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What is a Dollar Shortage?

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  • Written By: Ken Black
  • Edited By: Bronwyn Harris
  • Last Modified Date: 25 November 2016
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A dollar shortage occurs when a country does not have enough dollars to pay for imports from the United States. This is often a concern in emerging markets, but depending on a country's fiscal policy, it can affect more mature markets as well. However, for those emerging markets, the dollar shortage can be especially critical.

As investors invest and and businesses deposit money in foreign banks, the dollars available in the country increase. However, if there is concern about the financial system, or if investors see a better deal elsewhere in the world, it could trigger a massive demand for those deposits to be returned: a mass withdrawal. Of course, these banks are usually not sitting on the money, but have reinvested and lent the dollars to borrowers. If the demand exceeds the ability to pay in dollars immediately, a dollar shortage develops.

If there are not enough dollars to pay for importing U.S. goods, there is a chance those goods will not be delivered because the supplier is not guaranteed an acceptable form of payment. Banks, or the country itself, can then borrow more dollars from other countries or banks, or seek help from the U.S. government. In many cases, the U.S. government sees foreign aid in the midst of a dollar shortage as a good thing, because it allows for the importation of U.S. goods, thus improving the domestic economy, and also provides a show of goodwill to the country in need.

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However, there may be some cases where the U.S. government is not willing to provide foreign aid during a dollar shortage for a number of reasons, causing a further crisis in a particular country. The U.S. may not agree to provide aid because of other policy disagreements it may have with the foreign nation. This could lead to the possibility of economic collapse and make the country more willing to listen to U.S. demands. Of course, it could also entrench the foreign nation even further into its position.

A dollar shortage is also very critical because much of foreign trade, for purposes of simplicity, is done with the U.S. dollar. Thus, having a shortage of U.S dollars may not only be bad for trade with the United States, but also bad for trade for a number of other things, such as commodities like grain and oil. This could lead to food or energy shortages in the short term, thus causing even more unrest in a country already being squeezed by tight economic times.

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