Whenever a country which has had large current account deficits for a long time suffers a fall in the value of its currency in response to this imbalance, huge losses are incurred either for the creditor nation or the debtor nation. Usually it is the debtor nation which suffers as the fall in the value of their currency increases the debt burden nominated in the foreign currency. This was for example the case in East Asia when the most heavily indebted nations suffered sharp economic downturns after their currencies were devalued partly as a result of this massive increase in the debt burden. But the situation for the United States is much more beneficial because of the dollar’s value as the world’s reserve currency. Because of this almost all of the foreign debt is nominated in dollars. That in turn means that the U.S. won’t see its debt burden increase when the dollar falls. Instead it will be the creditor nations which will lose out on the dollar fall. Today’s Buttonwood column in The Economist points out that Japan, China and the rest of Asia has over $2 trillion in foreign exchange reserves, most of it in dollars. A 10% decline in the dollar means that the central banks alone will lose $200 billion. In Singapore, a 10% increase in the value of the Singapore dollar would mean capital losses of 10% of GDP for the central bank alone. Add to that the losses made by private investors. The dilemma for the Asians is that they must now choose between either taking these huge losses now (To which the losses suffered by their export industries must be added) or further increasing their exposure to the inevitable dollar decline. The United States might not formally default on its debt, but for the rest of the world the falling dollar produces a similar effect as their U.S. assets loses more and more of its value.
Source link: http://archive.mises.org/2768/the-dollar-standard-allows-the-u-s-to-default-on-its-debt/
The dollar standard allows the U.S. to default on its debt
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Well put. However, I cannot truly understand what Bush et al are up to. I know he famously professes not to read the newspapers, but, he is after all, supposed to be a conservative. Conservatives are supposed to believe in balanced budgets. What would happen if citizens behaved as our Federal government is now ? It is called bankruptcy. Does he not even listen to Greenspan ?
He is way off if he is attempting to ‘re-balance’ the dynamics of trade through a weaker currency. As a Chinese commentator mentioned yesterday, Chinese wages are 3% of what American labour rates are currently.
Right, but this means that far from existing something similar to a “free market”, or better said a “fair market”, here we are in front of a PLANNED MARKET leaded by one hand by MILITARY FORCE both in sight or covered, by the other hand as a protectionist tax, as in the tradition of ANY EMPIRE, hence also the ACTUAL. But the problem is not solely a financial one: for exemple the chineses are smart people, instead to park bucks in tresuries, one morning they buy all the 30 DJ listed in the merge of the century, and one week after they buy all the NEOCONS government sothat US become a colony of China. Without any default. Cheers.
I disagree. The U.S. dollar standard allows the U.S. government to default on its debt only to U.S. citizens. Nowhere else but in the U.S. is the dollar legal tender; are people forced to trade goods and services for it. Anyone else who trades for pieces of paper or digits representing pieces of paper has nobody but themselves to blame if production processes exist to increase the existence of dollars a trillion-FOLD such that the market value of those pieces of paper changes in the future. There will be no default whatsoever to foreigners. They can and will get their promised pieces of U.S. dollar paper, even on one piece of paper with a lot of zeros on it the parties so desire.
wow this currency devaluation story picking-up steam … the slide in the dollar is tied to falling exports … while the US may be borrowing from the world it is the world that is producing for the US.
The problem is not simply that the US borrows it is that the rest of the world seeks to grow by exporting to the US. China, Japan, Korea, Germany, France, etc. are all exporting to the US in an aggressive manner. They all actively discourage US imports … Once they stop pushing goods and stopping exports the US will balance trade.
We are coming to a head here … the rest of the world cannot have its cake and eat it to …
Nonsense. All the talk of hocus pocus “*imbalances*” is baloney. More goods and services are being freely traded globally than ever before. Global division of labor is on the rise. The only problems are the existence of fake fiat currencies and the unsustainable theft of welfare transfers — which is a GOOD thing.
The global monetary system has been steadily evolving away from printed currency toward represented “credit” (think of sci-fi movies) value of the relative subjective value of goods and services. Private thieves are much smarter than government thieves and they always gravitate to Where The Money Was At first (that being credit card and identity theft, and compare that to how much hard cash was stolen from banks).
GDP “growth” has nothing to do with real wealth. Wealth comes from being able to have possession of more better stuff. The more free trade there is, the wealthier everyone will get. A global meltdown and discreditization of government currencies would be the next greatest thing since the fall of communism. The U.S. dollar is like the Berlin wall.
It’s laughable that the government thinks imports and exports across imaginary lines have anything to do with “nations’” wealth. The “dollar falling 10% versus the euro” is meaningless. An equal mercedez benz transported from the United States to Germany will not become 90% of a Mercedez Benz that never left Germany. And there’s no reason to think a german mercedes benz owner who was moving to the U.S. wouldn’t trade cars with a U.S. benz owner who was moving to germany (cars in of course equal condition).
In the end fx market valuations of currencies represent traders probability expectations that there are still “suckers” who will trade real goods and services for fake government currency.
The value of all government currencies are and have pretty much always been falling in value to real goods and services. The old U.s one dollar peso is replaced by the new U.s five dollar peso. If relative currency differences mattered one could make an infinite arbitrage profit moving goods and services from one border to the next, exchanging them for the local fiat currency, and then repeating the process. That means, at the moment, possession of fake fiat currency is more valuable to the one who traded real goods and services for the fake fiat currency for whatever subjective valuational reasons they hold them. And there is no imbalance, just like there is no imbalance when a worthless losing lottery ticket is thrown to the ground after expiration.
