having a reserve currency may also be desirable for other reasons. first, with more reserve currencies available, portfolio diversification opportunities are enhanced. this is desirable because, all else equal, it would allow investors to move further out on the risk / return frontier. second, more currencies are likely to be close substitutes, which could dampen currency volatility. with many viable reserve currencies available, no particular one would necessarily have to bear the bulk of any adjustment. the dollar ’ s dominant reserve currency status has sometimes been referred to as the united states ’ “ exorbitant privilege, ” implying that the u. s. benefits extraordinarily from this privileged status. i ’ d argue that the situation is much more nuanced. yes, this status does allow the u. s. to benefit from seigniorage. more than half of all u. s. currency outstanding is held abroad. but, there are also costs of being the dominant reserve currency. for example, this can lead to shifts in the valuation of the dollar that are due primarily to developments abroad that affect risk appetites and international capital flows. in such cases, the dollar ’ s valuation can be pushed to levels inconsistent with u. s. economic fundamentals. for the united states, i believe that the most important goal must be to keep our own house in order. if we do this, then i expect that the u. s. dollar will earn the right to remain the most important reserve currency in the world. the united states has a number of advantages in sustaining the dominant reserve currency status of the u. s. dollar. first, there is a first - mover advantage. as the leading reserve currency in the world, there is no strong incentive for countries to move to other currencies as long as the dollar continues to have the attributes i discussed earlier. the history of reserve currency usage is characterized by considerable inertia. the u. s. dollar emerged as the leading reserve currency quite a bit after it became the world ’ s largest economy. typically, the loss of dominant reserve currency status requires either substantial economic decline or political instability that motivates foreign counterparties to shift to a new reserve currency. second, the u. s. has the deepest and most liquid capital markets in the world. this is important in making u. s. treasuries and agency mortgage - backed securities attractive holdings as part of countries ’ foreign exchange reserve portfolio

, increasingly relies on price signals generated by trading activity that takes place daily in these markets. the reliance on secondary market trading for price discovery constitutes the fundamental difference between funds from securities markets and loans from banks. let me be a bit more specific. in securities markets, investment decisions are driven by prices that arise from a trading process that reconciles differential information from a diverse group of investors. in bank loans, investment decisions are based on the bank ’ s private information about specific borrowers. while a bank makes its own investment decisions, securities markets rely on the consensus of a multitude of investors. when securities markets work well, they provide efficient ways of aggregating information and allocating risks among a wide range of investors. in order to function well, however, these markets require a trading infrastructure. this infrastructure may consist of an exchange, a network of brokers and dealers, and a clearing system. these markets also rely on a cadre of relatively well - informed investors, who confidently judge asset prices and take positions on the – 2 – strength of their judgments. if the trading infrastructure fails or investors lose confidence, trading will grind to a halt. the global fixed - income markets are unlike equity markets. in equity markets, everyone knows something about the trading infrastructure, which is centralized in exchanges. thus, there is no question as to the focal point of trading information. but the importance of fixed - income markets, which are multiple - dealer, over - the - counter markets, is sometimes hard to appreciate because they are so decentralized. in the united states, the bond market is where companies have been raising most of their funds in recent years. during the last ten years, for example, u. s. nonfinancial corporations borrowed a net amount of $ 785 billion in the form of bonds, three times the net amount they borrowed from banks. over this same period, these companies as a group spent $ 600 billion more to retire stock – through buybacks and mergers – than they raised in new offerings. accompanying these increased levels of debt market activity has been a continuous process of financial innovation. this innovation has served to unbundle different kinds of risk and, thereby, to enlarge the menu of risks that investors may choose to bear. for example, interest - rate swaps, futures and options help reconfigure various interest - rate risks. total return swaps and creditspread options are tools for reallocating the payment risks primarily of emerging market