Saturday, November 17, 2012

What is meant by the phrase the World's Reserve Currency?

I was watching Up with Chris Hayes last week.  I was surprised to hear him use a particular phrase:

World's reserve currency

What is meant by this phrase?

Well, the easiest way to begin to understand it is a wiki explanation on the phrase reserve currency:

A reserve currency, or anchor currency, is a currency that is held in significant quantities by many governments and institutions as part of their foreign exchange reserves. It also tends to be the international pricing currency for products traded on a global market, and commodities such as oil, gold, etc.

This permits the issuing country to purchase the commodities at a marginally lower rate than other nations, which must exchange their currencies with each purchase and pay a transaction cost. For major currencies, this transaction cost is negligible with respect to the price of the commodity. It also permits the government issuing the currency to borrow money at a better rate, as there will always be a larger market for that currency than others.

In other words, a reserve currency; increases the wealth of the country that prints that money.

So what is meant by the phrase the world's reserve currency?

Simply put, the US dollar is the single biggest reserve currency in the world. And that's a massive benefit to America -- a benefit that is risked by continued deficit spending.

Tim White

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