OT: End of the dollar?

Just think about that one for a minute, though. You own the home; your current mortgage, as mortgage lenders call it, is "seasoned." And you aren't buying anything, so it neither adds nor subtracts from economic activity.

In other words, to the degree that there is some mortgage money available, you're an ideal candidate. If I recall, you're thinking about extending the term of your mortgage. You probably have some equity; what your relative interest rate will be depends on what it was when you took your first mortgage.

Overall, yours is just a transaction that, to the bank, will extend the period over which they'll collect interest on a highly secure investment. To the economy, it's net zero. To you...well, that's your business, but you may wind up paying less per month, even though your monthly payments will reflect a much longer term of interest on the principal.

Those deals are the easy ones for banks to make, but they aren't the ones that matter to the economy. I don't doubt there's money around for that kind of contract. Where money is short is for *average* contracts, which is the kind that creates growth in the housing market.

That makes me wonder: is your deal really going to pay off for you? Banks weren't paying that much for money a couple of years ago, and mortgage rates are pretty low right now, for people who can get them.

Yeah, they do seem detertimed. And it isn't only mortgages. The commercial paper market is still on oxygen, except for unsecured financial CP. That has to get moving or more businesses will fail.

-- Ed Huntress

Ha-ha! That will do as an explanation, I suppose.

Well, actually there's a lot more to it. The subprime loans are one thing. The packaging of them into "securitized" bonds is another. Creative credit-default derivatives related to them, and more importantly related to various other kinds of commercial bonds, is still another. And the wild and crazy leverage ratios by which these things were "owned" are still another.

And there is more. What we have here has been called a perfect storm, in which several things happened at once, which made all of them unstable. But I think that misstates the situation. It could have started anywhere, because these largely unregulated securities were each, individually, built on sand, and they were all sitting on the same sandpile.

It didn't require a perfect storm. All it required was an economic downturn or a loss of confidence in one of the various types of securities. Once one fell, there were other securities that depended on the first, almost any which way you turned. The hedges that gave us low interest rates and growth that seemed to come out of nowhere were useless as hedge bets, because their security depended on something else, in almost every case, and they were all interdependent.

So it's a bit more complicated than Heidi's pub but the basic idea of your parable does a reasonable job of explaining one important aspect of the mechanism. The whole clockworks, however, was made of frozen crap.

-- Ed Huntress

The whole clockworks, however, was made of frozen crap.

Man, doncha hate it when that stuff thaws out?

I hesitate to enter the realm of high finance but last night's news had the US dollar at 35-something baht. Only about 5 baht off its all time high.

While the dollar's intrinsic value may fall through the floor, as someone suggests, its value vis-a-vis S.E.A. currency is approaching it highest value in years.

Cheers,

Bruce (bruceinbangkokatgmaildotcom)

Don't just repeat "theory." Do a thought experiment.

Assume that the true value of 1 dollar is 100 yen. Then price goods in yen with an exchange rate of 80 and 120 yen to the dollar.

For an example assume a micrometer at 100$

assume actual/real exchange @ 100 yen/dollar US price 100$ Japanese price 10,000 Yen

US currency undervalued at 80 yen/dollar US price 100$ Japanese price 8,000 yen helps sale US-->Japan Japanese price 10,000 yen US price 125$ hurts sales US-->Japan

US currency overvalued at 125 yen /dollar US price 100$ Japanese price 12,500 yen hurts sales US-->japan Japanese price 10,000 yen US price 80$ Helps sales Japan--> US

Assume that overvalued exchange rate is desired by the US financial services sectors because it help their earnings, and allows them to make bigger loans in the local currency with same level of US capital and is "fixed." Then to compete the US micrometer manufacturer must cut their costs to be competitive. Every cost except labor [machines, materials, money, etc.] is fixed, therefore labor costs, i.e. wages and benefits such as medical and retirement must be cut if the price of the micrometer is to be reduced.

He has it backwards. The balance of trade is effected by the actual/operational exchange rates. See "dutch disease"

Far too much of the US "prosperity" has been based on borrowed money at far too cheap interest, and even more critical, most of this is "hot" [short-term] international money. In this respect, the US is like post WW1 Germany after the hyperinflation. The country boomed but only as the result of massive US loans under the Dawes/Young "plans." When these stopped coming and the existing loans could/would not be "rolled over" the house of cards collapsed taking down the global economy. [Think PRC and OPEC]

Which segues into ============ China calls for new reserve currency

By Jamil Anderlini in Beijing

Published: March 23 2009 12:16 | Last updated: March 24 2009

00:06

China?s central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund.

In an essay posted on the People?s Bank of China?s website, Zhou Xiaochuan, the central bank?s governor, said the goal would be to create a reserve currency ?that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies?.

This is a clear sign that China, as the largest holder of US dollar financial assets, is concerned about the potential inflationary risk of the US Federal Reserve printing money,? said Qu Hongbin, chief China economist for HSBC.

Although Mr Zhou did not mention the US dollar, the essay gave a pointed critique of the current dollar-dominated monetary system.

?The outbreak of the [current] crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system,? Mr Zhou wrote.

China has little choice but to hold the bulk of its $2,000bn of foreign exchange reserves in US dollars, and this is unlikely to change in the near future.

