Re: Dollarisation

[Colin Danby <danbyc@xxxxxxx>]

Hello John:

I share your opposition to dollariz(s)ation but I'd stress the
difficulty in backstopping the financial system.  I wouldn't agree that
"an increase in the money supply ... cannot be generated internally"
because a non-U.S. bank can offer dollar-denominated liabilities.  As
long as confidence holds, internal money generation is possible.

However if one takes the point on board that financial crisis is an
especially grave threat under dollarization because it's a run on the
limited dollar holdings of the central bank, then your overall point
returns, even more strongly -- policymakers have to be careful about any
increase in growth that might draw in too many imports, so you build in
recessionary bias.  Let's hope Australia doesn't end up like Argentina.

Did the McKinsey document spell out the details?

Best, Colin

> IMHO a dollarised country cannot support entrepreneurial driven
economic
> growth without an increase in the money supply, which cannot be
generated
> internally, so can only be produced by a surplus on the external
balance.