GrumpyRabbit on Nostr: _The End Of The Petrodollar_ It's true that the USD's status as the world's ...
_The End Of The Petrodollar_
It's true that the USD's status as the world's pre-eminent reserve currency raises the USD's exchange rate relative to other countries, and it's true that that fact both reduces the quantity of goods and services that foreigners will purchase from US vendors, and also increases the quantity of goods and services that US entities will purchase from foreign sources. And therefore, it does cause the US current-account deficit to be higher than it would be otherwise. This is known as the 'Triffin Dilemma.'
HOWEVER, that also means that American entities buy goods and services from foreign sources at a discount, and sell goods and services to foreign buyers at a premium. Per economic theory, that makes it a net wash macro-economically, all else being equal:
Domestic goods and services not sold to foreigners increases the domestic supply in the US, thereby reducing the market-clearing price for domestic purchasers. Conversely, foreign-produced goods and services sold to US entities decreases the supply of those goods and services outside the US, thereby raising the market-clearing prices of those goods and services for the residents of foreign nations.
Per Austrian economic theory, a current-account deficit is not caused by a currency's status as a major reserve currency, but rather by other factors, such as the quality of a nation's goods and services relative to that of other nations, or the fact that a nation domestically produces significantly more or less of some set of highly-demanded goods or services relative to its competitor nations, or the fact that there are interest-rate differentials between national currencies.
One major factor determining currency exchange rates is the relative "money supply" of each currency. And that's why, in the case of fiat currencies, the rate of new-money creation relative to that of other currencies strongly affects the velocity and direction of the currency's exchange rate. It also strongly affects the interest rates charged to borrow the currency, which is one reason that Interest rate differentials are a significant factor in determining the exchange rate between currencies. Interest rates strongly depend on the rate of new money creation.
The status of a currency as a major world reserve currency does counteract the effects of a high rate of fiat money creation on the currency's exchange rate with other currencies, because those two factors have opposite effects: The former acts to raise the value of the currency relative to others, while the latter acts to lower it.
The fact that a currency is a major world reserve currency increases the ability of its issuing nation to borrow money, thereby strongly affecting the ability of said government to spend more than it collects via taxation. But that means that the effect on a currency of losing its status as a reserve currency (or of having that reduced) is to raise the interest rate that the issuing nation must pay to borrow money, or perhaps even to make it impossible to borrow any additional funds.
Given the fact that the US government currently borrows about as much money each year as it collects in taxes, what do you think will be the effects domestically of the US government having to pay a higher interest rate to borrow money, year after year, due to the loss of the USD's status as the world's pre-eminent reserve currency?
https://x.com/ShadowofEzra/status/1801012855627526349
It's true that the USD's status as the world's pre-eminent reserve currency raises the USD's exchange rate relative to other countries, and it's true that that fact both reduces the quantity of goods and services that foreigners will purchase from US vendors, and also increases the quantity of goods and services that US entities will purchase from foreign sources. And therefore, it does cause the US current-account deficit to be higher than it would be otherwise. This is known as the 'Triffin Dilemma.'
HOWEVER, that also means that American entities buy goods and services from foreign sources at a discount, and sell goods and services to foreign buyers at a premium. Per economic theory, that makes it a net wash macro-economically, all else being equal:
Domestic goods and services not sold to foreigners increases the domestic supply in the US, thereby reducing the market-clearing price for domestic purchasers. Conversely, foreign-produced goods and services sold to US entities decreases the supply of those goods and services outside the US, thereby raising the market-clearing prices of those goods and services for the residents of foreign nations.
Per Austrian economic theory, a current-account deficit is not caused by a currency's status as a major reserve currency, but rather by other factors, such as the quality of a nation's goods and services relative to that of other nations, or the fact that a nation domestically produces significantly more or less of some set of highly-demanded goods or services relative to its competitor nations, or the fact that there are interest-rate differentials between national currencies.
One major factor determining currency exchange rates is the relative "money supply" of each currency. And that's why, in the case of fiat currencies, the rate of new-money creation relative to that of other currencies strongly affects the velocity and direction of the currency's exchange rate. It also strongly affects the interest rates charged to borrow the currency, which is one reason that Interest rate differentials are a significant factor in determining the exchange rate between currencies. Interest rates strongly depend on the rate of new money creation.
The status of a currency as a major world reserve currency does counteract the effects of a high rate of fiat money creation on the currency's exchange rate with other currencies, because those two factors have opposite effects: The former acts to raise the value of the currency relative to others, while the latter acts to lower it.
The fact that a currency is a major world reserve currency increases the ability of its issuing nation to borrow money, thereby strongly affecting the ability of said government to spend more than it collects via taxation. But that means that the effect on a currency of losing its status as a reserve currency (or of having that reduced) is to raise the interest rate that the issuing nation must pay to borrow money, or perhaps even to make it impossible to borrow any additional funds.
Given the fact that the US government currently borrows about as much money each year as it collects in taxes, what do you think will be the effects domestically of the US government having to pay a higher interest rate to borrow money, year after year, due to the loss of the USD's status as the world's pre-eminent reserve currency?
https://x.com/ShadowofEzra/status/1801012855627526349