Thursday, March 8, 2012
What if foreigners sell their dollars?
Here’s question that is often asked: “What if every foreigner in the world sold their dollars?”
Well, who would they sell them to?
If they sold them to each other (i.e. A Chinese sold his dollars to a Brazilian, etc), it would just represent a shifting of ownership, but the total quantity of dollars held by foreigners would not change, only the composition of ownership would.
There is only one way for the rest of the world to completely get rid of their dollars and that is to exchange them for goods and services produced in the U.S.
They give us all their dollars and we give them our products and services in exchange.
That’s the only way that the total quantity of dollars held by foreigners could be reduced to zero.
So, a) would that be bad and b) would that affect the dollar’s exchange value?
The answer to “a” is, it would be neither good nor bad. Our economy would just look a lot different, that’s all. We’d have a HUGE trade surplus and a lot of Americans would be employed making goods and services that were ultimately exported. The foreigners would get the “stuff” and we’d have the dollars. (Then we’d have to turn around and either buy or make the stuff for ourselves.)
Would the foreign exchange value of the dollar suffer? Hard to see how. Ostensibly, we’d want those dollars in exchange for our goods and services otherwise why would we be selling them? And we’d have a HUGE trade surplus so how could that hurt the dollar? It wouldn’t.
When you think it through this stuff is pretty easy. It’s just that no one thinks it through.