Rumors that China’s central bank has reduced its holdings of US Treasuries in favor of European assets is putting more pressure on the already battered US dollar. China and other countries’s shifts cannot, however, alter the underlying Euro/US dollar rate of exchange. What sets a rate of exchange in motion is relative increases in money supply against increases in goods and services. Monetary pumping has been higher in the EU than the US. [Full Article]
Source link: http://archive.mises.org/2789/the-china-factor-and-the-us-dollar/
The China Factor and the US Dollar
Previous post: The Wine that Will Save France
Next post: The Glories and Pathologies of Texocentrism
{ 22 comments }
Frank’s argument about the more rapid growth of Euro MS v US MS seems to miss the rather obvious point that the Eurozone – both formal and informal – has expanded rapidly over the 10 years covered by his graph from a core of “Old” European nations, via the Olive belt, and now right into the former Soviet Empire.
Moreover, many of these nations have become more intensively commercialized, more international in their orientation (especially across borders within the zone) and the productive structures of the more primitive have arguably advanced, all of which means they have more (roundabout and horizontal) links in the transactional chain and thus the possibilty for more inherent money demand.
The reserve significance, too is that we may be seeing more and more of the payment of global seignorage (equivalent to roughly half the cumulative US trade deficit over most of the span of Frank’s graph) being diverted towards Europe.
If the Empire can now levy less implicit tribute, it can only serve to make the pressure on its currency all the greater for as long as rapid credit creation allows spending to outstrip domestic saving – as it does in the US, but not in the Eurozone.
The wider point is that inflation is not just a simplistic idea of more money, it is more money than people want to hold (see Mises on frying pans!)
Here the shift in demand, albeit a subjective one, away from the USD and towards the Euro is every bit as significant a factor in setting the exchange rate as any difference in the rate of supply.
No Austrian should be fixated on a mechanistic quantity theory of money, surely?
Shostak relies on the naive version of the PPP-theory: that in the long run exchange rates must be equal to the average price level in various countries and that exchange rate changes will follow money supply changes.
However, this theory simply is not consistent with facts. Switzerland has long had a far higher price level than the US. According to the OECD the purchasing power parity of swiss franc and US dollars would imply a exchange rate of 1.88 francs per dollar. The Economist’s Big Mac Index imply a even higher exchange rate 2.17 francs per dollar. Yet the actual franc/dollar was 1.14 yesterday. While the “overvaluation” of the swiss franc is rather extreme now, it has more or less always existed during the latest few decades.
Moreover, since according to Shostak’s theory, exchange rate arbitrage would involve the swiss buying far more of the cheaper US goods than americans buying of the pricier swiss goods Shostak’s theory would predict a US current account surplus and a swiss current account deficit. Yet the US has a current account deficit of nearly 6% of GDP,while Switzerland has a current account surplus of 11% of GDP. I really don’t think americans can borrow much more from the swiss to fund the goods arbitrage that would help achieve purchasing power parity.
There are several reasons why Switzerland has a consistently higher price level. First of all,
many goods and services are tradable in any significant extent. If a higher money supply bids up the price of Big Macs in Switzerland so that a Big Mac is nearly twice as expensive as in America, I don’t think the swiss is very likely to fly to America to buy its cheaper Big Macs since the airline tickets would cost far more than the price differential. And since Switzerland has a comparative advantage in tradable goods one would expect the domestic price level to be much higher there.
Moreover, exchange rate movements reflects people’s desire to buy and sell assets just as much as a desire to buy goods and services. Americans are buying present goods while selling future goods (assets), and its selling of assets is pushing down the value of the dollar to a level where the present goods will be “undervalued”. Until savings rise and/or investments fall, the continuing selling of american assets will keep the dollar “undervalued” in terms of present goods and services. In other words: the lower prices in the US is a natural consequence of the savings deficit in the US.
