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I don't understand why servicing a dollar-denominated debt causes an increase in aggregate demand. Sure, you need to buy dollars, but when you pay the debt, now
by jeffdavis 7y ago
I don't understand why servicing a dollar-denominated debt causes an increase in aggregate demand. Sure, you need to buy dollars, but when you pay the debt, now the person on the other end gets them and puts those dollars back in the market.
- daniel_levine 7y agoIn order to mitigate the risk of currency fluctuation, countries with dollar-denominated debt will stockpile dollar-denominated assets in advance as well. Those stockpiles are an increase in demand over what is just needed for immediate transacting.
- magicsmoke 7y agoIf all debters with dollar denominated debt could perfectly coordinate with each other that would be the case. They could all run through your scenario one at a time without causing a dollar shortage and a spike in demand and price. But the market is made up of independent actors all of whom want to make sure they get the dollars they need first. It's like a rush for the fire exit with everyone jammed at the door instead of an orderly line.