Post #34,995
4/10/02 4:16:03 PM
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Some folks are catching on
[link|http://atimes.com/global-econ/DD11Dj01.html|the dollar has no real worth]
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"World trade is now a game in which the US produces dollars and the rest of the world produces things that dollars can buy. The world's interlinked economies no longer trade to capture a comparative advantage; they compete in exports to capture needed dollars to service dollar-denominated foreign debts and to accumulate dollar reserves to sustain the exchange value of their domestic currencies. To prevent speculative and manipulative attacks on their currencies, the world's central banks must acquire and hold dollar reserves in corresponding amounts to their currencies in circulation. The higher the market pressure to devalue a particular currency, the more dollar reserves its central bank must hold. This creates a built-in support for a strong dollar that in turn forces the world's central banks to acquire and hold more dollar reserves, making it stronger. This phenomenon is known as dollar hegemony, which is created by the geopolitically constructed peculiarity that critical commodities, most notably oil, are denominated in dollars. Everyone accepts dollars because dollars can buy oil. The recycling of petro-dollars is the price the US has extracted from oil-producing countries for US tolerance of the oil-exporting cartel since 1973."
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The article does ignore that dollar stability (so far) is the main reason rubles or rupees are not used but the dollar is backed by nothing except the good faith of the US government, not a tangible like gold or other semi-stable recognised value.
thanx,
Bill
TAM ARIS QUAM ARMIPOTENS
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Post #34,998
4/10/02 4:37:07 PM
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The smoke&mirrors squishy underbelly of Econ 'theory'___:-\ufffd
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Post #35,045
4/10/02 9:35:59 PM
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And the biggest risk is...
That the euro will eventually replace the dollar in that role.
An incidental note that I found out about as a teenager. There have been a number of countries over the years who have been more powerful than the rest of the known world. Great Britain under Queen Victoria. Spain in the 1500s. The Roman Empire. Invariably they all overspent their economies, and then remained military powers without the economic backing, and only then faded militarily.
In my life the US has managed to overspend its economy and is now a world military power without the economic backing. I expect the latter to take decades to manifest, but I expect to see the US follow course in my lifetime...
Cheers,
Ben
"... I couldn't see how anyone could be educated by this self-propagating system in which people pass exams, teach others to pass exams, but nobody knows anything."
--Richard Feynman
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Post #35,102
4/11/02 11:06:15 AM
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Ya gonna live to 200?
Unless there is a catastrphic meltdown we have enough tangible resources within our borders (gold, Diamonds, Oil Heavy metals etc) to last a couple of hundred years.
thanx,
Bill
TAM ARIS QUAM ARMIPOTENS
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Post #35,207
4/11/02 8:41:28 PM
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We do?
The US has great natural wealth, yes. It is not self-sufficient in, for instance, oil, but it has great wealth.
However it does not have wealth in line with what people today spend. Take a look at [link|http://www.prudentbear.com/archive_comm_article.asp?category=Credit+Bubble+Bulletin&content_idx=8782|this article] and then tell me how an economy whose manufaturing shrinks year after year, which manages to run up an annual trade deficit of over 400 billion dollars, and whose businesses are having trouble posting profits is managing to give banner years to imported cars (domestics are in the tank) and handily beat all records in real estate sales.
Personally I am shocked that the recession didn't turn nuclear. It should have. OTOH when I read through [link|http://www.prudentbear.com/archive_home_com.asp?category=18|this archive] of articles, it makes sense. I have seen those processes at work. That is the business that I deal with.
Since his examples are long, I will give the short version. When banks first came around, they would lend money to a lot of different people. That money would come around, land in someone else's hands, who would deposit it in the bank, and then the bank would lend it again.
That was a lot of fun, until there was a run on the bank, and a lot of people who thought that they had money didn't. In effect the banks had printed money by lending and relending it. There is no limit to what they can create this way, and as long as payments are made, and people think it works, the structure stands. But when confidence is lost, the entire pyramid collapses.
So various kinds of regulations were invented to prevent that. And the single most important one is that a bank has to keep on hand a fixed fraction of the deposits made into it. This provides a brake on how many times they can relend the same dollar, limiting the creation of money to managable levels. You see, they can only relend the money that has been deposited back, and they can only relend a fraction of it, so each time around the amount relent is reduced.
That is all ancient history. Now let's talk about securitizing debt.
Securitizing debt is the process of taking debt, and turning it into securities - financial instruments that people can trade. For instance a bundle of loans on homes can be bundled together and sold as bonds. (Bonds are a type of security.)