Sorry about the last sentence of the third passage
in my comment. Price arbitrage would of course involve a reduction of the current account imbalances.
isn’t the traditional arugment that *anyone* holding currency commodities and not actively utilizing them in the market is distorting the value of that currency by effectively (albeit temporarily) removing it from the pool of available money? the specific reason why china and japan own USD and hold in in banks is to effectively “disappear” those dollars, making the USD artificially stronger in order to sell their exports for fewer of them (and thus export more goods. perhaps the logic of this economy of scale is flawed however.)
however, purchasing those USD incurred a warehousing cost. and if the cost of holding them is greater than the value made up in trade (such as their devaluation by fed inflation) — the asian banks may just switch gears and dump their USD which feels just like inflation from an uncontrolled (not that the fed is very controlled) source.
now, iirc, when this is done in the stock market, typically it is refered to as the “Pump and Dump” scheme, is it not?
-z
It is in my humble opinion that the commentors thus far have missed the point!
Shostak’s article wasn’t so much hard analysis and number crunching, it was one of rhetoric, attempting to illustrate that the real problems within modern-day markets are the effects of governmental manipulation in such markets, and the causal manifestations of such interference.
I live in a country(Australia)wherein ALMOST ALL of the commercial activity is at least overseen by, if not entirely involved with the government.
Reams would be required to explore just how intricate and complex this involvement is, and the extent as to how far removed this nation is from a ‘free market’ economy.
The beauty(in my humble opinion)of Shostak’s article is the reduction of the analysis to one of ‘essentials’, stated with clarity – wherein the fundamental flaws of modern markets can be traced to governmental intervention and its attempt to thwart the forces of the ‘invisible hand’.
I think the problem with the article is the author simply ignores the special circumstances determining the supply of dollars in the world economy. It seem to me that the dollar’s position as the international store of value creates the unique threat of a flight from it.
Is there not a huge dollar overhang in the world market from years of “non-productive consumption” made possible from the dollars unique position as the international store of value? What happens to American prices if those dollars come rushing home? What happens to the American standard of living if it is hit with just a fraction of the inflation produced by this inflow?
The article was interesting, but I think it raises more questions than it puts to rest.
I believe that Mr. Shostak hits the nail on the head in the second half of his article, where he concludes that it is ultimately Mr. Greenspan’s Fed which has allowed Americans to engage in non-productive consumption, which in turn has lead to the massive current-account deficit and has contributed to the “current currency turmoil”. Therefore, in answer to his question stated in the introduction on whether the state of the balance of payments “determines” the currency rate of exchange, the answer is no, but the same Fed loose monetary policy has caused both the current account deficit and the lower dollar.
In my opinion, however, Mr. Shostak ignores an important reason for the “recycling” of U.S. dollars spent on Chinese goods back into the U.S. economy through treasury purchases and the motivation behind it. It is not because the Chinese see the U.S. currency as “undervalued” that they choose to hold U.S. debt instruments (instead of converting their dollars into Euros, for example) but rather that they hold a huge stake in funding the U.S. current account, keeping the U.S. dollar up and U.S. interest rates low so that the American consumer, China’s largest export market, can continue to borrow and spend. This is also why they continue to massively inflate their own currency (at their own peril) in order to maintain the 8.3 to 1 offical exchange ratio between the Chinese Yuan and the U.S. dollar. If China (and Japan) decide that the risk of owning U.S. dollar reserves is too great, and switch to a “basket” of reserve currencies, I don’t see the rest of the world stepping in to buy U.S. dollars because they aren’t as dependent on the U.S. consumer – the dollar will continue to fall.
Your article suggests that inflation of the Euro is greater than inflation of the dollar. Could it be that the Euro central bank is forced to print euros in exchange for other countries currencies? We know that central banks in Asia are diversifying their foreign exchange holdings to favor the Euro. If this is the case, the printing of Euros in exchange for other foreign currencies becomes a trade off. The Euro central bank ends up with a balanced account. The US on the other hand prints dollars and squanders them. The US receives no assets in exchange for them. They are instead a liability. Is this not so?
