[gadster]

Has anyone noticed that the price of crude oil has sat at a fairly stable price compared to the Euro for the last 3 years, but is rising against the $US (to compensate for the Euros performance against $US)?

OPEC are blaming the weather, of all things, for the rise in oil price in $US!

So is OPEC already covertly pricing oil in euros? And what are the implications for the $US, and the US debt, if OPEC switch overtly? What will happen to the USA if oil goes Euro worldwide?

[SimeyTheLimey]

Originally posted by gadster:
if OPEC switch overtly? What will happen to the USA if oil goes Euro worldwide?

Nothing. Money is just a medium of exchange. The unit used is irrelevant.

[Millennium]

Originally posted by SimeyTheLimey:
Nothing. Money is just a medium of exchange. The unit used is irrelevant.

Certainly that is true from a mechanical standpoint. Psychologically, however, it would be a major blow to the US.

[Developer]

Originally posted by SimeyTheLimey:
Nothing. Money is just a medium of exchange. The unit used is irrelevant.

It is not irrelevant. It has implications on the stability of the Dollar since countries and companies would switch their investments away from the Dollar.

[theolein]

Theoretically nothing, but since a number of oil producing countries have been talking about switching over to dealing in Euros it could have an influence in the international markets.

[Spheric Harlot]

Originally posted by SimeyTheLimey:
Nothing. Money is just a medium of exchange. The unit used is irrelevant.

This was true when the value of a currency was still tied to a tangible worth (gold reserves), but your view has certainly been been outdated since around thirty years ago.

-s*

[voodoo]

Originally posted by Spheric Harlot:
This was true when the value of a currency was still tied to a tangible worth (gold reserves), but your view has certainly been been outdated since around thirty years ago.

-s*

True dat. Switching to € would actually be a bad thing for the $.

[shmerek]

switch

[SimeyTheLimey]

Originally posted by Spheric Harlot:
This was true when the value of a currency was still tied to a tangible worth (gold reserves), but your view has certainly been been outdated since around thirty years ago.

-s*

No. We are talking here about the currency used in international transactions in a market. The value of the good exchanged isn't altered by the unit of currency used. The oil market could use any currency, or it could simply do all the transactions in the local currencies of the trading nations. It doesn't because it reduces transaction costs to settle on one currency and express all the sales in that. But the currency itself isn't what is being bought and sold, so it's value isn't affected by the transaction.

The only effect I can see is that the market might draw on the dollar in order to have volume for oil transactions. A sudden switch could affect the US money supply. But the Federal Reserve can correct for that quite easily just by withdrawing dollars from the money supply.

I'll defer to a real economist (like finboy). But I'm pretty sure this is basically correct.

[finboy]

Originally posted by Developer:
It is not irrelevant. It has implications on the stability of the Dollar since countries and companies would switch their investments away from the Dollar.

Thanks Simey. I was late to the dance on this.

D, why would they switch? If nothing else, US banks would start offering Euro-denominated accounts, the same as what happened with "Eurodollars" the last time. There may be some temporary effects, but nothing serious or permanent.

AFAIK, there is no reason (theoretical or otherwise) to suspect that changing the denomination would impact markets at all. If people want to own US-based assets, they will. They'll hit the exchange desk first.

[dtriska]

The US dollar would fall a little further. The US dollar is strong because people want it. If oil producers stop wanting US dollars, others will have no demand for the US dollar either, and the price of the US dollar would fall. Conversely, the price of the competing currency the oil producers chose (Euro, etc.) would increase.

[gadster]

Originally posted by dtriska:
The US dollar would fall a little further. The US dollar is strong because people want it. If oil producers stop wanting US dollars, others will have no demand for the US dollar either, and the price of the US dollar would fall. Conversely, the price of the competing currency the oil producers chose (Euro, etc.) would increase.

Precisely. Oil buyers would stop wanting US dollars because to buy oil from OPEC, you currently need US dollars. So, if OPEC goes Euro, oil buying nations (ie: everyone) would sell their US dollars and buy Euros. So the demand for the US dollar would drop big time. Low demand -> low price. Inflation anyone?

