Threat to Dollar As the Term Paper

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The willingness of the foreign central banks to continue lending money to the U.S. has enabled Americans to sustain their consumer economy and to live beyond their means. The profligate nature of the American consumers is reflected in the personal savings rate in the U.S. (about 1% of disposable income) as compared to over 40% in China. (Gundzik, Para on "Consumption vs. investment")

However, indefinite support of the rising U.S. current accounts deficit by foreign banks is unlikely. Private foreign investors have already stopped investing in the U.S. since America now has the lowest real (in fact negative) interest rates in the world and over-valued stock and real estate markets. The Asian central banks have been making noises about diversifying their foreign exchange reserves that are almost exclusively in U.S. dollars. They now have an alternative currency (the Euro) that can perform the role of a joint reserve currency.

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Most of all, the Bush administration is itself undermining the dollar's position as the world's reserve currency by not being overly concerned about its further devaluation, whose value, according to some analysts could be halved if the foreign central banks stop supporting it.

The loss of the dollar's status as the global reserve currency would force America to live within its means. It would result in an economy in which consumption is limited by domestic production, and its borrowing is capped by its domestic savings. Moreover, the Americans' standard of living would fall way below its current levels and the U.S. government would be unable to sustain expensive foreign adventures such as the Iraqi occupation and its foreign policy plans to extend democracy all over the world.

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