Tuesday, April 26, 2011

A Krugman Post That FLG Completely Agrees With

Paul Krugman:
So, what does America gain from the dollar’s special status? One clear gain is that foreigners are holding a lot of pieces of green paper with dead presidents on them — maybe $500 billion worth. That’s in effect a zero-interest loan; in normal times, when short-term interest rates are 4 or 5 percent, it’s worth something like $25 billion a year. Nice, but not a big deal in a $15 trillion economy.

FLG immediately thought of another potential benefit, but Krugman addressed it:
it could be that purchases of Treasuries by foreign central banks keep the dollar stronger and interest rates lower than they would otherwise be. The way to think about this is that Chinese reserve accumulation (say) is a sterilized intervention in the dollar [i.e., one that isn't allowed to affect the money supply]. In general, we tend to think that sterilized intervention is only modestly effective, because it tends to be offset by private capital moving the other way. But maybe there’s something there.

It’s really hard, though, to see how the benefits of the dollar’s reserve status could be more than a fraction of a percent of GDP. It’s not a trivial issue, but it’s not among the things that should be a key driver of economic concern.

No comments:

Creative Commons License
This work is licensed under a Creative Commons Attribution-No Derivative Works 3.0 United States License.