Also, the US itself would have to cash in US dollars to buy Euros just to buy oil with, it won't be able to just print Euros, unlike the current situation. I think the implications are huge. The world is awash with US dollars mainly because of the oil connection. If the US dollar becomes 'on the nose', well, there could be trouble. Saddam Hussein found out the hard way that the US is not keen on the idea of a petroeuro.

[Millennium]

Originally posted by gadster:
Precisely. Oil buyers would stop wanting US dollars because to buy oil from OPEC, you currently need US dollars. So, if OPEC goes Euro, oil buying nations (ie: everyone) would sell their US dollars and buy Euros. So the demand for the US dollar would drop big time. Low demand -> low price. Inflation anyone?

Exactly.

It used to be the case that the unit of money was irrelevant. But now that money is nothing more than than a societal construct -it exists Because The Government Says So, not because any thing is backing it up- psychology becomes everything. This would, in fact, have grave implications.

[gadster]

Originally posted by Millennium:
Exactly.

It used to be the case that the unit of money was irrelevant. But now that money is nothing more than than a societal construct -it exists Because The Government Says So, not because any thing is backing it up- psychology becomes everything. This would, in fact, have grave implications.

The only thing that is real then, is the US deficit.
NB: the Euro is backed by gold, canny Europeans, eh?

[SimeyTheLimey]

Low demand = low price if the supply remains the same. However, the money supply of any currency is under the control of the central bank. In the US this is done indirectly through the Federal Reserve system.

So no, a reduced demand of the Dollar as a medium of exchange in one limited market (assuming this would cause that) would not cause inflation. All that would happen is that the Fed would reduce the supply of Dollars in circulation, restoring the previous equilibrium. This isn't ECON 101, but it is ECON 102.

In any case, I doubt the oil market is responsible for that significant a demand for dollars. The amount of oil being bought and sold on any given day is far smaller than the amount of other goods and services priced in dollars.

Secondly, gadster seems to think that the US buys oil with dollars it just prints for the purpose. That would cause inflation. But it isn't the case anyway.

[Developer]

Originally posted by SimeyTheLimey:
So no, a reduced demand of the Dollar as a medium of exchange in one limited market (assuming this would cause that) would not cause inflation. All that would happen is that the Fed would reduce the supply of Dollars in circulation, restoring the previous equilibrium. This isn't ECON 101, but it is ECON 102.

This isn't about demand for the Dollar. Nobody just purchases the currency and then just sits on it. This is about demand for investments in corporations, immovables etc. in US Dollar. The supply there can not be reduced artificially.

[SimeyTheLimey]

Originally posted by Developer:
This isn't about demand for the Dollar. Nobody just purchases the currency and then just sits on it. This is about demand for investments in corporations, immovables etc. in US Dollar. The supply there can not be reduced artificially.

No. This is about the oil market -- which is an international spot market. What investments in corporations etc are you talking about?

I think you need to separate out what is being bought and sold. If assets are being bought and sold, then the price of those assets is affected by the demand for the assets, but not in any way by the medium used for the exchange. Which currency you choose is purely a matter of administrative convenience.

Alternatively, if the asset being bought and sold is currency itself, then the demand on that currency can affect the value of the currency. But the real value of assets priced in that currency is unaffected.

You seem to be blurring this line somehow.

[Developer]

Simey, please read this short essay first, then we can continue an informed discussion.

[SimeyTheLimey]

Originally posted by Developer:
Simey, please read this short essay first, then we can continue an informed discussion.

Oh great, more conspiracy theories.

If the Euro suddenly replaced the dollar as the world's reserve currency, then the US Federal Reserve would need to reduce the money supply and haul in the excess of dollars currently circulating outside the US. That much is clear. If it didn't do that, then clearly the dollar would tank since it is a floating currency. However, this is unlikely because the US is still the largest economy in the world and its economy is significantly more robust and stable than any other economy of comparable size. That's the reason the US gets away with a large trade deficit. It's confidence in the US economy as a whole that drives the issue, not the historical accident that a number of global spot markets happen to trade in dollars.

Developer: I'll give you a free piece of advice when reading online sources about the US. If the work "hegemony" appears anywhere in the first sentence or two, it's crap and should be disregarded.

