Sunday, April 21, 2013

America's REAL export

... the country whose currency foreign nations wish to hold (the global reserve currency) must be willing to supply the world with an extra supply of its currency to fulfill world demand for this 'reserve' currency (foreign exchange reserves) and thus cause a trade deficit.

Yours truly stumbled upon Robert Triffin's simple yet profound concept while reading about the staggeringly large perpetual trade deficits this nation runs every year, along with econmists endlessly stating the fact it's slowly eroding any kind of remaining financial stability this nation has regarding money because of the enormous debt we continue to incur because of the trade deficit, something I knew nothing about until now. I guess running on empty, is, in the short term, in this particular case, the right way to go.

Which is easier to export: manufactured goods that require shipping ore and oil halfway around the world, smelting the ore into steel and turning the oil into plastics, laboriously fabricating real products and then shipping the finished manufactured goods to the U.S. where fierce pricing competition strips away much of the premium/profit?
Or electronically printing money and exchanging it for real products, steel, oil, etc.?...

This leads to a startling but inescapable conclusion: no exporting nation can issue the global reserve currency. That eliminates the European Union, China, Japan, Russia and every other nation running surpluses or modest deficits.

Many commentators are drawing incorrect conclusions from various attempts to bypass the dollar in settling trade accounts. For example, China is setting up direct exchanges where buyers and sellers can exchange their own currencies for renminbi, eliminating the need for intermediary dollars.

This is widely interpreted as the death knell for the dollar. But this misses the entire point of the reserve currency, which is that it must be available in quantity for everyone to use, not just those doing business with the domestic economy of the issuing nation.

Any questions?

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