Monday, December 22, 2008

Why the Dollar is King

Over the last fifty years, multinational corporations have sought to boost profits by selling excess capacity from thousands of factories to a world market. By the millennium, trade barriers had been lowered, many countries had joined the World Trade Organization, and globalization had become the watchword. International trade involves the exchange of two commodities – the goods or services that are for sale and the currency that is offered in return. When an Indonesian coffee exporter sells to a buyer in India, the contract will probably call for payment in U.S. dollars. There are reasons for this: Exchange Risk: The Indonesian Rupiah, even before the crisis of 1997, steadily lost value against the U.S. dollar because of higher internal inflation in Indonesia. Universal Tender: The Indonesian exporter can use dollars to buy goods in almost any other country. This would not be the case if the deal was made in Indian Rupee or Indonesian Rupiah. Taxation: The government of Indonesia, like all governments, wants to be able to seize assets of its citizens through taxation. Although the exporter may have to convert some dollars received into Rupiah to pay local wages and material costs, the profits may be kept abroad in dollar bank accounts, perhaps in the Cayman Islands. By manipulating invoices, using offshore distributors, and other tricks, the exporter can keep some profits out of the country and beyond the grasp of local tax collectors Repayment of Foreign Loans: International banks lend to Indonesian companies and these loans are often denominated in dollars. If the Indonesian exporter were to transact in Rupiah or Rupee, he would not obtain the dollars needed to pay foreign bankers. International commodity markets, from oil to coffee, are generally organized to trade in U.S. dollars. The same is true for non-commodity goods and services. Part of the profits from international trade accumulates in dollar bank accounts held by non-Americans. These dollar bank accounts are often outside the United States and beyond the control of the U.S. Federal Reserve Bank.

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