Mr. Corrigan:
“No Austrian should be fixated on a mechanistic quantity theory of money, surely?”
This is absolutely correct, Dr. Shostak would surely agree. However, one must remember that any article like this one that when an economist leaves pure theory behind and begins to predict he is acting as an entrepreneur, not purely an economist. His contention is that the increased quantity of of euro will out weigh the reduction of dollar demand. This is not an economic point, but an entrepreneurial prediction. Your counter point is no less correct from an economic standpoint. Economics is not prediction, despite what the econometricians say. It is understanding the mechanisms of human action. Using economic theory to predict economic outcomes is likely a good idea, but in the final analysis, prediction is the realm of the entrepreneur, not the economist.
Mr. Karlson:
Big Mac Switzerland and Big Mac US are two different goods, just wheat Germany and wheat Russia are two different goods. See The Theory of Money and Credit Chapter 9 section 2. It is The Economist (surprise, surprise), and those who talk of “average price level” that are mistaken. Price indexes of any sort are crude measures that often obscure as many facts as they reveal. Shostak’s stand on this issue seems quite solidly Misesian.
Mr. Cesarone analysis seems quite inline with what was noted by Jack Crooks as posted in the blog a bit back.
While I am not certain that the dollar will not continue to fall, the main point I take issue with in Dr. Shostak’s piece is his use of the term “expert” to describe Greenspan a positive light.
“Big Mac Switzerland and Big Mac US are two different goods, just wheat Germany and wheat Russia are two different goods.”
Maybe so, but if that’s the case then money supply increases in any country would effect different goods making it impossible for price arbitrage to go into effect, which in turn would make it unlikely that exchange rate movements to follow money supply movements. Shostak’s argument was that higher money supply movements in one country would induce the people in that country to buy goods from other countries which would weaken the exchange rate, but to the extent that the goods are not tradable monetarily induced price increases will not effect the exchange rate.
Now, I am certainly not denying that ceteris paribus a higher money supply is likely to lower the exchange rate. But as the money supply increase could effect the prices of things which are tradable to a lower or higher extent than the money supply increase, the effect on the exchange rate could be either lower or higher.
Moreover, there are many other things which effect the exchange rate in an even higher extent than the money supply movements. Like for example differing time preferences in different countries, differences to what the degree a country has a comparative advantage in tradable goods as well as the demand for different countries assets.
Reply to Sean Corrigan:
The point of my presentation was to suggest that given the monetary data the US dollar might not be overvalued. With respect to Corrigan’s comments regarding what inflation is we have to disagree. Printing money irrespective of changes in the demand for money is what inflation is all about. (The price of money and monetary inflation are two different things all together). In his writings Mises always referred to inflation as increases in money supply.
Reply to Stefan Karlsson
I don’t really know what Stefan means by naïve. I am using the theory that was developed by classical economists and which was further refined by Mises and Rothbard. Perhaps Stefan means by naïve the mainstream PPP, which I definitely do not subscribe to. Nowhere have I used the Big Mac theory that Stefan suggests. As far as my example is concerned it is meant for illustrative purposes. In reality the purchasing power of money cannot be measured directly – only purchasing power of money with respect to a particular good can be established. This is the reason why we have to use monetary changes in relation to changes in goods and services in order to establish the likely direction of the purchasing power of money. Furthermore, since changes in money supply move from one good to another good the time lag could be quite long. The meaning of arbitrage here is that individuals in various markets by striving to make profits will set in motion the tendency for the currency rate of exchange to gravitate towards the rate of exchange as set by changes in money supply against changes in goods and services. With respect to Switzerland if one takes lagged money growth differential then there is no problem at all to reconcile the apparent contradictions that Stefan mentioned. As far as financial assets are concerned as long as there are no changes in money and real goods, no change in the underlying rate of exchange will emerge. Finally I was a bit surprised that Stefan concludes that it is the state of the balance of payments that determines the currencies rate of exchange.
