[quote=jficquette]You can control the value by the interest rate you pay and manipulate the relative strength against other currencies.
If our debt was denominated in Euro’s then that would make things different.
John
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John, you are subscribing to the same error as Paulson and Bernanke, that the US is so powerful that we make the rules for the entire world. That isn’t true. We do not control the interest rate we pay on debt. Treasuries are bought and sold on the open market, and if foreign holders of our debt cease buying new bond issues and dump their current holdings, the price of that debt will plummet and the yield will spike. Likewise with the exchange rate. If countries that export to us are no longer willing to accept the glut of our dollars for their goods, the dollar will weaken. Our government can try to influence things, by encouraging other central banks to print as fast as we are, or by buying our own debt with newly printed money, but these actions all have side effects beyond the government’s control.
Also, our debt is effectively denominated in Euro’s, and Yuan, and Rubles. With our trade deficit, we buy goods priced in other currencies. We must exchange our dollars for those currencies. This puts too many dollars in the hands of foreigners, with nothing to buy with those dollars. Really, about all there is to buy with that glut of dollars is debt, treasuries and mortgage backed securities. But the debt is only valuable to a foreigner if they can redeem it eventually for a greater amount of purchase power in their own currency.
Let’s say, for example, that I’m a European and I make a product that sells for 1000 euros. I sell it to you, an American. I can require that you buy euros first with your dollars and pay me in euros, or I can accept your dollars and try to find something to buy with them. Let’s say I do the latter and I buy a 1-year US treasury with the dollars you paid me. (Or if you like, you buy 1000 euros and the forex guy who sold you the euros buys a bond with your dollars. Same end result, but let’s say I took the dollars to keep the example simple.) In a year, I want to exchange my treasury back into euros since everything I normally buy is in euros in my home land. But if the US Fed has printed lots of dollars in the last year, and, even after receiving interest on the bond, the exchange rate is such that I only get 900 euros back, the US has effectively defaulted on 10% of the loan as denominated in euros. In the future I am likely to charge you much more in dollars for my product (inflation), and/or not buy US debt without requiring a higher interest rate for default/dollar-debasement risk.
In short, I hope that example illustrates that the government doesn’t control the game. We are at the mercy ultimately to our foreign creditors and holders of our excess dollars.
