I was following Micheal Hudson’s videos & bumped into
http://www.amazon.com/Super-Imperialism-Origin-Fundamentals-Dominanc/dp/0745319890
read through the preface & introduction and have a few questions on how things work.
I have a question first…
1. What does a world reserve currency mean? Does it mean all countries use this as the mode of payment? I know oil for instance is in $ per barrel. Does it necessarily mean that all raw materials, fuels, ect will be traded in dollars? I presume that countries are free to choose, (but power and domination being a different story forcing oil producing nations to trade in $$ than gold or else). So how does it actually work in reality today, how do nations trade goods, raw materials, oil, ect…in what currency? Is it that some stuff are in $$ only while other stuff can be in any currency?
2. Now, Lets consider 2 nations A and the US. Nations buy and sell goods and services. So if nation A buys from the US, it in return pays to the US in their own currency. Similarly when it sells goods to the US they get paid in the US$ instead. So when a private company in nation A gets paid in US$, it is of no use for them, right? So how does it go about converting the cheque which is in US$?
3. From the book, I understand that nations produce and sell to one other and to the US, and in return from the US they get paid in US$. This US$$ is now sitting in central banks all over the world. Since this is pretty much useless the central banks *lend* this back to the US and buy treasury bonds. When bonds mature new bonds are issued. Instead of useless dollars they are now holding onto useless bonds which is never going to be paid & hence the enslavement of the planet by the $$ nation!!!
So my question here is, how and where from did the central banks get the dollars from? Guess this goes back to question (2). So if private companies trade stuff, and get paid in $$ what do they do with it? Secondly, what happens when nations sell raw materials/oil alone, as compared to something they produce like a software or a good from raw materials.
Basically am trying to understand the concept of ‘free lunch’. How on earth did central banks all over end up with US$ and Where did they get the dollars from?
OK, you’re dancing around the edges of real knowledge but you’re getting there. First, dismiss the notion that "nations" trade with each other. They do not. Many small individual companies trade with each other. One company is in the US, and the other company is in Country A. Some manufacturer in Country A sells its product to some importer in the US. (The notion of nations trading with each other is just an abstract macroeconomic construct that causes confusion to people who don’t really understand the underlying economic issues).
As private companies, they can choose to do business with each other in any currency they like. They could trade in goats if they wanted to. But as a practical matter, if a US company is involved, they will USUALLY agree to do trade in US dollars. Not always, but usually — especially if it’s a case of a large US corporation utilizing contract manufacturing overseas. And that’s just a result of the US being the dominant country and economy for many decades. We’re the big dog. That’s how things evolved.
Now, so this means a US corporation sends payment for goods in US dollars overseas to a supplier in, say, China. So some Chinese company lo and behold receives a big fat check in US dollars that it deposits into its bank. And you’re right, since the US dollar is not the local currency in China, what does the company do? The company has to make payroll and pay other expenses in China in Chinese Yuan (not dollars). And so that company may just exchange all those dollars for Yuan at its bank. That’s no mystery. You can run to your own nearest bank and exchange Mexican Pesos for dollars. That’s part of what a bank does.
What then does the bank do with dollars? It may use some for local currency exchange, for the next Chinese customer who needs dollars. What it doesn’t need, it filters up to the Chinese Central Bank. Hence a central bank is a collection point for US dollars and other foreign currencies. These are called "foreign reserves".
A central bank may do various things with its foreign reserves. The China Central Bank for example may contact the US central bank (The Federal Reserve) to swap Dollars for Yuan. They both have the others’ currency, so they swap to settle accounts. OR, the central bank may use its foreign reserves on the foreign-exchange markets to buy or sell its own currency or other currencies, in order to manipulate the value of its currency. This is common for a China, which tries to keep the Yuan at a certain value relative to the US dollar. The only way it can achieve a target value for its currency is by participating in the ForEx market itself.
OR the central bank may wish to simply hold on to the Dollars for future use. But it doesn’t want to hold useless, idle raw currency — stuff it under the mattress. The bank prefers to get some return on investment, so as a cash management strategy it buys short term US Treasury bonds, so as to get interest payments. Also doing so is a way to deploy US dollars without distorting the currency-exchange rate of the dollar versus other currencies. If you exchanged those dollars for any other currency or assets denominated in another currency, you start affecting the value of the dollar itself.
Now you’ve got that much but you greatly misunderstand by thinking the bonds are "useless" and won’t be redeemed. They certainly will be. All US bonds are redeemed for cash dollars upon maturity. The Treasury does NOT pay out new bonds to redeem old bonds. It ALWAYS pays cash in US dollars. Treasury does sell new bonds at auction to roll over debt, but that means selling new bonds to OTHER bond-buyers, in return for the cash used to redeem maturing bonds. And of course a central bank owning Treasuries can always just resell them on the bond market if they want US dollars in cash again.
Back to reserve currency. That means that any nation’s central bank is apt to keep US dollars on hand, because they’ll be useful in the future. Whereas, Mexican pesos or Canadian dollars, not so much. Therefore lots of foreign central banks keep dollars (or US Treasury Bonds) on hand. It also means when there is no better alternative, two foreign companies engaged in international trade may resort to using US dollars as a convenient medium of exchange — but that’s a voluntary choice, they are not required to. It also means that certain commodities that trade internationally (like oil) are usually traded among foreign trade partners in US dollars. Again, it’s a convenient solution as the universal currency on the planet, for two companies from different countries trading with each other.
powered by Yahoo Answers