I am trying to get to the mechanics of the part where you get to explain how the dollar is worth more than the paper it is printed on.
It is worth more because we have the mechanisms in place that inspire confidence compared to others. We are a very open democracy with quite good accountability of our elected officials. Corruption is low, and the Federal Reserve system is a very professional organization. We have good corporate oversight, a pro-business (yes, even when Dems hold power) environment, a culture with good work ethics, excellent educational systems, well educated work force, and most importantly a deep respect for the rights of property ownership including such things as IP rights, and a judicial system that backs up all of the above. People here in the US will argue on any of the above points, but that is mostly just a matter of rhetoric compared to these qualities in many foreign countries.
I agree that long term, you need more or less a balance of trade. But part of the imbalance we see now is simply that Asia is bootstrapping itself, so this is a distortion in the short term economic landscape. I remember the rise of Japan Inc in semiconductors in the 1980's. But the USA is still kick ass in that department as well.
If currency value was dominated by balance of trade, China's should be valued way higher then it is. China's currency will go up, and indeed, if you look at foreign direct investment, China is very hot. But although it has some of the necessary traits I listed above, it lacks some important ones as well. The best thing China could do would be to adopt real democracy, worry more about world peace rather than the PLA & Taiwan, and develop a robust consumer society with the one caveat that stability during the transition is important, and perhaps not easily achieved.
I do somewhat accept your point regarding the ease with which nations can exchange their dollars for goods from third countries. But international currency exchange is more fundamentally a free market task IMO as long as governments don't restrict or meddle overly much with the process. The US currency is certainly freely subject to market forces, so I don't see any objection on that front. |
