Rumors of the Dollar's Death Greatly Exaggerated

The doom-and-gloom crowd has regularly ignored the substantial interest rate spreads that make dollar denominated assets more attractive than yen and euro assets. (4% versus 2% and 0% respectively for main central bank interest rates.) The near constant refrain is that “runaway” US borrowing, whether by consumers or the government, has the dollar on the verge of collapse. Routinely ignored is the fact that US government deficits while large are not historically unusual in real terms, especially compared to previous war time budgets.

But in Thursday’s auction, foreign central banks and other offshore bidders accounted for a record of 55.6% of the bids.

Score one for the view that far from being an embattled currency the dollar is, in fact, the tool of American empire. It’s the method of collecting tribute not by guns and taxes but by the first voluntary tribute in history. We produce a stable currency widely in demand for use in and between other countries and the people of those other countries give us goods and services in exchange for pretty pieces of paper. The latest Treasury auction seems to indicate that the tributaries are perfectly happy with the situation – as well we might expect when they earn an extra 2 percent on their money by having it in dollars instead of their own, truly inflationary, currencies.

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