a question

[Toro]

But it strengthens the dollar instead of debasing it.

The Fed buying Treasury debt is de facto monetization and weakens the dollar because it is increasing the money supply.

You know I never quite understood that.

Here's why...T-bills are valued as money.

Banks holding them count them as money.

Based on their holdings banks lend money (which increases the money supply directly, too).

I mean I understand that the number of greenbacks in circulation will increase as the FED purchases T-bills, of course.

But as the dollar is just another promise to pay (and is valued according to the market's willingness to take them) so too are T-bills just another promise to pay and valued according to the markets willingness to take them.

You see why I am confused here?

What am I missing?

A couple things.

First, T-bills are claims on the US government, no different than a bond is a claim on the assets of a company, except of course that the government can create Tbills indefinitely if they are monetized by the Fed. Think of it terms of extremes. If the Treasury created $1,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000 worth of claims and it was all sold to the Fed, the supply of money would explode.

Second, money isn't just what the government creates. It is also what the private sector creates. Money creation in the private sector is a function of what the government does to a large extent, whether that is keyed off interest rates set by government, laws set by government, confidence in government, etc. But money creation is also a function of the general level of confidence, investment opportunities, leverage, etc. It is intertwined. So when the government does something, it affects how much money will also be created in the private sector.

 

[antagon]

i think savings is overrated.

I tend to agree, but apparently there is some basis for savings in a national economy that I just don't get and can't even yet imagine.

But I am all ears if somebody can present a compelling case to the otherwise.

not altogether bad for the saver, but macroeconomics wise, saving = hoarding for all intents and purposes. money is best on the streets growing instead of in a bank or under a mattress stagnating. this is why we print the shit in the first place: commerce.

 

[loosecannon]

Your examples of using gold and the dollar as pegs I don't really think applies because such pegs are legal pegs, not market pegs. They are exchanges of the local currencies into dollars and gold by law. They aren't free floating and they aren't really what I would consider an exercise in valuation modeling by investors.

My understanding is that China in fact does use market pegs to retain a peg to the dollar, not legal pegs.

They buy exactly enough foreign reserves, not just dollars, to maintain extremely strict valuation targets. Not only does China do it, but several small SEA states copy China in this process.

Apparently it works.

 

[loosecannon]

There are many ways to value currencies. You can use interest rate differentials. You can use purchasing power parity. You can use capital flows and supply and demand analysis.

What I was trying to get across was that I don't know of any analysis that uses reserves to value currencies in the same ways mentioned above. In multi-factor regression models, reserve levels may be a factor whereby the strength of the factor varies over time. But I don't do that, so I don't know. I just have never seen it, either in finance education, academic literature or active money management.

OK, the actual exchange rate of currencies is determined by FOREX. You are describing independent assessment criteria, formulas adopted on a proprietary basis.

Does this formulaic institutional assessment of currencies values impact the FOREX price and if so, how strong is the link?

 

[loosecannon]

i think savings is overrated.

I tend to agree, but apparently there is some basis for savings in a national economy that I just don't get and can't even yet imagine.

But I am all ears if somebody can present a compelling case to the otherwise.

not altogether bad for the saver, but macroeconomics wise, saving = hoarding for all intents and purposes. money is best on the streets growing instead of in a bank or under a mattress stagnating. this is why we print the shit in the first place: commerce.

Willie has posited some theoretical constants involving savings and potential growth that I simply can't understand. So I can't discount them either.

Personally I believe what you are saying, money velocity is a positive thing and savings just represent additional reserves that banks can use essentially free to multiply the money supply without having to rely on government lending.

But in an ideal economy people would spend money as soon as they get it. Of course this doesn't jive with retirement planning.

 

[loosecannon]

You know I never quite understood that.

Here's why...T-bills are valued as money.

Banks holding them count them as money.

Based on their holdings banks lend money (which increases the money supply directly, too).

I mean I understand that the number of greenbacks in circulation will increase as the FED purchases T-bills, of course.

But as the dollar is just another promise to pay (and is valued according to the market's willingness to take them) so too are T-bills just another promise to pay and valued according to the markets willingness to take them.

You see why I am confused here?

What am I missing?

Is this true? When the Fed sells T bills essentially to themselves does any money change hands? Much less find it's way into banks reserves boosting the money supply?

Monetizing the debt weakens the credit worthiness of the central bank devaluing the currency. It assures that if the debt is repaid it will be repaid with inflation weakened dollars.

 

[antagon]

i think savings is overrated. i also think broad expensibility is a consumer subsidy which doesn't catch any heat from trade orgs.

Yet, but it should and probably will if your plan is installed and the world continues down the WTO track toward full globalization. Just as currency manipulation isn't yet a certified WTO offense but will be, should be if things proceed according to the "plan".

I like your plan a lot. But it succinctly violates the spirit of globalization. In fact it is exactly what I prefer and China prefers: harsh mercantilism, protectionism in the midst of an orderly globalization bent world.

It's having your cake and eating it too.

