Answer to an email – When compared to other countries, why is the cost of living in the U.S. so much cheaper for its residents?

Having the reserve currency does have its privileges.

Note to reader: Recall our discussion of the the Triffin Paradox.  Triffin pointed out that the country, whose currency is the global reserve currency, must be willing to supply the world with an extra supply of its currency to fulfill world demand, thus leading to a structural trade deficit. Thus, a  nation whose currency is the global reserve currency, will tend to have its industrial base gutted over time. The upshot; this nation will tend to enjoy a less expensive standard of living than most other nations. Those who cannot adjust to this economic transformation will be left behind. The enhanced demand that reserve currencies receive will tend to support their value in the marketplace.

In my travels to Eastern Europe, I can say that the standard of living has caught up to Canada and the U.S in some places. I’ve seen more homeless people in downtown Toronto in one day than my 3 week vacation [to Eastern Europe]. Parts of inner city Detroit, Cleveland and Toledo sadly look more like third world.

Talking to the people there, a lot of young people want to immigrate to the west. The reason; their costs of living are much higher than the U.S. Most items are roughly the same prices as here but their wages are a third in Poland to 10% in a country like Moldova.

Not sure how long the U.S will still be one of the cheapest countries to live as per income.

V – Toronto

Here was my response (edited for grammar)

Distribution of global reserve currencies

The U.S. is probably one of the cheapest places to live vis-a-vis resident household income and the reasons for this are actually fairly straightforward.

It all has to do with the dollar’s role as the global reserve currency. Imagine how costly items in the US would be if there were no places around the world to soak up the US treasury pile and dollar printing. The whole world desperately needs the USD to transact, so the United States can easily offshore its monetary inflation to all four corners of the globe. The US has the easiest time importing deflation from the lower cost nations.

The rest of the world does not have this luxury, so the residents in the other countries have to more directly bear the negative externalities of whatever fiscal and monetary policies their governments offer. Relatively speaking, their sovereign debt is trapped in their system, which bids up their assets, especially housing and the costs of living. Canada, New Zealand, Australia, do not have highly sought out currencies for global use like the USD, because they are relatively illiquid.

With respect to all the other developed and developing nations, these nations do not have effective avenues to sterilize their sovereign debt and currency printing.

That’s what it is all about; the U.S can effectively sterilize its currency debasement by shipping its treasury debt and dollars overseas, while the other nations cannot.

Any nation having the global reserve currency has a great luxury. Their costs of living on everything will be less onerous on their population than anywhere else around the world.

I have always maintained that as long as people in the US can stay out of personal debt, this nation still offers the best opportunity to get ahead financially and live comfortably.

Once the USD loses its global reserve status, it’s all over for the Americans. The US does not have much productive capacity anymore, and if the dollar loses its status, it’s lights out on America.

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