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by lrajlich
2891 days ago
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Foreign demand for USD does in effect lower US govt borrowing costs given our situation of having a fairly large trade deficit as well. Petroleum is one example of foreign USD demand (china buys oil with USD, for example), as are central bank reserve holdings, real estate transactions in Argentina, and I'm sure there are other examples as well. These foreign demands for USD in effect lower our borrowing cost as it prevents the USD from being dumped, eg, prevent a devaluation of the USD by foreign holders of USD, which allows us to keep interest rates low and thus finance a large deficit cheaply (so the govt keeps doing it). |
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This is correct. But petroleum trading in dollars is an effect of the dollar's hegemony, not a cause.
Every dollar transaction contributes to the dollar's network effects. But petroleum's contribution is small and overstated. Petrodollar hypotheses are closer to conspiracy theories than useful models.
The U.S. dollar is underwritten, ultimately, by American consumption. About 15% of American imports are petroleum [1][2], so it's a significant factor. But it's not special in any particular regard.
[1] https://traderiskguaranty.com/trgpeak/what-are-the-top-10-u-...
[2] https://wits.worldbank.org/CountrySnapshot/en/USA/textview