Stiglitz: U.S. Should Abandon Dollar’s Dominant Role

Wednesday, 05 May 2010 08:40 AM

By Dan Weil

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Nobel laureate economist Joseph Stiglitz says the United States should drop the dollar as the world’s primary reserve currency.

That’s because the greenback’s supremacy allows the government to borrow beyond its means and for speculators to create bubbles in asset markets, he says in his new book “Freefall: America, Free Markets and the Sinking of the World Economy.”

Stiglitz notes that money borrowed from overseas helped fuel the housing bubble. Foreign investors feel comfortable investing in dollars because of the currency’s top dog status.

As for government debt, the budget deficit totaled $1.42 trillion last year, and the Congressional Budget Office estimates that government debt will total 60 percent of GDP by the end of this year.

The government borrows by printing dollars and selling them in the form of Treasuries to governments around the world. In that sense, we are the world’s largest foreign aid recipient, Stiglitz says.

Some of that money then gets recycled into asset markets, like housing and stocks, creating bubbles.

Without the dollar’s dominance, the United States couldn’t borrow so easily, Stiglitz explains.

“Knowing that it would be more difficult to borrow might curb America’s profligacy,” he wrote in the book.

Ironically, the same budget deficits that the dollar’s supremacy allowed us to create may end that supremacy.

“Deficits in the U.S. have become staggeringly large, and if this country doesn't correctly deal with them, then the dollar will itself suffer,” newsletter editor John Dessauer told MarketWatch.

© 2014 Moneynews. All rights reserved.

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