About 15% of Argentinian imports are from the United States. Yet over 87% of its imports are paid for with our dollars. This is not unique to Argentina. In Japan, for example, 13% of imports come from the U.S., but the U.S. dollar is used to pay for 71% of them. In 2016, the U.S. dollar was involved in 87.6% of all foreign-exchange transactions worldwide. After the U.S. financial meltdown of 2008, it was widely speculated that the dominance of the dollar in international transactions would wane—but it hasn’t. The euro crisis precluded the euro’s widespread adoption as a world currency, and China’s failure to allow full convertibility of its yuan keeps it from being used for transaction outside of China. It’s not that the dollar is so great, it’s that all the alternatives are worse.
This oversized use of the dollar in international commerce has been called an “exorbitant privilege” and does confer benefits on this country. For example, it is estimated that 60% to 80% of all the $100 bills printed circulate outside our borders. Most of those will never come home.
It costs the Treasury about 14 cents to print a $100 bill, yet each bill purchases $100 worth of goods and services. The mark-up, known as seigniorage, is the closest thing we’ve found to a free lunch. However, its impact is likely small. Paul Krugman has estimated it augments the American living standard by $20 billion a year—or around $60 per person. More important benefits are conferred on U.S. businesses, which are much less vulnerable to currency fluctuations than their foreign rivals because their home currency—the dollar—is so widely accepted.
In our opinion, the major downside to the dollar being the international currency appears, at first glance, to be an advantage. Foreigners are quite willing to lend all those dollars they hold in bank accounts to our government at low interest rates. That’s good. It keeps the interest rate on our national debt low, but it also means the U.S. government can borrow with impunity—which it unfortunately does. Just as a balloon can inflate for quite a while until it pops—increasing our debt is unsustainable in the long run. We suspect we are a decade or so from the U.S. debt balloon popping. But cheap debt encourages fiscal irresponsibility—among teenage boys and politicians. Our apologies to teenage boys.•
Bohanon and Curott are professors of economics at Ball State University. Send comments to [email protected]