As the dollar falls against the euro, yen and other major currencies, China and other emerging economic powers holding lots of dollars and U.S. securities are crying foul - and urging an end to the dollar's central status in global commerce.
If they are truly disgusted, they should look to themselves for answers.
Since the end of World War II, the dollar has largely replaced gold as the reserve asset central banks hold to back up national currencies. The supply of gold is too limited, and efforts to back up currency with gold would result in chronic shortages of liquidity and global deflation.
When a merchant moves goods - for example, from Thailand to Mexico - the market to convert pesos into bahts is thin or nonexistent, so the merchant sells pesos for dollars to buy bahts. Many other cross-border trades, financial contracts and debts are denominated in dollars (although the euro is coming into greater use).
Over the years, governments and traders gravitated to the dollar because the United States has the largest and most diversified economy and a stable government. And until recently, the dollar has been a well-managed currency; the U.S. government resisted the temptation to borrow too much and flood the world with too many dollars.
The current market-determined system of exchange rates emerged by default in the early 1970s, when the old system of government-enforced fixed exchange rates failed, and the United States ended the convertibility of the dollar into gold. Trouble is, this system has no rules or effective governing structure. Consequently, some governments have seized opportunities to manipulate the system to gain competitive advantages in trade.
Since 1995, China has undervalued its currency by selling huge amounts of yuan for dollars, making Chinese exports artificially cheap and foreign products expensive in Chinese markets. China enjoys huge trade surpluses that create millions of jobs and double-digit growth - in China. Japan and others have followed suit.
These policies impose huge trade deficits and unemployment on the United States, create enormous imbalances in the global economy, and contributed importantly to the Great Recession.
