack on U.K. business.
The reserve currency conveys unique advantages on the favored country. As the reserve currency, the U.S. dollar is guaranteed a high level of demand. Foreign central banks hold their reserves in dollars, and countries are billed in dollars for their oil imports, which requires other countries to buy dollars with their currencies.
As a reserve currency fulfills world needs in addition to the functions of a domestic currency, the favored country can hemorrhage debt for a protracted period on a scale that would promptly wreck any other country’s currency.
This advantage is a two-edged sword, however, because it permits the reserve country to behave irresponsibly by running large trade and budget deficits. When the tide turns against the reserve currency, its exchange value collapses.
The reason for the collapse is the huge stock of reserve currency held by foreigners. When other countries conclude that their hoards of dollar.