The US EU relationship is not working | 130 comments (130 topical, editorial, 0 hidden)

Re: The US EU relationship is not working (4.00 / 3)

I think the idea is that the British government is supposedly filling up its war chest to defend the £ against attacks and/or managing the rate of depreciation on the theory that a controlled devaluation is preferable to a pell-mell depreciation caused by a speculative attack.

- Jake

If you only spend 20 minutes of the rest of your life on economics, go spend them here.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Jul 17th, 2010 at 06:35:46 AM EST
[ Parent ]

Re: The US EU relationship is not working (4.00 / 3)

That has often been proffered as a major reason China became willing to hold large quantities of US paper after the Asian debt crisis. Even if, during a panic, a flight to the US$ is a flight to junk, US$ denominated assets are useful in such a situation.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Jul 17th, 2010 at 11:03:24 AM EST
[ Parent ]

Re: The US EU relationship is not working (4.00 / 3)

Here's a question: Suppose the U.S. economy goes (further) into the dumper. But the dollar is "the" international currency. I wonder if the big holders of dollars and the big sellers of dollar-denominated goods (oil, for instance), could force a separation of the externally held dollars from the U.S. held dollars.

So maybe China uses U.S. paper to buy oil from Saudi Arabia, which uses it to buy wheat from Ukraine, say, while the greenbacks used in daily U.S. transactions are devalued in accordance with the economy... I have no idea how you would make the division, though...

by asdf on Sat Jul 17th, 2010 at 06:58:12 PM EST
[ Parent ]

Re: The US EU relationship is not working (4.00 / 2)

Barring outright hyperinflation, devaluation of the dollar shouldn't be a problem for those who use it as a unit to denominate cash flows, although some people might get squeezed if their contracts with their customers are of longer duration than their contracts with their suppliers. The people who will lose money in a devaluation are those who hold balances. Which means central banks, basically.

- Jake

If you only spend 20 minutes of the rest of your life on economics, go spend them here.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Jul 17th, 2010 at 10:31:55 PM EST
[ Parent ]

Re: The US EU relationship is not working (4.00 / 2)

Or the Saudis could directly trade oil for wheat.

Currencies make it a damn sight easier to trade but they aren't necessary for trade.

Ever since I learnt about confirmation bias I've started seeing it everywhere

by ATinNM on Sat Jul 17th, 2010 at 11:25:18 PM EST
[ Parent ]

Re: The US EU relationship is not working (none / 1)

But almost all of the relationships that compose the institutional framework necessary for transcontinental trade involve large numbers of relationships that make reference to currency. Re-casting those relationships in terms that obviate the need for currencies will often involve renegotiating the entire relationship. Do this to a large enough fraction (in a short enough span of time) of the relationships that make up the institutional framework necessary for trade and that entire institutional framework risks going belly-up.

- Jake

If you only spend 20 minutes of the rest of your life on economics, go spend them here.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jul 18th, 2010 at 09:34:02 AM EST
[ Parent ]

Re: The US EU relationship is not working (none / 0)

ARGeezer:

Even if, during a panic, a flight to the US$ is a flight to junk, US$ denominated assets are useful in such a situation.

i'd love to understand why, if you don't mind taking some time to explain...

The power of knowledge is in mortal combat with the knowledge of power. It really is that simple... That's the Edenic apple we are all munching on.

by melo (melometa4(at)gmail.com) on Sun Jul 18th, 2010 at 01:46:08 PM EST
[ Parent ]

"Markets can remain irrational... (4.00 / 2)

... longer than you can remain solvent." - Keynes

Less flippantly, if most major market actors "know" that the US$ is "safe" then that is what they will buy during a panic.

Moreover, if everybody knows that everybody else "knows" that the US$ is "safe" then the US$ really will be safe during a panic, at least compared to everything else. That's an unstable sort of "safe," though, because any time a sufficiently serious actor decides to call the emperor on his nakedness, it stops being safe.

Oh, and then you have the fact that most transcontinental trade is denominated in US$, and it takes time to change denomination on all your trade contracts, so you want to have a war chest in order to avoid being squeezed between short-term contracts with your suppliers and long-term contracts with your customers, if the reference currency goes down (or vice versa if the reference currency goes up, but for the US$ that does not seem a serious prospect...).

- Jake

If you only spend 20 minutes of the rest of your life on economics, go spend them here.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jul 18th, 2010 at 04:30:24 PM EST
[ Parent ]

Re: "Markets can remain irrational... (none / 1)

With Oil being denominated in $, everyone who needs oil will hedge against Oil price volatility in $ by buying ahead in $ and buying $ to do so. - e.g. Ryanair usually hedges up to 75% of requirements at least 12-18 months in advance and thus there is a huge incentive to keep buying $ no matter what..

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot dotty communists) on Sun Jul 18th, 2010 at 04:36:57 PM EST
[ Parent ]

Re: "Markets can remain irrational... (none / 1)

thanks, it's very clear now, especially what leverage the $ being denominated as oil value metric gives.

The power of knowledge is in mortal combat with the knowledge of power. It really is that simple... That's the Edenic apple we are all munching on.

by melo (melometa4(at)gmail.com) on Sun Jul 18th, 2010 at 05:39:42 PM EST
[ Parent ]

Re: "Markets can remain irrational... (none / 0)

thanks, Jake, very helpful.

The power of knowledge is in mortal combat with the knowledge of power. It really is that simple... That's the Edenic apple we are all munching on.

by melo (melometa4(at)gmail.com) on Sun Jul 18th, 2010 at 05:43:39 PM EST
[ Parent ]

Re: The US EU relationship is not working (4.00 / 2)

Short answer: this will remain true so long as lots of debt is US dollar denominated. This is a legacy effect to some degree. But lots of toxic assets were created in the USA and thus the need for lots of US dollars. An alternative would be to repudiate that debt as fraudulent or require that it be demonstrated that the debt is not fraudulent before paying it.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jul 18th, 2010 at 09:46:09 PM EST
[ Parent ]

The US EU relationship is not working | 130 comments (130 topical, 0 editorial, 0 hidden)

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