Re: Dollarization -- Moore's argument

[Colin Danby <danbyc@xxxxxxx>]

Dear Basil,

Bruce is right.  This is solving a problem by assuming it away.  The
mischief is in the examples of a U.S. state and a branch bank.  Of
course these are inconsequential divisions.  But it does not follow that
they are usefully relevant to the way that El Salvador is divided from
the United States.

Assume, if you like, national banks able to identify "good prospect"
borrowers anywhere within the nation, and collect deposits in a variety
of ways throughout the nation.  Then yes it is largely irrelevant where
borrowers or lenders are located in physical space within the nation.
You could draw any number of arbitrary borders around them.  These
national banks may have regional offices called branches that do certain
things, but this is not consequential.  Lending and deposit-taking may
be conducted by different departments of the national bank with
different regional focuses, so that the question of drawing up one
branch's accounts might not even arise.  Indeed, one merit of large
national or multi-regional banks is that they can make regional net
transfers of finance.  (To the degree that some factors of production in
this nation *are* fixed in space, "regional adjustment" will happen in a
variety of ways that are easy to list.)

Re your reply to Matias:

> My point is solely that with dollarization, one does not need any
mechanism
> to "reduce the current account deficit". For example CT. could be
running a
> current account deficit with the rest of the US.(deficit on current
> account), and also experience capital outflows (on capital account).
So
> what?  With a single currency (provided the single currency, e.g.
> dollarization, is credible),

what is packed into this assumption?

> a country like an economic unit can continue
> to run a deficit on both current and capital account, in the sense of
> demanding additional consumption and capital goods, so long as another

> party is willing to provide deficit financing.

>...
> So long as an economic unit or a country has, or simply is
> believed to have, good future prospects, so that others are willing to
sell
> it things on credit.i.e. provide it with loans, it can continue to run

> deficits indefinitely, and is not constrained because it is running
out of
> foreign exchange reserves.

If we assume that "good future prospect" units anywhere in the world can
get financing we have largely solved the economic problem, at least in
PK terms.  There is a lot packed into this assumption.

Re your reply to Clifford:

>...Countries then become like US states.

Are you arguing that El Salvador is now like Kentucky?  If the argument
is that El Salvador is like Kentucky in that dollars are used to make
payments, sure -- El Salvador is like Kentucky in a number of of other
superficial ways too.  But if the argument is that along with the
dollars, certain structural features of the U.S. economy are transmitted
to El Salvador via the use of the dollar to make payments, you have
neither demonstrated this nor responded to earlier arguments about
enduring and consequential structural difference.

May I ask you to respond to the specific points along these lines that I
set out in response to your last reply to me?

http://csf.Colorado.EDU/forums/pkt/2001/msg01638.html

Best, Colin