January 13, 2002
From the desk of Mindles H. Dreck:Dollars Held Abroad
Steven Den Beste makes some interesting observations about dollarization. Among them, he wonders whether an increase in dollars held abroad could be inflationary. The short answer is probably not, as long as the central bank pays attention to the changes in demand for dollars and has the resources to act.
The problem of dollar reserves kept elsewhere has been with us for a while. For a long time the Eastern block countries' black markets were dollar currency markets, and this formed a permanent part of the most restrictive definition of money supply (M1). It's akin to the part of the money supply sitting in safes, mattresses and penny jars around the country. It's out there, it's hard to quantify, but it's velocity in our economy is low to negligible.
Oops - "velocity". As important as the actual supply of currency is how fast it moves, or how many transactions are made with it in a given period of time. Additional money is only inflationary if it has some velocity. The gold in Fort Knox doesn't reduce the value of gold in circulation much because it isn't circulating. If you buried a trillion dollars in the ground where nobody could get it, you'd need another trillion dollars to keep the value of the dollar constant (all else being equal, the economist says). Force = mass times acceleration, if you will.
Back to Steven's point. If the demand for dollars abroad suddenly changed, if we stopped exporting dollars, then the Fed would have a money supply problem. The value of the dollar in trade would decrease, which is inflation, by definition.
Have you noticed the piles of freight containers springing up in seaports around the country? There's a pile the size of a fallen skyscraper just off the turnpike extension bridge in Jersey City. It's there because goods are shipped here, and it's too expensive to bring the empty containers back (they would be empty because we aren't sending goods the other way). They just buy new ones abroad. So shipping containers are approaching "negative cost" - they will pay you to take them away. Some of them are even being rented as temporary office space (yuck). There's a business in here somewhere.
If foreign countries ever lost their appetite for dollars (if, for instance, they converted to Euros as a reserve currency), the Fed would have to be able to mop the dollars up like those freight containers. Right now they have plenty of resources to do so. Which is one of the reasons, ironically enough, that the bucks aren't coming back.
By the way, did you know that those Coinstar machines have actually materially changed money supply by putting those penny jar collections back in circulation? The Philadelphia mint has layed off a bunch of people and they aren't making pennies anymore, or so I've heard.
Posted by Mindles H. Dreck at January 13, 2002 11:10 AM | Technorati inbound linksDear 'Mindles', before we had the floating currency regime, these countries could repatriate the dollars at the Fed's gold window. The closing of that part of the feedback loop was what led to the inflation of the 70s, as the Fed printed money to meet monetarist targets.
Foreign banks were able to simply shove the excess dollars back into the US banking system in return for gold. That's basically why Nixon took the US off the gold standard, because he wanted to use monetarist ideas to boost the economy.
Right now the situation is as you describe it, and the Fed has to try to measure all the supplies and velocities with massive research to decide whether to print or not print. It all operates on the basis of Greenspan's ideas and instinct, and even somebody who is able and experienced is bound to be wrong on one side or the other.
Posted by: Eric Mauro on January 13, 2002 12:55 PMComments are Closed.