Now watch what happens now. Before how much and how often a bank could lend was constrained by deposits. But now the bank lends money, the loans are converted into bonds, the bonds are resold to investors, and the bank turns around with more money than it started with and makes more loans.
Isn't that a neat trick? If you deposit money in a bank, the bank can only relend part of it. But if you deposit your money in a pension fund, the fund can go to a bank, spend all of your money on bonds backed by some bank's loans, and that bank can now relend all of your money. Because it isn't called a deposit, the existing regulations are all circumvented, and there is no limit to how many times funds can be created.
How much has this happened? Enough that bonds backed by people's houses are now a bigger financial market than the entire US government debt. (Our personal savings rate is negative.)
Of course there are other transactions that can create money out of thin air as well. How many of those are there? Well for instance the swaps market (people trading future streams of cash with each other) is now 9 times the size of the US economy. In other words every dollar we will make has been traded 9 times already before it was made. (Need I mention that - on paper - trading money that doesn't exist yet makes huge amounts of cash in the present? That is one of the big reasons that people do it. Guess where that money came from?)
Wealth is not absolute. It is relative. We feel well off when what we can afford can exceed our expectations. While our natural resources may well put us well off compared to the rest of the world, it is unlikely to sustain us all in the manor to which we have become accustomed.
So when do things readjust?
I don't know. Possibly in 3 months. Possibly in 3 years. I sincerely thought it was about to happen a year and a half ago. It didn't.
But while I can't tell you when, I still believe that it will readjust, and I am willing to bet you that it happens within a decade.
Cheers,
Ben
PS US oil consumption is well beyond what we can produce, and projections are growing fast. Just a specific example of how the US resources don't match the current US lifestyle.
"... I couldn't see how anyone could be educated by this self-propagating system in which people pass exams, teach others to pass exams, but nobody knows anything."
--Richard Feynman
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Post #35,211
4/11/02 9:05:57 PM
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Thanks (again) Ben
for a nicely concise reminder of principles and how - legions immediately create ways of circumventing them. (And they call this roulette, 'business' ?)
As evidence of how seriously 'we' take this, as a society - note how regularly the Exec. dept. takes away huge options prior and bonuses.. during a company 'failure', and even after. Enron is merely the Popular current example of policies which have been lampooned umm most of my life? Then forgotten til the next repetition. Corporate 'law' in practice, could only be described as surreal, not to mention bogus.
Does the Priesthood of Econ publish something akin to that other Priesthood's, the J.A.M.A. ? Any idea if the points you made are expressed as starkly to.. wannabe MBAs? (I won't ask whether as, "a good scam to know" or as admonition against)
Sheep shearing - perhaps the only universal homo-sap pastime.
Ashton
..but what can one 'liquidate' ---> to ? 'cept to emulate the Survivalists (with or without the guns&ammo and that terrible jargon of grunts about "load and lock").
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Post #35,234
4/12/02 3:17:40 AM
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Brilliant summation.
My father has a long, detailed parable in a personal wealth book about why Credit is such a trap and is, in the end, not really a good idea. Your description reflects this: Credit is money that has no value. It only works because everyone uses it as if it does.
Wade.
"All around me are nothing but fakes
Come with me on the biggest fake of all!"
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Post #35,243
4/12/02 9:26:42 AM
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I remember reading books in 1966
That describe this phenonema as a series of buckets partly filled with water and 20 guys sloshing water from one bucket to another and as long as the buckets are moving no one really knows how much water there is. It should have collapsed in the 80's I was surprised it didnt during the S&L's. There is a boat load of bad loans fictionally being carried as good. I think if we melt completely, bottom feeders would come out and we would start again but at a much lower level.
thanx,
bill
TAM ARIS QUAM ARMIPOTENS
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Post #35,245
4/12/02 9:57:32 AM
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Semantic games should be illegal
If the end result of the shenanigans is that they are passing out money they don't have, which is what the law is intended to prohibit, then it should also be prohibited. Calling it a "sale of bonds" instead of a "loan" is just semantics. Another (smaller) example. Most (all?) states have laws capping the amount a bank can charge for an overdraft. But, if the bank the check is drawn on pays it instead of bouncing it, they can charge the account owner a "convenience fee" for covering the overdraft. This is the same dodge they use with credit cards. Charges are, for the most part, never refused regardless of whether there is any credit left. They will just authorize the transaction and tack on some extra fees. See [link|http://www.consumer-action.org/Library/CA_News/CA_News_Winter-1998-99_EN.html|here]: To show how damaging it can be for someone trapped in a cycle of late fees and penalty rates, CA calculated approximately how much it would cost a hypothetical cardholder who carried a $2,000 balance, paid only the 2% minimum payment and did not meet the due date three times in six months.