[spacefreak]

Originally posted by Developer:
Simey, please read this short essay first, then we can continue an informed discussion.

Gotta love the conclusion of that essay, "Which perhaps explains why the US is increasingly turning to its second major tool for dominating world affairs: military force."

Whatever. Let OPEC switch to the Euro. Let the dollar deflate to the point that the US buying of imports seizes. Let's see how the world fares without the US as a customer.

[Lerkfish]

Originally posted by SimeyTheLimey:
Oh great, more conspiracy theories.

If the Euro suddenly replaced the dollar as the world's reserve currency, then the US Federal Reserve would need to reduce the money supply and haul in the excess of dollars currently circulating outside the US. That much is clear. If it didn't do that, then clearly the dollar would tank since it is a floating currency. However, this is unlikely because the US is still the largest economy in the world and its economy is significantly more robust and stable than any other economy of comparable size. That's the reason the US gets away with a large trade deficit. It's confidence in the US economy as a whole that drives the issue, not the historical accident that a number of global spot markets happen to trade in dollars.

Developer: I'll give you a free piece of advice when reading online sources about the US. If the work "hegemony" appears anywhere in the first sentence or two, it's crap and should be disregarded.

you're free to disregard it. I don't think that automatically makes it "crap", though.

[SimeyTheLimey]

Originally posted by Lerkfish:
you're free to disregard it. I don't think that automatically makes it "crap", though.

I'll let finboy debunk it if he chooses. He's a real economist. I've just had a few econ classes, including international trade and finance. Based on what I can remember from those, I'd call it crap.

In any case, we need to be clear here about what we are discussing. The initial post was pitched as one discussing economics. Developer's internet source is all about how evil America is. It's off topic.

[Spliffdaddy]

Originally posted by Developer:
Simey, please read this short essay first, then we can continue an informed discussion.

HAHAHAHAHA

informed? you call that informed?

omg that's hilarious.

[finboy]

Originally posted by Developer:
This isn't about demand for the Dollar. Nobody just purchases the currency and then just sits on it. This is about demand for investments in corporations, immovables etc. in US Dollar. The supply there can not be reduced artificially.

You're assuming that the currency is somehow more important than the asset itself.

Explain, then, how investors who wish to purchase real estate in New York will do so without converting to dollars. It's the REAL ESTATE they're investing in, not the denomination of the price.

The "essay" isn't worth attacking. It's just plain naive.

But I understand the concerns that folks have -- it SOUNDS LIKE an important argument. It isn't, on many levels.

Dollars and Euros aren't little pieces of paper that sit in a pile someplace. They're just electronic notations in a computer, and changing from one to the other takes less time that typing a response here.

[OreoCookie]

Originally posted by SimeyTheLimey:
Nothing. Money is just a medium of exchange. The unit used is irrelevant.

I don't think so. I have read an interesting article about it about a year ago.

The basic line of argument was that the dollar is (compared to other currencies) pushed, because there are lots of dollars abroad that in turn are invested in US products or in the US directly.

[OreoCookie]

Originally posted by SimeyTheLimey:
No. We are talking here about the currency used in international transactions in a market. The value of the good exchanged isn't altered by the unit of currency used. The oil market could use any currency, or it could simply do all the transactions in the local currencies of the trading nations. It doesn't because it reduces transaction costs to settle on one currency and express all the sales in that. But the currency itself isn't what is being bought and sold, so it's value isn't affected by the transaction.

The only effect I can see is that the market might draw on the dollar in order to have volume for oil transactions. A sudden switch could affect the US money supply. But the Federal Reserve can correct for that quite easily just by withdrawing dollars from the money supply.

I'll defer to a real economist (like finboy). But I'm pretty sure this is basically correct.

So why is the US fighting so hard to keep the dollar as oil exchange currency?

[pooka]

Originally posted by OreoCookie:
So why is the US fighting so hard to keep the dollar as oil exchange currency?

Because foreign currency looks a little dainty.

[Lerkfish]

Originally posted by pooka:
Because foreign currency looks a little dainty.

have you noticed how OUR currency is beginning to look, lately?

