Some OPEC members started accepting Euros as oil hit $150 and USD/EUR was 1.60. Looks like that worked out very well….regardless, everyone knew what was going on there – OPEC members were taking their dollars and sinking them right back into oil futures – then they got smoked as the herd tried to stampede through a dog door.

This is like asking.. why would anyone stop buying and flipping houses?

Supply and demand brother.. the free market always wins- as I think you know..

but you seem not to recognize that there exists a market in money, like any other good, which has been horribly manipulated by governments (not unlike housing). But, the free market always wins in any market, including money. So, what is the free market solution to money?

Export-led recoveries are for small countries and/or short periods of time only, otherwise you get self-defeating mercantilism.

The worst part for me is that I must come across like a protectionist Far from it. Trade should be mostly free as long as it’s mostly bi-directional. No people should want to become like China’s, and no country should allow itself to become the world’s import sink.

The good news for the U.S. is that the demographic implosion bomb will be much less bad in the U.S. than elsewhere. And one lesson from the current crisis is that demographic implosion is felt much sooner than previously thought, especially when coupled with the European attitude that one need not work for even 50% of one’s life. There’s no way to save for 30-40 years of retirement having worked only 30-40 years, and governments can’t do it either if too many citizens demand that deal. It just isn’t possible, I suspect, even in the best of times.

Perennial and huge trade imbalances are bad, but they are especially bad for the people of exporting countries. Those poor people work hard so importers can have an easy life and they get nothing in return — that ~$1 trillion in China’s hands? Worthless. At best they could buy 1/20th of American assets, but unless those assets perform… Not that they’ll bother. Add in inflation risk… (yeah, not today, but maybe in a decade; that trillion isn’t going anywhere, so the question of what to do with it will still be around then). Meanwhile life in China is not great.

Consider the malinvestment that mercantilism has resulted in: China has invested enormous amounts of capital in production that Chinese citizens don’t need and for which they get little in return. Meanwhile importers have invested badly as well: in excess real estate for example (c.f., the U.S., Spain, …), and they have lost production capacity, leading to unemployment. If all these countries could form an ideal single currency zone (the way the American States do) and markets were reasonably free (but I repeat myself) then it wouldn’t be so bad: people would move where the jobs are and production would adjust more quickly to demand. But there’s zero chance of that (witness the EU). This can only lead to misery all around. One wonders at what point the Chinese people will rebel. Americans don’t like exporting manufacturing, but at least the almost-free imports make the consequences more tolerable. This modern mercantilism will die when the Chinese people decide to have better lives for themselves.

I’m a total newbie in economics, but isn’t the fact that the Dollar is the world’s reserve currency a key reason why US debt will find a market of willing buyers? Clearly, it helps when other sovereign debt issuers are perceived as more risky. The US wins the bond beauty contest by most measures.

But what is the role played by the Dollar as reserve currency? It seems to provide a critical advantage to US treasuries no matter how many trillions are floating around out there and that is why foreigners will keep buying US debt.

The question that occurs to me is: can you imagine a scenario where the Dollar loses its reserve currency status aside from profligate spending and massive debt build-up and continuing recession, etc? This might be a geo-political development, for example. I recall that some countries were pondering the possibility of repricing oil in Euros a while back. That’s likely not in the cards now, but I wonder if something like that could occur. The idea of a IMF-style currency basket has also been floated to replace the dollar.

Keep up the good work, TPC.