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 ...
You are not convincing me for a minute except that you are like a Shakespearean fool - who can make sounds like you know what you are talking about - but does not operate in the real world. My only purpose here is to make everyone aware that you have no serious economists, investors, federal reserve officals on your side of the argument and you are very quick to draw out a bunch of irrelevant numbers to confuse some other poor schmucks around here.
Bottom line Toddster is that you are an intellectual fraud.
Amen, brother.
We are going around in circles on this one Tikester. Get a clue Someone else's short term cash holdings dropped so that yours could increase. Its zero sum my young lad. Zero sum. Look it up.
Um, it is rising 14% a year on the dollar. The futures are at a 9% premium one year out. What does float look like again? It might take 3-5 years, but they are revaluing already.
Except, you know, for $14 trillion in goods and services every year. Little things like that...
This is the real story of how sad the whole Greenspan Bernanke real estate bubble is. What it amounts to is encouraging local governments to live beyond their means, supplying less and less for more and more costs.
Let me guess that your income did not increase by a factor of anyting like the amount of actual inflation that you are seeing.
Ah yes, the rear view mirror that never lies. All trends continue. So, if you ever see one, borrow the whole world and bet it keeps going. I mean, it worked so well in US real estate, right? And the techs, before that. And junk bonds, before that. And commodities, before that. And...
The amount of stock in existence rises from IPOs and options issuance to insiders, and declines from share buybacks and cash takeover offers. The amount of dollars in existence changes when dollar banks make loans, or retire assets without making new loans to match (a net positive cash flow toward banks). The amount of FRNs in existence changes when customers want more physical notes and fewer deposits or vice versa. No other process changes the quantities of these things in existence, they only shift around who holds how much of which type.
Yes the Fed control the increase in the narrower measures of money, through require reserves and their effect on banks' ability to make new loans. But it is there new loans that directly create or destroy new dollars. And MZM is much broader than the items the Fed directly controls. M1 closely, M2 loosely, yes. MZM, no.
But there is a more basic error in your comment, when you say only more short term money can allow stocks to be sold at higher prices. This is obviously just false. The same $1 million can serve to liquidate any amount of stock, just by using it over and over. A typical dollar in the financial circulation in New York turns over literally 50000 times faster than a dollar in the rest of the economy.
Once someone sells a stock, what do they want to hold instead? If it is a dollar balance at a bank, then it will increase the demand for dollars, which would raise the value of dollars (cause deflation) if the quantity of them were fixed. Since the quantity of them isn't fixed, it doesn't do that either, it just prompts the Fed to ease a little to accomodate the higher demand for held dollar balances.
But if they want to hold art, or gold, or Brazilean Llama futures, then no, it doesn't increase the demand for dollars, the dollars turns right over as many times as people want to move from one asset to another through as many intermediaries and at any prices they please, and those dollars have performed their medium of exchange function, without the amount of gold or art or stocks or llamas or written contracts or little green slips of paper, having changed in the slightest.
I have not ignored that, but am trying to figure out what things would cause the US$ trend to reverse. The thesis of the article is that that dollar should turn around. The presumption behind this must be that trade balances and financial flows have adjusted rapidly to make the dollar relatively underpriced. But my argument is that aside from commodities we have a hard time producing for export, and for a particular reason. The US is still struggling with high quality product design and fabrication. Virtually every manufactured good I purchase I compare quality and select on the basis of design functionality and quality of construction, even paying 2-3 times what I might get away with using lower standards. I do this because I am tired of American and Chinese manufactured $HIT that does not work as advertised and breaks trying to get it out of the box. Given our trade deficits I would guess I am not alone in my tastes and predilections.
I see nothing in that trend that is changing, and I think it will take a fundamental structural change in our economy that rewards folks who invent and design and manufacture, and not folks who are good and moving money around and folks who argue the lawsuits for or against those who do.
Furthermore, about 1/2 of our economy has nothing to do with exports, being government, healthcare and energy. 1 in 7 dollars in the US goes to health care and yet none of us think we have a great health care system. Michelle Obama as a lawyer gets $300K + as an administrator, as an example. I would bet that only a few specialist MDs get paid more than that and most GPs get 1/2 of that.
