Posted on 04/27/2008 3:01:19 PM PDT by shrinkermd
When the Federal Reserve cuts interest rates for a seventh consecutive time this Wednesday, it will begin to wind down a pernicious campaign that has flooded the market with cheap dollars since last summer. At the same time, the whoosh of air from Europe's deflating credit bubble puts new pressure on the European Central Bank to begin cutting borrowing costs in order to goose growth.
The strategy shifts by central banks will drive a greenback comeback against the overpriced euro, turning back the 15% slide that since August has lifted the euro -- to a record $1.60 last week -- even as the dollar continues to struggle against the undervalued currencies of Asia.
Monetary policy isn't the only catalyst for a healthier dollar. "A lot of what has happened since last summer also is emotional, and that can change on a dime," says James Paulsen, Wells Capital Management's chief investment strategist. Among other drivers: mounting evidence that the credit crisis loosening its grip stateside is still tightening across the Atlantic, and a growing belief that the U.S. economy could bottom and rebound before Europe's.
The rehabilitation, ironically, is driven by a weak dollar, which makes bargains of our exports, fills Manhattan's 65,000 hotel rooms with European tourists, and entices foreign giants from Ikea to Toyota to open factories here to exploit our increasingly cheap labor.
Already, the dollar has begun to strengthen against commodity-driven currencies from the Canadian loonie to the South African rand, and odds are it is close to a bottom against the euro, sterling and most developed-world currencies. On top of that, "negatives about the dollar are more fully discounted compared to the potential positives," says Marc Chandler, Brown Brothers Harriman's currency strategist, who expects the euro to pull back to test the $1.40 threshold this year
(Excerpt) Read more at online.barrons.com ...
Not gonna bet against that one.
There’s a significant possibility he is a perl script programmed by Toddster to illustrate economic ignorance.
OR, kind of like when you set up tin cans on a fence post for target practice? LOL.
You're off topic. Tell us how a change in M1 can change the money stock.
As the saying goes, "OK, pick one". But indeed, you alleged above that the Fed created new short term money to let someone cash out of their mutual fund. But I'll move on to the second and overlook the dodge on the first.
"The argument was whether or not the federal reserve controlled the supply of short term money."
They try to, but in the long run they don't much manage to, I'd say. Money creation, like all credit, is endogenous. When regulators control one sort, private financiers invent new structures and substitutes to economize on whatever the regulators have controlled, get it to stretch farther, and use new money substitutes instead. Which will be accepted and thereby become money, in economic fact, whatever legalisms attempt to maintain.
"regardless, at the beginning and at the end, whether you liquidate no Picassos or all the Picassos total cash holdings are unchanged."
I believe I already said that, stock for picassos. (He's dreck, by the way. But that's a quibble).
"There is an enormous difference between assets that are not regarded as near term money equivalents and near term money equivalents."
Actually, I can't see any in anything you've said so far, since yes the money is constant in trade in existing assets, but then so are the existing assets. Same number of picassos, or shares, as well as the same number of dollars. Ah, but, you will say, money equivalents, more *are* made. And I'll agree, and then point out that people are scribbling on their napkins all over, and some of them are making new picassos thereby, and others new shares of stock, and others new promissary notes or credit card receipts. All assets can be increased in quantity, by processes disjoint from trade in existing assets.
"$1M cash cannot liquidate more than $1M in stock."
Sure it can.
"If the seller of the original $1M in stocks uses his cash to purchase another $1M shares of stock"
Ah but he didn't, be bought a great big boat he is sailing to Bermuda. Or a Florida condo. Or overpriced dreck signed by some Pablo or other. He has still liquidated his stock, and passed his dollars or dollar equivalents on. Just as any number of shares of Exxon can be swapped for shares of Microsoft with the same dollars, any number of boats or dreck or condos can be swapped for shares of Exxon, using the same dollars as medium of exchange, between. The only thing you can say, is more people can't hold dollars than there are dollars - but since, when lots more people want to hold more dollars, scribblers are not wanting to scribble away and meet their demand, even that isn't saying very much.
