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Comment by mercy_dude | Hacker News Reader

Assuming US can print any value of USD out of thin existence as they have done multiple times in last 20yrs, it doesn’t matter for them whether they later buy in the oil to fill the reserve back at 40$ or 400$.

Key issue here is that we are seeing hard assets especially commodities being repriced in USD after a steep cycle. The winner here, as always are gulf countries flushing with cash as they are the real owners of the hard commodity assets. And the losers are developing and emerging market economies with poor FX reserves (as we have seen with Sri Lanka, Argentina etc). Pakistan could save 2.26B rupees since last April by trading oil in rupees instead of dollar [1]. The real monopoly in this world is USD hegemony and it’s once again developing economies who will bail out the monopoly paying steep prices for import.

[1] https://adamtooze.substack.com/p/chartbook-153-the-south-asi...

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I want to offer an alternative to a couple of commentators bringing up inflation rates:

We have identified a real-world, physical problem (look in the big tank, no oil).

The proposed solution here is - and I think this is a fair paraphrase - "well we can print money and people will trade oil for that".

This is an almost absurdly high-risk assumption. Financial solutions might just not work to fix physical problems. That sort of plan is pretty close to an endgame where the US will collapse because it no longer has the energy to sustain complex society. If there is a day where the US needs the strategic reserve - which we haven't seen yet - money will not solve the problem. That is, in fact, the reason why there even is a strategic reserve instead of a JIT strategy.

The accountants might recognise it through inflation or some other metric, but attempting to execute this plan could literally involve hitherto unknown catastrophe in the US, like being invaded or mass starvation. One of those things that is supposed to happen only in other countries.

Good thing, then, that the politicians who engineered this collapse will all be dead and gone by the time their children have to live through it!

I think you are mistaken with how long before this is going to happen. Europe is already experiencing the effects and this winter will feel the full effects of this. The US is probably got a bit more time... but Russia, China, India, etc are working on bypassing the US Dollar for their trade, reducing the amount of trade that occurs in US Dollars. As for reserve currency status, the politicians have also made the US dollar more unfriendly when they froze the Russian Central banks reserves. This will result in other countries reconsidering where they store their wealth.

If your solution to USD being restricted is to trade in CNY you‘re in for a rude awakening.

CNY does not freely flow across the Chinese border, and the government will not hesitate to put strict capital controls to limit inflows and outflows. The government knows that this prevents it from being used as an international reserve currency, but they would rather keep stability in the Chinese economy.

What exactly do you mean by "flow across the Chinese border"? It's my understanding that all electronic USD are in the USA, either directly in the central bank or indirectly through another bank which has an account in the central bank. They can't actually flow out of the country, except as cash.

China controls the use of CNY to buy non-domestic things, particularly foreign exchange. Domestic companies and savers‘ “movement” of the currency is tightly controlled, and the government has immediately tightened the screws on everyone before.

USD is not controlled in this manner, which makes it pretty easy to obtain. One of the important features of a reserve currency is easy obtainability and convertibility, but this runs counter to China’s internal stability goals.

That's why China created the Digital Yuan for overseas trade.

Digital Yuan are currently not approved for international use. And they seem to be subject to the exact same Chinese capital controls that traditional CNY are subject to, if I’m not mistaken.

Except there is plenty of oil all over the world flowing, and sellers eager for USD. The “big tank” can be filled still, with an endless supplies of USD, and it’s no where near empty now.

The bigger issue IMO is that over the last couple elections we’ve seen politicians trying to buy votes. Trump cut taxes, then delayed their payment, then wrote stimulus checks, and now Biden forgave student loans and is spending US oil reserves to keep gas prices low until *checks notes* November.

That has been true for decades it might not be true right now - otherwise why is the US running down its strategic reserve?

Obviously the Americans don't believe they can print money and exchange it for oil - or they would do so. Paper for oil is a much better trade than running down the strategic reserves. Their relationships with a lot of the top 10 oil producers range between highly competitive to low-intensity war.

