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Dollar and the global economy Essay

We trade because we can gain something from it. The fact that trading between countries continues to persist indicates that there must be some degree of truth to this reason. Economic theory tells us that whenever nations trade with each other, there are always economic gains for both nations. The advent of globalization ushers in a new era of economic integration and cooperation. No longer are national economies considered separate independent entities but as closely interrelated strands of growing web of economic communities.

The rapid development in communication and technology further fuels the train of change and integration to the reality that indeed we are one; that we are fast becoming a people without borders. Money serves as a unit of account. It means that the currency itself represents an item with which the values of all other goods and services are expressed or quoted. Most countries around the globe, if not all, have their respective currencies which serve as the means with which commodities traded in the market are valued.

Before the advent of a money economy, during the period where the barter system prevailed, people used commodities such as cows, fish, rice, and like to express the values of other

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goods. Most modern economies do not operate in isolation (Finsterbusch). But as during the 1970’s, barter system and the use of gold as the countries foreign reserve are being replaced by only one currency, the US dollar. It transforms the way countries trade and operate their businesses around the world. Dollar become more and more important as the whole world utilize the dollar.

It gives the United States extra dominance by the advancement of the dollar aside from its military supremacy. DOLLAR AND THE UNITED STATES The United States economy is said to be the biggest in the world, Why is that so? This is primarily because of its basic financial structure, the US dollar. It became more and more important when the oil producing giant, Saudi Arabia, announced the world that it had agreed with the United States to denominate the US dollar. Recently, the World Bank has noted that there are eight million Americans who are richest in the world.

Liechtenstein, Monaco and other small European countries have population lesser than eight million. This means that there is enough room for these rich people in the United States to expand their businesses abroad thus making the huge amounts of dollars in profits. No wonder why it has almost $12 trillion of GDP (Dapice). Many other aspects could also be attributed to the greatness of this nation. It has the democracy, free media, political autonomy and many other things that many countries could not easily implement on their lands.

Their constant system governance within the last two centuries with concrete economic visualization through optimization of their market gives them the advantage to be flexible economically (Beams “Us Dollar Slide Increases Global Tensions”). We could see that during the First and the Second World War, the economy of the whole world collapses. First signs of dollar supremacy began in the 1950’s when the US government backed up the shattered economies of Europe. It leads to the creation of the Treaty in Paris. This would help to stabilize the European economies in the first place.

It became a bargain for the many multinational corporations US as they export their products to Europe. In these years, many American companies are enjoying the benefits of using the dollar as they became more and more important in the international trade (Green, Balch and Capella University. ). When the United States came with a strong economic transformation, the dollar is slowly rising to become the main currency used in trading goods after the dilemma of the war. This would bring effect to the whole world since most countries import oil and fuel products.

This has been the secret of the hegemony of the dollar (Correggia). DOLLAR AUTHORITY Dollar enables the United States government to be flexible enough to handle enormous financial issues. It is a fact that the US has been benefiting from the US dollar ever since. Although United States is a world power and its military dominance is unparallel, the dollar is still the main reason why it is being respected as a supreme country. In addition, many of the capitalist are Americans, and they are continuously expanding their investments all throughout the world. (Correggia).

This means that they continuously spreading the use of dollar as the main currency for trading. Financial leaders and other prominent economists are some of are also Americans like Jeffrey Sachs, Larry Summers and Paul Krugman. International Monetary Fund is also governed by most of Americans. These are some of the reasons why the US is a serious power in almost every aspect there is (Andrews). It is why this nation it can dictate what it wants from others. The occupation of many Middle East nations such as Iraq made the United States power more pronounce than ever. ADVANTAGES OF DOLLAR IN THE U.

S The dollar gives many beneficial advantages for the Americans. First, it allows them to buy cheaper products from other countries since the medium of payment is in dollars. Secondly, it finances the government to help minimize the fiscal deficit of the country (Alegado and University of Hawaii. ). Multinational corporations in the US are producing commodities abroad and sell these products in the countries where they are being produced and also to their home country. The dollar has the monopoly of giving the United States financial materials that would keep them running their businesses.

But through the introduction of the euro, which is far more secure and steady, the dollar seems to have a new threat to its supremacy (Scher). We could see that during the First and the Second World War, the economy of the whole world collapses(Liu).. When the United States came with a strong economic transformation, the dollar is slowly rising to become the main currency used in trading goods after the dilemma of the war. This would bring effect to the whole world since most countries import oil and fuel products. This has been the secret of the hegemony of the dollar (Correggia).

DOLLAR: THE GLOBAL CURRENCY It has been estimated that the dollar is used in almost three quarters of the world trade. And oil is one of the primary products that uses dollar as the currency. The so-called petrodollar or the necessity for dollar to import oil products connects to the importance of the US dollar. It is also the reason why most of the countries’ primary goal is to have a big trade surplus in order for them to buy more oil. We know that every nation’s economy needs oil as source of energy (Andrews). ECONOMICAL IMPORTANCE OF DOLLAR AS A CURRENCY

Countries rely in varying degrees on trade with other countries on goods and services for their consumption and production needs. The transactions among the countries extend to transfer payments, sales and purchases of assets, borrowing and others. A country to have this kind of financial structure is said to have an open economy. Although, there are currencies that are widely used such as the newly created money in Europe, the Euro, and the Japanese Yen still the United States dollar has the authority to control the world of currency. It is the monetary instrument that makes the global economy moves and interacts with one another.

