You know what else can't be good?

[Avernus]

nope (they could, but they certainly don't have to and typically don't)

 

I have heard otherwise from extremely credible sources, I question you on this not in a way to slight what you know.....but I find it confusing when you have a couple of experts say one thing and one expert saying another.....and I do consider you an expert on our financial system as it was created....

[wiegie]

I have heard otherwise from extremely credible sources, I question you on this not in a way to slight what you know.....but I find it confusing when you have a couple of experts say one thing and one expert saying another.....and I do consider you an expert on our financial system as it was created....

Let me explain things a little bit.

 

The US dollar is indeed widely used as a "vehicle currency". This means that internation trade is indeed denominated and consummated in US dollars, but there is absolutely no reason why people have to use the dollar in such a fashion.

 

As an example, suppose a German wanted to buy a good produced in England. Since the German has euros and the Brit wants to get paid in pounds, something is going to have to give. One option is that the German (or more likely, his bank) just goes to the foreign exchange market and uses his euros to buy however many pounds he needs. (You might ask, well who is selling these pounds? And the answer is that they will be sold by Brits who are wanted to obtain euros so that they can either buy goods from eurozone countries or else they want to lend money to eurozone countries.) If this is how the trade is transacted, there is absolutely no need for US dollars.

 

So, then why do people ever use the dollar as a vehicle currency? There are a few reasons:

 

1) It often makes trade easier--especially trade between two nations who don't trade all that much directly with each-other. In my above example, when the German went to buy pounds, he needed to find Brits who wanted euros. This might not always be easy to do. So basically the German will use his euros to buy US dollars and then will use those dollars to buy the pounds he needs to conduct his transaction. But, you ask, why would the Brit be willing to sell his pounds to get dollars when he wouldn't sell his pounds to get euros? The answer is that the Brit knows that he can use those dollars to buy any other currency in the world easily. The whole situation works very analogously to money being used as a "medium of exchange" rather than people having resort to a barter system. [Note that there is no real reason why the dollar has to serve this role rather than some other currency, but the fact that the US is such a huge economy makes the dollar attractive for this use. The Euro is a potential alternative--although since the Euro has been introduced, the volume of of all foreign exchange transactions involving the dollar has remained pretty stable--indicating that the dollar is still the primary vehicle currency in the world.]

 

2) Another reason dollars are used is for stability. Suppose a German wants to buy a British good in three months, but they are writing the contract today. There is the chance that there might be a big swing in the exchange rate between the euro and the pound over the next three months, so somebody might get screwed by the change in exchange rates. But, if their contract is denominated in dollars, then this is less of a problem (assuming that the dollar is stable). The east asian crisis of the late 1990s where many asian currencies collapsed is one reason why many east asian countries voluntarily conduct trade denominated in dollars rather than in local currencies. [i will note that if people expect the dollar to not be stable in the future, then people will probably want to switch to a different vehicle currency.]

 

3) A third reason US dollars are used, especially in commodities markets, is because it makes things much easier to just have one price for each commodity--rather than scores of prices for the same goods in all sorts of different currencies.

 

So, in conclusion, I'm not sure who your other experts are, or what they are exactly saying, but if they say that international trade transactions have to be conducted in US dollars, they are just wrong. If they say that a lot of international trade transactions are voluntarily conducted in US dollars, then they are correct.

 

I hope this helps.

[Avernus]

Let me explain things a little bit.

 

The US dollar is indeed widely used as a "vehicle currency". This means that internation trade is indeed denominated and consummated in US dollars, but there is absolutely no reason why people have to use the dollar in such a fashion.

 

As an example, suppose a German wanted to buy a good produced in England. Since the German has euros and the Brit wants to get paid in pounds, something is going to have to give. One option is that the German (or more likely, his bank) just goes to the foreign exchange market and uses his euros to buy however many pounds he needs. (You might ask, well who is selling these pounds? And the answer is that they will be sold by Brits who are wanted to obtain euros so that they can either buy goods from eurozone countries or else they want to lend money to eurozone countries.) If this is how the trade is transacted, there is absolutely no need for US dollars.

 

So, then why do people ever use the dollar as a vehicle currency? There are a few reasons:

 

1) It often makes trade easier--especially trade between two nations who don't trade all that much directly with each-other. In my above example, when the German went to buy pounds, he needed to find Brits who wanted euros. This might not always be easy to do. So basically the German will use his euros to buy US dollars and then will use those dollars to buy the pounds he needs to conduct his transaction. But, you ask, why would the Brit be willing to sell his pounds to get dollars when he wouldn't sell his pounds to get euros? The answer is that the Brit knows that he can use those dollars to buy any other currency in the world easily. The whole situation works very analogously to money being used as a "medium of exchange" rather than people having resort to a barter system. [Note that there is no real reason why the dollar has to serve this role rather than some other currency, but the fact that the US is such a huge economy makes the dollar attractive for this use. The Euro is a potential alternative--although since the Euro has been introduced, the volume of of all foreign exchange transactions involving the dollar has remained pretty stable--indicating that the dollar is still the primary vehicle currency in the world.]

