The US economy has been financialized to the degree that it takes USD 4 dollars to produce USD 1 dollar of output. This ratio will keep enlarging. Indeed, it used to be USD 1.5 dollars to produce an output of USD 1 dollar in the 1970s-1980s. The good old days are gone, and will probably not return, especially given the strength of economic globalization and automation acceleration. But what is the strength and value of the US greenback, especially when America is going through a serious process of deindustrialization? Its manufacturing industry has lost some 57,000 factories over the last ten years.
Eswar S. Prasad, a professor in international economics at Cornell University, argues that the US dollar will remain the pillar of US strength, notwithstanding the arrival of the Euro and Renminbi in recent years. Why will the US dollar become stronger with each financial crisis?
Part of the reason, if not the major one, lies with the absence of any alternative. There aren’t any currencies out there, Euro or Renminbi, that can be the store of value or exchange of value like the US dollar.
The Federal Reserve Bank, formed in 1917, was created to increase the elastic supply of the US dollars. Since then, to the degree the US dollar has been badly battered, the Federal Reserve has pumped various tranches of money into the system to stabilize the financial order to prevent massive panic and bank runs. Under President Obama alone, some USD 26 trillion has been spent to defend the balance sheets of the banks.
With vivid details and graphs, Eswar S. Prasad argues highly leveraged government and consumer debts were due to a lack of good assessments of the risks posed to one another, thereby creating a violent reaction.