May 6, 2010
Most people don’t realize how many countries out there are dollarized.
In some countries, like El Salvador, Panama, Palau, Ecuador, etc. the US dollar officially circulates in the economy. In others, like Cambodia and Zimbabwe, the US dollar is the de facto currency, which means that they officially have their own currency, but US dollars are commonly used and accepted for everyday purchases.
Moreover, in other countries like Uruguay and Argentina, high ticket items like real estate generally change hands in US dollars. And finally, in many countries like Venezuela, Ukraine, Saudi Arabia, Hong Kong, Cuba, etc., the local currency is pegged to the US dollar at a fixed rate.
To be clear, there are many advantages to being dollarized. For tourists, it is far more convenient to deal in a major currency. For investors, there is generally less stability risk if you don’t have to deal with a third world peso. For business owners and traders, it makes sense to use the world’s #1 reserve currency.
But just as there are a lot of benefits to using the US dollar in a foreign economy, there is one massive, critical risk: what happens to these economies when the greenback finally breaks? What if there’s a run on the dollar, similar to what’s happening with the euro right now? Are these countries insulated? Here’s my take:
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