Skip to main content

View Diary: New: concern trolling the euro (241 comments)

Comment Preferences

  •  the limits of the concept of reserve currency (6+ / 0-)

    I see the following idea that has a limit: a country can have a big trade surpluss for a very long time without adverse consequences because the proceeds can be safely kept in the reserve currency and accessed after many years when needed.

    Adverse consequences occur when suddenly what looked like assets is a bunch of computer printouts.  Clearly, small surpluses can be always located somewhere, but if you want to park, say, 10%-20% of global GNP somewhere abroad, you need some huge capacity for absorbing the "excess savings".  The assets denominated in the global reserve currency provide such a safe parking space.

    Except that there is a limit.  Euro is strong precisely because it cannot be used in that manner, as the balance of savings and consumption within Euro zone is rather close.  USD provides the "parking space", but when exporters use it more and more, they loose the safety.

    During 70-ties so-called "third world" countries provided a safe zone for parking excess surplusses, until assorted countries went more or less bancrupt during 80-ties.  So the exporters got wiser and sticked to assets located in the zone of the reserve currency.  Which was a good idea, but again, there are only so many trillions of dollars that USD zone could absorbed without unreasonable risk.

    To me, the most interesting thing is what the oil exporters will do.  A lot of them have exports about twice larger than imports.  No problem if the excess is safely located somewhere.  Otherwise, it can be wiser to decrease the volume of exports, perhaps by "neglecting the investments to replenish production capacity".  You neglect invesments -- you spend less, and you have oil in the ground.  Tomorrow, if needed, you can borrow against that reserve in the ground, make the investments you currently "neglected" and sell that oil.  If the prices are not going down, there is no ruch to sell.

    In this way, the combination of peak oil and a narrow concentration of oil reserves can lead to steeper production cuts then "normal models" would predict.  Before peak oil, the oil that you haven't exported yet can be less valuable tomorrow when the competion will join exporters of today, so you better be diligent about pumping whatever you can.  After the peak, you should relax, otherwise you exchange your non-renewable assets for computer printouts.

Subscribe or Donate to support Daily Kos.

Click here for the mobile view of the site