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Would the US Debt become a problem if other countries shift away from the dollar?

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Hi Cullen, what are your thoughts about countries wanting to reduce their exposure to the dollar and how do you think this might affect the US Debt?

According to this article, “The US debt and unbalances have never been a problem. Up until the world economy runs with US dollars and world central banks keep buying treasuries and the world energy markets are priced in dollars, then there is no problem. But now, because of geopolitical shifts out of the US dollar and US treasuries, this debt starts to matter. And the most likely way to deal with the debt problem for the US will be to ultimately devalue its currency, through inflation.” https://cryptodaily.co.uk/2018/01/the-mother-of-all-bubbles-no-one-talks-about/

Ofcourse this article does have a huge cryptocurrency bias because it appears to claim that the dollar is the bubble and not the former!

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Posted by (Questions: 42, Responses: 53)
Posted on 01/10/2018 9:25 AM
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Well they will need some USD exposure if they want access to a 20 “Trillion” USD denominated economy.

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Posted by (Questions: 31, Responses: 115)
Answered on 01/10/2018 3:54 PM
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The author doesn’t seem to understand why the USD is the dominant reserve currency and why foreign central banks obtain USDs. They aren’t just “sterilizing” FX reserves for fun. They are obtaining the USD because the actual economy trades with the USA in enormous quantities. So, for instance, China imports about $500B every year because we buy so many goods and services from China. Those USDs ultimately end up at the Central Bank and the Chinese govt can decide to do whatever they want with those dollars.

But make no mistake – the US economy remains an extremely large player in global trade and unless these foreign players want to do less business with the USA then they have no choice but to accept payments in USD. China, for instance, isn’t going to stop important USDs any time soon so I find these stories about foreign demand for USD collapsing to be mostly nonsense based on misunderstandings about how foreign trade actually works.

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Cullen Roche Posted by (Questions: 10, Responses: 1855)
Answered on 01/11/2018 12:05 AM
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Being from the UK, I’ve always been a bit jealous that Americans seem able to acquire vast quantities of ‘stuff’ from the likes of China in return for sending IOUs the other way. There seems no lack of demand for these IOUs – in fact the Chinese and others seem ever more keen to supply more ‘stuff’ to Americans in order to obtain more of those IOUs. I guess I shouldn’t be too jealous, since the GBP is (still, just) a reserve currency, albeit a minor one, so we can do the same to a lesser extent.

What I do find really surprising is that rather than the Chinese saying ‘enough now, we don’t want anymore of your IOUs’, it’s actually the populist President of the US trying to stop the Chinese supplying ‘stuff’ to Americans in return for the IOUs they desire and actually wants Americans to start producing and supplying ‘stuff’ to the Chinese in return for them ripping up the IOUs they already hold.

What’s even more surprising is that for this to happen, it will be the American worker that will have to stop consuming Chinese ‘stuff’ and do all this producing of ‘stuff’ to send to China , who thinks that this is a great idea.

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Posted by (Questions: 8, Responses: 99)
Answered on 01/11/2018 4:48 AM
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Savings are an export product

https://medium.com/modern-money-matters/savings-are-an-export-product-e1db780d1c1b

Yet, to see any difference between foreign sector savings and domestic sector savings. They all get treated in the exact same way just with different labels attached.

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Posted by (Questions: 6, Responses: 100)
Answered on 01/11/2018 7:41 PM
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Derek,

I would be careful using the MMT foreign sector analysis. One thing they tend to overlook is that the savings are an export product because they are accompanied by huge amounts of foreign investment. For instance, when Apple makes an iPhone they do so by hiring tons of Chinese manufacturing firms and investing billions of dollars in the Chinese economy. The Chinese are not just obtaining pieces of paper from the USA. They are getting millions of jobs and domestic investment in the process.

So, when I buy an iPhone Apple is effectively hiring and training people in China. I get a cheaper phone than I otherwise would, but who is actually on the winning side of that trade? Well, I am personally in one sense, but the USA is net losing in the long run because we are foregoing potential domestic investment. If domestic firms do not invest more to offset the loss of this investment then the USA is worse off than it otherwise would be. And that means we’re likely to grow at a slower rate because our economy is likely to be less dynamic going forward (all else equal). This should sound familiar because it's exactly what's happening in the USA.

Of course, MMT thinks it has a free lunch as an answer to this which is just govt spending and a Job Guarantee, but it’s not that simple. hiring govt workers to dig holes is not the same as Apple hiring people and training them to build iPhones. There’s more going on below the surface here. Being a trade deficit country is not an optimal position as it leaves you more fragile than your economy otherwise would be.

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Cullen Roche Posted by (Questions: 10, Responses: 1855)
Answered on 01/11/2018 8:05 PM
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Cullen, I thought outsourcing menial jobs allowed your domestic workforce to do more valuable jobs?
These numbers look pretty impressive for Apple’s domestic work force:
https://www.apple.com/job-creation/

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Posted by (Questions: 31, Responses: 115)
Answered on 01/12/2018 6:47 AM
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Cow,

That assumes domestic workers won’t do those jobs. And yes, they won’t do them for Chinese level wages, but they’d do them at US level wages. Apple doesn’t want to pay US wages though. So they outsource.

It’s not necessarily bad. If firms were investing more in the USA then we wouldn’t have a problem. But they’re not. So we’re worse off because all that excess price savings in the USA thanks to cheap imports isn’t translating into higher domestic investment.

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Cullen Roche Posted by (Questions: 10, Responses: 1855)
Answered on 01/12/2018 1:57 PM