The cardholder's payments were not on time in the second and third billing cycles, which led to two late fees ($25 each) and an increase in the cardholder's interest rate from 13% to 24%. In the sixth billing cycle, the cardholder paid late again, incurring another $25 late fee. By the end of six months, the cardholder's $2,000 balance had increased by $76 and he had paid $277 in interest and late fees. or [link|http://www.reporternews.com/biz/cards1107.html|here]: "This study is the first to reveal that in the last two years banks have imposed penalty rates and significantly increased fees," said Stephen Brobeck, executive director of the Consumer Federation of America, a Washington-based association of more than 260 pro-consumer groups. "Essentially what's happening is the issuers are shifting costs onto the most troubled debtors: those who have trouble making payments on time or may exceed the credit limit." ===
I can't be a Democrat because I like to spend the money I make.
I can't be a Republican because I like to spend the money I make on drugs and whores.
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Post #35,372
4/14/02 1:54:03 PM
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But they aren't being dishonest
The people buying the bonds know exactly what is backing them. There are fairly extensive reporting requirements, and every bond holder knows both how much is required in defaults before they are hit, and has estimates from the rating agencies of the odds of that. (For investment grade bonds the odds are supposed to be 99.9% of paying off, for B-grade bonds they expect a 30-40% failure rate.) Everyone involved in the process is keenly aware that risk has not been reduced in any way, it has merely been reallocated from one bond to another. The purchaser gets to pick the risks - and returns - they feel comfortable with. ([link|http://www.criimimaeinc.com/corporate.asp|Sometimes] they feel comfortable with too much risk...)
When loans are made, the banks have cash on hand to make the loans. Again no dishonesty here.
And when the banks have deposits, those are backed by cash on hand, exactly as regulations require. Where financial institutions are supposed to also back up debts owed by cash, they generally do as well. (If they don't, that is a regulatory issue.)
No individual player is stepping outside of regulations or behaving unrealistically. The problem I see is an overall systemic one. Banking rules are designed to limit the amount of credit that can wind up extended total in the system. They no longer are performing that function as effectively as they used to. The result is an increase in leverage to levels that historically were regarded as unwise and unhealthy.
Let me give a specific example. Life insurance companies make loans on commercial real estate. If they hold those loans, they are legally obligated to hold at least 3% of the value of those loans in cash on hand. If they convert those loans into bonds, sell some, and keep others, regulations say that they have to back those bonds with 0.3% cash on hand.
In other words when a life company like John Hancock goes from holding loans on its books, to passing loans into bonds, 2 things happen. The first is that with a given amount of cash on hand, they can hold 10 times as much debt. The second thing is that the cycle from making a loan to getting their money back shortens from 10 years to a few months. So, subject to the availability of people willing to buy the bonds, they can issue loans over 20x as fast with the same cash on hand, hold 10x the debt long term, and they lose all limits on how many loans they can make in the long term.
The result? A staid financial institution turns into a mean, lean lending machine, a small minority of the market gets the vast majority of the risk (and return), while the total amount of money available to lend goes up. This is a process that has happened for a lot of kinds of loans. It has happened to a different extent for different kinds of loans, but the result is an ongoing fundamental restructuring in our economy of who ultimately issues credit and how much credit they can issue.
Cheers,
Ben
"... I couldn't see how anyone could be educated by this self-propagating system in which people pass exams, teach others to pass exams, but nobody knows anything."
--Richard Feynman
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Post #35,394
4/14/02 7:48:29 PM
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Summary of the summary of the summary.
"Credit is ba-a-ad, mm'kay?"
:-)
Wade.
"All around me are nothing but fakes
Come with me on the biggest fake of all!"
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Post #35,422
4/15/02 7:09:20 AM
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But that isn't true
Credit is a necessary part of capitalism. It is how we pay for things now that we know will make money in the future. (Eg Getting an education, moving from renting to owning a home, getting a car when that transportation is needed to hold down a job.) The ability to translate into the present that which you have good reason to believe that you can earn allows people to take advantage of opportunities that result in us all being better off.
The problem is that excessive credit is a Bad Thing. A loan at the right time is a great enabler. When it enables economically productive activity, this is Good. It is also good when it allows us to weather minor crises that we didn't have resources set aside for. But when we have a lifestyle based on credit, there is an enormous hidden cost. When we have an economic system where credit is overextended, there is risk to our monetary system.
Cheers,
Ben
"... I couldn't see how anyone could be educated by this self-propagating system in which people pass exams, teach others to pass exams, but nobody knows anything."
