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The cost of neglect

The dollar is not what it used to be. Over the past three years it has fallen by 35% against the euro and by 24% against the yen. But its latest slide is merely a symptom of a worse malaise: the global financial system is under great strain. America has habits that are inappropriate for the guardian of the world’s main reserve currency: rampant government borrowing, furious consumer spending and a current-account deficit big enough to have bankrupted any other country some time ago. This makes a dollar devaluation inevitable, not least because it becomes a seemingly attractive option for the leaders of a heavily indebted America. Policymakers now seem to be talking the dollar down. Yet this is a dangerous game. Why would anybody want to invest in a currency that will almost certainly depreciate?

A second disturbing feature of the global financial system is that it has become a giant money press as America’s easy-money policy has spilled beyond its borders. Total global liquidity is growing faster in real terms than ever before. Emerging economies that try to fix their currencies against the dollar, notably in Asia, have been forced to amplify the Fed’s super-loose monetary policy: when central banks buy dollars to hold down their currencies, they print local money to do so.

In a free market, without the massive support of Asian central banks, the dollar would be far weaker. In any case, such support has its limits, and the dollar now seems likely to fall further. How harmful will the economic consequences be? Will it really undermine the dollar’s reserve-currency status?

Practice 1. Look through the text to find out who this text is intended for:

1) general readers;

2) students in economics;

3) professional accountants.

Practice 2. Read the text to find out which paragraph says that:

1) the dollar is going to depreciate eventually;

2) the American economy greatly relies on the economies of other countries;

3) the American dollar stops being the leading international currency.

Practice 3. Re-read the text to discover the author’s main idea. Choose the statement which best expresses it.

1. America’s easy-money policy can lead to losing the dollar’s mighty status in the world.

2. The American dollar has been the leading international currency for a long time.

3. America keeps on borrowing money on far better terms than other countries.

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