In fact today, the US dollar accounts for nearly two thirds of the global currency reserves doubling its value a decade ago (Liu). Some countries in the Middle East are now relying on the power of Euro. The president of Iraq, Saddam Hussein, transformed its $10 billion dollar reserve fund from UN into Euro. Some analysts say that this move was very vulnerable to the economic situation of Iraq (Scher). But years later, Saddam Hussein had actually gained profit from converting its reserve currency because of the recovery of the euro against the dollar.

Similar action was done by the Iraq’s neighbor country, Iran, which also converts almost half of its reserve accounts to euros. Since these two countries are primary producers of oil, their transformation of trading currency would give a noticeable impact on the price of the crude oil (Correggia). This change, in effect, yields steep price of oil which would bounce to the economies of oil-importing countries. The dollar becomes more and more important during the 1980’s as rising Japanese automakers such as Toyota, Honda, Mitsubishi and other car manufacturers uses dollar as their main capital money.

The facilities were built all over the United States in expecting a much bigger market share in the US. In turn, the dollar becomes an important currency for these companies (Perrucci). Since the United States bargain most of the products in this region, the fall of dollar would be unacceptable to them. In addition, the World Band which is source of finance for international development, are of the American dominance. In relation to this event, dollar is the currency that the World Bank would be lending to its borrowers (Rich). If the dollar weakens, the interest rates from the borrowed money would decrease.

It is somewhat an advantage for these poor countries for the weakening of the dollar. But still, big disadvantages always arouse to these country if this currency falls. Global economy would be chaotic if the dollar is very unstable. It is likely to affect overall income for the countries who are in depending on the dollar. This has been the long issue for most of the Asian countries since their economic identity is tied up with the United States. Moreover, the introduction of American products has encouraged these countries to use dollars (Picciotto and Weaving). Global economy would be chaotic if the dollar is very unstable.

It is likely to affect overall income for the countries who are in depending on the dollar. This has been the long issue for most of the Asian countries since their economic identity is tied up with the United States. Moreover, the introduction of American products has encouraged these countries to use dollars (Salbuchi). THE COLLAPSE OF DOLLAR The issue here is not only the performance of the dollar but also the country that runs it. The ballooning deficit amounting to almost $US650 billion in 2004 shows how massive the trade loss of the United States compare to European countries or even Japan and China.

Most of these borrowings come from the central banks of China and Japan. These countries are holding more than enough dollars they are really expecting to. Why do they keep dollars? It is because the United States consumption alone eats up to a quarter to half of global (Yergin and Stanislaw). The catastrophe that happened in the United States during the attacks of the terrorists in 2001 also targeted the pull of the foreign investment to use the dollar as their foreign currency. And now, the dollar seems to be struggling from its position.

It had shown tremendous fall against competing currencies such as the European euro and the Japanese yen over the past three years. And because of this, many countries such as those with fragile economies are greatly affected. This has also put other countries in doubt because they cannot trust a depreciating currency. In addition to this, the overuse of the dollar by the United States government through massive borrowing and colossal budget deficit makes the dollar more and more unstable (Limited).

The fact that it is a key instrument in trading and finance, it does not necessarily mean that the country where all of it was created, the United States, has been benefiting from it since then. The supremacy of the United States’ economy relies heavily on the status of the dollar. The slow recovery of other industrial economies like Germany and Japan would also mean less growth for the US economy. It is a domino-effect in these situations that prevents these countries to survive the crisis. As the dollar falls, Japan, Germany, United Kingdom and other key market players deteriorates its export earnings.

In this situation, United States is the one that holds the responsibility. But despite these problems, they would continue on supporting the dollar as it is the one that determines their earnings (Andrews). There is already a scenario wherein the supremacy of the U. S is being challenged. This event is becoming more pronounced over the past years as the value of the US dollar was overvalued by Asian currencies such as yen and the Chinese yuan (Beams “Dollar Fall Adds to Global Turbulence”). On the other hand, third world countries such as most of the Southeast Asian nations are depending on their export revenues.

Since the United States bargain most of the products in this region, the fall of dollar would be unacceptable to them. In addition, the World Band which is source of finance for international development, are of the American dominance. In relation to this event, dollar is the currency that the World Bank would be lending to its borrowers (Root). If the dollar weakens, the interest rates from the borrowed money would decrease (Mann). It is somewhat an advantage for these poor countries for the weakening of the dollar. But still, big disadvantages always arouse to these country if this currency falls. RESPONSE OF THE GLOBAL COMMUNITY

The foreign policy of the United States makes the Arab countries in the Middle East more isolated and less dependent to the economic sanctions of the latter. Economists from these countries are discouraging the use of US dollar as the response to the growing deterioration of relationship between the west and the east. Not only are the nations from the oil-rich regions of Middle East are differing the US dollar but also Russia and even China. According to reports, the Iranian oil representative has predicted that European acquisition of oil would be traded into euros in the very near future (Yergin and Stanislaw).

