a question

[loosecannon]

I understand how central bank reserves used to work to support currency value. Back in the days when we wanted a strong dollar.

But that was then and this is now. We are in some otherworld now.

China buys reserves to suppress their currency, nations compete to debase their currencies by printing or spreading rumor that they may print money. Japan prints money to combat deflation...

But either I really have no clue about how this works or something is broken. Currencies are no longer valued according to reserves, they are valued according to spot price and demand on FOREX. To effect the daily FOREX price, you have to buy reserves every single day to impact demand and drive prices up.

But how do you drive a currency down? Printing money doesn't drive your currency down unless you use that money to buy everybody else's currency effecting today's price. And again you gotta do this every day to keep those prices suppressed.

You could print a gazzillion dollars and offer it for sale on FOREX. That would drive your currency down. But that isn't how money is introduced into circulation. Money has to be lent into circulation.

But Japan has been at this for decades printing gazzillions of yen, buying dollar reserves and it really hasn't helped them combat deflation. The world still treats the yen like it is short in supply, or like there is an infinite demand for more yen. And those dollar reserves Japan holds sure aren't supporting their yen!

In fact there are actually a lot of examples wherein nations printed gazzillions of their units and inflation didn't materialize. The US of late is just one glaring example.

Anybody who thinks they understand this please straighten me out.

CA Girl, esp you, since you work with the world's best economists who routinely predict the future with perfect precision.

 

[william the wie]

Currency values are a vector sum of all sources of demand vs. all sources of supply for each currency. Since I do not intend to trade Forex I just read my free FX 360 news alerts and look for actionable intelligence. It does work but I am getting to the point where I am having trouble finding tithe money to cover my Roth IRA yields since I am not old enough to start withdrawals.

 

[Oddball]

Start here:

[ame]http://www.youtube.com/watch?v=7auQEXTWomA[/ame]

 

[CrusaderFrank]

We are in a deflationary cycle because Fannie and Freddie intentionally tanked the US real estate market and all the money people used to mint in refinancings/sales has turned negative; money supply and asset values are plummeting.

The Fed propped the system up by throwing literally trillions at institutions they've yet to name, but it's a last hurrah.

 

[loosecannon]

thanks for the responses but they didn't clarify much. But thanks anyway.

 

[CrusaderFrank]

thanks for the responses but they didn't clarify much. But thanks anyway.

I answered your question. We're not "printing a gazillion" dollars. The money supply is collapsing in the USA as we continue a deflationary spiral

 

[Paulie]

I understand how central bank reserves used to work to support currency value. Back in the days when we wanted a strong dollar.

But that was then and this is now. We are in some otherworld now.

China buys reserves to suppress their currency, nations compete to debase their currencies by printing or spreading rumor that they may print money. Japan prints money to combat deflation...

But either I really have no clue about how this works or something is broken. Currencies are no longer valued according to reserves, they are valued according to spot price and demand on FOREX. To effect the daily FOREX price, you have to buy reserves every single day to impact demand and drive prices up.

But how do you drive a currency down? Printing money doesn't drive your currency down unless you use that money to buy everybody else's currency effecting today's price. And again you gotta do this every day to keep those prices suppressed.

You could print a gazzillion dollars and offer it for sale on FOREX. That would drive your currency down. But that isn't how money is introduced into circulation. Money has to be lent into circulation.

But Japan has been at this for decades printing gazzillions of yen, buying dollar reserves and it really hasn't helped them combat deflation. The world still treats the yen like it is short in supply, or like there is an infinite demand for more yen. And those dollar reserves Japan holds sure aren't supporting their yen!

In fact there are actually a lot of examples wherein nations printed gazzillions of their units and inflation didn't materialize. The US of late is just one glaring example.

Anybody who thinks they understand this please straighten me out.

CA Girl, esp you, since you work with the world's best economists who routinely predict the future with perfect precision.

FOREX value is only one value you can look at.

Perceived value via supply/demand of the currency in existence is also just as important, if not more.

Prices rise and fall despite whatever FOREX might be showing you today on currencies. The market eventually realizes roughly how much cash is chasing goods and services.