> otherwise why is the US running down its strategic reserve?

Because it keeps domestic oil prices low which keeps an electorate happy. The government can’t force OPEC to pump more oil at a low price nor can they set prices, but they CAN increase oil supply on the market through reserves.

That sits in conflict with the idea there are lots of people who want to sell the US oil though, does it not? They don't. The US dollar isn't exciting enough for them to go out and pump oil. It isn't obvious that the US firing up the printing presses would suddenly make them excited at the thought because it isn't like that gives them a better deal. The US has the same capability to get them goods, services and assurances before & after the printing.

And unless the electorate are very stupid (an option, I suppose) they will note that at some point they will be paying even higher prices if the SPR is refilled. It'll be even worse than it would be right now.

> They don't. The US dollar isn't exciting enough for them to go out and pump oil.

They do, in fact, pump oil for US dollars right now. They obviously have an incentive for prices to rise, and they’re a cartel. OPEC colluded to raise prices.

Of course, we also have treaties that say when the do sell their oil it’ll happen in USD.

> they will note that at some point they will be paying for even higher prices

Yea but that’s ok when it’s not an election year and inflation isn’t raising other expenses. Or, just play chicken and hope that you can last until the next political party takes office, then they look bad for raising prices.

> it will be even worse

Not if it’s done slowly at a time when the demand is lower or supply is higher.

> exchange it for oil - or they would do so

ostensibly this is what's going on. when citizens and corps receive stimulus or other breaks, they buy petroleum products that floated over on a petroleum powered barge, were driven to a hub by a petroleum powered intermodal freight transport, trucked via petroleum products to the retailer where the consumer drives a petroleum based and often still petroleum powered vehicle to go and make their purchases of petroleum made plastic products.

Petroleum is in everything. If you print american dollars, it will eventually end up purchasing petroleum products many times over in the lifetime of those dollars, whether they be paper or digital.

Ummm, have you been reading the news this past year? Maybe any other time in the last 20 years the US could print money without worry, but the federal reserve is currently trying their best to reduce the money supply to fight run away inflation.

America's option to print it's way out of economic crisis will not be available again until inflation is under control

That was exactly my point though. The way you “fight inflation” is you raise the rates and that means all currencies pegged to yours must raise their rates at the same pace no matter what their economic conditions are like or they get destroyed in FX market. Look at right now EUR, GBP or YEN. The way Fed fights inflation is nothing but rest of the world (mostly developing world) pegged to your dollar monopoly bailing you out. And that inevitably requires hard commodity asset repricing.

Europe is having massive inflation to (also did quantitative easing), so of course if the US tightens rates the EU would have to tighten as well to maintain exchange rate parity?

It has nothing to do with US dollar dominance, this interrelationship also happens with non-dominant currencies as well.

Agree Europe is a different story altogether- their currency free fall against Dollar is more to do with the mixed signal ECB is sending by still having to buy Italian and Greek bonds that find no other buyers AND at the same time trying to do a rate hike. And that is at the backdrop of a cold nuclear (potentially) winter.

> It has nothing to do with US Dollar dominance

Say that to Sri Lanka, Bangladesh, Pakistan, Iran, Argentina or literally any other developing currencies out there.

It's very simple, the US did the most easing due to the "exorbitant privilege" and so has the strongest economy coming out of the pandemic and so it can afford to raise rates the most and so it exports its inflation to other countries via the FX market.

The Fed is trying that for now, but even they know it's not going to work. Inflation today is mostly caused by goods supply issues (supply chain, Europe's energy crisis because of tensions with Russia, lingering impact from Covid on manufacturing), not monetary policy.

Inflation is a monetary phenomenon. -- Friedman

Then we're not experiencing inflation, just an increase in the price of the vast majority of consumer goods based on non-monetary reasons.

The way you can tell it's not inflation is if there is corresponding deflation when those non-monetary reasons disappear.

