Barry Eichengreen and Marc Flandreau, two noted economists, argue in the FT that all the hysteria surrounding the ever impending “collapse” of the dollar is completely overblown. The pair suggest that to say that central banks hold dollars only due to network effects and other externalities is to miss the point. In reality, central banks hold dollars as their reserve currency because no other currency bloc has financial markets that are so deeply liquid. They continue:
This is the most important lesson of history. The dollar lost its role as a reserve currency in the 1930s, albeit temporarily, because of disastrous mismanagement of the US economy. Equally disastrous mismanagement today would certainly cause the dollar to disappear from the international scene, leaving the euro as the only international currency standing. That said, no matter how difficult the current situation and how contentious the US policy response to the crisis could prove to be, we are still very far from that point.
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