Originally posted by KazetNagorraI'm rather less than expert but it's interesting to have a go.
How exactly does not being the world reserve currency trigger hyperinflation?
Supply and demand. If there is less demand for the currency, then its value falls in relation to alternative currencies. This will result in the need to charge more in dollars for exports and pay more in dollars for imports. Hence exports will earn less (less competitive) and imports will rise in price.
However, I am not sure that the US is as reliant on exports as many other economies and America has more capacity to substitute US made products instead of imports. So on one level, arguably it will have a protectionist type of impact and benefit US business more than it harms it.
Then again, much of the currency is held in the form of government bonds - when the US wants to fund its deficit, it has to sell its bonds and it is foreign buyers who buy most of these. If they stop, then it will have to pay far higher interest to raise loans - the Greek and Italian and .....scenario. Not widely considered desirable. So Government spending will have to crash. That in turn will suck demand out of the American economy and result in recession and deflation. Nirvana for the Republicans of course.
If other currencies took up the role of reserve currency (ies) then presumably Americans would have to buy them as well, not least the multi nationals based there. That might escalate the impact further. Even Americans would be selling dollars. That's global markets for you - patriotic it is not.
I don't quite see where hyperinflation comes into this. Would it not be deflationary?
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In theory I suppose. "Money" is really just a fiction, and always has been. It's a measure of exchange, but we try to turn it into more with gold standards, etc. The fact is that currency represents only a tiny percentage of the "money" (ie. purchasing power) at any given moment, and most of it is actually outside of the country.
It could lead to inflation. It could also lead to deflation, depending on the circumstances. And it could have very little effect at all.
Originally posted by finneganI'm not sure my macro-economics is still 100%, but I think I spot some problems in you analysis. For one, a falling dollar would stimulate exports, as the price of products will fall in foreign currencies if the dollar price remains stable. The increased demand for American products will increase prices for American products (in dollars) in the USA itself, increasing inflation.
I'm rather less than expert but it's interesting to have a go.
Supply and demand. If there is less demand for the currency, then its value falls in relation to alternative currencies. This will result in the need to charge more in dollars for exports and pay more in dollars for imports. Hence exports will earn less (less competitive) and imports will ...[text shortened]... t.
I don't quite see where hyperinflation comes into this. Would it not be deflationary?
You're right on the second count a falling dollar will make imports more expensive, adding even more inflation.
A falling dollar will be good for producers in the USA, but bad for consumers due to the increased price.
Your point that if the dollar stops being the reserve currency it will adversely impact the government's finances could be true though, and the resulting fall in government spending would have a deflatory effect.
All in all, it will depend on the size of both effects, so it's something that's very hard to judge for someone who is not an expert in macro-economics.
Originally posted by BartsI would trust your analysis more than most self described experts, like Tim Geitner, who can't figure out how to use Turbotax.
I'm not sure my macro-economics is still 100%, but I think I spot some problems in you analysis. For one, a falling dollar would stimulate exports, as the price of products will fall in foreign currencies if the dollar price remains stable. The increased demand for American products will increase prices for American products (in dollars) in the USA itself, inc ...[text shortened]... 's something that's very hard to judge for someone who is not an expert in macro-economics.
Originally posted by whodeyIt could, but the hyper inflation's cause is already out there, and loss of the reserve currency would only be a possible trigger, among many others. The cause of an avalanche is massive snow drifts on the mountain side. It is probably going to come down, regardless of what triggers it.
Here is a question for you kids, if the US dollar ceases to be the world's reserve currency, wouldn't that triggor hyperinflation in the US?
The cause of hyper inflation is too many dollars being created out of thin air.
Originally posted by Bartsa falling dollar would stimulate exports, as the price of products will fall in foreign currencies if the dollar price remains stable.
I'm not sure my macro-economics is still 100%, but I think I spot some problems in you analysis. For one, a falling dollar would stimulate exports, as the price of products will fall in foreign currencies if the dollar price remains stable. The increased demand for American products will increase prices for American products (in dollars) in the USA itself, inc ...[text shortened]... 's something that's very hard to judge for someone who is not an expert in macro-economics.
So a dollar is worth five pineapples today. Tomorrow, the dollar price falls and it is worth only 3 pineapples. Then a one dollar product costs less if priced in pineapples. You are right about exports being more competitive then.
Equally, pineapples are now more expensive, so imports cost more. We can only buy 3 instead of 5 for a dollar. Domestic products are more competitive than before.
American producers may maintain prices to get market share - presumably as far as they have spare capacity to meet the increased demand. Alternatively they may increase prices to reflect greater demand and improve profitability. In any case, depending on the product, they may be less willing to invest in new capacity and more swilling to take the increased prices.
Confusing stuff.
Originally posted by normbenignOr too many dollars coming home because foreign countries are using them less. The world reserve currency is able to export inflation. A reduction in the world reserve status would have the opposite effect.
It could, but the hyper inflation's cause is already out there, and loss of the reserve currency would only be a possible trigger, among many others. The cause of an avalanche is massive snow drifts on the mountain side. It is probably going to come down, regardless of what triggers it.
The cause of hyper inflation is too many dollars being created out of thin air.
That would cause inflation, but not necessarily hyperinflation. That depends on how fast it happens.