 

2) Another reason dollars are used is for stability. Suppose a German wants to buy a British good in three months, but they are writing the contract today. There is the chance that there might be a big swing in the exchange rate between the euro and the pound over the next three months, so somebody might get screwed by the change in exchange rates. But, if their contract is denominated in dollars, then this is less of a problem (assuming that the dollar is stable). The east asian crisis of the late 1990s where many asian currencies collapsed is one reason why many east asian countries voluntarily conduct trade denominated in dollars rather than in local currencies. [i will note that if people expect the dollar to not be stable in the future, then people will probably want to switch to a different vehicle currency.]

 

3) A third reason US dollars are used, especially in commodities markets, is because it makes things much easier to just have one price for each commodity--rather than scores of prices for the same goods in all sorts of different currencies.

 

So, in conclusion, I'm not sure who your other experts are, or what they are exactly saying, but if they say that international trade transactions have to be conducted in US dollars, they are just wrong. If they say that a lot of international trade transactions are voluntarily conducted in US dollars, then they are correct.

 

I hope this helps.

 

thanks wiege, it more than helps...you went above and beyond any type of response or explanation I could have even asked for.....and from what it sounds like you're saying - If a Brit wants to buy oil from a Saudi, but the Saudi's never deal with the pound for any reason as far as importing goes then you'll see the USD as a means of exchange rather than the Brit having to try and find a Saudi that is willing to take his pounds in exchange for whatever Saudi's use (the dinari?...wild guess)....which makes sense....hopefully this is what you were saying because when I read it, it made perfect sense...

 

the people I spoke to and the original source I caught it from all said that the USD had to be used as a means of exchange between one country and another who used different currencies which seemed a bit off, but of course this is the USA and capitalism is what it is for a reason....so I wasn't completely shocked...

 

and again, thanks..

[wiegie]

I'm glad my response helped (as I was typing it up, I thought to myself, "damn, I'm spending more time on this answer than I do when my students e-mail me).

 

As for oil, I'm not an expert on it, but I think oil is different in that many oil exporting countries do require getting paid in US dollars. (But that is their own choice and nothing that they are forced to do by anybody else.)

[Avernus]

I'm glad my response helped (as I was typing it up, I thought to myself, "damn, I'm spending more time on this answer than I do when my students e-mail me).

 

As for oil, I'm not an expert on it, but I think oil is different in that many oil exporting countries do require getting paid in US dollars. (But that is their own choice and nothing that they are forced to do by anybody else.)

 

yeah, I was reading this thinking "he must be saying why the -blank- did I spend so much time on this response"...but it is much appreciated and while I probably used a bad example with oil, I think I know what you mean and when I heard other people talking about it, they used oil and certain other goods as an example which led me to believe it was the norm across the board.....

[Ursa Majoris]

Just for clarity, the income flows you are talking about (i.e. dividends and interest payments) are added to net exports to get something called the current account balance. The current account balance is more important (and appropriate to look at for many purposes) than just net exports, but since net exports are by far the largest part of the current account balance for most countries (US included) people generally just focus on net exports.

So the China manufacturer gets paid the manufacturing costs just like any partner gets paid. The item itself ships to Europe and is bought by a European, who forks over the money to the Apple store, who in turn add the money to the Apple corporate accounts.

 

Using figures plucked out of the air, Apple probably pays $50 to the manufacturer and another $50 to the shipper and others, then pockets $500, so why is this considered an export from China? Is it the fact that the physical artifact went from there to the shop? Or is it NOT considered an export from China at all?

[SEC=UGA]

So the China manufacturer gets paid the manufacturing costs just like any partner gets paid. The item itself ships to Europe and is bought by a European, who forks over the money to the Apple store, who in turn add the money to the Apple corporate accounts.

 

Using figures plucked out of the air, Apple probably pays $50 to the manufacturer and another $50 to the shipper and others, then pockets $500, so why is this considered an export from China? Is it the fact that the physical artifact went from there to the shop? Or is it NOT considered an export from China at all?

 

And then Apple pulls the 'Double Irish" and pays hardly any tax on the profit.

Edited May 5, 2011 by SEC=UGA

[jetsfan]

and again, thanks..

 

+1, excellent write-up wiegie

thank you.