 

[California Girl]

I understand how central bank reserves used to work to support currency value. Back in the days when we wanted a strong dollar.

But that was then and this is now. We are in some otherworld now.

China buys reserves to suppress their currency, nations compete to debase their currencies by printing or spreading rumor that they may print money. Japan prints money to combat deflation...

But either I really have no clue about how this works or something is broken. Currencies are no longer valued according to reserves, they are valued according to spot price and demand on FOREX. To effect the daily FOREX price, you have to buy reserves every single day to impact demand and drive prices up.

But how do you drive a currency down? Printing money doesn't drive your currency down unless you use that money to buy everybody else's currency effecting today's price. And again you gotta do this every day to keep those prices suppressed.

You could print a gazzillion dollars and offer it for sale on FOREX. That would drive your currency down. But that isn't how money is introduced into circulation. Money has to be lent into circulation.

But Japan has been at this for decades printing gazzillions of yen, buying dollar reserves and it really hasn't helped them combat deflation. The world still treats the yen like it is short in supply, or like there is an infinite demand for more yen. And those dollar reserves Japan holds sure aren't supporting their yen!

In fact there are actually a lot of examples wherein nations printed gazzillions of their units and inflation didn't materialize. The US of late is just one glaring example.

Anybody who thinks they understand this please straighten me out.

CA Girl, esp you, since you work with the world's best economists who routinely predict the future with perfect precision.

Read more. I don't have the time, or the energy, to post chapter and verse on the current mess..... but there'll be a really good book about it out pretty soon. The writer rocks.

 

[antagon]

i think exchanges merely facilitate the trade of currencies, and 'hover' above the effective values of these currencies on the street. those trading in FOREX do examine reserves, rates, purchasing power, and central bank's activity for an idea of where to jerk trading on a currency, however, as you have noted, this is not a direct reflection of value based on reserve anymore. in some ways the old system is silly. no matter how rare or shiny gold or another reserve commodity might be, economies function on supply and demand. currency is no exception: when supply of a currency is high on the street, merchants demand more for the same bushel of corn, due to the relative abundance of money to their produce. when money is hard to come by and the merchant wants it more than his corn, he liquidates the corn at prices which make people think they could do with an extra ear instead of the cash to save or buy competitive produce. does it really matter if the paper whirring around this market is backed by gold or oil?

the same applies to FOREX. while you've asserted that cash has to be lent into circulation, this is not the only way. QE liquidates institutions, and indications are that rather than invest that on the street with the proven hordes of dead-beat borrowers, the institutions could snap up other investments like commodities, to include currency. this flooding of the market with bucks has the same effect as the farmer's market above. relative to other traded commodities, the dollar drops when these billions are intro'd at the institutional level and those institutions turn to the market to spend them.

that's merely monetary liquidation. fiscally, the issuer could decide to subsidize corn-chip makers with billions in purchasing power. the chipmakers will inflate the price of corn in turn by upsetting the ratio of willing cash to dearer and dearer corn. this is a crude example in a narrow market, but it shows how deficit spending introduces liquidity without the central bank's involvement, and in a way which might still effect inflation -- certainly on the street.

i think that there is a disposition to hoard money in a recovery or in times of economic uncertainty. this is what is keeping QE off of the street's deflationary trends. the very lust over yen is why institutions getting pumped yen are not pumping it back into their economy as much as into the markets putting out more reliable margins for it. back on the streets, the conservative business person is tightening his belt, and narrowing his investment exposure, looking to capture more profit, rather than spur more growth in the face of shrinking demand.

this is my fundamental criticism of monetary policy over fiscal policy when it comes to real deflation. the efficiency per dollar spent is dramatically less when it is measured on the street in terms of home sale prices. this cant be said for the expired $9000 homebuyer rebate or the expired cash for clunkers program, fiscal policies, which get the market moving on the street.

i've ranted on the topic, but i dont know if that answers a question.