"which is the point that panics Bernanke."
Hardly.
"The panic comes when there is an attempt to create NET liquidation in favor of short term cash."
Nope, the Fed can readily accomodate any such demand, and it does. Not that panic changes the amount of stock in the world, it doesn't - nor do panickers sell stock to the tooth fairy, they sell it to other men willing to part with cash because they think the prices attractive. But a simple net increase in the demand to hold dollar balances, due say to a desire to be better placed to meet exigent demands from worried creditors, the Fed can and does meet, by providing extra funds to the banks allowing them to carry larger balance sheets etc. Or these days by just letting them hold asset classes they are willing to carry smaller risk reserves against. Or by arranging for other institutions to do likewise e.g. the Home Loan Banks running up their debts as fast as commercial paper runs down.
"create so much short term cash that there is little desire to hold short term cash"
Nah, it just accomodates demand and refuses to let cash go "on special" due to deflationary demand shocks to the level of desired money balances. If it were a matter of incentives, a spread between T-bills and LIBOR of 1.5% would more than suffice. Instead it is a matter of Basel II standards and risk adjusted asset measurements, so holding the T-bill frees up a dollar to carry 10 times as much in paper that actually pays something.
"you cannot liquidate much of a highly leveraged asset without sucking all the cash out of the economy."
You can't suck all the cash out of the economy with transactions that leave the number of dollars unchanged, such as trade in existing assets. No, the deflation issue is, do the banks and only the banks, deliberately run off assets and repay liabilities, both, to reduce their total balance sheets and bring their risks back into line with desired ratios to capital?
If the banks do that, then bank debt outstanding declines, and financial claims outstanding, running in favor of the bank, also decline. The rest of the world owes its banks less. But banks also owe the rest of the world, less. And what banks owe the rest of the world, that's the money supply. But the issue is not, does that figure rise to huge enough amounts that people don't want to hold it. No, it is, does it decline absolutely, and rapidly?
That, the Fed deliberately prevents. Because it would put short term money "on special". Instead, it intends for discounted and temporary transfer of any sound asset to be a perfectly acceptable substitute for short term money - and that makes its specialness decidedly less important.
"First, increasing demand for dollars does not change the supply of cash $"
True, but it will raise the exchange value of an unchanged quantity of them. If, instead, the supply of dollars rises when demand for them rises sharply, then the exchange value of dollars against other assets will not spike, as panic demand for holding dollar balances, hits. And that is precisely the reason for the lender of last resort function of the Fed. The supply is deliberately made elastic to meet and match any panic demand, so the panic demand cannot raise the exchange value of the demanded item.
Your mistake, is in seeing the "delation" I referred to in my post, as necessarily referring to a *quantity* of anything. It isn't. Deflation is falling *prices*, not a falling quantity of dollars. Falling prices of everything, is simply an increase in the exchange value of money. Deflation is caused in the first instance, by a sharp, panic increase in the demand for money balances, compared to all other assets.
If that panic increase is allowed to increase the exchange value of money, it makes all existing debts contracted in money terms, that much more difficult to repay, at the new prevailing prices. And this is a positive feedback process that spreads bankruptcy. The Fed deliberately interrupts its course, by accomodating the heightened demand for money balances, until the market understands that money cannot go "on special".
The exchange value of money will not be allowed to rise. Its quantity will move instead. This being realized, the panic ebbs, all who wanted to get into money have done so, no bankruptcies caused purely by a scramble and increased weight of nominal claims, occurs. All real adjustments are still required, but no one is going to fail merely because the weight of their dollar debts it artificially increased 30% or more, by a passing panic. Been there, done that, everyone from Friedman left knows it is idiocy. It isn't going to happen again.
"The quantity of them isn't fixed ONLY because the FED expands reserves to make more of them."
Um, yes the Fed does so allow, and yes that is the point in a panic, but I still have to dispute the "only". In fact, the Fed acts as a regulator throughout, limiting the banks' ability to make new money. If the Fed weren't there, any private bank that liked could act the same way, if brave enough. Before it was, some did. Private banks didn't need Fed reserves to expand the money supply. They didn't need Fed reserves at all. They expanded the money supply whenever they felt like it. Solely governed by their own prudence in the level of debt they could get to pass, without distrust of their own ability to pay.
So, yes, the Fed is deliberately *allowing* the money supply to expand to accomodate a sudden panic demand for money balances. Which, frankly, is just counteracting the bank's own desire to force a cash flow in their favor to run off assets and fund writeoffs of bad debts, in favor of deadbeats who will never repay. With precious little net movement in the narrower money supply, but, sure, any panic demand for more money balances, met, without dollars ever going "on special".
"It is the whole point of central banking."
Actually, we have them to restrain private banks from creating too much money in boom times, by requiring reserves. And to accomodate sudden increases in demand for money in bust times, to lending freely when others pull back.
"what counts is M0"
A silly and antiquated idea, but fine, it simply isn't moving at all. M1 today is the same as it was in March of 2005, 3 years ago, literally the same. Currency is 3.3% higher than 2 years ago, but then the Fed accomodates any consumer preference for notes rather than deposits, so M1 is the nearest relevant measure.
The Fed isn't increasing the money supply it closely controls. It understands perfectly that the banks make use of fuzzier money substitutes, preferring the least regulated forms farthest from M1, precisely because they involve the least regulatory straightjacketing.
The reason it doesn't care, is in practice the reserve requirements do not "bite" first, and haven't for some time. The Fed moves reserves to meet banking conditions, not the other way around. What bites first for commercial banks are the Basel capital requirements, and not the Fed reserves-on-deposit requirements.
Banks limit their balance sheet growth to the amount they can carry while receiving a "well capitalized" grade from their regulators, under Basel II. They regard any slip below that level as a commercial liability likely to result in credit downgrades and higher costs of capital, and a consequent fall in competitiveness against one another. When one has such a correction to make, it simply grows slower than its rivals and loses market share.
When most or all need to do so at once, on the other hand, the Fed and its seconds step forward to lend, countercyclically.
All, exactly as designed and intended from the founding of the Fed. Frankly, the worst one can say about this cycle is that the Fed raised rates a bit too slowly after the boom got going, and was consequently about a year late. It broke the real estate fever exactly as it had to do, and now it is dutifully (and in my opinion, quite expertly) policing up everybody's over-done boom-time mess.
"I am against this kind of funny money accounting"
Nothing funny-money about it. If you don't think you are benefitted by using bank debts as money, try getting through the day paying for everything with blueberry scones. If you voluntarily use bank debt money, you are acknowledging by your actions that doing so benefits you. You then haggle over the deal anyway, even though you know the gains from the trade are beneficial to you, on the whole. Which is mere griping.
bump
In other words, were you to try simple English, the FED increases the money supply to keep the NET liquidation of assets from deflating the economy, which is what I think I said.
Because of a very large and robust US government debt market, the FED can increase the money supply as fast as it wants to and the private markets have no power to stop it until merchants and contractors stop taking US$ as payment for services rendered to the US government.
Lots of people are running around throwing brickbats at the Fed. They are exploiting ignorance about financial matters on the part of the public. They are assigning responsibilities and playing blame games very loosely, in ways that deliberately obscure the critical roles in all that is happening, of everyone else.
The Fed didn't sign loans it can't repay.
The Fed didn't loan acres of money to deadbeats.
The Fed didn't increase its demand for money out of panic.
The Fed isn't shrinking its balance sheet drastically.
The Fed didn't stop making markets, where it normally deals.
The Fed isn't forcing anyone to up the short term dollar balances they carry.
The Fed isn't chasing every transient price movement in every sort of asset for reckless speculative purposes.
Free men are doing all of those things, all on their own.
Deadbeats are walking away from signed contracts.
Lenders are seizing collateral and dumping assets onto illiquid markets are fire sale prices.
