US Dollar issue
Hi guys,
I‘m currently reading a textbook and having issues related to the passage down below. Could anybody please help? Thank you
“Another contributing factor is the increasing “dollarization” of
Latin America. On New Year’s Day 2001, El Salvador made the U.S.
dollar legal tender there. El Salvador’s Central Reserve Bank
purchased $450 million worth of U.S. currency to implement
this change. Ecuador adopted a similar policy in mid-2000, and
Guatemala has taken steps to dollarize its economy as well.
These foreign holdings of U.S. paper currency provide an
important benefit to the U.S. Treasury and ultimately to the U.S.
taxpayer because they effectively serve as an interest-free loan.
Normally, to fund the U.S. debt, the U.S. Treasury must float loans in
the form of bonds, notes, and bills. Currency holdings substitute for
such loans and reduce the amount the treasury must borrow. If 30-
year treasury bonds bear an interest rate of 5 percent, then the U.S.
Treasury saves $22.7 billion (5 percent times $454 billion) in interest
payments annually as a result of foreign holdings of U.S. currency.
This is one of the benefits U.S. citizens receive as a result of the coun-
try’s economic and political stability. Other countries—particularly
those members of the EU using the euro—also benefit from large
holdings of their paper currencies by residents of other countries.“
So what exactly is your question?
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