It is example after example throughout our economy of things that make no sense and would not be that way if there were a free market exchange of goods and services in that particular sector, including the right not to participate at all in that sector.
I think we have too many built in structural problems that have nothing to do with foreign financial flows for goods and services to lead to a genuine reversal of the trend.
First, that is not the argument. Second, you are incorrect. The argument was whether or not the federal reserve controlled the supply of short term money. They do, every economists says they do, and I will defer arguing any idiotic contention to the contrary.
Imagine an economy with 200 people. 1/2 of the folks have Picassos valued at $.5M per copy and $.5M in near term cash holdings. The other 100 have each $1M in near term cash holdings. Now the 1/2 could liquidate their art collection, assuming willing buyers. Each of the 100 Picassos could sell at $.5M. At the end of the day, total cash holdings are unchanged, assuming there is a willing buyer for each. Imagine, a panic in Picassos where everyone is a seller and no one a buyer. The the Picassos suddenly become worthless. Of course at some price $.01 on the dollar, say, some smart guy will step in and buy all the Picassos. But regardless, at the beginning and at the end, whether you liquidate no Picassos or all the Picassos total cash holdings are unchanged. Individual holdings change all over.
There is an enormous difference between assets that are not regarded as near term money equivalents and near term money equivalents.
The same $1 million can serve to liquidate any amount of stock, just by using it over and over.
First, this is irrelevant to the creation of near term money equivalents. Second, this is wrong. $1M cash cannot liquidate more than $1M in stock. If the seller of the original $1M in stocks uses his cash to purchase another $1M shares of stock then there has been no net liquidation, which is the point that panics Bernanke. So long as there is only swapping of financial or real estate holdings at near peak market valuations everything is ok. The panic comes when there is an attempt to create NET liquidation in favor of short term cash. What the FED attempts to do is to create so much short term cash that there is little desire to hold short term cash and folks are willing to hold financial assets instead. It takes a lot because you cannot liquidate much of a highly leveraged asset without sucking all the cash out of the economy.
Once someone sells a stock, what do they want to hold instead? If it is a dollar balance at a bank, then it will increase the demand for dollars, which would raise the value of dollars (cause deflation) if the quantity of them were fixed. Since the quantity of them isn't fixed, it doesn't do that either, it just prompts the Fed to ease a little to accomodate the higher demand for held dollar balances..
First, increasing demand for dollars does not change the supply of cash $. The quantity of them isn't fixed ONLY because the FED expands reserves to make more of them. It is the whole point of central banking. Really. It is what central banks do and it is why we have them.
MZM is much broader than the items the Fed directly controls. M1 closely, M2 loosely, yes. MZM, no.
I would agree with the Austrians that what counts is M0, but the Fed thinks that anything in MZM is really money, and their recent actions show their willingness to use anthing in MZM as money, so it is for these purposes money. Since the regulators of our currency think it is money and will treat it as money in the creation of bank reserves, and they created an extra $2T of this kind of money in the last year or so, I will concede the argument to the FED.
Me I am against this kind of funny money accounting as the kind of flimflammery that got us into this mess, but if you disagree run your argument with the FED, not with me.
Is there any equal to the hilarious combination of hubris and abject ignorance displayed by this rocket surgeon? I haven't encountered many freepers who are this wrong and so damned sure of themselves that they come across as complete fools.
Do you even bother to reply to him anymore? Is it worth it?
I’m not sure he’s even real. There’s a significant possibility he is a perl script programmed by Toddster to illustrate economic ignorance.
Money stock vs. M1 vs M2. As toddster pointed out when you cash in a CD the money therein reverts from M1 to Money stock. So when you sell a stock the funds go into the measures of money supply also as long as you put the proceeds into a money market fund or checking account of some kind.
Simple, investment demand for USD assets.
"The presumption behind this must be that trade balances and financial flows have adjusted rapidly"
Nope. First, trade balances do not determine exchange rates. While there is undoubtedly some weak but longer term correlation between a positive current account balance and currency appreciation, it is second order and weak, and in the short run currencies can go wherever they like.
Second, current account balances themselves are not driven by trade competitiveness, but primarily by savings rate decisions. The savings rate in any country minus the investment rate in that country is its current account surplus. That is an accounting identity, and not a weak correlation.
