"Be careful what you wish for", Or "How Europe paid for the Vietnam War"

I can't believe I'm posting something I found via Drudge, but since Shamira's blog sent me there...

Here's another IPE issue raised... the dollar's role as a reserve currency.

We will be talking about the international monetary system soon, but notice that this issue -- the strength of the dollar -- underpins a huge range of related IPE issues. This includes your postings about China and the yuan, the Japanese yen, and so on.

One argument, just for fun, and just to keep the juices flowing: since the dollar was the reserve currency in the 1960s and 1970s (and we went off the gold standard in 1971), the U.S. was basically able to "export inflation" from all the expenditures of the 1960s. Which included Vietnam, Medicare, and Medicaid. Because other countries were stuffing dollars under their mattresses, the U.S. could spend a huge amount of dollars, suffering some inflation at home, but also knowing that the Europeans and others would accumulate some of the excess. Of course, with inflation, the dollar bought less over time (35 of them could no longer buy an ounce of gold, for starters), but the impact of that inflation was felt by foreigners just as it was felt by Americans. In other words, Europe partly paid for the Vietnam War.

If the world moves away from the dollar as the global reserve currency, think about what this means for American consumers and producers. Less demand for dollars from overseas, a less valuable ("weaker") dollar. Imports get more expensive. (Fuhgeddabout German cars...) Exports become relatively cheaper for others to buy. (Buy American! Woohoo!) It could be a kind of "rebalancing" that many people wish for... but, as we'll discuss...

be careful what you wish for, you just might get it...