Reply to Zuzu Jehu
Foreign holders of dollars do not remove them from circulation they use them to buy goods and financial assets in the US. Hence the money supply is never stashed away and disappears from circulation. Consequently, there cannot be such thing as a sudden flood of hidden dollars that is going to undermine the US economy. The only source for a possible flood is the Fed and fractional reserve banking.
Reply to Joe Cesarone
Regardless of their reasoning if the underlying purchasing power of the US$ vs the Euro is out of balance this will set corrective actions in motion. Also, why a basket of currencies will be better than the dollar? As I mentioned in my article the other central banks policies are just as bad as the US Fed actions.
Dear Sir:
You overlook dollar demand.
Demand is driving the dollar rout.
The dollar is becoming less saleable as a commodity therefore it is losing its value as global money.
Furthermore, I suggest you look at money supply growth of the German Mark before hyperinflation in 1923.
Arguments about relative money supply growth were of little predictive value, I bet.
The demand for the Mark collapsed and with it the Mark’s purchasing power.
The same goes for Argentina pesos a few years back.
Foreigners hold very large dollar cash balances. Americans have no foreign cash balances.
Therefore, on a net basis they are trapped and velocity could spiral out of control as they sell dollars back and forth to each other.
The last stage of this is the flight to real values. Under that scenario, the hordes of dollars from overseas would flood the US domestic money supply.
Even if the Fed never printed another dollar that alone would cause a huge loss of domestic dollar purchasing power.
The market is smart.
Best regards,
Jeff Fisher
I think the article is on the right track to a proper evaluation of money and rates of exchange. However:
F.S.: “For a given supply of money an increase in the production of goods implies that producers will demand more money since more goods must now be exchanged for money.”
Money is just another good. If it were not so, the post-wwi german mark would still be money. Increased demand for money given increased goods and services is perhaps the biggest Chicago School monetary theory error, and the basis upon which the Fed argues it must increase the money supply to fight “natural” deflation (where economic activity would be reduced because people would save for tomorrow instead of spending today in the belief that prices will be lower tomorrow).
If three times more goods and services can be produced given the same limited resource inputs, technology has expanded. Three times as much goods and services can [ostensibly] be acquired with the same previous amount of money. In other words, the money price of goods and services (as a whole) declines by a third. But the question then becomes why would anyone produce three times as much goods and services for the same amount of money? Wouldn’t the economy be ever stagnant or even worse, in a state of decline, with the all the necessary unemployment consequences et al etc. ?
The answer is that three times as much of the exact same goods and services will not necessarily be produced. Increased technology allows those next most urgent wants which were unable to be satisfied with the old technology structure to be satisfied under the new technology structure. Thus some producers would profit more from reduced costs even if they received the same amount (*or even less*) of money for the end consumer goods. Real wages and real wealth increase.
It’s a mistake to hold from a “medium of exchange” perspective that demand for money changes given a change in the supply of other goods and services. To claim such is to claim that increased production of *anything* increases the demand for *everything else*.
A trades one orange for one apple from B. If A now has the capacity to produce two oranges does that mean he will trade two oranges for one apple? One orange for one apple so that A now has one orange and one apple? One orange for one half of an apple? The situation is *no* different if A produces “money” and B produces “real” goods and services.
One cannot a priori ascribe quantifiable relations between ever-changing ordinal subjective valuations of individuals. All that can be said is that every instance of trade increases the subjective wealth of all parties who exchange. It is the exact same nature of trade when money is voluntarily exchanged along with and for the exchange of “real” goods and services. Subjective wealth can disappear as quickly as it appears with ever-changing subjective preferences regarding something previously considered valuable as now considered worthless.
F.S.: “As we have seen, the purchasing power of money is set by the relative scarcity of money in relation to real goods and services.”
