The American dollar is currently the reserve currency which means it is held in significant quantities by international governments and is commonly used in international transactions.
What goes with reserve currency status is something called 'exorbiant privilege' which means due to their own currency being the international reserve currency, Americans can purchase imports and borrow across borders more cheaply than persons in other nations because they need not exchange their currency to do so, an advantage in excess of $100 billion per year according to the book 'From world banker to world venture capitalist: The U.S. external adjustment and the exorbitant privilege'.
As the financial deadlock continues in America, and as the debt ceiling deadline grows closer, China is making noises about America getting its house in order, and as it hold 22% of American debt, it is right to be worried. So what can China do about it? Good old Max Keiser explains.
China understands what is at stake and has increased its gold holdings and has instituted controls to prevent gold from leaving China. Should the world’s second largest economy and one of the world’s greatest trading nations decide to tie its currency to gold, demand for the yuan would increase and demand for the dollar would decrease.
In practical terms this means that the world’s great trading nations would reduce their holdings of dollars, and dollars held overseas would flow back into the US economy, causing prices to increase and considering that there is an equal amount of dollars held outside the US as inside the US, prices will leap.
In short, Americans will not only be unable to borrow a library book or get into Mount Rushmore, all the shop prices will go through the roof.
That $6 trillion Congress costed has been spent on the War on Terror is starting to look mighty expensive and not just in terms of lives lost, reputation or Worldwide instability, but America could actually be looking at the end of its time as the tallest poppy.