[OPE-L] Boneheads, Iraq and the Artificial Dollar

From: Hans G. Ehrbar (ehrbar@LISTS.ECON.UTAH.EDU)
Date: Thu Feb 23 2006 - 11:43:09 EST

Here is my reply on the yahoo group mentioned by Jerry:

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From: "Hans G. Ehrbar" <ehrbar@lists.econ.utah.edu>
Date: Mon, 20 Feb 2006 12:43:51 -0700

The bonehead article gives the following quote:

> If other nations have to hoard dollars to buy oil, then they
> want to use that hoard for other trading too. This fact
> gives America a huge trading advantage and helps make it the
> dominant economy in the world."

and tries to refute it with the argument that the
transactions costs are so minimal that nobody has to hoard
dollars to buy oil, and that it is also irrelevant
for the other trading whether the reserves are kept
in dollars or in other currencies.

My response: it is true that nobody *has* to keep their
hoards (foreign currency reserves) denominated in dollars;
they could, with only a minimal additional cost, also keep
it in other currencies (and China and Venezuela have
recently started to do just that).  But it is a matter of
fact that most countries *do* hold their reserves in
dollars: not because they are forced to do so by stringent
economic incentives, but because it is a little more
convenient and buys a little more security against military
aggression by the US (and perhaps there is some
behind-the-scenes diplomatic prodding too).  And since
every nation is keeping large dollar hoards, the dollar becomes
the logical choice for settling payments when imports and
exports do not quite match etc.  This, in turn, allows the
US to acquire considerable amounts of real wealth by issuing
paper dollars.  In other words, small causes have large
effects because these small causes act as a signal
coordinating everybody's activity.

- --
Hans G. Ehrbar   http://www.econ.utah.edu/~ehrbar   ehrbar@economics.utah.edu
Economics Department, University of Utah     (801) 581 7797 (my office)
1645 Campus Center Dr., Rm 308               (801) 581 7481 (econ office)
Salt Lake City    UT 84112-9300              (801) 585 5649 (FAX)

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