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Strategies & Market Trends : Currencies and the Global Capital Markets -- Ignore unavailable to you. Want to Upgrade?

To: Freedom Fighter who wrote (1794)	6/16/1999 3:29:00 PM
From: Henry Volquardsen	Read Replies (1) \| Respond to of 3536

Hi Wayne, Your first supposition n the right track. If foreign investors in aggregate wanted US assets in excess of the current account deficit there would need to be an offset in US based investors who in aggregate would be interested in holding non US assets. This does not need to be banks however and could simply be ordinary investors willing to hold non US assets. The exchange rate would be the facilitating mechanism. If the aggregate demand exceeded both sources of supply then the market would bit up dollars until a new equilibrium is reached. Either by making the dollar expensive enough to reduce aggregate demand or making non dollar currencies cheap enough to encourage US demand for non dollar assets. The process would not effect the money supply in the way I think you were considering. It could however have an impact through the multiplier effect. I'm not an expert in the monetary aggregates but depending on the flows involved it is actually possible that such a shift could have a lower multiplier and could reduce money supply. But that is just blue sky speculation on my part. The answer to your question however is that excess foreign demand does not 'create' new money. Henry