Wednesday, September 29, 2010

How America is taxing the world

Towards the end of the second world war, major powers came together to to agree on a new international standard for international trade. It was decided that all international trade would be done in US dollars.

As a result of this countries of the world have to hold a large proportion of their international currency reserves in dollars to protect themselves and ensure they can continue to buy oil even if their own currency devalues.

Recently The United States started printing money in quantities before now unknown. The key thing to understand here is that printing more dollars does not create more wealth it dilutes the value of the existing dollars. If originally there were 100 dollars in circulation and you print 100 more your new dollars are worth half what the old ones were.

This means that in effect the recent printing of over a trillion dollars was a huge tax on the rest of the world. China is the largest holder of dollars outside the US and I cannot imagine them being very happy about this at all. However, the two countries have so intricately tied together their two economies there is not much that can be done about it. America needs China and China needs America.

A proposed solution to this problem is the SDR. A currency whose value is pegged not to the dollar but a basket of major world currencies - preventing any single nation from taxing the world. China has suggested this is its preferred solution. Surprisingly the US is not so keen to see this become the new standard. I wonder why?

1 comment:

  1. On the flip side of the coin. China could allow their currency to float freely in relation to the dollar and this might not have happened? China has America by the Balls and America has China by the balls - something has to give.