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Bad News You Can Safely Ignore

Written by Gary North on February 13, 2012

For 40 years, we have been told that at some point, foreigners will bring back their dollars into the USA and buy our goods. This will create price inflation here.

When you see this argument, you can ignore it. In fact, you should suspect the author’s understanding of the banking system.

Digital money never leaves the U.S. banking system. Digits called dollars are owned by people all over the world. They function as money. The best example is the oil market. It is mostly conducted in dollars. But this money is accepted by foreigners.

Can foreigners buy up goods? Yes. But this does not bring money back into the USA. It never left the USA. It is in banks that are under U.S. government jurisdiction because they do business here.

Ownership changes. But money does not somehow move out of the country.

A seller of Chinese goods accepts dollars. But where are these dollars located? In banks inside the USA. Chinese residents do not buy and sell inside China for dollars. There are no digital dollars in the hands of Chinese who do not own a U.S. bank account.

There are physical dollars in circulation in third world nations. But these dollars do not return. They serve as alternatives to their own fiat currencies. These people do not buy U.S. goods. They buy domestic goods. Where do they get paper U.S. dollars? From relatives in the USA who send the dollars to them.

The foreigners who own digital dollars can buy anything they want today. They may buy goods used by Americans, such as Venezuelan oil. But this has nothing to do with a vast supply of digital dollars held off shore in foreign banks. These bank accounts are used by people who buy goods that are sold in dollars. It has nothing do do with digits that can somehow flow back into the U.S. banking system.  The money never left the U.S. banking system. Digital dollars do not circulate in foreign nations.

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One thought on “Bad News You Can Safely Ignore

  1. I think you misunderstand the nature of the concern: many foreign entities hold dollar balances as reserves, or hold dollar-denominated debt (e.g., treasuries). Additionally, many dollars circulate in substantial quantities as the currency of choice fo rinternational trade (the oil trade you noted has historically been conducted in dollars). If the dollar ceases to be the world's reserve currency, or if it ceases to be in demand for transactions purposes between other foreign entities, then those dollars will be freed up to chase other assets.