Godwin and the Greenback
Paul Krugman, NYT
Oh, dear. I’m starting to notice a shift in the scare talk. Cries that we’re about to turn into Greece, Greece I tell you are getting a bit fainter, maybe because of what I’ve been writing. But taking their place are dire warnings that we’re endangering the dollar’s role as a reserve currency.
Urk. People who talk like this generally have no idea what they mean — that is, they have no idea what the dollar’s role really is, what might endanger that role, and why it matters (to the extent it does). In fact, I’d suggest that there’s almost a Godwin-like principle here, which is that any extended economic discussion ends up with people invoking the need to defend the dollar’s international role — which is in effect a concession that they’ve lost the rest of the argument.
So, what is the dollar’s international role? It is, in a sense, to other currencies the way money is to other assets, filling to some extent the classic three functions of medium of exchange, unit of account, and store of value. In talking about these roles you also want to distinguish between the role in private decisions and the role in official actions. So you get a matrix that looks like this:
The dollar is, first of all, a vehicle currency (mainly in the interbank market) thanks to thick markets: if a bank wants to convert bolivars into zlotys, it will generally trade the bolivars for dollars, then the dollars for zlotys, rather than try to find someone wanting to make the reverse trade. It is the currency many though by no means all international transactions are invoiced in. And to some extent people hold dollars or dollar-denominated assets because the dollar is more liquid than other currencies.
(More here.)
Oh, dear. I’m starting to notice a shift in the scare talk. Cries that we’re about to turn into Greece, Greece I tell you are getting a bit fainter, maybe because of what I’ve been writing. But taking their place are dire warnings that we’re endangering the dollar’s role as a reserve currency.
Urk. People who talk like this generally have no idea what they mean — that is, they have no idea what the dollar’s role really is, what might endanger that role, and why it matters (to the extent it does). In fact, I’d suggest that there’s almost a Godwin-like principle here, which is that any extended economic discussion ends up with people invoking the need to defend the dollar’s international role — which is in effect a concession that they’ve lost the rest of the argument.
So, what is the dollar’s international role? It is, in a sense, to other currencies the way money is to other assets, filling to some extent the classic three functions of medium of exchange, unit of account, and store of value. In talking about these roles you also want to distinguish between the role in private decisions and the role in official actions. So you get a matrix that looks like this:
The dollar is, first of all, a vehicle currency (mainly in the interbank market) thanks to thick markets: if a bank wants to convert bolivars into zlotys, it will generally trade the bolivars for dollars, then the dollars for zlotys, rather than try to find someone wanting to make the reverse trade. It is the currency many though by no means all international transactions are invoiced in. And to some extent people hold dollars or dollar-denominated assets because the dollar is more liquid than other currencies.
(More here.)
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1 Comments:
The dollar used to be a dollar, until Bretton Woods. Now we have QE. 'Making' money will end badly, no matter how smart the feds are, you simply cannot make money out of thin air without consequences.
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