Wednesday, January 23, 2013

The Dollar Standard

It has been a long time since I've come across a good macro paper.

And his new book on the same topic.

Fascinating excerpts from the paper:

"In retrospect, these disruptions in the marketing of oil provided a deceptive excuse for
the two great inflationary episodes of the 1970s. But it was the worldwide loss of monetary control following the Nixon Shock of 1971 and then the Carter shock of 1976 that was the primary engine of inflation in both cases—with the surprisingly sharp increases in the price of oil (Figure 8) being largely endogenous to the preceding surge in foreign money growth."
- Most people (including me) believed that oil was the major culprit...


"(Indeed, in 2007–08, the world suffered another big shock when the price of oil
more than tripled between 2002 and July 2008 (Figure 8)—but without politically based disruptions in the supply of oil). As shown later, this last oil shock can again be attributed to hot money outflows from the USA associated with a ‘carry’ trade based on a weak and falling dollar. But in most people’s minds, the great inflations of the 1970s are cavalierly remembered as ‘supply side’ oil shocks rather than as worldwide monetary shocks arising out of a malfunctioning world dollar standard—as
hypothesised here."

Goes on to say that during the Greenspan- Bernanke post 2001 era many currencies were appreciating against the USD and China for one had big issues sterilizing USD inflows, but the US "with its orientation towards only domestic monetary indicators, ignored all this." including its own asset bubble.

And the final section is the US, China and the exchange rate fallacy :D
I cant post the entire section now... can I ;)
Reg. it : "However, the trade imbalance [between US and China] is a net saving imbalance, and not an exchange rate issue."

Brilliant stuff.

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