To replace the current system, Mr Zhou suggested expanding the role of special drawing rights, which were introduced by the IMF in 1969 to support the Bretton Woods fixed exchange rate regime but became less relevant once that collapsed in the 1970s.

Today, the value of SDRs is based on a basket of four currencies ? the US dollar, yen, euro and sterling ? and they are used largely as a unit of account by the IMF and some other international organisations.

China?s proposal would expand the basket of currencies forming the basis of SDR valuation to all major economies and set up a settlement system between SDRs and other currencies so they could be used in international trade and financial transactions.

---------------

For the article see Note that this is in English, not "FedSpeak," and appears to be completely understandable. [Thinks -- can we outsource the US Fed?]

Unka' George [George McDuffee]

------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?

Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).

The closest thing to "intrinsic value" of any currency today is measured by what it will buy. In that regard, the overall US consumer-price index for February was up by 0.2% over a year ago, and down by a fraction of a percent over the past three months.

In other words, a dollar will buy slightly more than it did a few months ago. In terms of "value," then, the dollar's worth is *increasing*, not decreasing.

And, as you point out, it's fairly flat, and certainly not declining overall, against most foreign currencies.

That's happening despite large increases in the money supply. I guess those weekend economic pundits are going to have to get out a fresh piece of paper and start over.

(Actually, it's pretty simple to explain. There is a lot of money around, but it's sitting in bank accounts, including bank deposits with the Fed, rather than changing hands and heating up the economy. Money supply is only half of the story in terms of inflation or deflation. Velocity, or the rate at which the money turns over in transactions, is the other half. The tendency for money to inflate or deflate is a product of supply and velocity. And velocity is in the tank because people aren't buying any more than they have to.)

-- Ed Huntress

Something discussed here at length about a month or so ago.

JC

Assuming events occurred as you're describing, so far that doesn't address what happens to currency values when you promote or restrict exports. That just tells us what the consequences are of currency values that are already inflated or deflated. Are we together so far?

Dutch disease doesn't apply to the US. Our influx of foreign cash is from foreign investment in business and industry ($7 trillion) more than in cash purchases of Treasury securities ($3 trillion). And it's stretching a point to begin with to equate what happens when foreign cash flows into a country as a result of a pure gift of exportable resources (Venezuela; Russia; Iran) versus cash coming in because a country has a strong and stable economy (the US). The supporting evidence is that US industrial output has not declined over the years we've run a trade deficit. What's happened is that our services grew a lot faster, which is typical for advanced economies.

And none of that has anything to do with balance of trade in goods and services itself, George, which is what we were talking about.

I disagree on the first point. That's a line that media pundits keep repeating, but our per capita national debt (the borrowed money) is lower than in many other industrial countries. We highly industrialized countries are in similar places in that regard. Interest rates have been low on those Treasury securities because the world market regards the US as the safest place to invest money. And the money doesn't look very hot when it lands here and doesn't leave. If it was hot, it would have run for cover. But there is no better cover than right here. This isn't Malaysia in the late '90s.

You're assuming the foreign investments in Treasuries are going to stop rolling over. People have been predicting that for 20 years. So far, no dice.

Again, we've been hearing these rumblings for years and years. China is worried that a declining dollar will close our markets to their goods. So they threaten to do this or that, neglecting to note that there is no other currency on which to hang their hat. Nor is there any "basket" of currencies that are doing better.

They know this. They also know that their entire system is much more vulnerable than they would admit, or than most pundits understand. Of the 45 major trading countries tracked by the World Bank, the average drop in exports last year was 32%. The WB predicts that world trade will fall by 10% this year, after growing at an average rate of 5.7% for the previous ten years. Where do you think that leaves China?

We're all interdependent as hell, and there's little anyone could do about that fact right now.

-- Ed Huntress

Like most of this, it's a constant replay. d8-)

-- Ed Huntress

1Bsomeconundrum@216.196.97.131...

So well written, but..... While it as true when as it was when Jesus talked about burying money, money out of circulation has no effect and money held is reserve will not cause inflation, but Obama's spending is going to dilute the circulating money supply quickly.

The gov measures inflation with the cost of Asian TV sets, not energy, food, and rent. That keeps the COLA of social security down. Real inflation has doubled the cost of ammo in the last year.

So well written, but..... While it as true when as it was when Jesus talked about burying money, money out of circulation has no effect and money held is reserve will not cause inflation, but Obama's spending is going to dilute the circulating money supply quickly.

The gov measures inflation with the cost of Asian TV sets, not energy, food, and rent. That keeps the COLA of social security down. Real inflation has doubled the cost of ammo in the last year.

As you pointed out, the CPI has been distorted by cheap imported goods. There was a lot of excess money pumped into the monetary system over the last twenty years which inflated prices of housing and other assets. I agree the stimulus money, especially on the fiscal side, has the potential for spurring future inflation. But letting the economy self correct at this point with no measures to ease the transition would not be prudent.

I wonder if cap and trade on carbon will be in the index? A taxing scheme that will affect the cheapest source of electricity generation (coal) is going to raise COLA unless some cheap trick is applied.

Wes

-- In her book "Atlas Shrugged", first published in 1957, Ayn Rand warned us about the society we find ourselves in. We were warned.

The index is consumer prices. If carbon caps increase consumer prices, it will show up in the CDI. If not, not.

We'll put your prediction down on the ledger here...

-- Ed Huntress