Here we go again. Is there a *capital* account in the balance-of-payments or not? Do people invest their savings abroad? occasionally? Can they do this with *domestic* currency? Why not? If they need foreign exchange – to invest abroad – how on earth do they get it?! Why – they must save out of current earnings of foreign exchange. But that means running a current account *surplus*!!- And a capital account *deficit*! – Which is how Japan has invested so much in SEAsia. And how Britain exported capital to the rest of the world since the beginning of the 18th century.
– And the receiving countries? Why – they *must* have – capital account surpluses! But they can’t spend foreign exchange inside the country. So they use the foreign money to import goods & services – &,gasp, run current account deficits. Which is what Australia & other capital importers have done since the early 19th century.
Upto the early 1980s, the US ran current account surpluses & exported capital to the rest of the world. Since then – the rest of the world, on net, has increased their savings. So they save their current earnings of foreign exchange – run current account surpluses – & send capital to the US, ie, have capital account deficits. That means the US *must* present the opposite (the world as a whole is a closed system.)
A lot of fake paper fiat currency is traded along with goods and services. Only individuals trade goods and services, not countries. If the government of country A doubles its fiat currency supply, the savings of the individuals in country A has not doubled. So if the savings of the individuals in country A does not double with a doubling of the fiat currency, then who’s to say there were any savings even existing before a doubling of the fiat currency.
If I write a “1″ on 100 yellow post-it notes, is my capital stock savings now increased by 100 yellow post-it notes with “1″s written on them?
Now what if the government of country A quadruples its fiat currency supply while the government of country B doubles its fiat currency supply and the same real goods and services are still traded what will happen to the so-called fictional “balance-of-payments”? The individuals of country B will have twice as much of the fake fiat currency issued by the government of country A. So are we now to say that country B is running a current account surplus and country A is running a current account deficit even though the exact same real goods and services are being traded as before the fiat currency inflations (along with four times as much fake fiat currency of country A and two times as much fake fiat currency of country B)?
If the market value of both fiat currencies changes such that both become worth zero, is there an imbalance? Nope.
Just because pure and simple trade is complicated with government interventionism outlawing the use of certain goods in certain areas (including “monies”) doesn’t change the fundamental fact that all parties to all exchange are better off having exchanged. Credit promises to repay in the future are economically as real goods as apples or ticks or whatever. If I trade 1 orange for 2 apples the other party does not incur an imbalance of 1 apple. All trade is wholly and immediately balanced.
“Capital” is a subjectively valued concept which is often arbitrarily defined by fake government statistics. A piece of land worth zero can suddenly become a piece of land worth 1 million dollars and the capital stock has increased by a piece of land worth 1 million dollars. Economics lessons would improve dramatically if they did not always start with misleading materially tangible goods like “apples” (something materially intangible should be substituted simultaneously like a “story” or a “song” to draw out the complete idea).
My economic ideas may have been picked from both the Chicago and Austrian schools, and are either correct or incorrect economics. Just because nobody has agreed with me yet does not mean that I am necessarily wrong and hopefully makes you rethink commonly regarded economic theorems, especially macroeconomic concepts revolving around “international” trade.
I am still at a loss for what this administration is up to. Do they want higher interest rates ? Coming. Higher (personal) savings rates ? Sorry, they are not part of the package when a ‘shock’ occurs, which is probable.
The ‘weak dollar boost exports’ argument does not work when exports are only 11% of GDP (the worlds airlines are no longer flocking to Seattle to buy Boeing airplanes, and manufacturing has been declining for years )
Anyone care to speculate about their ‘let them eat cake ‘ attitude to budget deficits ?intentions ?
to W,Woodruff…intentions of this administration? They have no ideas. They believe to take control of any single “piece” of the planet, from Tierra Fuego to Ukraine, by military forces, secret services, big business lobbies etc. Result: trying to dominate all implies dominate NADA. The empire is close to crash.Dot.
It’s worth looking at how currency manipulations were used as part of colonialist “peaceful penetration”. Unfortunately the English speaking world has few examples, as it only worked in partly developed areas and the only one of those the British penetrated was India, before the techniques matured (Egypt was actually penetrated by the French).
The trick involved maintaining an artificially favourable rate of exchange, but not just using that for current consumption at home. Fake “investment” happened, with colonisers buying up local productive resources on the cheap. Examples include not only North Africa, Egypt, Palestine, and the Dutch East Indies, but also post 1918 Austria (and in a lesser proportion Germany) and Vichy France.
Palestine shows that this can be mediated through middlemen; Britain gained a current benefit, while Zionists mediated that and ended up buying out Palestinian resources on the cheap. Institutional changes like the commutation of tithes acted to hold down inflation.
This example shows us one realistic scenario for the future: countries that export to the USA can literally pass the buck, using the currency to buy up productive resources under the guise of investment. Countries like Australia that have been forced to open up capital markets under the pretence of free trade are at risk here, even though that argument in favour of open capital markets does not apply to nominal investment but only to real investment.
Flying a plane has always been a dream of mine, enjoyed reading your blog.
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