[ExI] Fwd: undercover at Walmart

[Rafal Smigrodzki]

On Thu, Feb 26, 2009 at 5:35 AM, Stathis Papaioannou <stathisp at gmail.com> wrote:
> 2009/2/26 Rafal Smigrodzki <rafal.smigrodzki at gmail.com>:
>
>> ### Jeesus H Christ. An American dollar is *not* an IOU. It is not a
>> promissory note, it is not backed by any physical object. The holder
>> of an American dollar does not have a legal claim to anything except
>> the dollar itself. It is only legal tender which must be accepted by
>> vendors inside the US. Accumulation of legal tender outside of this
>> country does not represent accumulation of debt.
>
> Dollars are not legally backed by real assets but people only want
> them because they believe they can exchange them for real assets. They
> function like an IOU with a variable exchange rate between face value
> and real assets, the exchange rate being set by market mechanisms.

### No, they don't. An IOU is a legal document specifying a claim
against property. Fiat currency does not, and I repeat, does not
provide a claim against property.

--------------------------------

> Foreigners who accumulate dollars as a result of a trade imbalance
> will use them to buy US assets or interest-bearing debt, public or
> private.

### In other words, they will make US interest rates lower, making it
easier to invest in new technologies and more growth. Of course, if
the debt is squandered rather than used wisely (a foregone conclusion
in the case of public debt), it can cause mild difficulties in the
future, but this possibility is independent of where the debt-holders
live, in Florida or in China.

------------------------------------

 So if there is a sustained trade imbalance, foreigners will
> come to own an increasingly large proportion of US assets and US debt.
> That's perhaps OK if you're not xenophobic,

### Indeed, Bayesian libertarians have difficulty being xenophobic.

-------------------------------

 but probably long before
> the foreigners own everything they will start to become nervous about
> the value of dollars they hold and start demanding more of them for
> the goods provided in trade, i.e. the dollar will be devalued.

### Yeah, so what? Devalued dollar means easier exports from and
dearer imports to America, automatically correcting the "imbalance".

Stat, you are a smart guy but you are suffering from the anti-market
bias (and perhaps a mild form of the anti-foreign bias, see "Myth of
the rational voter"). This is a very common affliction, only treatable
by a conscious effort of will. Whenever you feel a market mechanism
doesn't work, think again, and there is a good chance that once the
initial emotional reaction subsides, you will be able to find that the
mechanism either works in the larger context, or else, nothing would
work in the given case anyway.

--------------------
 The
> other route to devaluation is what the US government is trying to do
> now, and which can't be done with normal IOU's or commodity-backed
> currency: inflate away the debt by printing more dollars.

### Either way, problem solved.
----------------

 The
> possibility that this might happen worries foreigners with dollars who
> then put pressure on the US government to protect their investment.

### Like "stop this bullshit, institute some market reforms"? Wish they would.

Rafal