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Comment by mooreds | Hacker News Reader

Note that actually, being a reserve currency isn't all that great, as you cede some control over your local economy. See http://blog.mpettis.com/2014/10/are-we-starting-to-see-why-i... for more.

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Respectfully, I must dissagree.

My country (USA) has benefitted hugely by being the reserve currency: effectively being able to generate money by fiat with lower chance of this causing inflation because other countries buy dollars and hold them in reserve to buy oil, etc.

I expect the economy in the USA will take a small gradual hit over the next decade as we lose (mostly exclusive) reserve currency status.

Weakening currency and a bit of inflation would be great for most people in the US, reducing unemployment, strengthening US experts, and reducing debt load for all the folks struggling to pay off their mortgages and student loans. Prices on imported goods would of course rise a bit, but prices on non-tradeables like healthcare, housing, and education would probably stop rising so fast, or might even drop a bit. For the last few years now the US has had too little inflation (this year it’s stuck close to 0%), and too strong a currency. Getting inflation up to about 2–3% annually (the Fed target is 2%) would be great.

This is nonsense. By that logic every country should continuously weaken it's currency in order to gain an advantage. So we would get caught in a descending spiral of every country constantly trying to have a weaker currency relative to its trading partners. If the USD weakened, which other currencies would strengthen and how do you think those other central banks would react?

Well obviously if everyone races to weaken their currency as fast as possible, that causes a lot of instability. A weaker currency hurts lenders and the wealthy, and drives up consumer prices, so it’s not some infinitely applicable strategy that can be endlessly pursued by everyone.

But the point is, the US dollar has been kept “artificially” strong for a good while now, which goes along with a structural trade deficit, current account deficit, low domestic savings rate, unemployment, rising prices of non-tradeable goods, and struggling US export industries. On the other side, countries with artificially weak currencies like Germany or China have had high domestic savings rates, trade surpluses, current account surplus, etc. This kind of imbalance builds up pressure over time, and isn’t stable in the long term.

> By that logic every country should continuously weaken it's currency in order to gain an advantage.

It might be an advantage for most people in the country (at least in the short term), but it would be a disadvantage (even in the short term) for the people with the most wealth, and, perhaps more specifically, for the people with the most power over monetary policy.

The advantages (particularly in the near term) that countries get from weakening currency is why the people who loan them money have come to insist than monetary policy should generally handled by independent central banks that are, while generally accountable in some way to government, also somewhat insulated from political pressure from the rest of government (and, often, with direct influence from the financial industry.)

You're missing the point. Every country would like to have a weak currency in order to boost exports. However every country can't have a weak currency simultaneously; it's mathematically impossible. If the USD weakens then other countries will respond by weakening their currencies in a race to the bottom.

We will be better off in the long run by not playing that game. Keeping the currency fairly stable helps to encourage long-term economic growth by allowing businesses and consumers to plan ahead. That's better than chasing a quick and unsustainable boost in exports through devaluation.

Can you explain how "weakening our currency" isn't equivalent to making us poorer overall? What's so bad about a strong currency?

A weakening currency is probably aimed to boost exports.

I think in theory, say the US Dollar weakens, everything appears cheaper, exports increase. US companies will then be able to employ more people within the country and thus improves employability and domestic consumption.

It makes us poor overall, if we consume imported products, travel internationally, and if the economic plan fails in which employability and domestic consumption does not increase. This can happen when other equally competitive countries counter by de-valuing their currency as well.

I'll give it a shot. If the U.S. dollar falls 30% against the Euro, suddenly Tesla cars are 30% cheaper for rich Frenchmen to buy. Maybe now the company makes a nice profit and goes on a hiring/investment spree instead of struggling to survive. Similarly for Boeing jets vs. Airbus jets, etc.

Mark, that's a good point. However, I don't know how much of the world's dollars are used to buy goods that are priced in dollars, but I suspect the holdings of the developing countries to defend their currencies dwarf the amount used to buy such goods. From http://usgovinfo.about.com/od/moneymatters/ss/How-Much-US-De... foreign governments own $4.5T of the US debt.

