1. Because, realistically, you have to hold relatively large amounts of USD. Transactions take time, they cost money, they're volatile, US currency markets migh

1. Because, realistically, you have to hold relatively large amounts of USD. Transactions take time, they cost money, they're volatile, US currency markets might be 12 time zones away -> Reserves aren't just economic insurance for bad weather, they're also buffers. The big difference: 2. Since you need large reserves (see 1), why hold USD and see it inflate away? No one holds USD. What they hold and trade are treasuries. The return is small, but if you have 10 billion in reserves, 100 million isn't spare change This is the real lynchpin: - the massive market for treasuries significantly lowers the cost of the US' deficit. The US can debt finance itself artificially lowering taxes or inflation. - To maintain this position, "dollars" have to available -> the US must run a deficit. If there were no more deficits, the debt would wither, there would be a global monetary contraction. - Effectively this is a way of exporting inflation: the treasury issues debt -to finance government -> the t-bills are treated as equal to USD -> the excess currency is soaked up by 8 billion people instead of 330 million - unlike cash, the treasury can wake up one day and wipe (I mean "freeze") your account if you've been naughty. Imagine PayPal writ large. In the short run it works great for the US, but in the long run it makes exports more expensive therefore eroding US industry. Short term gain for long term pain? Politicians love it!