 

[loosecannon]

while you've asserted that cash has to be lent into circulation, this is not the only way. QE liquidates institutions, and indications are that rather than invest that on the street with the proven hordes of dead-beat borrowers, the institutions could snap up other investments like commodities, to include currency. this flooding of the market with bucks has the same effect as the farmer's market above. relative to other traded commodities, the dollar drops when these billions are intro'd at the institutional level and those institutions turn to the market to spend them.

that's merely monetary liquidation. fiscally, the issuer could decide to subsidize corn-chip makers with billions in purchasing power. the chipmakers will inflate the price of corn in turn by upsetting the ratio of willing cash to dearer and dearer corn. this is a crude example in a narrow market, but it shows how deficit spending introduces liquidity without the central bank's involvement, and in a way which might still effect inflation -- certainly on the street.

Well even QE relies on institutions (member banks of the Federal Reserve) to borrow this new money, albeit at interest rates that are near zero. If the money is invested directly into commodities markets there is no multiplier boosting the money supply unless the assets purchased can be converted into securities of some kind and used as reserves. If that money was lent only the reserve has to be retained while at least 9 times that number of dollars can then be lent into circulation.

So I don't see how the issuer could target corn chip makers.

The only benefit from this process is bubbles and if bubbles persist, inflation.

You mentioned the inefficiency of this approach, indeed. Esp considering that the inflation created comes almost purely in the form of investor profits at the onset and then evolves into commodity producer products, a process that reverses itself creating equal loses should the bubble collapse.

This was a big part of what caused the credit crisis, far too large a share of new currency being allocated by the commercial banks toward socially unproductive investment with destructive downsides.

IOW this can't end well.

 

[loosecannon]

i think exchanges merely facilitate the trade of currencies, and 'hover' above the effective values of these currencies on the street. those trading in FOREX do examine reserves, rates, purchasing power, and central bank's activity for an idea of where to jerk trading on a currency, however, as you have noted, this is not a direct reflection of value based on reserve anymore. in some ways the old system is silly. no matter how rare or shiny gold or another reserve commodity might be, economies function on supply and demand. currency is no exception: when supply of a currency is high on the street, merchants demand more for the same bushel of corn, due to the relative abundance of money to their produce. when money is hard to come by and the merchant wants it more than his corn, he liquidates the corn at prices which make people think they could do with an extra ear instead of the cash to save or buy competitive produce. does it really matter if the paper whirring around this market is backed by gold or oil?

the same applies to FOREX.

This is a good explanation, and it may be the right answer. But it doesn't explain the nearly perfect mechanical control that China can exert upon it's own daily currency values meeting targets defined to 3 decimal points.

You have mentioned before an advantage that China maintains in limiting the flow of yuan. I do not really understand the mechanics of that advantage but I get that the gist is that China has a one sided access to FOREX to manipulate other currencies and their own while being somewhat shielded from others who may want to do the same in reverse.

The intuitive assumption would be that if China's currency was freely traded as is the dollar, yen etc, it would be difficult for China to so mechanically control the value of the yuan.

But like I said I do not fully understand the one sided relationship the yuan plays to FOREX trading.

 

[loosecannon]

i think that there is a disposition to hoard money in a recovery or in times of economic uncertainty. this is what is keeping QE off of the street's deflationary trends. the very lust over yen is why institutions getting pumped yen are not pumping it back into their economy as much as into the markets putting out more reliable margins for it. back on the streets, the conservative business person is tightening his belt, and narrowing his investment exposure, looking to capture more profit, rather than spur more growth in the face of shrinking demand.

this is my fundamental criticism of monetary policy over fiscal policy when it comes to real deflation. the efficiency per dollar spent is dramatically less when it is measured on the street in terms of home sale prices. this cant be said for the expired $9000 homebuyer rebate or the expired cash for clunkers program, fiscal policies, which get the market moving on the street.

i've ranted on the topic, but i dont know if that answers a question.

You have summarized basic deflation and why it is difficult to impossible to correct with QE.

But that supports my original distrust of the ways in which currency value is allegedly set. Because it demonstrates that powerful market forces can undermine efforts to deflate currencies, which calls into question the ability of the fed to undermine the value of the dollar no matter how much money they distribute via QE.

Can you suggest a real formulaic approach in which the fed could introduce money into the economy and achieve direct destruction of dollar value within the limitations of our present system?

