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: ------- Start of forwarded message ------- 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) ------- End of forwarded message -------
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