[SimeyTheLimey]

Originally posted by OreoCookie:
So why is the US fighting so hard to keep the dollar as oil exchange currency?

Please provide evidence that it is fighting to keep it.

[SimeyTheLimey]

Originally posted by finboy:
The "essay" isn't worth attacking. It's just plain naive.

Just for you, finboy:

Why it is Important for Economists to Combat Public Ignorance

Some years ago, the distinguished international-trade economist Jagdish Bhagwati was visiting Cornell University, giving a lecture to graduate students during the day and debating Ralph Nader on free trade that evening. During his lecture, Prof. Bhagwati asked how many of the graduate students would be attending that evening's debate. Not one hand went up.

Amazed, he asked why. The answer was that the economics students considered it to be a waste of time. The kind of silly stuff that Ralph Nader was saying had been refuted by economists ages ago. The net result was that the audience for the debate consisted of people largely illiterate in economics and they cheered for Mr. Nader.

Prof. Bhagwati was exceptional among leading economists in understanding the need to confront gross misconceptions of economics in the general public, including the so-called educated public. Nobel Laureates Milton Friedman and Gary Becker are other such exceptions in addressing a wider general audience, rather than confining what they say to technical analysis addressed to fellow economists and their students. By and large, the economics profession fails to educate the public on the basics, while devoting much time and effort to narrower and even esoteric research.

The net result is that fallacies flourish in discussions of economic policy issues, while the refutations of those fallacies lie dormant in old books and academic journals gathering dust on library shelves. As former House Majority Leader Dick Armey--an economist by trade--put it: "Demagoguery beats data in making public policy."

Wall Street Journal Editorial Page.

[vmarks]

Side note:

I agree with the good professor, which is why it's important for me to reply in threads about Israel- so much of the nonsense posted in these forums has been refuted ages ago, but the old adage is correct: rumor unchallenged becomes assumed truth in 72 hours.

[eklipse]

Originally posted by vmarks:
...which is why it's important for me to reply in threads about Israel- so much of the nonsense posted in these forums has been refuted ages ago, but the old adage is correct: rumor unchallenged becomes assumed truth in 72 hours.

Couldn't agree more.

[dialo]

Originally posted by SimeyTheLimey:
Nothing. Money is just a medium of exchange. The unit used is irrelevant.

The wide use of the dollar as a reserve currency not irrelevant, it's just outwieghed by other factors that make its influence on the US economy insignificant.

[Developer]

Originally posted by vmarks:
I agree with the good professor, which is why it's important for me to reply in threads about Israel- so much of the nonsense posted in these forums has been refuted ages ago, but the old adage is correct: rumor unchallenged becomes assumed truth in 72 hours.

I agree with you on this principle, but nothing that was said here refuted the assumption that the US Dollar as world wide reserve currency is important for the America economy. And hey, I'm here listening with an open mind and willing to learn. But just stating that I am "naive" isn't going to help.

[kvm_mkdb]

Originally posted by SimeyTheLimey:
Please provide evidence that it is fighting to keep it.

Besides the fact that it invaded the only oil-exporting country that switched to euro?
Besides the fact that it's actively destabilizing the 2 oil-exporting countries that are promoting such a switch?

"Putin is trying to create a position for Russia as an independent player. But his aim is not to undermine relations [with the United States]. He just wants to boost Russia's position up from being a junior partner," said Dmitry Trenin, geopolitical analyst at the Carnegie Moscow Center. Yevgeny Gavrilenkov, chief economist at Troika Dialog and an earlier architect of the Putin government's first economic plan, said debate is growing on a move to the euro as Russia mulls siding with the EU. "Such an idea is really possible," he said. "Why not? More than half of Russia's oil trade is with Europe. But there will be great opposition to this from the United States."
http://www.globalpolicy.org/socecon/...lpriceeuro.htm

[kvm_mkdb]

An article linked on the 'crappy' paper doesn't look like crap at all:

The world’s dependency on US dollars to pay for trade has seen countries bound to dollar reserves, which are disproportionally higher than America’s share in global output. The share of the dollar in the denomination of world trade is also much higher than the share of the US in world trade.

