What Would a Dumped Dollar Cost the US?

The demise of the dollar! The bust of the buck! There's a lot of commentary on the possibility that the world would drop the dollar as the world reserve currency. But what would it actually cost us? The McKinsey Global Institute, in a new paper, says the answer is ... not as much as you'd think.

Real Time Economics breaks down the costs:

• 1) When people in other countries hold dollars, they are effectively giving the U.S. zero-interest loans -- a benefit economists call "seigniorage." Annual benefit: about $10 billion.
• 2) When foreign governments and central banks park their dollars in US Treasury bonds, they push down those bonds' yields. That, in turn, pushes down borrowing rates for U.S. consumer and companies. Annual benefit: about 0.50 to 0.60 percentage point, or about $90 billion.
• 3) The dollar's global allure, though, also tends to push up its exchange rate against other currencies. That makes it harder for U.S. exporters to compete abroad, and for domestic companies to compete against imports. Annual cost: $30 billion to $60 billion.

To be clear, I don't consider it likely that dollar will be dumped any time soon. Greenbacks are still extremely liquid, interest rates are low and the market for dollars is still very strong -- and it's not like we're hiding the news about our 2009 deficit and long-term debt crisis.

This article available online at:

http://www.theatlantic.com/business/archive/2009/12/what-would-a-dumped-dollar-cost-the-us/32229/