Originally posted by slow99
I wonder what the eff happens to a country when its currency is the world's reserve currency, it attracts all the world's capital, it has an abundance of capital, the country's cost of capital becomes extremely cheap, it's easy to make money when your cost of borrowing is the lowest in the world, the cheap cost of capital drives profitable positive NPV projects like you wouldn't believe, the economy explodes, wealth expands, its citizens get used to a increasingly high standard of living, now all of these citizens demand more goods in aggregate, their desire to import more and more goods increases, they trade in their currency for foreign currency driving the fx markets downward, the unions driving an inefficient labor market don't help the situation, investors realize that meaningful elements of the factors of production (land, labor, capital, technology) are in aggregate cheaper elsewhere, they send capital to invest overseas, while the cheap currency is obviously good for exporters it isn't good for attracting capital anymore, the country raises interest rates, the outflow of capital drives up the overall cost of investment, making it more difficult find positive NPV investments, the economy slows, government intervenes, government competition for investment projects crowds out private money, private money now flows outside the borders, other countries now see the mass inflows as damaging to their own economies, they foresee a pending economic downturn and turn to their safehaven - the world's reserve country- for investment, causing the country to borrow more and more, at which point the country realizes this isn't sustainable - but - they have a printing press...carry on, rinse, repeat.
Leave a comment: