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Dog Days For The Super Dollar

CAMBRIDGE -- Is the United States’ position as the world’s dominant superpower at risk if the dollar loses its super-currency status? Maybe not, but Americans will certainly find global hegemony a lot more expensive if the dollar falls off its perch.

Until now, Americans have been raking in profits by borrowing cheaply from pliant foreigners and investing the money in high-yield foreign equities, land, and bonds. Counting capital gains, Americans have profited to the tune of $300 billion to $400 billion annually in many recent years – an amount roughly equivalent to the entire US military budget.

Former French president Valéry Giscard d’Estaing once famously complained about America’s “exorbitant privilege.” D’Estaing was incensed that the US seemed to be able to flood the world with dollar currency and debt without ever seeming to pay a price in terms of higher inflation or interest rates.

At least half the $800 billion US currency supply is held abroad, mainly in the world’s underground economy. But the really big bucks come from the fact that places like the People’s Bank of China and the Bank of Japan passively hold enormous volumes of low-interest US debt, while Americans romp around the world with venture capital, private equity, and investment banks, reaping huge gains.