Right now the US has a large current account deficit because the savings rate here is low but the rate of gross investment here is very high. That means we import real capital. The question whether or not that benefits or harms us in the long run, it not determined just by knowing the sign of the flow - inward in this case. It depends on whether the cost of that capital is greater than or less than how much it does for us.
The same is true of any investment whatever, but we care less about other forms because we expect the losers and winners to both be residents etc.
"aside from commodities we have a hard time producing for export"
Nonsense, US exports are at record levels, of course so are imports. They are also highly varied, lots of it is high tech, high value added stuff not commodities (e.g. pharmecuticals, aircraft, computers and other tech, communications equipment, heavy machinery and industrial equipment, etc). The reason we have a large current account deficit is the personal savings rate is near zero, while we invest over $1 trillion a year in new plant and equipment. Retained corporate earnings only funds about half of investment.
"The US is still struggling with high quality product design"
iPhone. MacAir. 757s. F-15s. GE power turbines. CAT construction equipment. Intel chips. It is just nonsense, the US is the leading industrial and technological economy on the planet. It is also the leading service economy on the planet, of course, dominating the information and entertainment and financial industries world wide.
"I see nothing in that trend that is changing"
Your problem is simple then, you have misidentified a non-existent subjective trend in your own ridiculously high flown preferences or standards, with the actual cause of the current account deficit. Mexico and Brazil and India don't care whether you think quality is up to your father's day standards, they prefer to have actual capital equipment and technology, to sitting around on assorted manure piles digging ditches with a hoe. Europeans and Japanese, meanwhile, want to watch Hollywood starlets prance about in their underwear, and would prefer not to die of heart disease if a pill can stop it. None of that is the reason we import more capital than we export. We simply don't save enough out of current income to fund the gusher of ongoing real investment occurring here. Also, I am pretty sure "energy" isn't pushing paper around, and as for health care, you are welcome to go try Africa's if you think ours pointless.
"example after example throughout our economy of things that make no sense"
Um, sorry, your not dictating every value in existence is not equivalent to "make no sense". The real value of goods or services to anybody who will bid for them is what they will actually bid for them and not what you think they should spend their money on. In case you hadn't noticed, it isn't your money, it is theirs. And it is their freedom, what they choose to do with it. Do plenty of people make rather vapid use of their wealth? No doubt. Who cares? If they toss it away to others around them, those others pick it up.
"the right not to participate at all in that sector."
Thinking of government? lol.
No, see, the financial crisis since last summer has resulted in all major banks, but especially US and European ones, forcing a net cash flow in their favor, and using that cash flow to extinguish old debts that did not perform, rather than to fund any new ones. As that has happened, the Fed has cut rates here to compensate. The dollar has fallen and commodity prices have risen strongly (bubble strongly) in real terms. These will all curtail consumption expenditure in the US, probably by enough to cause a recession.
But they are also all shutting off avenues to overspending beyond income for the half the population that doesn't save. The net US savings rate of zero is not a result of no one here having money - US household net worth is around $55 trillion. It is, instead, a result of about half the population funding expenditure with debt, and the other half lending it to them, mostly through financial intermediaries. Stop the former, and the savings rate of the latter remains.
A higher average savings rate will reduce the current account deficit. It is already moving - it stopped growing over a year ago and has decline in the last year or so, though not very rapidly. It will decline more as various avenues to spending beyond income are shut off. In the immediate past, all those losses the banks are writing off are gains to the deadbeats they lent to. But the deadbeats aren't going to get more - from that source, anyway, the government might (lol).
That is the longer term reason the credit crunch will address the current account situation. But the short term turn around for the dollar the article is forecasting, won't depend on anything that gradual. It is much simpler than that. Japanese households have $25 trillion in savings and their yen now buy a lot more than a year ago. Europeans, lower savings each, at least as big a currency move. They are all going to want to buy US financial assets that have fallen up to 20% in dollar price and much more than that in their currencies.
Really simple. See all those sovereign funds and Arab investors piling into the likes of Citigroup? There is your short term dollar demand.
The illusion is you think a change in *your* holdings of money, are a change in the amount of money there is. Not so.
Money is the debt of a bank. The money supply increases when banks run up the size of their balance sheets, both the liabilities side (their debts, which are money) and their asset side (their loans and other claims on the rest of us).
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