...it is worthwhile to note that in the long run the euro is not at such a disadvantage versus the dollar when one compares the relative sizes of the economies involved, especially given the EU enlargement plans. Moreover, the Euro-zone has a bigger share of global trade than the US and while the US has a huge current account deficit, the euro area has a more, or balanced, external accounts position.

http://www.opec.org/NewsInfo/Speeche...SpainApr14.htm

[voodoo]

...and the truth comes out

[SimeyTheLimey]

Originally posted by kvm_mkdb:
An article linked on the 'crappy' paper doesn't look like crap at all:

The world’s dependency on US dollars to pay for trade has seen countries bound to dollar reserves, which are disproportionally higher than America’s share in global output. The share of the dollar in the denomination of world trade is also much higher than the share of the US in world trade.

...it is worthwhile to note that in the long run the euro is not at such a disadvantage versus the dollar when one compares the relative sizes of the economies involved, especially given the EU enlargement plans. Moreover, the Euro-zone has a bigger share of global trade than the US and while the US has a huge current account deficit, the euro area has a more, or balanced, external accounts position.

http://www.opec.org/NewsInfo/Speeche...SpainApr14.htm

This set of comments from 2002 still doesn't suggest any particular benefit to the US derived from the fact that the dollar is the world's reserve curency and trading currency. You seem to be implying it from the quote above, but in fact it does not suggest any advantage to the US economy, either in the quote, or body of the speech itself. In any case, the focus of the speech is the Euro for the sake of the Euro (and Europe). The speech is in response to Spain asking if OPEC would move its OPEC bill to the (then fairly new) Euro. It doesn't appear that OPEC instigated the question.

Is that is all this is about? European ambitions for the Euro as pen1s envy?

Notice also that OPEC's reply was a polite "no." The speaker pointed out that the critical spot markets are denominated in dollars and it would be awkward to rejigger the "complex formulas" used for pricing. The speaker also points out that major oil producers in Europe, like the UK, are not Eurozone countries.

Better luck next time. Maybe you should read things before you post them?

[kvm_mkdb]

Originally posted by SimeyTheLimey:
This set of comments from 2002 still doesn't suggest any particular benefit to the US derived from the fact that the dollar is the world's reserve curency and trading currency. You seem to be implying it from the quote above, [snip]

It was in response to the assertion that the US is still the largest economy in the world and its economy is significantly more robust and stable than any other economy of comparable size, and did not imply anything but exactly what I quoted.

Besides, I think the speaker's point was that it's not up to the sellers to make the switch, it's up to the buyers: they have to see an advantage in paying in euros.

And your penis-envy comparison is quite misplaced.

It is irrefutable that the US benefits from the fact that the dollar is the world's reserve and trade currency, being the buyer of last resort.

[voodoo]

Originally posted by SimeyTheLimey:
This set of comments from 2002 still doesn't suggest any particular benefit to the US derived from the fact that the dollar is the world's reserve curency and trading currency. You seem to be implying it from the quote above, but in fact it does not suggest any advantage to the US economy, either in the quote, or body of the speech itself. In any case, the focus of the speech is the Euro for the sake of the Euro (and Europe). The speech is in response to Spain asking if OPEC would move its OPEC bill to the (then fairly new) Euro. It doesn't appear that OPEC instigated the question.

Is that is all this is about? European ambitions for the Euro as pen1s envy?

Notice also that OPEC's reply was a polite "no." The speaker pointed out that the critical spot markets are denominated in dollars and it would be awkward to rejigger the "complex formulas" used for pricing. The speaker also points out that major oil producers in Europe, like the UK, are not Eurozone countries.

Better luck next time. Maybe you should read things before you post them?

You read penis envy out of this while I don't. Must be a Freudian thing.

It is really as simple as this: Oil is bought and sold in USD which gives the US a certain influence over it as the US treasury controls the USD. Oil business in USD certainly bumps the US economy as well. To decrease the influence of the US over OPEC they are looking towards the Euro. That is probably not the best solution for OPEC but it is desirable. The EU is not a single country with one specific interest in the Middle East, no common foreign policy like the US. The answer that is most common to all questions starting with 'why' is 'money'.