China on the other hand has revealed that it could soon convert its foreign assets in euros. Economists and analysts from some of the institutions in China also observed that country is already losing its economy because of the weak performance of the dollar. They recommended the government to convert its dollar to euro to minimize their loss. Other major market players such as South Korea and Taiwan are also considering the use of euro as their foreign currency to lessen the damage that the dollar would bring (Roach) More and more countries would opt to change their currency as the dollar decreases in economic value.

This would enable them to be more flexible and less dependent on the rise and fall of the dollar (Dapice). In the East Asia, the option of complete ‘dollarization’ is hanging as the dollar keeps declining over the past years. Big economic countries such as Japan, China and South Korea need to choose the most stable currency for their businesses (Bloomfield). It is home for some of the biggest corporation ranging from manufacturing cars to the production of shoes (Suthiphand, Claassen and Schroder). CONCLUSION It seems that world’s foreign currency, the dollar, is losing its reputation as one of the most superb currencies ever to exist.

Numerous studies and observations have predicted that this currency would soon be replaced with other competing currencies. In response to this event, rising countries like China would dominate the international market and could use other currency aside the dollar. But as of now, these future hypotheses are not yet happening and most of the time dollar is still the dominant currency in the world. And while it is still the governing currency that rules the market, many countries such as those developing nations, would still rely heavily on the performance of the dollar.

If the United States federal government would not respond to this event, foreign countries would continue to divert their attentions from new currencies that are stable enough in times of economic downfall. Through the initialization of the Bush’s administration, dollar could be revived. Shifting their priorities to economic reforms and slashing their federal budget would keep the dollar on its track. Alegado, Dean Tiburcio, and University of Hawaii. “The Political Economy of International Labor Migration from the Philippines”. 1992. 202. <http://eproxy.

lib. hku. hk/login? url=http://pqdd. sinica. edu. tw/twdaoeng/servlet/advanced? query=9300311 Click to view the dissertation via Digital dissertation consortium >. Andrews, Edmund L. “The Dollar Is Down, but Should Anyone Care? ” 2004. Beams, Nick. “Dollar Fall Adds to Global Turbulence. ” (2003). —. “Us Dollar Slide Increases Global Tensions. ” (2004). Bloomfield, Lincoln Palmer. Global Markets and National Interests : The New Geopolitics of Energy, Capital, and Information. Significant Issues Series ; V. 23, No. 2. Washington, D. C.

: CSIS Press, 2002. Correggia, Rohini Hensman and Marinella. “Us Dollar Hegemony: The Soft Underbelly of Empire (and What Can Be Done to Use It! ) ” (2005). Dapice, David. “Dealing with a Declining Dollar – Part Ii. ” YaleGlobal 9 February 2005 2005. Finsterbusch, Kurt. Taking Sides : Clashing Views on Controversial Social Issues. 13th ed. Dubuque, Iowa: McGraw-Hill/Dushkin, 2005. Green, David T. , Dave Balch, and Capella University. “Corporate Training Programs a Study of the Kirkpatrick-Phillips Model at Electronic Data Systems (Texas)”. 2004. 198.

<http://eproxy. lib. hku. hk/login? url=http://pqdd. sinica. edu. tw/twdaoeng/servlet/advanced? query=3138944 Click to view the dissertation via Digital dissertation consortium >. Limited, The Economist Newspaper. “The Economist “, 2004. Liu, Henry C K. Global Economy 2002. Mann, Catherine L. Is the U. S. Trade Deficit Sustainable? Washington, DC: Institute for International Economics, 1999. Perrucci, Robert. Japanese Auto Transplants in the Heartland : Corporatism and Community. Social Institutions and Social Change. New York: Aldine de Gruyter, 1994.

Picciotto, Robert, and Rachel Weaving. Impact of Rich Countries’ Policies on Poor Countries : Towards a Level Playing Field in Development Cooperation. New Brunswick: Transaction Publishers, 2004. Rich, Bruce. Mortgaging the Earth : The World Bank, Environmental Impoverishment, and the Crisis of Development. Boston, Mass. : Beacon Press, 1994. Roach, Stephen. “The World Economy at the Crossroads: Outsourcing, Protectionism, and the Global Labor Arbitrage. ” (2003). Root, Hilton. “Do Us Deficits Threaten Global Financial Stability? ” (2004 ).

Salbuchi, Adrian. “Death and Resurrection of the Us Dollar. ” (2006). Scher, Abby. “The Abcs of the Global Economy. ” Dollars & Sense magazine 2002. Suthiphand, Chirathivat, Emil Maria Claassen, and Jurgen Schroder. East Asia’s Monetary Future : Integration in the Global Economy. New Horizons in Money and Finance. Cheltenham, UK ; Northampton, MA: Edward Elgar, 2004. Yergin, Daniel, and Joseph Stanislaw. The Commanding Heights : The Battle between Government and the Marketplace That Is Remaking the Modern World. New York, N. Y. : Simon & Schuster, 1998.

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