Bankers are hording treasury securities because they don't have to hold any Basel capital against them.
Banks are shrinking their balance sheets rapidly.
Financiers have let auction markets seize up and whole security classes they created and underwrote go begging for bids at a fraction of fair model values.
Investors are voluntarily ramping their short term cash holdings at vanishing interest rates in a declining currency.
Men who can't be dignified by the title "investor" have gone from tech stock to real estate to commodity and emerging market bubbles without a pause or a blink, at reckless levels of leverage and despite appalling losses on each previous bubble.
Nobody is putting a gun to any of these people's heads, forcing them to do these things.
Now, some critics think it would be a capital plan to "corner" dollars for debt settlement, drive their value up in a bubble as big as those in oil or gold or China or Brazil, and force half the world into bankruptcy. Some probably think they'd pick up big bargains in the resulting smash, though probably the Chinese or Arabs would outbid them. And if they can't, they will huff and stamp their feet and pretend they have every right to expect authorities to help them run their corner, and pretend they are being robbed if they can't rob everyone else.
But they are jerks, transparently. Clear? Nobody's interests in mind but a narrow "book" of their own bets. They are free to bet all they like, but the Fed isn't going to contract the money supply 30% and allow a depression, just so they can shout ha ha, I'm in cash already, whoopie.
I exaggerate ever so slightly for clarity. Only on the last bit - everything before it is stone sober.
Last point. When a central bank allows banks to ramp up the money supply even when nobody wants to hold that form of money, is isn't accomodating a sharp panic demand for higher money balances. And when it is accomodating a sharp panic demand for higher money balances, people are not scrambling to get rid of their money balances.
It is quite clear which of these situations we are in. And the Fed slanderers, know it.
I really cannot believe that I am arguing with a bunch of idiots who seriously believe that the Federal Reserve does not control and has not caused enormous growth of the money supply. No economist and no central banker claims otherwise, but you three twits do. Why? Are y’all really that ignorant or are you trying to swindle the rest of your reading public?
Even some sitting governors of the Federal Reserve Board, as well as former chairman Paul Volker are throwing brickbats at Bernanke, so we slanderers are in good company.
PS. You cannot slander a public institution, which the FED most definitely is.
Earth to Jason please blast your retro rockets before you pass Pluto....
The FED created the moral hazard, increased the money supply year over year, and put on the regulatory see no evil blinders that made this pyramiding ponzi scheme of financial skullduggery all but a certainty. Everything on your list is the certain result of expansion of credit at the hands of a lax federal reserve and has happened over and over and over and over again throughout history. Despite all the claims that it is different this time, it is never actually different this time.
Greenspan was at the helm for all of it and he is not too far gone yet for us to blame it all on him. He even used to be part of the school of economics that knew that this was the certain path to ruin.
Oh this is the biggest BS I have read yet.
This becomes a critical distinction when a sect of men proposes to restrict essential economic liberties I have and want to keep, supposedly in the name of restraining a state agency that allows me that liberty. As though a gun controller were to say, this is ridiculous, everyone knows that the ATF controls American gun ownership, so it is being reckless if it doesn't confiscate all guns tomorrow.
Well no. I have freedom to engage in credit transactions, which the government somewhat restricts through the Fed. When you criticize the Fed for leaving me any liberty in the matter, and claim it is oppressing you by leaving me free, I have a legitimate objection. Particularly when you phrase your attack on their not removing my liberty to engage in credit transactions, as an attack in state interference in a supposedly free economy, as though you are the one speaking for liberty. You aren't. You want them to be more draconian in forbidding me to do things - and others I support, more than myself. That isn't championing my liberties. It is trying to enlist the state in a project to take them away by force.
Banks have increased the money supply. I freely patronize banks and I wholeheartedly support them as great engines of modern capitalism. The Fed has left them fairly free to go about their business, and I want them left fairly free to go about their business. You don't. Pretending everything they do is done by the government won't make it so, and is pretending.
Are we clear?
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