Since they are taking money that was off the market and adding it to the market it will increase the money supply. When you increase the money supply it decreases the value of the money. IMHO this won't have too much of an effect on the value of the dollar. B
Doesn't your last statement contradict your first 2? I expect it to decrease the value of the dollar and increase inflation.
The reason why I say I don't think it will have too much of an effect is that it will probably be a very small percentage increase in the money supply. If they were doubling the money supply, then I'd expect to see the dollar drop significantly. B
This is a classic anti-inflation measure used during periods of extreme economic uncertainty. The most important point is that the increase in money supply will be temporary in nature, therefore having no long-term impact on the supply of US dollars worldwide. Small fluctuations in the value of the dollar are likely to take place, but I would not envision a step change in the dollar's value taking place here.
WHy not Drop the Euro instead? WHy the DOllar? England still uses the Pound, why not let Germany and France and other countries do their part, and deliver Euros... ...Never mind....this idea was stupid. USA Dollar is world wide...Euros arent.
Remember that supply is only one side of the equation. Demand is the other. Dollars are in essence *replacing* the Iraqi money supply in the short term. Money's value is ultimately based on a collective hallucination. As long as people think it has value, then it does. During periods of exteme economic uncertainty, like what we are seeing in Iraq, the belief that Iraqi money has value is challenged. This creates a decrease in the demand for money, resulting in lower values of money, which in turn results in goods costing more Iraqi currency (in nominal terms). Instead of a book costing 5 Iraqi bills, it now costs 10. This is inflation. The introduction of US dollars into their economy eliminates the uncertainty surrounding the value of money. The US dollar has a widely accepted value which eliminates the decreased demand in currency due to the uncertainty. This will keep prices from skyrocketing and will keep inflation in check.
Not all would, but many would because a lot of mainstream economics were very influenced by Keynes, a liberal economist. There are a lot of free market thinkers who would disagree with the idea that monetary value is just a hallucination. Remember Keynes advocated a lot of government printing and spending of money to get us out of the recession. That's something I disagree with. It's the same idea at work here.
Actually, the only idea at work is temporarily replacing the Iraqi currency. What T_J said is something you would learn in a high school or first semester economics class. It's basic macroeconomics. Monetary value has a lot to do with perception. People have no faith in the Iraqi money, so it loses value. You replace the Iraqi dollar with something that has a perception of value behind it and some of the problems are taken care of. (simplified version of course) B
But why is increasing the money supply necessary? Why not use money that is already out there. Like you said, it can increase inflation if done in large amounts. But Jorge said it is an anti-inflationary measure, so which is it? Also, I dispute that money has no inherent value. It is a commodity just like any other commodity. I am not hallucinating when I believe that the dollar in my wallet is worth something.
The money has to be taken from somewhere, and it's tough to take the amount off the market in a quick manner to then ship to Iraq. By shipping money over there that is already off the market, the Fed isn't taking away dollars from Americans. If they wanted to do this without increasing the money supply they would probably sell bonds, which take away money from US consumers. Considering that taking away dollars from consumers decreases spending, and that we are trying to jump start our own economy, this would be an unwise choice. The US dollar has no inherent value. It is not based on a gold standard. The part of the value in the US dollar is based on the faith in the US government. If the US government was taken out today, your dollar could be worth next to nothing in a few days. B
On your first point, while I agree that it would hurt the economy to give the Iraqis what amounts to a loan they don't have to pay back...I believe it is also hurting us to just print money and increase the money supply. It might be marginal, in which case just using current money in supply would have a marginal effect also. Actually, if the US government was taken out, I don't see why the dollar would lose it's value. As long as the financial institutons are working, like the banks and the federal reserve, then people will still have their money without feer that there will be a run on the banks. Besides, a government seems to barely have control over the value of money, look at cases like Argentina! Money may be printed by the government, but it's value comes about because people are willing to trade goods for it. People agree upon it's use as a bartering commodity, and that gives it value.
TJ responded to the response to my 'Why' question. Essentially, if the entire world switched to the dollar, we'd get to print a bunch of money and it would have zero inflationary value on the existing dollars. That may not be exactly what will take place here, but probably close enough in most minds to have nearly 0 impact.
