Get real time updates directly on you device, subscribe now.

10 Comments
  1. Anonymous says

    Any fixed rate system is going to turn out to be deflationary rather than “stablizing,” putting national policy in a bind in downturns. Is there going to be a lender of last resort? Who sets the conditions? Is this government body in control of the world’s reserve currency elected and accountable, or it is composed of the world’s super-bankers? The New World Order people would have a field day with this, and I suspect that a lot of the Tea Partiers now in control of the GOP are NWO’ers.

    Sovereign governments would have to give up monetary sovereignty to join such a currency union even at the international level. Is the world an optimal currency area?

    See also Dani Rodrik’s “inescapable trilemma of the world economy“.

    Lots of issues here. Look forward to your thoughts on this.

    1. Edward Harrison says

      I agree with you that a fixed-exchange rate system is deflationary when private sector debt levels are high. That was the crucial problem for the gold standard. There a few problems with currency regimes that have to massaged.

      1. Fixed exchange rates or floating
      2. Accountability of the reserve currency creators
      3. Trade balances

      You could argue that all economic systems have a certain instability built-in if you believe Minsky’s thesis about the instability of stability. So that means you get these generational crises no matter what system you use. What you want is a system that minimises the damage when those crises occur because the alternative brings political conflict and potentially even armed responses. I wish I knew of a magic bullet to solve this. But there are a lot of smart people who have spent more time looking at this than me – and none of their proposals entirely eliminates these problems.

  2. Anonymous says

    Any fixed rate system is going to turn out to be deflationary rather than “stablizing,” putting national policy in a bind in downturns. Is there going to be a lender of last resort? Who sets the conditions? Is this government body in control of the world’s reserve currency elected and accountable, or it is composed of the world’s super-bankers? The New World Order people would have a field day with this, and I suspect that a lot of the Tea Partiers now in control of the GOP are NWO’ers.

    Sovereign governments would have to give up monetary sovereignty to join such a currency union even at the international level. Is the world an optimal currency area?

    See also Dani Rodrik’s “inescapable trilemma of the world economy“.

    Lots of issues here. Look forward to your thoughts on this.

    1. Edward Harrison says

      I agree with you that a fixed-exchange rate system is deflationary when private sector debt levels are high. That was the crucial problem for the gold standard. There a few problems with currency regimes that have to massaged.

      1. Fixed exchange rates or floating
      2. Accountability of the reserve currency creators
      3. Trade balances

      You could argue that all economic systems have a certain instability built-in if you believe Minsky’s thesis about the instability of stability. So that means you get these generational crises no matter what system you use. What you want is a system that minimises the damage when those crises occur because the alternative brings political conflict and potentially even armed responses. I wish I knew of a magic bullet to solve this. But there are a lot of smart people who have spent more time looking at this than me – and none of their proposals entirely eliminates these problems.

  3. Karthik N says

    So if the USD is not the world’s reserve currency, then that can lead to hyperinflation?

    1. Edward Harrison says

      It would certainly make it easier. The U.S. benefits from the reserve currency status because it means the world’s other currencies, goods and services are tied to the dollar. It means everyone has an incentive in using dollars as a store of value. But look at the British Pound. It is not the world’s main reserve currency and there is relatively little chance of hyperinflation. The hyperinflation talk is far fetched. When the Fed is creating $15 trillion dollars and annual inflation is 12%, maybe we can start talking about it.

      1. Karthik N says

        Thanks for your response, now here’s another question. What happens if the bond market stops buying U.S. treasuries? What if they say “We don’t have faith anymore in the U.S. dollar or in the U.S.’s ability to pay back its debt so we’re gonna stop funding you.”? And what makes you think the Fed wouldn’t create $15T? I don’t have much faith in Bernanke.

        1. Edward Harrison says

          The hyperinflation thing is ideological claptrap. If the U.S. experiences hyperinflation, Japan would certainly precede it. It would crush the Chinese and the Europeans. It’s ridiculous to be thinking about this as a likely scenario, especially with the USD as the world’s reserve currency.

          As to bonds, we will see what happens in July when QE2 ends.

