patrick.net

The devaluation of the US Dollar is a hot topic in the bubble blogging world. We make fun of the "strong dollar policy", blame the Fed for "trashing" the dollar and argue that a country cannot debase its currency to prosperity.

We also argue about the benefits of dollar devaluation. This includes the possibility of reduced out sourcing, economic war against countries like China who deliberately keep their currency undervalued and spreading the pain from us to foreign holders of USD.

In this post, I want to point out another potentially big result of this phenomenon.

I am going to quote verbatim - with added emphasis - from the book "Reefer Madness: Sex, Drugs, and Cheap Labor in the American Black Market" by Eric Schlosser, who is better known as the author of "Fast Food Nation".

In the introduction, Schlosser writes ...

The US Dollar now serves as the unofficial currency of this new global underground. During the late 1960s and the early 1970s American economists began to notice that the amount of currency in circulation had grown much larger than the amount ordinary citizens were likely to use in their everyday transactions. ... ... ... The $100 bill soon became the underground favorite, not just in the United States, but overseas as well, thanks to its high face value and the relative stability of the dollar. During the late 1970s the outflow of the currency from the United States averaged about $2 billion a year. By the 1990s, about $20 billion in the U.S. currency was being shipped to foreign countries every year. Today approximately three-quarters of all $100 bills circulate outside the United States.
...
The supremacy of the dollar in the global underground has proven a boon to the American economy. The outflow of the U.S. currency now serves, in essence, as a gigantic interest-free loan. ... ... ... The latest threat to the $100 bill comes not from organized crime figures [counterfeiters], but from the central bank of the European Union. The new 500-euro note is perfect for black market activity. It has roughly 5 times the value of a $100 bill [at the time of book's publication], allowing drug dealers and smugglers to lighten their suitcases. Portugal has banned the 500-euro note for those reasons, and its acceptance in other foreign undergrounds is not yet certain.

It may be impossible to gauge the exact influence this "underground" demand has had on the appreciation of Euro against USD. But it certainly cannot be negligible given how globally linked the organized crime has become. I won't be the one to cry if USD devaluation decreases the buying power of international terrorists.

I want to make myself clear. I am not in favor of US devaluation if its happening by design - no matter what the reason is. Definitely not the argument - "let's punish those bad guys by reducing their wealth". Like any economic lever, the value of USD is both the cause and effect - and just one parameter in the grand scheme of things. All I am pointing out is, among the many good and bad side-effects of USD devaluation, this is one very interesting and desirable outcome.

by StuckInBA

#crime