Take China, for instance. We buy (import) goods from them, giving them dollars in exchange. Generally, the Chinese exporter takes the goods to his local bank, exchanging them for Chinese yuan. The local bank then exchanges these dollars with the Chinese central bank for Chinese yuan. The Chinese central bank then either holds those dollars as reserves or uses them to buy US Treasury debt or other government-sponsored entity debt (such as Fannie Mae or Freddie Mac).

I understand your (Mr. Boudreaux\’s) distinction between using those dollars to buy American goods, services, or debt or other capital. I realize that the Chinese do not necessarily have to use those dollars to buy debt. But just look at the parabolic rise in Chinese central reserves held in US dollars (or other government or GSE debt). The use of the US dollar as the world reserve currency leads to this result. To support the US dollar as the world reserve currency in which oil and other critical assets are priced, demand for the dollar is artificially high. If this situation ever changes, then very likely the dollar will depreciate drastically.

Such dollar depreciation would then likely serve to increase US exports and decrease US imports, thus bringing our trade deficit closer to balance. Why does this matter for US citizens? Legal tender laws compel the use of the US dollar within the US, and thus devaluation of the dollar reduces our purchasing power with regard to foreign goods & services, compelling us to live more within our international means so to speak.

Now if we were on some type of free-market global currency, such as a free-market gold standard, then I think your analysis would hold. But we are not. Remember, Austrian School economics (and common sense) tells us that government interventions into the market produce distortions that skew the natural result to which the voluntary transactions of individual human action would take us.

I thought about this after reading this article \"The 100 Year Clearing\" at http://fofoa.blogspot.com/2008/11/100-year-clearing.html, from which a lot of this analysis is taken. That link also shows a graph of the exponential rise in US dollar-denominated foreign reserves held by the world\’s central banks.

I would love to get some feedback on this idea, whether positive or negative — always interested in learning something new.