Sovereign debt bubble thread

[crazy canuck]

Ok, maybe someone else can make sense of your position.

[MadImmortalMan]

Do you think it would have been better for the US if foreigners did not buy US dollars?

I'm starting to think that long-term it might have been. It contributed to the bubbles after all. And look at our debt. A little pressure against that rising, say, 30 years ago might have been a pretty good idea.

[Admiral Yi]

I'm starting to think that long-term it might have been. It contributed to the bubbles after all. And look at our debt. A little pressure against that rising, say, 30 years ago might have been a pretty good idea.

As with all macroeconomic policies, it's a trade off.  A lower dollar means more competitive exports, smaller trade deficit, more jobs.  And more expensive imports.

[Caliga]

Yi, I wouldn't be buying a bond directly.  I'm talking about bond funds.  But I wouldn't touch those right now either (I have owned them in the past).  Direct purchase of bonds isn't necessarily restricted to the very wealthy, but you typically do need a huge cash reserve to buy one.  Sometimes munis are offered in smaller amounts, though in my experience the smaller bonds are offered by banks and corps.

[The Minsky Moment]

Ok, maybe someone else can make sense of your position.

I will guess.

Perhaps he is suggesting that foreign governments could have simply allowed their currencies to adjust.  That is a disinflationary response.  It would also have the effect of tending to restore balance on the current account.

[DGuller]

Ok, maybe someone else can make sense of your position.

This is only a problem because other nations peg to the dollar.  Guess what, if you have a fixed peg to the dollar, then when the dollar inflates, so will your currency.  Importing inflation is a very well-known side effect of pegging your currency to someone else rather than letting your own currency rise.

[crazy canuck]

Ok, maybe someone else can make sense of your position.

This is only a problem because other nations peg to the dollar.  Guess what, if you have a fixed peg to the dollar, then when the dollar inflates, so will your currency.  Importing inflation is a very well-known side effect of pegging your currency to someone else rather than letting your own currency rise.

Isnt the article talking about other countries buying a weak US dollar to keep their currencies from appreciating?  What does that have to do with a country pegging their currency to an "inflating" US dollar?

[crazy canuck]

Ok, maybe someone else can make sense of your position.

I will guess.

Perhaps he is suggesting that foreign governments could have simply allowed their currencies to adjust.  That is a disinflationary response.  It would also have the effect of tending to restore balance on the current account.

Granted.  But what of the other consequences?  If other nations do not buy your dollar (in the form of debt instruments etc) how does the US fund itself?

[chipwich]

The U.S. is not responsible for babying the financial policy of other nations

[DGuller]

Isnt the article talking about other countries buying a weak US dollar to keep their currencies from appreciating?  What does that have to do with a country pegging their currency to an "inflating" US dollar?

Because that's part of the peg, and a currency intervention in any case.  The peg is there to keep the dollar artificially strong, which is also what buying up the dollar to keep it from appreciating does.

[The Minsky Moment]

Granted.  But what of the other consequences?  If other nations do not buy your dollar (in the form of debt instruments etc) how does the US fund itself?

In theory, would be no need because the current account would come into balance.

The problem arises in the first instance when countries of sufficient economic weight  (ie. China)  adopt a developmental policy that is based on importing demand from the US and therefore running large current account surpluses.  This is not meant to be critical of China - the policy made sense and helped vault it out of poverty but China is so large that the limitations of that policy in the context of an international economy have been reached earlier.

[crazy canuck]

Granted.  But what of the other consequences?  If other nations do not buy your dollar (in the form of debt instruments etc) how does the US fund itself?

In theory, would be no need because the current account would come into balance.

The problem arises in the first instance when countries of sufficient economic weight  (ie. China)  adopt a developmental policy that is based on importing demand from the US and therefore running large current account surpluses.  This is not meant to be critical of China - the policy made sense and helped vault it out of poverty but China is so large that the limitations of that policy in the context of an international economy have been reached earlier.

But the article is also talking about time periods when China was not engaged in this policy and I think had no or little impact on international currency valuation.

If other countries did not supported the value of the US dollar would its decreased value have diminished its status as the denomination for international business?  Also, would the US have had to cut its spending?

In other words, doesnt the US also enjoy benefits by others buying its currency?

[The Minsky Moment]

But the article is also talking about time periods when China was not engaged in this policy and I think had no or little impact on international currency valuation.

The only other such time period mentioned was the early 70s.  That is a more complicated situation - and the author seems to be confusing an effect (the breakdown of Bretton Woods) as a cause.

If other countries did not supported the value of the US dollar would its decreased value have diminished its status as the denomination for international business?  Also, would the US have had to cut its spending?

1. no the US dollar is used to denominate certain international transactions either because of the predominance of US buyers or sellers or because dollar liquidity is plentiful and convertibility free.
2.  What kind of spending are you referring to - consumption, business investment or government spending?

In other words, doesnt the US also enjoy benefits by others buying its currency?

Not particularly.
The question you may have wanted to ask is whether the US benefits from the dollar's status as the principal reserve currency.  the short answer is that there are some benefits but they are subtle, and there are downsides as well. 

Google "triffin dilemma"

[crazy canuck]

/quote]

I was thinking of government spending.

[The Minsky Moment]

There is no obvious relationship between a government's ability to spend and the value of the national currency.

There is a belief by some that an issuer of an international reserve currency can afford to maintain higher levels of deficit because it is easier for them to place government debt securities.