And what about deficit spending? Deficit spending is another way to inject money directly into circulation, targeted quite specifically.

 

[Paulie]

i think that there is a disposition to hoard money in a recovery or in times of economic uncertainty. this is what is keeping QE off of the street's deflationary trends. the very lust over yen is why institutions getting pumped yen are not pumping it back into their economy as much as into the markets putting out more reliable margins for it. back on the streets, the conservative business person is tightening his belt, and narrowing his investment exposure, looking to capture more profit, rather than spur more growth in the face of shrinking demand.

this is my fundamental criticism of monetary policy over fiscal policy when it comes to real deflation. the efficiency per dollar spent is dramatically less when it is measured on the street in terms of home sale prices. this cant be said for the expired $9000 homebuyer rebate or the expired cash for clunkers program, fiscal policies, which get the market moving on the street.

i've ranted on the topic, but i dont know if that answers a question.

You have summarized basic deflation and why it is difficult to impossible to correct with QE.

But that supports my original distrust of the ways in which currency value is allegedly set. Because it demonstrates that powerful market forces can undermine efforts to deflate currencies, which calls into question the ability of the fed to undermine the value of the dollar no matter how much money they distribute via QE.

Can you suggest a real formulaic approach in which the fed could introduce money into the economy and achieve direct destruction of dollar value within the limitations of our present system?

And what about deficit spending? Deficit spending is another way to inject money directly into circulation, targeted quite specifically.

The Fed could lend directly to individuals maybe?

 

[loosecannon]

The Fed could lend directly to individuals maybe?

GMTA

 

[antagon]

So I don't see how the issuer could target corn chip makers.

fiscal rather than monetary policy, ie 'Strengthening America's Corn Chippers Act, HR 7342.xx'

The only benefit from this process is bubbles and if bubbles persist, inflation... this can't end well.

not well for everyone, but good while it lasts. i think bubbles have some inevitability to them. i think we can get somewhere by helping the economy out of a burst, but i neither advocate inflating bubbles nor putting the brakes on a boom economy, myself. it just takes a real astute team to tell when to stop pushing and hop in the bobsled.

 

[Toro]

I don't know of cuurencies ever being valued based on reserves. Reserves instead can be used to influence supply and demand.

Edit - reserve levels may be used in a multifactor model but it would be just one factor of many that will have varying influence over time.

 

[Paulie]

The Fed could lend directly to individuals maybe?

GMTA

Obviously that would have to be regulated accordingly, though.

Lender of last resort to consumers.

I'm an opponent of the Fed anyway, so this is hard for me to try and ponder. But I'd have to think hard about the caveats on direct Fed lending to consumers.

 

[Toro]

We are in a deflationary cycle because Fannie and Freddie intentionally tanked the US real estate market and all the money people used to mint in refinancings/sales has turned negative; money supply and asset values are plummeting.

The Fed propped the system up by throwing literally trillions at institutions they've yet to name, but it's a last hurrah.

Lol

Frank is one of myfavourite posters.

 

[Toro]

The Fed could lend directly to individuals maybe?

GMTA

Obviously that would have to be regulated accordingly, though.

Lender of last resort to consumers.

I'm an opponent of the Fed anyway, so this is hard for me to try and ponder. But I'd have to think hard about the caveats on direct Fed lending to consumers.

I don't think the Fed is allowed by law to lend to consumers.

There is an interesting argument that the Fed's actions may become unconstitutional if it is still hding GSE debt when the explicit government guarantee expires ib 2012.

 

[Paulie]

GMTA

Obviously that would have to be regulated accordingly, though.

Lender of last resort to consumers.

I'm an opponent of the Fed anyway, so this is hard for me to try and ponder. But I'd have to think hard about the caveats on direct Fed lending to consumers.

I don't think the Fed is allowed by law to lend to consumers.

There is an interesting argument that the Fed's actions may become unconstitutional if it is still hding GSE debt when the explicit government guarantee expires ib 2012.

Yeah I know, we're just talking about new possible ideas on how to get Fed money to actually enter the economy and move, rather than sit in bank reserves indefinitely.

I can't even believe I'm talking like this