U.S. Dollar Is the Real Thing Everywhere
Get ready for another decline in the value of the dollar--despite improved U.S. competitiveness--when the government releases the latest trade figures this coming Thursday.
The numbers may look bad--a January trade deficit of $13 billion or even $14 billion, compared to December’s $12.2 billion. And, although international economists say that’s just the normal seasonal pattern, the markets will probably react nervously and knock down the dollar.
It will be a false alarm. The fundamental trend of U.S. industrial competitiveness is good, says David Jones, research director of Aubrey G. Lanston & Co., a government securities dealer.
And beyond that, the dollar is supported by a worldwide demand that is more likely to grow than diminish. For many reasons, people and institutions in many places are often eager to hold the dollar.
There are official holdings. Central banks of other nations hold the U.S. dollar as a store of value underlying their own currency; in large measure, it has replaced gold as a reserve for the world’s money.
But, beyond those, there are other holdings more fascinating and numerous than you may realize. Did you know that more than $150 billion of U.S. currency--including 40% of the $100 bills in circulation--is used or hoarded outside the United States, beyond the Federal Reserve’s ability to say with certainty where it is?
Some of that cash is not really missing. Panama and Liberia use the U.S. dollar as official currency and have a constant demand for fresh bills. Israel uses the U.S. dollar as a parallel currency to the shekel--accepting it freely as a medium of exchange.
In countries where inflation is rampant, such as Brazil and Mexico, the dollar is held as “the poor man’s Swiss bank,” says a currency expert. With 100% inflation reducing the Brazilian cruzado’s purchasing power to a mere guessing game, the average Brazilian finds the dollar buys more because Brazilian merchants prefer to sell goods for sound money. Therefore, if a Brazilian banker gets hold of dollars, he doesn’t exchange them for cruzados at a U.S. bank. He has ready customers who are willing to pay big premiums in cruzados to get the sounder currency. So the dollars remain outside the U.S. Federal Reserve system.
Purchasing Power Backed
For similar reasons, the dollar is in demand where the local money buys only what the government supplies, but convertible currency buys better products. In Poland and Hungary--and the Soviet Union itself--you can buy things for U.S. dollars that you cannot buy for zlotys or forints or rubles.
Criminals like dollars, too, although the drug traffic is not the repository of missing currency that many experts assume. Drug traffickers may avoid banks, but they still want to put their money back in the United States, legitimized--or laundered--through investment in legal business.
Ironically, the drug dealers act from the same faith as the world’s legitimate traders in oil and grain--who conduct their business in dollars--or the world’s central bankers. That is, they believe that the political stability of the United States ultimately backs the currency’s purchasing power.
As Americans, we benefit from that faith. Because other nations support the dollar, the U.S. government can run a deficit and Americans can enjoy a higher standard of living than would otherwise be possible. The International Monetary Fund doesn’t tell Washington to tighten its belt.
Do we deserve to benefit? These days, possibly we do. One of the fundamentals supporting the dollar is renewed productivity. U.S. workers produce more per dollar of labor costs than their counterparts in Japan or West Germany.
Also, the United States accepts responsibility for keeping the currency stable. The Federal Reserve spent $4 billion in money markets to support the currency in the November through January period. And it would probably raise interest rates if it had to for the same purpose.
Why? It recognizes that the benefits America enjoys outweigh the burdens it carries, because ordinary people from Brazil to Poland and central bankers from Bonn to Tokyo count its currency as “real money.”
