>For decades, the U.S. has bought more abroad than it imports. (That includes military spending overseas.) That means dollars build up abroad. Locals exchange the dollars for their own currencies, which means that dollar balances ultimately build up at central banks. Central banks have to do something with this money, and about the only thing they can do with it is buy U.S. Treasury paper. (Short-term bills preferred to long-term bonds, since there's no risk of capital losses should interest rates rise <http:/www.leftbusinessobserver.com/Bond_supplement.html>.) I don't get where Hudson sees coercion here - there aren't any other government bond markets big enough to absorb the huge quantities involved. Some countries used to keep some of their reserves in D-marks and pounds, and now in euros, but until there's a unifed euro-denominated government bond market, the U.S. Treasury market's the best place to park money. Besides, much world trade is quoted in dollars, so if you keep your reserves in dollars, there's no risk that exchange values might go against you.
Presumably central banks can exchange their surplus US currency on currency markets for other currency. The Reserve Bank in Australia doesn't have such a big problem, since this country country consistently runs a trade deficit, so it just uses the dollars to buy back Australian dollars. Or not, depending on whether it wants to push up the Oz$ or let it fall.
But I suppose those jurisdictions that run large trade surpluses, such as Japan, have a more serious problem. If they sell their huge reserves of US$ in large quantities, then that would depress the value of the US currency. Since most long term export contracts are written in US$, this would lower the value of exports. Of course it would also lower the cost of their imports, but by definition a country with a balance of payments surplus stands to lose a great deal more than it gains. Not to mention the fact that they already have billions tied up in the US$ and so any reduction in its nominal value would result in terrible losses in nominal reserves if the US$ balloon should ever burst.
Bill Bartlett Bracknell Tas