"It is easy to confuse what is with what ought to be, especially when what is has worked out in your favor."
- Tyrion Lannister

"Lannister. Baratheon. Stark. Tyrell. They're all just spokes on a wheel. This one's on top, then that's ones on top and on and on it spins, crushing those on the ground. I'm not going to stop the wheel. I'm going to break the wheel."

- Daenerys Targaryen

"The Lord of Light wants his enemies burned. The Drowned God wants them drowned. Why are all the gods such vicious cunts? Where's the God of Tits and Wine?"

- Tyrion Lannister

"The common people pray for rain, healthy children, and a summer that never ends. It is no matter to them if the high lords play their game of thrones, so long as they are left in peace. They never are."

- Jorah Mormont

"These bad people are what I'm good at. Out talking them. Out thinking them."

- Tyrion Lannister

"What happened? I think fundamentals were trumped by mechanics and, to a lesser extent, by demographics."

- Michael Barone

"If you want to know what God thinks of money, just look at the people he gave it to."
- Dorothy Parker

Thursday, October 03, 2013

reserve currency

More Which Way Is Up Problems in Washington by Dean Baker
The implication of course is that the United States benefits from being the world's reserve currency. This is not obviously true.  
The increased demand for dollars as a result of being a reserve currency raises the value of the dollar. Higher demand leads to higher prices. (Sorry for the repetition of simple concepts, but there could be some economists reading.) A higher valued dollar makes our exports more expensive to people living in other countries. This means that we will have fewer exports. A higher dollar means that imports will be cheaper for people living in the United States, which means that we will import more goods.  
Fewer exports and more imports means a larger trade deficit and less demand in the domestic economy. That in turn means lower GDP and higher unemployment. This increase in unemployment hits middle and lower income workers especially hard, since they will not be in a position to achieve wage gains during periods of high unemployment. On the other hand, high unemployment and the resulting low wages, could be good for corporate profits and highly paid professionals like doctors and lawyers.  
There is not only reason to believe that having the dollar as the major reserve currency is bad for the economy, it is also contrary to stated policy. Ostensibly the Obama administration has been pushing to have China raise the value of its currency against the dollar. (For the directionally challenged, that means a lower valued dollar.) The line coming from the administration is that we always press China to raise the value of its currency, but they are just stubborn and won't do what we ask. 
Of course if the dollar stopped being the world's major reserve currency then we would likely get what we are ostensibly asking for in our negotiations with China. The dollar would fall in value against China's currency and against the other currencies where many have suspected "manipulation." In other words, ending the dollar's status as the world's major reserve currency would allow us to achieve a lower valued currency, which has supposedly been a major policy goal in negotiations with China as well as some other countries. 
So ending the dollar's status as the world's reserve currency could boast growth and create jobs and would be consistent with longstanding goals of both the Obama administration and Bush administration for ending currency manipulation, but we are supposed to be scared that it could be an outcome from a debt default. Like I said, people doing economic policy are not very good at economics.

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