Dollar Drain

Dollar drain definition

The accepted dollar drain definition applies to economies throughout the world, not only those using the dollar as a unit of currency. Dollar drains are trade deficits that result when imports exceed exports in monetary terms. For instance, a country that imports more goods from overseas than it exports to foreign countries is, in effect, sending its currency overseas in return for those goods. This can lead to a shortage of currency in circulation at home, creating a tight money situation in which companies have difficulty obtaining the loans and funds they need to grow or to continue operations. Consumers feel the effects of dollar drains as well, since they cannot obtain loans for the purchase of property or for other immediate needs; a shortage of currency in the home economy affects every aspect of that economy.

Major risks of dollar drains

A ready supply of circulating money is necessary for economies to engage in setting monetary policies; loosening or tightening the supply of money in the market is one of the most important tools government has in determining fiscal policy. When there is a shortage of currency in the economy, the government cannot exercise this control over the economic situation. If the dollar drain continues for a significant length of time, the government may be forced to curtail foreign purchases or to borrow heavily from other countries in order to meet its obligations. This can lead to inflation and devaluation of the currency on the international FOREX market.

Methods for addressing dollar drain

Governments experiencing dollar drains are left with limited options. They can attempt to control imports through tariffs or barriers to foreign trade; existing agreements may make this option impractical, however. The government may choose to encourage foreign investment in the country, in effect offsetting the drain on its own currency by exercising a drain on the currencies of other nations. This may not be possible in countries with significantly higher costs of living, however, since the operating costs may be too high for companies in less developed nations. Most analysts believe the long-term solution to dollar drain is to promote and encourage consumers to purchase goods manufactured in their own country where possible; this can stem the flow of currency out of the country and lessen the trade differential over time.