When is one dollar worth one trillion dollars worth one euro worth 500 billion euros worth 10 yen worth one yen…? When the subjective value of them all is zero. That is the only true long term “currency crisis”. Fiat money is not scarce, but too easily potentially infinitely abundant. That is why currently perceived “political stability” has as much of an impact on market maker valuations of currency exchange rates as does how fast new bills are being minted by the respective governments.
A must read to discern how government currencies are similar to blue tulips and red tulips is Charles Mackay’s chapter on Tulipomania in Memoirs of Extraordinary Popular Delusions and the Madness of Crowds.
http://www.econlib.org/library/Mackay/macEx.html
All the disagreements and confusions existing in regard to monetary theory (what would seemingly in this day and age be easily settled) show (imo) in what silly shambles economic monetary theory for the most part remains. Money has been mis-defined, incorrectly categorized, and misunderstood in many aspects. Even as eminent a thinker as Mises was continually revising his theory and categorizations of money with respect to demand deposits, etc.
So monetary theory remains an over-complicated mess, similar to the confusions involving value that Menger confronted in the late nineteenth century. And many theories and explanations are advanced for the behavior of money in certain periods of time much like might be similarly expounded for the behavior of the stock price of an individual company. One might even say it would be an improved state of understanding to regard money like the behavior of the stock price of an individual company.
Frank,
I hope you’re still checking this (your article sure generated comments!). I have one question:
Does the dollar being the reserve currency affect the argument in any way?
Seems like you’re saying that issue is not relevant. In other words, contra Grant Nulle’s recent article, in the free floating cuurency era, “exporting inflation” really depends on who’s doing the (realtive) inflating.
“Perhaps Stefan means by naïve the mainstream PPP, which I definitely do not subscribe to.”
I meant the idea that exchange rate movements will follow money supply movements in relation to the supply of current goods and services. Which was your reason for concluding that the dollar are not overvalued. There is however no real reason to expect any such rigid correlation (Though again, I of course agree that ceteris paribus, a higher money supply is likely to lower the exchange rate) because (1) Demand for cash balances might change meaning that a money supply increase might not be followed by price increases-or that the price increase will be even larger (2) Demand for assets relative to current goods and services might change which means that prices of assets might rise but not the prices of goods and services-or that prices of current goods might rise but not asset prices (3) The prices of relatively less tradable goods might rise which means that the price increases may not effect the exchange rate-or that the exchange rate might fall even more than the money supply increase.
“As far as my example is concerned it is meant for illustrative purposes. In reality the purchasing power of money cannot be measured directly – only purchasing power of money with respect to a particular good can be established. This is the reason why we have to use monetary changes in relation to changes in goods and services in order to establish the likely direction of the purchasing power of money.”
But if you reject the measurement of money’s value and therefore reject by default all measurement of movements of the real economy, then there is really no way to tell how much supply of goods and services have changed, which in turn mean that it will be impossible to tell whether money supply has increased in relation to the supply of goods and services which in turn make it impossible for you to use your theory to say anything about the direction of the exchange rate.
“The meaning of arbitrage here is that individuals in various markets by striving to make profits will set in motion the tendency for the currency rate of exchange to gravitate towards the rate of exchange as set by changes in money supply against changes in goods and services.”
But just how is this to be done if the goods cannot be traded because of shipping costs (and government trade barriers)? If a Big Mac is twice as expensive in Switzerland as in the US -as happens to be the case right now- this will have virtually no effect on the exchange rate since aside from slightly increasing the preference of tourists (a marginal factor) for America relative Switzerland , no arbitrage trade can occur to correct the price difference.
As you know (or should know) there is no reason to expect all prices to be bid up equally by an increase in money supply because money always enter the economy in a specific way
effecting different goods at different times and by differing amount,changing relative prices, and if goods that have little or no tradeability is bid up disproportionally (Or for that matter if the relative prices move for some other reason)then price arbitrage cannot occur and money supply increases will not effect the exchange rate.
