There have been a series of articles in the past few days about how now even rappers and supermodels are giving up on the US dollar in favor of the euro. (Interestingly, my Spanish blogger friend Marc Vidal wrote about this a week ago, before the story went everywhere). Here's the Independent's take on it:
Pay attention as you watch the catchy new music video from the mega-star rapster Jay-Z, "Blue Magic", and see if you can't spot the product placement. It is not a fancy car that he is endorsing – although both his rides, a Rolls- Royce and soft-top Bentley, are plenty spiffy – but rather a currency – and it is not the dollar.And Bloomberg shows that the dollar dumping is even wider:
Like so many in the hip-hop genre, the song is a celebration of ostentatious wealth. But capturing the attention of commentators in this clip, shot in the glimmering, neon-lit canyons of New York City, are the repeated glimpses of flickering wads of €500 notes. Jay-Z has thus performed a currency defection: the dollar is not just down, it is out. The euro is the new bling.
Kuwait, freed by the U.S. from Saddam Hussein's army in 1991, unhinged its currency from the dollar in May, and pressure is building for Gulf Arab neighbors to follow suit. Qatar's prime minister, Sheikh Hamad bin Jasim bin Jaber al-Thani, complained Nov. 11 that the dollar's drop is cutting oil and gas income, leaving less to invest abroad. The United Arab Emirates may drop the dirham's peg to the dollar, analysts said.I took a few classes in international economics in grad school, and did well, but still, the issue of the dollar and its effects on the economy confuses the hell out of me at times, and none of these articles make it any clearer. I get how interest rates affect the dollar exchange (higher interest rates mean you get a higher return when you buy dollars, which increases demand for dollars which increases the dollar exchange rate). What I don't get is this line from the Bloomberg piece:
The central bank in Iraq, a country the U.S. military has occupied since 2003, last month said it, too, wants to diversify reserves away from mostly dollars.
Korean Shipbuilders
Korea's central bank this week urged shipbuilders to issue invoices in won, the Korean currency, and take out more hedging policies to guard against a weakened dollar.
Ultimately, if the dollar's swoon depresses U.S. stocks or threatens global growth, Group of Seven major industrial nations may have to do more than issue communiqués.How does a weak dollar affect US stocks or global growth? I.e., what's the tie between the dollar exchange rate and a real impact on the US and/or world economy other than people making more or less money by investing in dollars?
And while we're at it, I don't think I'd mind a good explanation of the entire issue of other countries "buying dollars." Why and how do they "buy dollars" and what's the impact of them selling the dollars they have? We always hear about how China is financing our debt - what does that really mean, and what happens if they stop?
Any enterprising economists want to take a stab at writing a very concise explanation of all of this that I can post in the future?
