Here.
I don’t know a lot about economics to know how important this is, but it seems to be a real blow to US fiat currency, no?
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Dear Robert
This isn’t important at all. The US doesn’t derive many benefits from the fact that foreign countries carry out trade in US dollars. The advantages that the US gets from the fact that the dollar is the world’s principal international currency are (1) that the US government has all its debts denominated in its own currency and (2) that a lot of foreigners use the dollar as a reserve.
Having all one’s debt in one’s own currency is an advantage because it means that the American government doesn’t run a currency risk and because the American government could in extreme circumstances inflate away all of its debts, not just domestic debts.
The fact that so many foreigners use the dollar as a reserve is an advantage to Americans because it allows them to live beyond their means. A US dollar is a claim on American goods. If foreigners who hold US dollars don’t exercise that claim, the US can in fact acquire foreign goods in exchange for pieces of paper.
Suppose that you buy goods and pay for them with IOUs. Now your friends and neighbors start using your IOUs as a reserve. That means that you are in fact getting those goods for free. Isn’t that pleasant?
Regards. James
“The fact that so many foreigners use the dollar as a reserve is an advantage to Americans because it allows them to live beyond their means”
I know that conventional wisdom says that this is an advantage, but at some point I think you have to worry about the decadence that could be brought about this. I frankly don’t believe in, or at least don’t like, the’economic man’ who lives on bread alone.
“This isn’t important at all. The US doesn’t derive many benefits from the fact that foreign countries carry out trade in US dollars…..” So True!
http://www.youtube.com/watch?v=fOshw4kIGR4&feature=email