(Right click, save link as for MP3 download)
Thanks guys. The argument centers around how important oil being priced in dollars is. I say it doesn’t matter but this kid keeps saying that other countries are being forced to used the dollar because payment requires actual dollars and that the sky will fall if oil is priced otherwise. I just convinced him and a few others that the quantity theory of money can’t be right so I figured I would take a stab at this.
As long as you are answering some off-topic questions. I’ve tried longer versions but will keep it short. If China used its dollar reserves to go on a consumption buying spree, could that generate inflation in the US? enough to be a problem? If China used its dollar reserves to buy real US assets, is that a problem? For instance if they gained control over some important sector.
I’m still trying to understand if there is really no downside to the continued trade deficit with China.
Neil Wilson Reply:March 18th, 2012 at 4:00 am
So what you’re saying is that if foreign countries suddenly decided to turn your country into an export powerhouse like Germany, that would be a bad thing and it must be stopped?
Rerun the problem with a National Savings account available to domestic individuals providing index-linked savings facilities (or some other policy designed to increase household saving rates).
What you will see is that ‘foreign’ savings then become domestic savings, while real output is maintained at maximum – exactly as is happening currently in Germany and Japan.
Sergei Reply:March 18th, 2012 at 4:52 am
Neil: if foreign countries suddenly decided to turn your country into an export powerhouse like Germany
Why Germany?! Greece! If it was so easy to become Germany, Greece would already have become
Neil Wilson Reply:March 18th, 2012 at 8:16 am
Suggesting that Greece’s problems are because too many foreigners with Euros tried to buy their output and assets really is pushing the bounds of credibility.
ESM Reply:March 18th, 2012 at 12:37 pm
“If it was so easy to become Germany, Greece would already have become”
It’s a bit too early to say. Greece only recently suffered a devaluation of its currency (i.e. Greek government IOUs). Either way, Greeks (and Americans eventually, maybe) will suffer a decline in standard of living. A decline in standard of living means you’re working harder and consuming less, although i suppose it could also encompass working much harder, and consuming the same or only a little bit more, or working the same or less and consuming a lot less, etc.
How a country’s domestic economy responds to a sudden and sustained increase in competition for goods and services, I think, depends upon how “free” it is. I’m confident that in the freer markets, like in the US, you would see people working harder and consuming only slightly less. This is because that is what most individuals would choose for themselves to maximize their happiness. Not coincidentally, an economy where the domestic population works harder than before and consumes less would be seen as “good” by the mainstream media and politicians of all stripes.
I think that in the less free markets, like Greece, unfortunately, where such a high percentage of the population has government or union jobs, you’ll probably see little increase in work (if any). There will simply be a big drop in consumption.
WARREN MOSLER Reply:March 18th, 2012 at 1:18 pm
Think of how much more severe the adjustment would have been without the 100billion euro bond tax just levied.
WARREN MOSLER Reply:March 18th, 2012 at 1:16 pm
Germany’s real terms of trade, as with any net exporter, could be enhanced.
exports are real costs and imports real benefits
WARREN MOSLER Reply:March 18th, 2012 at 1:15 pm
a buying spree could mean a ‘one time’ shift in ‘relative value’ with what they buy going up, but technically not ‘inflation’
like when japan ran up selected US property values way back.
yes, ‘important sectors’ need to be looked at from the public purpose point of view and sometimes it makes sense to
restrict domestic buying as well, hence, anti trust law, etc. and govt. control of ‘strategic’ assets
This is kind of off topic but I figured I would ask you guys because your knowledgeable. Oil is only priced in dollars, right, or do you need actual dollars to buy it? I’m having an arguement with the austrian types about what gives the dollars value and I need to put them in their place.
walter Reply:March 17th, 2012 at 12:48 pm
USD has value because IRS is serious when it comes to tax collection.
Also when they have to collect from Apple, and the whole world wants iPads ;)
One thing is for sure. Saudis receive USD from the US, then convert them to EUR to go shopping in Europe (cars, equipment, fashion, food etc).
WARREN MOSLER Reply:March 17th, 2012 at 5:35 pm
no, you don’t need actual dollars, and the sellers of oil don’t necessarily hold the dollars after they sell the oil, so it doesn’t matter
As far as i hear this is a replay of your post on March 1st, 2012.
I raised there the question about whether cb will always execute payment instructions from tsy and how independent the cb is.
You replied with that congress is boss of both tsy and cb.
That is correct of course and thus they can arrange any payment.
This very Congress however leaves in place all the outdated self imposed restrictions, such as debt ceiling, no-overdraft rule etc.
Don’t get me wrong, I am in favor of restrictions on govt spending, but not those restrictions.
How big do you see the risk that Congress and Senate one day will e.g. not increase the debt ceiling and voluntarily default? This especially in light of what is going on in Europe with PSI.
This week we saw some sell off in tsy secs. Do you see that as a normal correction, rotation to equities, sign of economic recovery, or do you see this as first sign of fear in the bond markets for European like PSI style of ‘resolving’ things?
WARREN MOSLER Reply:March 17th, 2012 at 5:34 pm
i don’t see it as a psi concern, just a ‘technical correction’ due to no qe, not as terrible employment reports,
and no telling what else we have know way of knowing about
yes, there’s a real chance of self imposed constraints wreaking havoc some day, but not in the next few weeks so not a factor
You’re getting good at this!
WARREN MOSLER Reply:March 17th, 2012 at 5:31 pm
thanks, this prior interview was supposed to be over on the right margin. the latest interview will be on soon
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Warren B. Mosler