So why is America an economic 'Empire'?

[KrazyHorse]

Right.

No. Not even close to right.

[KrazyHorse]

I think that misunderstandings of even basic concepts in economics are most prevalent when you're dealing with exchange rates.

Modulo transactions costs, it DOES NOT MATTER which currency markets are denominated in. And transactions costs are extremely low for major currencies.

[Felch]

Ah, you see, this is what happens when I open my big mouth without really thinking. I sort of skimmed this whole thing, and thought it was about needing reserve currency stocks to buy up oil. For that you'd need something readily accepted, but it could be Euros, or yen, or silly Canadian dollars, or whatever. As long as the currency is backed by a reliable and somewhat honest government (or group of governments) it's going to work.

[KrazyHorse]

To illustrate the point, let's once more place ourselves in Moldova's shoes. It's 2009. 1 EUR = 1.4 USD. 1 bbl of oil = 70 USD. I sock away 1 billion USD. 2012 rolls around. 1 EUR = 1.2 USD. 1 bbl of oil = 100 USD. I'm fighting Bulgaria. I go out and buy 10 million bbls of oil with the USD I squirrelled away.

Now let's go to the counterfactual world where oil is denominated in EUR, but the relative prices of all major currencies and commodities followed the same path. All we did was tell NYMEX et al to start quoting oil in EUR.

I'm Moldova, it's 2009. I still sock away 1 billion USD. The price of oil is 1 bbl = 50 EUR, 1 EUR = 1.4 USD

2012: 1 EUR = 1.2 USD. Price of oil is 1 bbl = (100/1.2) EUR. How much oil can I get for my 1 billion USD? First I go out and exchange USD for EUR. I get (1 billion / 1.2) EUR. Now I buy oil. How much do I get? (1 billion / 1.2) / (100 / 1.2) bbl = 10 million barrels

EXACTLY THE SAME AS BEFORE

[KrazyHorse]

Ah, you see, this is what happens when I open my big mouth without really thinking. I sort of skimmed this whole thing, and thought it was about needing reserve currency stocks to buy up oil. For that you'd need something readily accepted, but it could be Euros, or yen, or silly Canadian dollars, or whatever. As long as the currency is backed by a reliable and somewhat honest government (or group of governments) it's going to work.

Yes.

[Traianvs]

No. Not even close to right.

Was actually referring to your post, but Felch squeezed in between

Besides, I didn't know the amount of currency required to be held in order to process oil transactions is so low; no need to get all edgy about it.

[Aeson]

EXACTLY THE SAME AS BEFORE

As long as the currency you've chosen as a reserve is readily convertable to the currency you need as payment for the necessary commodity. While day to day that can be assumed, in a time of international crisis the demand for the "payment currency" could jump very high at a time when the commodity is absolutely necessary to procure.

Holding the "payment currency" protects you from that liability, and could give you the ability to profiteer from the situation even if you aren't directly involved. (Not as surely as would holding reserves of the commodity though, but that has it's own costs as well.)

[KrazyHorse]

I like being edgy. It's who I am.

[Felch]

Was actually referring to your post, but Felch squeezed in between

It was all part of my grand plan to make you look foolish.

[Felch]

As long as the currency you've chosen as a reserve is readily convertable to the currency you need as payment for the necessary commodity. While day to day that can be assumed, in a time of international crisis the demand for the "payment currency" could jump very high at a time when the commodity is absolutely necessary to procure.

Holding the "payment currency" protects you from that liability, and could give you the ability to profiteer from the situation even if you aren't directly involved. (Not as surely as would holding reserves of the commodity though, but that has it's own costs as well.)

GOOD LUCK WITH THAT ARGUMENT!!!l!!!

[KrazyHorse]

As long as the currency you've chosen as a reserve is readily convertable to the currency you need as payment for the necessary commodity. While day to day that can be assumed, in a time of international crisis the demand for the "payment currency" could jump very high at a time when the commodity is absolutely necessary to procure.

Holding the "payment currency" protects you from that liability, and could give you the ability to profiteer from the situation even if you aren't directly involved. (Not as surely as would holding reserves of the commodity though, but that has it's own costs as well.)

a) The day that USD/EUR become unconvertible we are pretty much all ****ed anyway

b) You're begging the question. Why would demand for the exchange currency spike in an emergency any more than demand for any other reserve currency? As long as FX markets operate liquidly (doesn't matter WHAT the rate goes to, as long as the spread isn't too high) the denomination currency doesn't matter

c) I think you might be confusing transactions costs and exchange rate risk. As an example, take USD and CAD. CAD tends to appreciate against USD when oil goes up, because our terms of trade improve. This means that the price volatility of oil in CAD is lower than the price volatility of oil in USD. Doesn't matter whether oil's denominated in USD or CAD (or EUR for that matter); the volatility of oil against each of these currencies remains the same independent of denomination currency. Assuming that you're going to want to buy oil (and other commodities) with your reserves then this would argue for you to hold CAD....even though nobody trades these commodities in CAD!

d) The best thing to do would be to hold some sort of commodity derivative.

[Felch]

Wow. And he hasn't even butt raped you with talk of Higgs Bosons yet.

[KrazyHorse]

To clarify: I DO think it matters what reserve currency you hold. They are not all born equal. First off, you might trust the long term value of one more than the other (especially in the case of low probability events). Also, you are holding the reserves as a safety net to buy X at time T (T determined by events, not ahead of time). You want to find a currency which you believe will buy a lot of X at time T. As given in my example, if you want to buy oil then you should consider holding CAD or Norwegian Krone over other currencies, etc.

What DOESN'T matter is what units people keep track of prices in. Your choice of a reserve currency should be unaffected by transaction currencies, UNLESS you believe that major world currencies will become unconvertible when you want to use your reserves.

[KrazyHorse]

Wow. And he hasn't even butt raped you with talk of Higgs Bosons yet.

See how polite I'm being to him (and was to you as well).

[Felch]

You know what I like about KH? I like how, when he felt the time was right, he didn't just rock me hard like a throw away skut. He gracefully took my innocence with all the charm and romance of a true gentleman.