Two weeks ago, Sam Zell, a successful and well-known real estate investor, was interviewed on CNBC.
He said, in this period of financial crisis, he worries most about the possibility that the U.S. dollar would lose its status as the world's reserve currency.
If that happened, he opined, the standard of living in the Unites States could decline by 25 percent.
Since that is such a shocking number and since the topic has received very little attention, I thought it would help the current dialogue to raise understanding and awareness.
The U.S. imports more goods and services than we export. This is a great deal for the U.S. We get more foreign cars, wine, beer, electronics, etc., and foreigners receive dollars for the difference.
They like the dollars and do not use them to purchase goods and services produced in the U.S.
Let's call them IOU Dollars. We give a piece of paper manufactured at the Federal Reserve and printed at the U.S. Treasury, that costs us nothing to produce and pays no interest. It is like having a credit card that requires no payments and accrues no interest charge.
If this sounds too good to be true, it isn't. The U.S. dollar is considered a reserve currency in international trade by our trading partners.
A reserve currency is defined as one which foreigners are willing to hold. The reasons might include the reserve currency might hold its value better or might be more acceptable in trade than one's own currency.
There have been three reserve currencies of long duration: the Roman coin, the British pound and the U.S. dollar.
The Roman coin was accepted everywhere because the Romans said you would accept it - or else.
The British pound had this privilege because of Britain's dominance in international trade, its colonies, and the British Navy. The U.S. dollar succeeded the British pound as the world's reserve currency.
These currencies were issued by the large, dominant and stable country/empire of its day.
The U.S. imports have exceeded exports since about 1970, and this gap has been increasing. As a result, there is a very large amount of IOU Dollars held by foreigners.
What if they decided that they did not want to hold them anymore?
Well, two things could happen, and neither is pleasant.
First, foreigners could use their IOU Dollars to purchase currently produced U.S. goods and services. This would not only bid up the prices of goods and services but also mean that less of everything would remain available to U.S. consumers.
Second, the flood of IOU Dollars in the marketplace would cause the U.S. dollar to depreciate relative to the currencies of other countries.
Depreciation of the dollar increases the cost of all the imports and makes our exports cheaper in international markets. U.S. businesses are more likely to export their products than sell them at home.
All three of these effects point to higher consumer prices in the U.S.
Together Zell thinks this could raise prices and reduce availability by 25 percent - that's a huge reduction in our standard of living.
It all hinges on continued confidence our political and economic stability.
If the U.S. does not get its fiscal house in order, IOU Dollars will come home.
Christopher Gable lives in Altoona and is a financial adviser and senior vice president for Wells Fargo Advisors in Hollidaysburg. The views expressed are his and not necessarily those of his employer.
