In the old days, this money was composed of specie (gold and silver). Nowadays, the money that matters is a “Reserve Currency.” The major benchmarks are the USD, Euro, British Pound, Japanese Yen, and perhaps the Swiss France. The minor currencies include the Canadian and Aussie dollars. The bottom line is that holding one of these currencies gives you a claim on the output of the economy of the country that issued the money (it is actually a credit, though actual bills are promissory notes issued by the central bank). To simplify, holding dollars, wherever you live, makes it possible to buy stuff denominated in dollars.

All fascinating topics to be sure.

The risk of having too many dollars and too little stuff to buy is the risk of inflation, and this is a risk to anyone who holds dollars and dollar denominated fixed-income securities (i.e, most bonds). It is a threat to any holder of dollars, no matter where they live.

The simplest way to minimize the value of your obligations is through rapid money creation. This is far more likely than declaring bankruptcy, which is an extremely remote possibility, however entertaining some might find the prospect.

If I were a foreign bond-holder, say the Chinese Central Bank, I would be far more concerned about the devaluation of the dollar related rapid increases in the US money supply, which would simultaneously hammer the value of my enormous dollar reserves and damage my ability to export to the US by making Chinese goods more expensive and US consumers less able to afford them. The good news for China here is, money supply in China has grown even faster than in the US (10% above GDP growth), and the Chinese will be able to avoid appreciation against the dollar.

But I think that rather than worrying about freshman macroeconomics, we should not keep our eyes on the bigger picture:

1) The US is the world’s buyer of last resort. It has been essential to the development of the rest of the world for the US to run trade deficits so that they can collectively run surpluses.

2) The US is ultimately the guarantor of the world trading system.

3) The stability of the US Government is the foundation for the world’s financial systems, and the US government is the ultimate bank. (It shares this role with the other members of the G-7).

4) The US is the world’s guarantor of security and the balance of power. It is the ultimate safe haven. People like Thomas Barnett argue that the US is a security “exporter.”

5) The US has problems, but its total indebtedness is far more manageable than those of other advanced economics, primarily because of demographics and its inherent dynamism.

6) All things being equal, I would rather play the economic hand of the US than that of any other country. (Although there is something to say for Switzerland, the scenery is magnificent, and I strongly recommend the filet de perche.)

You see some of this in the world’s reaction to the financial crisis in the demand for US Treasuries. Not only have yields fallen, but the dollar has strengthened dramatically. For example, last August 1, the Canadian dollar was more or less equal in value to the American dollar. Since then, the price of energy has collapsed, and the loonie is down 20%.

We PAY for the items we purchase. There is no bond created for that. It’s payment rendered.

I have no way to guage your actual intelligence, but you appear to have virtually no understanding of how international trade actually works. Since on international currency exists (UNies?), you can only actually pay for what you get from other countries by doing one of two things: selling goods of the same value to them, or sending them your (paper) money. Even in your own country, paper, or fiat money has the function of a promissory note; internationally, where the domestic laws that define your currency as “legal tender for all debts, public and private” do not apply, American bills function purely as promissory notes. You can only redeem these notes, once held by foreigners, in three ways:

1) Exchange them for foreign currency, which you can only acquire by selling foreigners (not necessarily the ones you buy things from) goods of value roughly equivalent to those you import, or
2) Allowing foreigners to use the money you send them to purchase assets (buildings, land, businesses, etc.) in your own country, or
3) Declaring bankruptcy.

Americans (collectively) have done each of these three things in your history.

You must think i’m stupid. Reread my question and answer it. Of course I know what positive imbalance would be. It would be me giving groceries to the grocery store and them paying me… We are more of a consumer nation because we are a very prosperous nation and THUS THE ROOT OF MY QUESTION.

John wrote, “lasted at least from the 1930s, through the great post-war boom of the fifties and sixties, until the 1970s.”

Japan and Germany and many other nations were VERY weak back then. As their ability to become a world player increased – our production as compared to the world’s production decreased. While we have nominally produced more, as compared to the rest of the world it is a smaller percentage. Should we solve this by bombing people back to the stone age again or just BE HAPPY for countries enjoying prosperity also. There is nothing wrong with MORE people enjoying prosperity. Democrats and leftists like to reduce the common denominator and bring everyone down in prosperity with their policies. Conservative policies allow more people to prosper.

John without understanding of what trade is wrote, “When you run a long term trade deficit, you can only finance it,”

Nope. I don’t finance anything with the grocery store. And as we are a prosperous nation we don’t finance the good from other countries except maybe cars. Our prosperity took a hit because of the leftist policies of teaser interest rate home loans targeted to help more people who couldn’t afford a home get into a home (ala Dodd, Obama, Frank) but yet people want more leftist policies??? Crazy…

John cleary showed his misunderstanding with the following, “Other countries collect these promises as bonds.”

No. This John is the result of FEDERAL spending and borrowing. Not the trade imbalance. Your understanding of economics is severely limited if you can’t understand what trade and purchasing power of Americans means in the world market. We PAY for the items we purchase. There is no bond created for that. It’s payment rendered.

Mixing things up and then continuing to post like this does not persuade anybody but does make us chuckle.. 🙂

How in the world would we have a positive trade imbalance with the rest of the world ??

Normally, you have a positive trade imbalance when you sell more to other nations than you buy from them, a situation that, in the case of the United States, lasted at least from the 1930s, through the great post-war boom of the fifties and sixties, until the 1970s. Following the oil shocks of the 1970s, the value of American imports began to outpace the value of exports. As of 2005, the value of American imports exceeded exports by over $700 billion, or about 5% of total US GDP.

When you run a long term trade deficit, you can only finance it, which means, in effect, that you promise to pay in the future at a higher price. Other countries collect these promises as bonds. They can also use the promisory notes to buy American productive assets. In the latter case, control of American production passes into foreign hands. This can have economic consequences, as firms from other countries increasingly take ownership of discoveries made in the United States, and exert control over American production.

Think of it as a ‘trade imbalance’.

If you persist in calling it a deficit then it shows your misunderstanding more than anything.

We are a prosperous nation. How in the world would we have a positive trade imbalance with the rest of the world ??

A deficit is what happens when the federal government spends more than it takes in. Our country has been spending about 23+% of GDP while only receiving in revenues about 20% of GDP since 1974.

THat can’t go on without end. They need to reduce spending.

Big government (liberalism) needs to pass away and not come back.

This Generational Theft Act that Obama is trying to push is just about criminal. And it will be his legacy.

Sorry for the unintended exaggeration, I miscounted zeros early in the morning (still get up at dawn to go to work); However, at about 35k a crack, the bill for those “makework” jobs alone will be well in excess of 2 billion+ per year (is my math still off?). Incidentally, are these 600,000 jobs actually the new domestic security corps which both Obama and Rahmbo have alluded to prior to the growing crisis? Interesting the coincidence in timing and rhetoric; Just exactly what are 600000 very modestly paid federal employees going to do, that the private sector couldn’t better accomplish? Events look more and more suspicious as the dems unfold their plans for us…

http://pajamasmedia.com/richardfernandez/2009/01/09/preventable-diseases/#more-1802