Which beats the hell out of just sending your cake overseas in exchange for more purchasing power over plastic forks and party plates.

this is possible, but the fast-moving economies are likely to agree among eachother what is ethical or not and leave slowpoke european economies sucking salt this next century.

i dont believe there has been any change in the freedom of trade, anyhow. instead i think nations have shifted their trade restrictions from consumption to production, and now it is time to strike a middle ground in light of trade imbalances presented by the mercantile economies dominating production. last century a dose of socialism did capitalism 3.0 wonders. i just suggest capitalism 4.0 take a dose of antagonian neo-communism instead.

when the world's superpower(s) decide they want to do something, NATO, WTO, all that bullshit leeching off of them will have to comply. there are no rules in geopolitics, and any pretense of singularity is historically laughed at in the end if you dont have the tanks and shells to back it up. i dont see us having matured past that, yet: the global economy requires too much growth to play by the rules a place like the UK plays by. what could they know about economics with inflation and growth in the 2% range? if trade regs attempt to play into slug-economy pockets, the USs, chinas, brazils and mexicos will just ignore them ala kyoto.

i dont see the textbook globalization sustaining into this century like it has since the 80s. its a misinterpretation of what globalization is anyhow.

 

[Toro]

Your examples of using gold and the dollar as pegs I don't really think applies because such pegs are legal pegs, not market pegs. They are exchanges of the local currencies into dollars and gold by law. They aren't free floating and they aren't really what I would consider an exercise in valuation modeling by investors.

My understanding is that China in fact does use market pegs to retain a peg to the dollar, not legal pegs.

They buy exactly enough foreign reserves, not just dollars, to maintain extremely strict valuation targets. Not only does China do it, but several small SEA states copy China in this process.

Apparently it works.

By legal, I mean they have some sort of government policy to actively peg the currency to the dollar. They aren't using the market to determine the price. They are saying "The dollar is worth 7 yuan" and then conducting monetary operations around that price. So the Peoples Bank of China buys dollars (and other currencies) to get the price in a range around 7 yuan.

 

[loosecannon]

i dont see the textbook globalization sustaining into this century like it has since the 80s. its a misinterpretation of what globalization is anyhow.

?

 

[Paulie]

i think savings is overrated.

I don't understand this line of thinking.

If consumers didn't spend so much money that they didn't have on extra house they didn't need, they would have more money left in their pockets to use for situations like recessions.

And ironically, had consumers not spent so much on housing, the bubble would not have inflated to the proportions that it did and the economy would have in fact been healthier.

While we may not have had that boom period, we wouldn't have had this big of a bust. Perhaps there still would have been some economic slowdown, but at least consumers would have had healthier balance sheets and some spare cash to meet expenses during times of unemployment.

 

[Paulie]

i think savings is overrated.

I tend to agree, but apparently there is some basis for savings in a national economy that I just don't get and can't even yet imagine.

But I am all ears if somebody can present a compelling case to the otherwise.

not altogether bad for the saver, but macroeconomics wise, saving = hoarding for all intents and purposes. money is best on the streets growing instead of in a bank or under a mattress stagnating. this is why we print the shit in the first place: commerce.

Saving is not always hoarding.

One can save a percentage while still spend a responsible amount.

I would rather have an economy that stays on a flat line for a few years while people save, then have it boom out of control while people misallocate trillions of dollars in speculative endeavors.

Money is not always best left on the street. What we're dealing with right now economically is a prime example of why.

 

[antagon]

i dont see the textbook globalization sustaining into this century like it has since the 80s. its a misinterpretation of what globalization is anyhow.

?

it looks like the dot-com boom to me, this globalization. folks really oversold the proceeds from the new and exciting world we're interacting on right now. similarly, the fact that we are shrinking the world with greater accessibility to international markets doesnt require proactive policing of the world economy. these lessons are learned as they come and are within the prerogative of nations to be schooled from time to time.

the protections we've put on steel and maritime industry here in the US ought to have schooled us. we've absolutely blown it with legal and tariff protections. subsidies on labor, have done well for norwegian maritime industry, however. it is still tough going, but they're able to compete with south korean shipyards -- a fantasy with our crude system -- while maintaining higher average earnings than SK or the US.

they've got it right. we could have it even better with the dynamicism of our economy. the WTO, if they find themselves dissenting the better recourse for developed industrial nations, has got it wrong.

 

[loosecannon]

well you are still describing rogue protectionism within a greater context of globalization.

Globalization demands extremely pervasive authoritative top down control to install and maintain laws, customs, governments, institutions, politicians, security, policies and financial architecture that are universal enough to do things like streamline currency exchange, ensure the sanctity of intellectual property and private property. It's end goal is some kind of world government, but not in the overt sense. More like a shadow government.

It is really about paving the way for global corporatization more than it is about expanding personal access to the world.

I was just interested in why you didn't see what is developing as real globalization.

 

[antagon]

sure, but governments for and by their constituents include corporate constituents. this, on a global scale, is what is real, at least at this juncture. the pressure to erase the government-based organization of groups of individuals and their companies is way ahead of its time, such that assuming the rules of engagement is a shot in the dark.

 

[loosecannon]

i dunno how attached to it's chartering nation any multinational corp is. Dubai was kind of built to accomidate nationless multi nationals, or multinational, multinationals, whatever.

 

[antagon]

this is why governments compete for corporate allegiances. i only propose how ours should lay the next blow.