The Cost of America’s Free Lunch
For decades, the world has complained that the dollar’s role as global reserve currency has given the US guaranteed access to cheap money. But there is no free lunch; the US must choose between job creation, which requires a more competitive exchange rate, and cheap financing of its external and fiscal deficits.
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BRUSSELS – For decades, the world has complained that the dollar’s role as global reserve currency has given the United States, in a term usually attributed to Charles de Gaulle but actually coined by his finance minister, Valery Giscard d’Estaing, an “exorbitant privilege.” As long as exchange rates were fixed under the Bretton Woods system, the nature of that privilege was clear: the US was the only country that could freely determine its own monetary policy. All others had to adapt to the policy dictated by the US.