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Well, I understand you to mean by "paying for huge amounts of debt" that people had to sell other assets at fire-sale prices in order to pay their bankers, and since their bankers lent in dollars, demand for dollars must increase, driving exchange rates up in favor of the dollar.  (Correct me if I'm not reading you right. I do that a lot I know.)

The only problem with that argument is that it doesn't explain why bankers would want dollars instead of debt assets in the first place.  What makes a currency unit a more desirable entry on a bank's balance sheet than their debt asset did?  Well, we know it's likely because the bankers realized that their debt assets are riskier and less valuable than they thought -- that there's a good chance the borrower simply can't deliver on his commitment to repay them. What was the wealth, then, that the banker reported on its balance sheet? It was really just a commitment -- that is a political or social claim on society's resources -- made by the borrower to the banker. Nothing more.

When a banker (or any other investor) decides it would rather have currency in its vaults instead of debt assets on its books, it is deciding to substitute the political power represented in currency for the social power of a borrower.  

Currency is like the city walls that people hide behind when the brigands come. When the danger is gone, people go back outside to farm and work to increase their wealth, rather than just protect it.  But if the brigand threat is particularly big, the city with biggest walls offers the best protection.
 

by santiago on Wed Sep 2nd, 2009 at 12:10:21 PM EST
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