I was reading about Bolivia running out of US Dollars and the government is shitting their pants.
Why is this a problem?
I don’t have any US dollars and I’m fine. If I buy something from an American website, I don’t need US dollars. I only have Euros in my bank account. I will use my Euro bank card to buy something from the American website.
Same if I buy something from a Japanese website. I don’t need Japanese Yen. I just use my bank card.
I can survive my entire life without worrying about having “foreign reserves”.
So why do countries like Bolivia need foreign reserves to buy some oil or whatever?
In: Economics
if you are buying internationally, chances are you can’t use your own currency. it’s easy to understand this if you are going to another country for a vacation.
if you invest in another country, your returns will be in their currency. if you invest a lot internationally, you will have tons of foreign currency.
if you are trade reliant, you are also exchange rate reliant. you don’t want the rates to go out of control. holding a large sum of their currency allows you to manipulate it to some extent, weakening or strengthening the rate against other forces as necessary. countries like China, India, Malaysia and Singapore do this.
if any of the above apply, you will probably also be borrowing foreign currency, either from their central bank or from other international sources. holding a bunch of that currency already improves confidence from the lending party that you can meet your debt obligations.
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