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2005-12-08 Home Front Economy

'Dark matterâ makes the US deficit disappear

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Posted by lotp 2005-12-08 00:00|| || Front Page|| [11130 views since 2007-05-07] Top

#1 When currencies float, by definition the amount of money entering and leaving a currency (zone) are equal. Therefore if the USA were running a deficit on trade and investment, US dollars must be piling up somewhere. The fear was that lose of confidence would cause those USDs to be sold and cause a sharp fall in the dollar.

Assets are only relevant to the equation to the extent they are bought and sold and generate income.

The Dark Matter concept is intriguing, but its hard to see how it would generate the income required to offset the trade imbalance.

I note neither author is an economist.

Posted by phil_b">phil_b 2005-12-08 01:00|| 2005-12-08 01:00|| Front Page Top

#2 That excerpt wasn't enough to convince me these guys know more about dark matter than do physicists.

The question they ask, why have markets not precipitated the crisis already? is a good one, but the answer is because no one can see a way to make a profit doing it. A better question is what would it take to precipitate such a crisis.

At the moment, there are two things that pop to mind immediately. The first is a political dispute with China. The second is a disruption of petroleum flows. Both would create acute economic dislocations sufficient to threaten the country as it has not been since the Great Depression. They might help the value of the dollar initially with a flight from risk. They might even have a positive effect for a longer while if we repudiated the debt we owe as a wartime measure.

While I stand in second place to no one in my respect for the Partier's commercial accomplishment's, the comment that it's like using your credit cards a lot but being able to pay them off monthly is a bit off base. It's more like using your credit cards a lot and being able to get even more new ones to pay off the interest on the old ones without ever paying the balance owed down.

It seems to me that the reason for this no visible means of support deficit is a form of seigneurage for being the consumer of last resort. Who else will buy (insert name of export driven economy)'s products and where else can they invest the dollar payment they receive? Like all things credit related it rests on the 3 c's of credit, character, capacity, capital, condition and collateral. In this case, the character is so beneficial, the capital, condition and collateral so immense that no one is paying attention to the capacity.

But, ultimately the markets are supported by confidence. And the markets continue to vote for the dollar because they see no new top dog on the horizon.

Posted by Thereth Omeresh1074 2005-12-08 08:03|| 2005-12-08 08:03|| Front Page Top

#3 How do they calculate the billions of US dollars that are employed by 25 or so other countries that use it as their national currency? How do they calculate the US dollars that are literally stuff in mattresses or kept in old coffee tins around the world because people don't trust their own government's economic integrity and currency manipulations?

Its sort like, you don't have to be faster than the bear, just faster than one other person in your party.

Posted by Spaiter Hupereck8082 2005-12-08 08:41|| 2005-12-08 08:41|| Front Page Top

#4 SH, most dollars held overseas exist as accounting entries in bank accounts rather than as paper currency. Re: stuff in mattresses, economists measure the 'velocity' with which money is turned over in new exchanges rather than being held in bank or informal savings. Lots of people spend whole careers, I guess, figuring out different measures of the money supply.

TO, I agree with much of what you wrote. What made this particular study interesting to me is that the authors apply an investor's point of view to the question of why trade deficits have persisted. The answer is that those who hold $$s or $$-denominated debt do so because they've done the same kind of analysis that investors do when they decide whether or not to buy a corporate bond: namely, will this company/country generate a Return on Assets purchased using the bond funds that makes it very likely I'll get repaid with the promised level of interest.

So agree, it's all about confidence, this just gives a new and interesting point of view re: the basis for that confidence.

Posted by lotp 2005-12-08 12:37|| 2005-12-08 12:37|| Front Page Top

#5 lotp, no some countries actually use American paper and coins rather than issue their own currancy. Ecuador which converted in 2001. The number of countries is somewhere over 20.

Posted by Thrineger Shineque9492 2005-12-08 13:00|| 2005-12-08 13:00|| Front Page Top

#6 According to FRBNY

As of June 2005, currency in circulationâthat is, U.S. coins and paper currency in the hands of the publicâtotaled about three-quarters of a trillion dollars. The amount of cash in circulation has risen rapidly in recent decades and much of the increase has been caused by demand from abroad. The Federal Reserve estimates that the majority of the cash in circulation today is outside the United States.

I can't find the table now, but almost all of that, monetarily, is $100 bills. It will be interesting to see if the 500 Euro note horns in on that and If we start issuing a $1,000 bill in retaliation.

Posted by Thereth Omeresh1074 2005-12-08 13:48|| 2005-12-08 13:48|| Front Page Top

#7 How many of those $100 bills were printed in Norkland, Iran or Cuba?

Posted by 3dc 2005-12-08 15:54|| 2005-12-08 15:54|| Front Page Top

#8 None. So when you add up the value of all the counterfeits out there, that's more potential assets.

Posted by Thereth Omeresh1074 2005-12-08 16:20|| 2005-12-08 16:20|| Front Page Top

#9 So, if we are to be reassured our trade imbalance with China is covered by 'dark matter' and the dollar really is stable, why is the price of gold at record highs and Europeans buying it up? Last summer, the Malaysian PM suggested they go on the gold standard when the dollar was devalued, showing he fully expected a major correction. Economics are challenging for me, but I do hope the deficit would disappear this easily.

Posted by Danielle 2005-12-08 17:00|| 2005-12-08 17:00|| Front Page Top

#10 A couple responses, quickly ...

re: cash currency held overseas, holding $100 bills is like having 24k gold jewelry you wear all the time (as some friends of mine from Asia still do) - it's an insurance policy in unstable times. But while 3/4 of a trillion dollars is a lot of money, it isn't a huge percentage of the total dollar-denominated holdings abroad, by any means.

To put it in perspective, roughly $2 trillion of currency trades occur every day on the major exchanges.

FWIW .... ;-)

Posted by lotp 2005-12-08 21:43|| 2005-12-08 21:43|| Front Page Top

#11 Panama has an official currency, the Balboa. I never saw a Balboa note the entire 18 months I was stationed there in 1967-68. Everything was done in US$$. The British Virgin Islands also use US$$ as their official currency. It would be interesting to discover which other countries also use US currency as their official currency. I know the former Trust Territory of the Pacific nations do. Who else?

Posted by Old Patriot">Old Patriot 2005-12-08 23:06|| http://oldpatriot.blogspot.com/]">[http://oldpatriot.blogspot.com/] 2005-12-08 23:06|| Front Page Top

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