Hi all, Is there someone here who knows about economics and can explain something to me? I'm reading this article on Wikipedia, about the Euro:
http://en.wikipedia.org/wiki/Euro Part of the article says that shift in monetary reserves to the Euro would cause a decline in the US economy. The article points out that the Euro has been rising compared to the US dollar. Then it says: <quote> The role of the dollar as the world's de facto reserve currency helps support both the dollar and the US budget deficit - but it depends on the continued willingness of foreigners to finance both. Central banks and others finance the budget by acquiring newly-issued, dollar-denominated US government bonds, which they need to acquire dollars for. If at some point foreigners become unwilling to accept new bonds at the prevailing interest rate (perhaps because the falling dollar is reducing the bonds' value too much), the dollar will fall even more - or the US will have to raise interest rates, which would reduce economic growth. There is speculation that the strength of the euro relative to the dollar might encourage the use of the euro as an alternative reserve currency; ... [which] will further reinforce the dollar's decline... The falling dollar also raises returns for US investors from investing in foreign stocks, encouraging a switch which further depresses the dollar. </quote> I think I sort of understand that having everyone's reserves in US dollars would make he US dollar artificially expensive. It'd create artificial demand. Is that about right? What I don't understand is in which way foreign markets are supposed to be subsidising the US budget deficit. Nor do I understand what this has this has to do with the price of the dollar or the trade deficit. The article also mentions interest rates. Could someone explain where those come in? Any guidance would be most appreciated. Thanks! Cheers, -- Daniel Carrera | I don't want it perfect, Join OOoAuthors today! | I want it Tuesday. http://oooauthors.org |