The way you can tell it IS inflation is to chart the M1 money supply.

https://fred.stlouisfed.org/series/M1SL

Citation needed. It’s the covid era monetary and fiscal policy that screwed us.

Is it just a coincidence then that the rest of the world is experiencing the same (or worse) inflation? And do you think the shortages of things like computer chips, and the increase in price of natural gas because of Europe's new imports have no effect on prices in the US?

But the rest of the (developed) world largely reacted in the same way to covid. You'd expect the impacts to be largely similar too.

> It’s the covid era monetary and fiscal policy that screwed us.

Citation needed ;)

But maybe it’s both. And maybe it’s complex. Maybe we’ll never know.

Housing prices and liquid asset prices seem very correlated to covid lockdowns amount wealthy people who couldn’t spend and 0% interest. Much of that asset pricing has reverted now. But stimulus checks and other often cited welfare benefits went mostly to grocery stores and supplanting income that was lost.

The rise in consumer goods prices is due to supplies chain issues like a war and sanctions on an oil producing nation and (my hypothesis) a desire for businesses to raise prices to raise profits to account for declining stock price and changing post pandemic spending patterns.

Of course it's going to work, regardless of the reason for inflation. Lower demand and prices will come down. Neutral stance monetary policy is meant to grow the supply of money at the same rate as the economy grows in the long run (+2%), so if there is inflation beyond that it means the money supply is growing too fast for the capacity of the economy to produce, even if that's due to other reasons. Neutral stance monetary policy does not live in a vacuum and the target never stays the same, so I don't know what you mean by inflation is not caused by monetary policy. It's monetary policy being run incorrectly for the circumstances.

Assuming US can print any value of USD out of thin existence

Based on events this year it would appear the US can’t do that with some pretty severe domestic consequences?

Arguing the MMT line in the middle of an inflationary bust. It's a bold strategy Cotton!

> Assuming US can print any value of USD out of thin existence as they have done multiple times in last 20yrs

The US doesn't do that. You're probably confusing the increase in the US debt with money supply. So long as the economy grows (as it has over the last 20 years) then the debt is not a problem

Everything goes up forever until it doesn't. Japan hasn't recovered from highs like 30 years ago.

One reason foreign debt may not matter is because when you have the most powerful military in the world, some of the most fertile land (food), natural barriers (defenses), and cultural hegemony (arguably America's real export, and English is like a virus) who is going to make you repay it and how exactly?

> who is going to make you repay it and how exactly?

people are used to thinking of personal debt which they need to repay.

Corporate debt is not repaid, the %age is considered part of the "capital structure" of the company. It's a type of ownership, equity holders own the frothy top of the company, bondholders own the underlying assets at the bottom. As corporate bonds are repaid, new bonds are issued, renewing the debt. The fixed %age interest payments on the debt are a cheap way for the equity holders to increase their profits.

Government debt is more in the category of corporate debt, repaying it is not part of the plan, the goal is to move future spending into the present for long term infrastructure projects, etc. And as long as the economy grows so the debt percentage stays manageable, it's not an issue.

Thanks for the well-reasoned response. I hadn't considered that angle and have to think on it.

But if growth stops..

> And as long as the economy grows so the debt percentage stays manageable, it's not an issue

What happens when it stops growing? Italy, Greece, Japan want to know. China and the US could use the info for later too.

Companies who roll their debt are about to hit a world of pain. The US treasury interest rate dictates just about all other rates, and it has more than doubled since its lows.

All of the folks decrying high corporate profits are about to get their wish, as interest and inflation will begin to eat into those profits.

At least, that’s my guess as to how the next few quarters play out. Who knows what happens afterwards?

As for governments being somehow immune from the physics of economics, I’m a skeptic. It takes longer for government-scale economics to play out. It’s like climate change in a way. My guess is it’ll play out, and we won’t like the consequences, but it’ll be too late to fix things by the time we’re really grappling with them. We’ll know who’s right in a few decades.

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