          1. Karthik N says

            Sorry, I have to keep asking…Don’t you think inflation is close to double digits anyway? With gas prices and food (which govt deliberately excludes from the index)? My concerns are 1) the unsustainability of U.S. deficit spending and 2) the fact that there has already been much talk about replacing the dollar as a reserve currency altogether.

          2. Edward Harrison says

            Of course, people talked about the sustainability of Japanese deficit spending 10 years ago. This can go on for a long time. I see debt deflationary forces as more likely to be felt because inflation is demand destroying unless it can pass through to wages. When wages start rising, then we can talk about an inflationary spiral.

            Rather than go back and forth on this, my suggestion is to wait and see.

          3. Karthik N says

            Thank you.

          4. DavidLazarusUK says

            If the US dollar is dropped as reserve currency the first impact would be a rocketing of oil prices within the US as the dollar devalues. As it devalues it effectively gives manufatcuring a huge boost within the US economy. It makes exports cheaper and imports more expensive. Initially the balance of trade would deteriorate as high oil prices impact the US consumer. Though longer term it will mean that US citizens will have to become far more efficient with energy to cope. Inflation will climb but as that erodes the value of debts it might make foreclosures less of a problem over time. As they do the trade balance will improve as oil imports fall and exports benefit from the devaluation. Eventually the increased exports will create jobs domestically and jobs will even be returned from offshore as the devaluation makes the US more competitive again.

  4. Karthik N says

    So if the USD is not the world’s reserve currency, then that can lead to hyperinflation?

    1. Edward Harrison says

      It would certainly make it easier. The U.S. benefits from the reserve currency status because it means the world’s other currencies, goods and services are tied to the dollar. It means everyone has an incentive in using dollars as a store of value. But look at the British Pound. It is not the world’s main reserve currency and there is relatively little chance of hyperinflation. The hyperinflation talk is far fetched. When the Fed is creating $15 trillion dollars and annual inflation is 12%, maybe we can start talking about it.

      1. Karthik N says

        Thanks for your response, now here’s another question. What happens if the bond market stops buying U.S. treasuries? What if they say “We don’t have faith anymore in the U.S. dollar or in the U.S.’s ability to pay back its debt so we’re gonna stop funding you.”? And what makes you think the Fed wouldn’t create $15T? I don’t have much faith in Bernanke.

        1. Edward Harrison says

          The hyperinflation thing is ideological claptrap. If the U.S. experiences hyperinflation, Japan would certainly precede it. It would crush the Chinese and the Europeans. It’s ridiculous to be thinking about this as a likely scenario, especially with the USD as the world’s reserve currency.

          As to bonds, we will see what happens in July when QE2 ends.

          1. Karthik N says

            Sorry, I have to keep asking…Don’t you think inflation is close to double digits anyway? With gas prices and food (which govt deliberately excludes from the index)? My concerns are 1) the unsustainability of U.S. deficit spending and 2) the fact that there has already been much talk about replacing the dollar as a reserve currency altogether.

          2. Edward Harrison says

            Of course, people talked about the sustainability of Japanese deficit spending 10 years ago. This can go on for a long time. I see debt deflationary forces as more likely to be felt because inflation is demand destroying unless it can pass through to wages. When wages start rising, then we can talk about an inflationary spiral.

            Rather than go back and forth on this, my suggestion is to wait and see.

          3. Karthik N says

            Thank you.

          4. Anonymous says

            If the US dollar is dropped as reserve currency the first impact would be a rocketing of oil prices within the US as the dollar devalues. As it devalues it effectively gives manufatcuring a huge boost within the US economy. It makes exports cheaper and imports more expensive. Initially the balance of trade would deteriorate as high oil prices impact the US consumer. Though longer term it will mean that US citizens will have to become far more efficient with energy to cope. Inflation will climb but as that erodes the value of debts it might make foreclosures less of a problem over time. As they do the trade balance will improve as oil imports fall and exports benefit from the devaluation. Eventually the increased exports will create jobs domestically and jobs will even be returned from offshore as the devaluation makes the US more competitive again.

Comments are closed.

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More