Monday, April 15, 2013

Ben Franklin is a world traveler

America's #1 Export is US $100 dollar bills. No joke.

The US trade deficit is not operating in the way that trade deficits normally operate. Normally, countries import and export physical goods and/or services. The US is importing goods and exporting paper money. If a country has a trade deficit, then that means they have bought goods now in exchange for selling goods later. If a country has a trade surplus, then that means they are holding foreign reserve currencies ready to spend the money in the future for goods from that country. The exception is the US dollar..

In other words, because the US dollar is also the world's sole reserve currency it does not act like normally currencies do. It has many distortions that even the best monetary economists would find strange. Citizens of countries all over the world buy up US dollars bills not because they plan on making investments in the United States, but because they do not trust the stability of their own banking/monetary system. It is a hedge against instability - much like some Americans hoard gold.

They know that a dollar is a dollar because the currency is relatively stable. They have no such guarantees on the Russian Ruble or the European Euro. So they stuff their mattresses full of US Dollars as a rainy day contingency. They might even go as far as using it as a de-facto currency instead of their own.

Example: If Greece (or Cyprus or Slovenia) move off of the Euro to return to a national currency that they have stronger control over, then there will be significant ramifications for the stability of the Eurozone. The Euro, if it does not come apart completely, will lose a lot of value. A dollar will still be a dollar. They are holding onto US dollars as Americans hold onto gold, but with much better reason.

Large denominations of currency make storing and holding value much easier (less paper). The $100 bill is the largest paper denomination of US currency. 65 percent of US $100 dollar bills are circulating outside the United States, causing monetary policy to be less effective and inflation to be lower. 

We live in strange times.

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