I don't see how those of you who think this is a matter of prestige or er penis envy can come to that conclusion when business is, was and will always be about profit and power and in the oil business it mingles with politics on a big scale as well. Perhaps it fits better with your world view that this is some kind of a 'competition'.

[SimeyTheLimey]

Originally posted by kvm_mkdb:
It is irrefutable that the US benefits from the fact that the dollar is the world's reserve and trade currency, being the buyer of last resort.

It's strange how you have all asserted that, yet none seem to be able to rationally articulate why the US benefits.

You say you posted the link-that-didn't-quite-say-what-you-thought in response to the fact that the US is the largest economy in the world and is highly robust. Those would be reasons why people choose to invest in the US. The currency used to denominate spot markets has nothing to do with it.

[voodoo]

Originally posted by SimeyTheLimey:
The currency used to denominate spot markets has nothing to do with it.

So because you say so it is true?

[lil'babykitten]

Originally posted by voodoo:
So because you say so it is true?

Yes, duh!

[SimeyTheLimey]

Originally posted by voodoo:
So because you say so it is true?

No. Because it is true it is true.

You say, for example, that because a commodity is denominated in dollars the US gets control over the commodity because the US Treasury (I think you mean the Federal Reserve, which is separate) controls the dollar. Please explain how the Fed controls oil? Describe the economic mechanism. Tell us how any change in the value of the dollar wouldn't be immediately compensated for in an open market.

[Developer]

Quote of the relevant part:

"The dollar is the de facto world reserve currency: the US currency accounts for approximately two thirds of all official exchange reserves. More than four-fifths of all foreign exchange transactions and half of all world exports are denominated in dollars. In addition, all IMF loans are denominated in dollars.

But the more dollars there are circulating outside the US, or invested by foreign owners in American assets, the more the rest of the world has had to provide the US with goods and services in exchange for these dollars. The dollars cost the US next to nothing to produce, so the fact that the world uses the currency in this way means that the US is importing vast quantities of goods and services virtually for free.

Since so many foreign-owned dollars are not spent on American goods and services, the US is able to run a huge trade deficit year after year without apparently any major economic consequences. The most recently published figures, for example, show that in November of last year US imports were worth 48% more than US exports1. No other country can run such a large trade deficit with impunity. The financial media tell us the US is acting as the 'consumer of last resort' and the implication is that we should be thankful, but a more enlightening description of this state of affairs would be to say that it is getting a massive interest-free loan from the rest of the world."

[SimeyTheLimey]

Developer: yes, the most popular reserve currency is the dollar. But why would you (or your internet source) say that the "the more the rest of the world has had to provide the US with goods and services in exchange for these dollars"? They don't have to give the US goods and services in enxhange for dollars. All they have to do is exchange other currencies for dollars. As Finboy pointed out, all this is done electronically.

You make it seem like there is one currency in the world and the rest of the world uses barter. This is absurd.

I'm amazed you are still relying on that junk internet post. Finboy's an economics professor. Didn't you notice when he said it was wrong?

[Developer]

Originally posted by SimeyTheLimey:
Developer: yes, the most popular reserve currency is the dollar. But why would you (or your internet source) say that the "the more the rest of the world has had to provide the US with goods and services in exchange for these dollars"? They don't have to give the US goods and services in enxhange for dollars. All they have to do is exchange other currencies for dollars. As Finboy pointed out, all this is done electronically.

Simey, the Euro, is just a piece of paper (or a few bits in a few computers nowadays). In itself it is worth nothing. What makes it worth something is the gold reserve of the currency (originally a banknote is nothing more than a receipt for a gold deposit) traditionally, or modernly it is the fact that the currency is in relation to the produced goods. In other words, the Euro is worth something only by the fact that you can purchase goods and services of the equivalent Euro's value.

Therefore, dear Simey, giving Euros in exchange to Dollars is equivalent to giving goods (and services) in exchange for Dollars. Because these Euros are exchanged to goods - not held as a reserve.
The US giving Dollars in exchange for Euros on the other hand are not giving goods for these Dollars, because these Dollars are held as the reserve. The exchange of the currency into goods is delayed, hence the paper's argumentation that it is a free loan to the US.
And the money isn't simply held either, it is invested into the US stock and immovables market, thereby pushing the US economy.

