AH Challenge: Two Broke Ex-Superpowers

[Hansmeister]

For now. But what will happen if foreign countries decide to offload dollars and switch to euro as foreign reserves? Or if OPEC switches to euro instead of USD for oil (something Iraq did)?

Very simple, the value of the USD declines vis-a-vis foreign currencies, making imports more expensive and exports cheaper in order to balance out trade. Investment flows always have to equal trade flows. If we have a $400 billion trade deficit, we have to have a $400 billion investment surplus. Any change in one is immediately reflected in the other.

Rising import prices will increase inflationary pressure, resulting in the fed raising interest rates probably leading to a decline of domestic consumtion while exports rise sharply.

 

[wkwillis]

Brilliant Light
We are talking about different things. Interest rates of 20% assume inflation rates of 20%. Interest rates in 1980 were far lower than they are now at 5%. Lower stock market levels and lower house price levels are irrelevant to the kind of economics I am talking about. It's not price levels or psychology, it's the ability to move physical objects around.
A good example of what I mean is whether hurricane Ivan hits New Orleans or Mobile. Mobile will have as much damage as New Orleans, but New Orleans is far more important to the Kilogram/Kilowatt economy than to the M1/M2 economy. New Orleans is a much more important port than Mobile. The insurance payout cost is a small fraction of the total cost if we lose New Orleans and the port because the Atchafalaya finally tears America a new asshole to the southwest of where the Mississippi delta is now.