Last Updated on July 23, 2024
Describes an inherent problem with a country’s national currency (the dollar) also serving as the reserve currency of choice for the international system.
The country supplying the world with the reserve currency has to produce a surplus of money, thereby creating a trade deficit. In other words, the supplier country needs to be continually losing money to fill up the reserves of other countries and make the currency a low-risk option to hold as a reserve.
But if the supplier country becomes too indebted to the rest of the world in this scenario, then its currency ceases to be such a low-risk asset.