Saturday, December 19, 2009

McKinsey and the role of the US dollar

McKinsey discussion of the international role of the US dollar. McKinsey: What Matters
This follows their own cost-benefit analysis of the US dollars' position that concluded that the benefits were rather modest. There are three main issue for me:

1) If International Seniorage is so good, why do we have rules against dumping goods. Seniorage allows countries to dump goods for paper. It harms local industry at the expense of that overseas.
2) The issue of international currency faces international pressure to allow sufficient currency to help the world economy. Though it can be argued that this pressure can be ignored (as the BBK was largely able to do in the micro-environment of the EMS), it was not the case with the US from 1998 through 2005. Monetary policy was too loose as a result.
3) International reserve currency status is a version of the Dutch disease: international demand for the currency pushes up the exchange rate and harms manufacturing interest.

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