Quote from jem:
I have not negotiated for oil, but I have other contracts... there are all sorts of risk that are negotiated via contract and bills of lading.
Who bears the insurance risk and when? When does the customer assume freight loss or damage and theft risk. When does the money get paid from where to where. Where is the delivery.
You need a bank. You use a big bank and they cross the money.
Are oil deals different?
I am asking I really do not understand this reserve currency argument?
so I have he same question...
I understand that it is argued on the internet that the U.S. made a deal with Saudi Arabia that oil be only priced in dollars. But I keep saying so what? Why does it matter?
I just want one person to tell me a benefit of being a reserve currency....
Reserve currency status is a byproduct of being a AAA rated country, first, that, secondly, is the dominant economic power.
You get to borrow money at lower interest rates, and that's because your bonds are considered risk-free. You can basically issue as many as you like as long as you don't go completely crazy, and they will be bought.
Also, you get to issue them in your own currency. This isn't exclusive to having the reserve currency though.
As Mundell noted, as increasing amounts of a currency are used as a reserve, your inflation rate stays lower than it would otherwise be because the currency is valued more highly than would otherwise be the case, so the cost of imported goods is lower than it is for countries with weak currencies. There are some things that are assigned to having the reserve currency that are actually the result of having the dominant economy: oil being priced in dollars is only important because the US was the dominant consumer of oil, so it set the price and others had to take that price.
China is now the largest consumer of a lot of commodities, and that means they are now setting the price for these commodities, regardless of the fact the yuan is not a reserve currency.
The cost to having a reserve currency is the flip side of the above: since others will take as many bonds as you can issue, you can wind up with interest rates that are too low to provide the proper macroeconomic feedback into your economy, resulting in asset bubbles like the recently demised one in real estate. Also, of course, it results in a currency that is chronically overvalued because demand for assets backed by it - government bonds - is higher than it would otherwise be because its used as a reserve asset by other countries, which results in chronic current account deficits.
