4 ms·

Largely you are correct. It works like this. If you are a net exporter, you are essentially giving away your own output to a foreign nation in exchange for bit

Largely you are correct. It works like this. If you are a net exporter, you are essentially giving away your own output to a foreign nation in exchange for bits of paper. The reason you can't spend that paper is that it would destroy your exports (your own currency would go sky high as the system tried to eliminate the imbalance) and you'd have to find something else for the people working in exports to do, or you'd get a Dutch Disease problem internally (and likely end up in a situation like Venezuela) So Botswana sells its natural assets to the US in exchange for US dollars. Those US dollars find their way into the bowels of the financial system and are discounted into the local currency. Either directly - like the Chinese do, or indirectly via some fancy financial system (normally a Sovereign Wealth fund, or Pension schemes with compulsory contributions). They then sit there (the Norwegian fund for example cannot spend anything - ever) - largely to avoid a Dutch disease in the country and to stop the local currency appreciating against the export target. The result is that the rich countries get stuff essentially for free from the poorer countries so that the poorer countries can issue their own money without people getting agitated. The whole thing is a conjuring trick. The poorer country would be better putting people to work creating domestic infrastructure straight away and only exporting what is necessary to get needed goods and services required to create that infrastructure. But to do that requires you to operate the central bank in a way that appears 'wrong'. You have to issue liabilities against 'Other Assets' rather than 'US Treasuries' and that upsets people who don't understand how banks actually work. The GBP/USD gets 'locked' in the financial system. Because it is being used to discount to the scrip used locally you can never get rid of it. To do so would reveal the central bank illusion and explain how the trick is done. Then people might start asking question like: why don't we use our own money in our own circulation to ensure everybody has a job and solve unemployment permanently and forever? And that would never do ;-)

pjc50 7y ago
This is largely nonsense - Botswana is on average net-neutral: https://tradingeconomics.com/botswana/balance-of-trade https://tradingeconomics.com/botswana/balance-of-trade The poor countries more or less have to spend the dollars because they need to buy fuel and high tech. It's the rare exceptions that stockpile it, China and Norway, and they can afford to do that because they're oil-producing. > The poorer country would be better putting people to work creating domestic infrastructure straight away and only exporting what is necessary to get needed goods and services required to create that infrastructure Generally true, but harder to achieve than it sounds. Worked in east Asian countries, but not in Africa, largely due to corruption. And the amount that has to be imported is high. > You have to issue liabilities against 'Other Assets' rather than 'US Treasuries' I can't even work out what this is referring to.
- candiodari 7y ago
  It means you'd have to issue local currency against local infrastructure. Or otherwise anything local. I guess that doesn't make much sense either. You have to GIVE a currency value. What that means is that you must give people a reason to use that currency. Now internally in a country this is done through taxes and the bank system. Externally however this has to be done differently. It must be "guaranteed" to be exchangeable ... to the global reserve currency (so that anyone can buy what they want with it). How do you guarantee that exchange rate ? By having an instrument that's guaranteed to be exchangeable for the reserve currency. A lot of US treasuries, a little gold, a little EU sovereign bonds, ... So instead you'd have to issue currency and make it exchangeable for local assets. So you'd loan that to local people to build roads, harbors, bridges, buildings, ... That doesn't work, because sovereignty means that you can't exchange those things for the global reserve currency anywhere near as well as you can US treasuries. Because investors are acutely aware that the government could just immediately impound their money (and there's lot of historical precedent of that actually happening), whether it's local currency or local assets. Investors would have to accept that they can bring money in, but not take it out. And good luck with that one.
pdm55 7y ago
Does anyone know where petrodollars fit in this picture? Do they give the US a particular economic advantage?
- IllogicalLogic 7y ago
  If the US priced oil in gold, it would hurt the US economy in a big way, you are correct. This is part of the reason Saddam and Gaddafi were put in the ground, they wanted to do just that. Not only does the US get to print the currency that oil is traded in willy-nilly. US also gets to export the resulting inflation (from excessive printing) to the rest of the world.
- NTDF9 7y ago
  It gives the US a very big advantage. How? 1. The US never has to produce anything to buy oil. They can just print dollars and import oil. Another country, say Bostwana, has to produce something else, sell it to another country in exchange for USD and then they can buy oil. This is a significant crutch 2. The US will never have a shortage of oil before other countries do 3. The US can import anything it wants, whenever it wants. Say a year with bad weather caused low corn production. That will not take down companies dependent on corn. US can always print USD and buy corn from somewhere. Compare that to Brazil, who would just have to suck it up since they don't have enough USD in reserves to go import corn.

pjc50 7y ago

This is largely nonsense - Botswana is on average net-neutral: https://tradingeconomics.com/botswana/balance-of-trade https://tradingeconomics.com/botswana/balance-of-trade The poor countries more or less have to spend the dollars because they need to buy fuel and high tech. It's the rare exceptions that stockpile it, China and Norway, and they can afford to do that because they're oil-producing. > The poorer country would be better putting people to work creating domestic infrastructure straight away and only exporting what is necessary to get needed goods and services required to create that infrastructure Generally true, but harder to achieve than it sounds. Worked in east Asian countries, but not in Africa, largely due to corruption. And the amount that has to be imported is high. > You have to issue liabilities against 'Other Assets' rather than 'US Treasuries' I can't even work out what this is referring to.

candiodari 7y ago
It means you'd have to issue local currency against local infrastructure. Or otherwise anything local. I guess that doesn't make much sense either. You have to GIVE a currency value. What that means is that you must give people a reason to use that currency. Now internally in a country this is done through taxes and the bank system. Externally however this has to be done differently. It must be "guaranteed" to be exchangeable ... to the global reserve currency (so that anyone can buy what they want with it). How do you guarantee that exchange rate ? By having an instrument that's guaranteed to be exchangeable for the reserve currency. A lot of US treasuries, a little gold, a little EU sovereign bonds, ... So instead you'd have to issue currency and make it exchangeable for local assets. So you'd loan that to local people to build roads, harbors, bridges, buildings, ... That doesn't work, because sovereignty means that you can't exchange those things for the global reserve currency anywhere near as well as you can US treasuries. Because investors are acutely aware that the government could just immediately impound their money (and there's lot of historical precedent of that actually happening), whether it's local currency or local assets. Investors would have to accept that they can bring money in, but not take it out. And good luck with that one.

pdm55 7y ago

Does anyone know where petrodollars fit in this picture? Do they give the US a particular economic advantage?

IllogicalLogic 7y ago
If the US priced oil in gold, it would hurt the US economy in a big way, you are correct. This is part of the reason Saddam and Gaddafi were put in the ground, they wanted to do just that. Not only does the US get to print the currency that oil is traded in willy-nilly. US also gets to export the resulting inflation (from excessive printing) to the rest of the world.
NTDF9 7y ago
It gives the US a very big advantage. How? 1. The US never has to produce anything to buy oil. They can just print dollars and import oil. Another country, say Bostwana, has to produce something else, sell it to another country in exchange for USD and then they can buy oil. This is a significant crutch 2. The US will never have a shortage of oil before other countries do 3. The US can import anything it wants, whenever it wants. Say a year with bad weather caused low corn production. That will not take down companies dependent on corn. US can always print USD and buy corn from somewhere. Compare that to Brazil, who would just have to suck it up since they don't have enough USD in reserves to go import corn.