Yearly world trade is around $37T, of which around 60% is done in $US. So, no.

As of 2012, it was actually ~40% (half of 84%), but your point still stands: https://www.wto.org/ENGLISH/res_e/reser_e/ersd201210_e.pdf

That guy is seriously confused. He seems to be referring to sectoral balances but doesn't realise that having the USD as the international reserve currency is what has allowed the US to consistently run trade deficits (where importing is a benefit to society and exporting is a cost), that the US government does entirely determine the ability of the US private sector to save USD and is able to pursue full employment because it is a sovereign currency issuing government, and that foreign central banks can only buy US treasury bonds in USD, and mostly do so with reserves earned by exporting to the US, with interest being paid in USD. The entire article is like economic sounding gibberish.

I've been following Mr Pettis for a while. I don't have a degree in economics, just a few classes and an interest. I like how he argues from identities, but can't vouch for his methods in the greater economic landscape.

I'm not sure I understand all of your argument, but would be interested in your counterpoints to point 6 of his appendix on that post. Perhaps he's missing some of the benefits of a reserve currency that you espouse.

Point 6 in his appendix is in counterpoint to his own article in that it states the benefits to the US of the USD being the international reserve currency. Wilson and Riley's article is accurate! However they fail to mention that US denominated debt is simply an instrument for controlling the overnight interest rate target, rather than a borrowing operation used to fund government spending (ie. it's not really "debt" at all) and that the US government has the capacity to pursue full employment because it runs a sovereign, floating exchange rate currency which gives it maximum domestic policy space. Wilson and Riley correctly state that running a trade surplus is a disadvantage to the local population in that exporting everything increases costs to local consumers -- exporting is a net cost, importing is a net benefit.

For more on this see:

Introductory video: https://www.youtube.com/watch?v=i35uBVeNp6c

Book that describes everything in detail: http://www.amazon.com/Modern-Money-Theory-Macroeconomics-Sov...

The Pettis post under discussion in this subthread is straight-forward analysis according to standard textbook models of international trade. Everything he says is right out of an intro undergraduate course on the subject.

I don’t understand why you find it confusing. Perhaps you could elaborate a bit? (Admittedly, this stuff is clearer when spelled out over 100 pages of a textbook with a bunch of examples, clear formulae, and discussion of competing theories, vs. condensed into a blog post.)

Wilson and Riley’s argument is pretty hand-wavey, full of entirely unsupported assertions. (Which is fair for a very short blog post, I suppose, but isn’t very convincing.) I’m not sure what they have to do with “Modern Money Theory”, which from what I gather in a quick web search disagrees sharply with their analysis.

I don't find it confusing, I find that the man is confused about economics. I already listed the main points in my post above, although admittedly this stuff is clearer when spelled out over 100 pages of a textbook with a bunch of examples, clear formulae, and discussion of competing theories versus a post on Hacker News[1]

MMT agrees with most of the points Wilson and Riley make (ie. that exporting is a cost and importing is a benefit, referred to in the article as "Seignorage", and lower transaction costs) but they're incorrect on the notion that one of the advantages of being the reserve currency is the ability to "run up huge amounts of debt at low interest rates" -- the US doesn't need to borrow US dollars, it creates US dollars. If they're referring to the advantage in being that the US private sector has been able to borrow US dollars from foreigners cheaply, then maybe that's a benefit I'm not really sure but they could just as easily have gotten that money from other banks with accounts at the Fed anyway (so long as there was sufficient cash reserves to satisfy the demand for dollars!)

[1]http://www.amazon.com/Modern-Money-Theory-Macroeconomics-Sov...

Read his book The Great Rebalancing. There are pros and cons to it, whether you think it's an overall positive or overall negative likely depends on who you are and what interests you seek.

One thing I've learned, most people do not understand international trade or the balance of payments.

One thing I've learned: most people do not understand even the fundamentals of how money or the economy work on any level (including most economists, and most people who work in banking, finance and government). The level of ignorance is astonishing, at all levels.

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