It's obvious that a switch away from the Dollar would have severe consequences for the US economy, but what do I understand? I have a small penis.

[Spliffdaddy]

Simey earns yet another *SMACKDOWN*

while the liberals fail to make their point.

"The US benefits" - yet they can't say how or why.

[OreoCookie]

Originally posted by Developer:
Quote of the relevant part:

"The dollar is the de facto world reserve currency: the US currency accounts for approximately two thirds of all official exchange reserves. More than four-fifths of all foreign exchange transactions and half of all world exports are denominated in dollars. In addition, all IMF loans are denominated in dollars.

But the more dollars there are circulating outside the US, or invested by foreign owners in American assets, the more the rest of the world has had to provide the US with goods and services in exchange for these dollars. The dollars cost the US next to nothing to produce, so the fact that the world uses the currency in this way means that the US is importing vast quantities of goods and services virtually for free.

Since so many foreign-owned dollars are not spent on American goods and services, the US is able to run a huge trade deficit year after year without apparently any major economic consequences. The most recently published figures, for example, show that in November of last year US imports were worth 48% more than US exports1. No other country can run such a large trade deficit with impunity. The financial media tell us the US is acting as the 'consumer of last resort' and the implication is that we should be thankful, but a more enlightening description of this state of affairs would be to say that it is getting a massive interest-free loan from the rest of the world."

Very well put.

[SimeyTheLimey]

Originally posted by Developer:
Simey, the Euro, is just a piece of paper (or a few bits in a few computers nowadays). In itself it is worth nothing. What makes it worth something is the gold reserve of the currency (originally a banknote is nothing more than a receipt for a gold deposit) traditionally, or modernly it is the fact that the currency is in relation to the produced goods. In other words, the Euro is worth something only by the fact that you can purchase goods and services of the equivalent Euro's value.

Therefore, dear Simey, giving Euros in exchange to Dollars is equivalent to giving goods (and services) in exchange for Dollars. Because these Euros are exchanged to goods - not held as a reserve.
The US giving Dollars in exchange for Euros on the other hand are not giving goods for these Dollars, because these Dollars are held as the reserve. The exchange of the currency into goods is delayed, hence the paper's argumentation that it is a free loan to the US.
And the money isn't simply held either, it is invested into the US stock and immovables market, thereby pushing the US economy.

It's obvious that a switch away from the Dollar would have severe consequences for the US economy, but what do I understand? I have a small penis.

This is hard to follow because you seem to skip so many steps. Break it down. First of all, the Euro is AFAIK, only partly backed by gold. The reason for that is presumably because it is a new currency and on introduction, there were fears about its valuation and stability, especially in comparison to such established currencies as the Mark. But it has worked out that the Euro is stable, which is good. Theoretically, a gold standard means you should be able to demand payment in gold and not paper. Do you know anyone who actually does this? I don't and I don't believe that any investors actually do. So the fact that it is backed by gold is functionally irrelevant.

Secondly, exactly how is it that an exchange from Euros causes goods and services to be transferred from Europe to the United States. You seem to skate over the logic on that one. There are separate currency markets established. Both the dollar and the Euro are freely convertible. No goods change hands if you convert from one currency to the other. All that changes hands is money.

Thirdly is the next step: where is that money invested. Of course foreign investors investing in physical assets in a country contribute to that country's overall economy. That's not a product of the currency used to purchase the asset, it is just a function of the investment itself. Obviously, if foreign investors all decided that the US was a poor economy to invest in, then the US economy would suffer. But the US isn't a poor economy to invest in. Quite the opposite. As you yourself noted a couple of weeks ago, Germany (for example) is economically in the toilet in comparison to the US. So a prudent investor would invest in the US, not Germany because you will get a better return here. That would be the case even if the US joined the Euro (assuming the Euro didn't tank our economy).

Fourthly, there is a separate issue of financial investments. Here, the US is probably not as good an investment at present because US interest rates are at historic lows. That's probably the primary reason why the dollar is performing poorly at the moment. But a weak currency is good for exports provided it is still relatively stable, which the US dollar is. So this is a net plus for the US.