On Wed, 2005-03-30 at 22:59, Daniel Carrera wrote: > Hi all, > > Is there someone here who knows about economics and can explain something to > me? > I'm reading this article on Wikipedia, about the Euro: > > http://en.wikipedia.org/wiki/Euro
> I think I sort of understand that having everyone's reserves in US dollars > would > make he US dollar artificially expensive. It'd create artificial demand. Is > that > about right? Yes, if somethng is in demand the value rises even if the Emperor has no clothes and its peceived rather than real value. If confidence suddenly falls there can be a crash - recent stock market crash after the .com bubble burst is an example. > What I don't understand is in which way foreign markets are supposed to be > subsidising the US budget deficit. Nor do I understand what this has this has > to > do with the price of the dollar or the trade deficit. If there is investment in the US because people believe that some time in the future the economy will grow giving good return on investment that investment can be used to bridge any gap between revenue and spending. The other way to get investment into a country is to put up interest rates so people put their money into that country rather than another for a higher rate of return. Here in the UK interest rates are high and tend to be because finance is a key part of the UK economy. Raising interest rates takes money out of the pockets of consumers - their credit card bills mortgages etc go up with no tangible benefit to them but this is then money they can't spend on consumer goods. This tends to inhibit growth and act in a deflationary way. So putting up interest rates is a classic way of reducing inflation. Also if interest rates are high, people tend to take money out of stocks and shares and put them into bank accounts.The dynamic equilibrium between interest rates, inflation, currency values and stock exchange prices is complicated. The sort of things that mathematics PhD people do to build models to try and predict the effects of different scenarios ;-) There was a famous day called Black Wednesday here in the UK when financier George Soros speculatively bought lots of currency. It caused interest rates to go up to 15% here momentarily and the Chancellor of the exchequor to lose his job. I believe Soros made billions and is now busy giving it out to projects in Eastern Europe and Africa. Sort of Robin Hood on a big scale :-) -- Ian Lynch <[EMAIL PROTECTED]> ZMS Ltd
