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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.
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13 comments:
This happened in the 80's when Japanese companies bought Pebble Beach and half of Hawaii among other things. That inflated real estate and office space for a while until their bubble burst.
If foreigners started buying goods en mass from each other with their (currently stored-up) piles of dollars, wouldn't that lead to a fall in the value of the dollar?
Do you have any further info on this subject as its something I'm confused about.
Anon-
A nation would have to accept less and less in real terms and at some point the exchange would stop. Admittedly, it could have a temporary adverse effect "at the margin," on the exchange rate, but nothing long-lasting. You're not creating any new dollars--you're just shifting ownership around. The supply remains constant.
What if we turn the question around instead.
"What if foreigners (mainly China) insist that we PAY them in their currency (Yuan) for all the US imports? .i.e. what if they stop accepting our dollars. How would the US go about funding these imports?
Why would China want to "collect back yuan" from us when it's the issuer of yuan? It doesn't make sense. The only reason it sells us stuff is because it wants to net save in dollar units of account.
Then the Chinese wouldn't sell anything and their economy would collapse.
Not going to happen is it.
In particular it is not going to happen because the main holder of dollar and dollar financial assets are the foreign central banks.
And they have no interest in spending dollars - after all they have an infinite amount of their own currency.
No they are interested in draining dollars from your economy, which reduces the output capacity of the domestic dollar economy. And that makes more room for foreign exports into the US.
The counter to that is to re-create whatever dollars foreign central banks take out of circulation.
And if necessary prevent foreign central banks from doing to many dollar transfers (ie anti-dumping measures - as you do for trade goods).
And if necessary prevent foreign central banks from doing to many dollar transfers (ie anti-dumping measures - as you do for trade goods).
How does that work and how does one do it?
By the way Mike,
The RT channel has a finance program called 'capital account' which often invites 'unorthodox' people on. They've had Steve Keen and Edward Harrison on recently.
They're very interested in trying to understand the situation in Greece, so they might really appreciate your insight.
I just realised you've been on that show already.
Phil,
Yes, I'm on that show pretty regularly now.
they really like to push the austrian agenda though huh?
Stock maniac,
China isn't even close to demanding payment in yuan - they want to keep their currency DOWN given it's export oriented model. The last thing they want is to create demand for yuan, which also, I imagine, require freeing up trade in the yuan.
Apj
When the Chinese buy Ore from Australia, Oil from Iran, or Corn from Africa, do they generally pay in USD?
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