Currency and Seigniorage

Jussi Jaatinen <[EMAIL PROTECTED]> wrote in message news:<[EMAIL PROTECTED]>...

> The currency of choice there isn't very important as such. If OPEC
> charged oil in dollars and subsequently sold those dollars to buy Euros,
> the net effect would be very similar to charging in Euros to begin with. 

Actually the currency is very important. The worldwide use and
acceptance of the dollar gives the US the benefit of "seigniorage".

Suppose you are Brazil and are merrily consuming more than you are
producing. The day of reckoning soon catches up with you, with your
debt downgraded, no new loans to be had, and generally the economy in
a mess.

However if you are the US, you can continue doing the same thing for a
long time. All you need to do is to print dollars and give them to
foreigners who use them for transactions. The paper dollar notes
outside the US represent debt that the US government has taken from
foreigners, however it is not debt that can be called in. And it earns
the holder ZERO INTEREST. Or NEGATIVE INTEREST if you take US
inflation (currently about 3%) into account.

The benefit of "seigniorage" to the US is about $25 billion a year (I
think this is the total amount of paper currency printed, rather than
only that which is exported to other countries). If half of all
dollars printed end up outside the US then the benefit to the US would
be $12.5 billion a year, which is still rather less than the trade
deficit of $300 billion a year.

In a hearing before the US Senate Dr. Angell, Dr. Guillermo Calvo, and
Dr. Gavin testified in favor of sharing seigniorage with countries
that dollarized. Mr. David Malpass testified that the United States
should quickly assess the feasibility of sharing seigniorage.
(http://banking.senate.gov/docs/reports/dollar.htm)

> 
> -JJ

Regards,

LD