“As far as financial assets are concerned as long as there are no changes in money and real goods, no change in the underlying rate of exchange will emerge.”
Odd thing to say, since assets are traded if anything even more easily across borders than present goods and services. And since the exchange rate is effected by all cross-border trade, the supply and demand of assets should effect the exchange rate just as much -if not more- than present goods and services.
“Finally I was a bit surprised that Stefan concludes that it is the state of the balance of payments that determines the currencies rate of exchange.”
The Balance of Payments is a recording of supply and demand regarding foreign transactions. To say that the balance of payments don’t matter is to say that supply and demand don’t matter
In case you by balance of payments mean the current account balance, I think it should be obvious that if the people in one country ,say Switzerland, choose to sell their current goods in another country, like say the United States, instead of using these goods themselves, this will mean that there will be a over-supply of goods in America relative Switzerland which in turn will mean a lower price level for current goods in America relative Switzerland.
zuzu:
Misesian monetary theory (with which I concur entirely in this specific point) rejects the idea that money (whether of some basic commodity or any other type) saved, whether in a bank deposit or buried in a box in the back yard, is somehow withdrawn from “circulation.” The concept (whether of “money” or “medium of exchange”) includes entirely its employment as a “store of value” whether as accumulation for specific future expenditure or as a protection against future contingencies of various sorts. That a good suffices to fulfill an expectation that its approximate purchasing power will not be markedly different in the relatively distant future with respect to goods and services (in general) is what contributes to that good having been being considered “money” in the first place and to its continuance in being so regarded. In a nutshell, that is the entire “monetary problem.”
No government or group of governments operating in concert can solve the “monetary problem” nor have they any wish to beyond the provision of some temporary patch to avert their being “bitten in the ass” by the “problem” that they themselves have created. But there is no escape except for those who can duck out in time and, in some cases, for those whose entrepreneurial activities are arranged to benefit from the ignorance of most.
The ultimate truth of the “monetary problem” theory is completely contained in Mises writing–but he himself missed it entirely and went on to suggest schemes for “monetary reconstruction” which he might well have omitted entirely had he put his own 2 plus 2 together. I laid this out in a letter (to Lew, I think) and jokingly referred to it as the “Mises-Berman Corollary” or something equally stupid. But the recognition is not stupid–it is profound and comprehensive. Recognizing its inescapable truth actually renders all ordinary discussion of monetary matters moot and (as Mises would have said) “supererrogatory.” I’ll see if I can hunt it up (in case anyone’s interested).
Yes. I found it; it was relatively recent. The relevant portion follows.
I am of the opinion that my own monetary theory is an improvement on
that of Mises, though it’s absolutely, 100% derived from Mises himself
–not a speck of originality in there whatever, except for a better,
more correctly jaundiced view. Basically, it’s a synthesis between Mises’
monetary theory and his comments regarding the attitude of determined
men toward “scraps of paper”–the written constitutions they’ve sworn
to uphold and defend.
The Mises-Berman Theory of Money states that all currencies whose value
depends on state control of its quantity is predestined to eventual
failure. Nothing complicated about that at all. What really puzzles me
is why Mises saw ny (presumably) lasting value in “Monetary
Reconstruction” in restoring the Gold Standard; had he put “2 plus 2″
together–all the experience of monetary experiences of the past plus
the observations about written constitutions–I believe he’d have seen
that the only durable money would need be one that wsn’t a government
creation. In other words, what we really need isn’t a “good, 5-cent
cigar” but a good, 5-cent nickel. And, if achievable, it will only
be through private enterprise.
I have more (and very specific) ideas on how just such a development
may be achieved–if you are interested.
As I’ve said, when the foregoing is understood, the idea of endless monetary discussion is just plain silly.
Hey all, first post. Hope you don’t mind my inexact language.
On whether foreign reserves can cause price inflation:
It is true that money held in reserve doesn’t increase the supply and that ultimately what determines these rates of exchange (for goods and other monies) is, in the short term, being driven by demand. However, the foreign reserves of US dollars does have a massive effect due to why they are in demand.
Look under the mattress of most latin american households and you’re more likely to find dollars than the local currency. Dollars can be held in reserve for purposes of cash balance for exchange (like if you want to trade oil) or for savings due to an unstable local currency. In my simplistic example, local currencies in one’s wallet are often used for the former while dollars under the mattress the latter. This is even true in countries which fix their local currency to the dollar like Belize.
The relatively strong dollar has been used as a savings reserve and hedge against wild local price fluctuations. When the dollar starts to lose value, its use as an exchange medium for US goods and certain commodities won’t drop as wildly as its use as a store of wealth. The demand for the US dollar could vanish overnight because it is primarily used in this fashion and in international exchanges. To my knowledge (please correct me if you know otherwise!), no other fiat currency has ever been in this position as most trading of that currency would have been in the local economy. A mere cessation of foreign demand will put the dollar in a tailspin.
Hyperinflation has often been blamed for wip
Hey all, first post. Hope you don’t mind my inexact language.
On whether foreign reserves can cause price inflation:
It is true that money held in reserve doesn’t increase the supply and that ultimately what determines these rates of exchange (for goods and other monies) is, in the short term, being driven by demand. However, the foreign reserves of US dollars does have a massive effect due to why they are in demand.
Look under the mattress of most latin american households and you’re more likely to find dollars than the local currency. Dollars can be held in reserve for purposes of cash balance for exchange (like if you want to trade oil) or for savings due to an unstable local currency. In my simplistic example, local currencies in one’s wallet are often used for the former while dollars under the mattress the latter. This is even true in countries which fix their local currency to the dollar like Belize.
The relatively strong dollar has been used as a savings reserve and hedge against wild local price fluctuations. When the dollar starts to lose value, its use as an exchange medium for US goods and certain commodities won’t drop as wildly as its use as a store of wealth. The demand for the US dollar could vanish overnight because it is primarily used in this fashion and in international exchanges. To my knowledge (please correct me if you know otherwise!), no other fiat currency has ever been in this position as most trading of that currency would have been in the local economy. A mere cessation of foreign demand will put the dollar in a tailspin.
Hyperinflation has often been blamed for wiping out the value of a currency, but these odd circumstances makes it likely the US dollar will vanish regardless what the immediate issuance is. After all, given that the US dollar reserves are so huge, what effect can the FRS’s bond market moves have? You may need to print new denominations much like that humorous Simpsons episode where a trillion dollar bill is printed after WW2.
(OK, this post was way too long for stating the obvious, oh well)
Of course it is not practical to export a Big Mac made in the USA to Swisserland in order to take advantages of price disparities between the two countries, but, certainly, you can export meat , wheat or flour to the Swiss or, instead of using the Swiss labor for “flipping hamburgers” you can use them for making watches instead.
Remember the good old Austrian business cycle theory ABCT? I tell you it applies as well for international trade and currency exchange.
The US exporting industries and becoming a service economy, ask Alan Greespan about that.
I love to read a work on that, can anyone point me???
Olmedo
Great comments by all.
I’m not an expert in this field so pardon me if I make a naive statement. I am just an ordinary middle class American.
But does the US savings rate incorporate the investments made by more than 60% of the US workforce in the finacial markets? Right now the interest rate in a bank savings account if percent and half below the inflation rate. Hence, I have most of my holdings in asian stocks (higher growth rates in asia than US/Europe) and foreign bonds, and a smaller percentage in US value stocks.
While I invest more than 16% of my income between my 401k/IRA and my 2 daughters college trust funds
does this get computed as savings?
If you want to refute the supposed link between the current account deficit and the falling dollar (as proposed by Greenspan), all you need to do is superimpose a chart of the dollar over the current account deficit. When you do this, you see that there is absolutely no historical linkage between the two whatsoever — no inverse correlation, no direct correlation.
Comments on this entry are closed.