--Richard Feynman
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Post #35,443
4/15/02 11:44:59 AM
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Something else that effects the economy is cash
there is a huge amount of goods trading in cash and convertables. I think this portion of the unmeasured economy has been propping up the measured one. Look at the downtown sky in Miami, no industry to speak of, a shipping and transport hub to the south and tourists, yet the building boom hasnt stopped yet. Loans made by offshore banks that are washing money and shell games to cover losses.
thanx,
bill
TAM ARIS QUAM ARMIPOTENS
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Post #35,567
4/16/02 7:16:16 AM
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Okay, yes, you're right.
It is dangerous to simplify too far, which is what I obviously did. I'm sorry. The discussion is indeed about excessive credit and unfettered credit and misuse of credit, all of which can and do cause problems in an economy.
You'll have to forgive me for overreacting somewhat; although I have a credit card, I have never found it difficult to spend less than I earn.
Wade.
"All around me are nothing but fakes
Come with me on the biggest fake of all!"
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Post #35,180
4/11/02 5:30:38 PM
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Interesting side note to all this.
From what I understand, fully a third of the total value of U.S. Dollars (not number of bills, but total $ value) is being held in the so-called black markets of the world. Apparently, it's quite popular due to a) it's stability and b) the high-value denominations. Some U.S. financiers are concerned about the Euro due to it's high-value currency being in the same neighborhood as the Dollar - which might cause a rolling transition to the Euro if the Dollar starts to fluctuate, which would lead to more chaos as the amount of availible Dollars for legitimate transactions increases by around 50%.
Needless to say, this would be bad.
Now, as far as a declining value of the dollar goes, I seem to remember something about a place called Fort Knox down south somewhere... Really, when it comes down to it, money is just a proxy for the inherent value behind a limited resource, such as a manufactured good, or somebody's time. Only if we all agree to value the currency, is it worth anything.
"He who fights with monsters might take care lest he thereby become a monster. And if you gaze for long into an abyss, the abyss gazes also into you." - Friedrich Nietzsche
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Post #35,191
4/11/02 6:17:28 PM
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No son, you have no choice
"Only if we all agree to value the currency, is it worth anything"
If every person in America agreed to back the dollar with gold it doesnt matter. The Federal Reserve, an Agency that none of the branches have any control over can tell us all to fsck off.
[link|http://www.buildfreedom.com/tl/rape3.shtml|its true!]
thanx, :)
Bill
TAM ARIS QUAM ARMIPOTENS
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Post #35,209
4/11/02 8:47:19 PM
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Interesting read, but that's not what I meant.
I'm looking it over, will report back later with my own thoughts 'n feelings. However, I was referring to the whole idea of "confidence" - if everybody becomes convinced that the almighty $ ain't worth the tp it's printed on...
...then it ain't. Doesn't matter whether or not the Federal Reserve and their cronies back it.
"He who fights with monsters might take care lest he thereby become a monster. And if you gaze for long into an abyss, the abyss gazes also into you." - Friedrich Nietzsche
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Post #35,210
4/11/02 8:48:48 PM
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You haven't been current on how money works...
...for, say your entire life! Have you?
The US went off of the gold standard in 1972. Fort Knox does not and cannot back the existing US currency in any meaningful way. It certainly cannot back the strength that US dollars have had in the last decade.
The US dollar is now, and has been for decades, only backed by the feeling that Uncle Sam is a good guy and will protect his interests. In the last decade the dollar has gone through the roof on the strength of a confidence game. All confidence games end eventually, and the US hasn't managed to produce stuff that the rest of the world has been interested for quite some time now. (To be fair, the US dollar's strength has made it very hard for US businesses to compete, but that is another story.)
Cheers,
Ben
"... I couldn't see how anyone could be educated by this self-propagating system in which people pass exams, teach others to pass exams, but nobody knows anything."
--Richard Feynman
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Post #35,215
4/11/02 9:30:36 PM
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I just wasn't clear in my post.
Something I've made mistakes with before - I have this little joke that I make sometimes, that English is my second language, and when somebody asks me what my first is, I say, "Well, I'd sure like to know that too!"
What I meant about the gold in Ft. Knox was that IF things ever get shifty on the U.S. Dollar, we can always fall back on gold to prop it up - as long as people value gold. Which is only worth it if people actually want it to be worth anything...
Me, I'll value what's important: a roof, food, water, friends, and freedom. The Kings can have their gold crowns... And be hung by them, as well.
"He who fights with monsters might take care lest he thereby become a monster. And if you gaze for long into an abyss, the abyss gazes also into you." - Friedrich Nietzsche
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Post #35,235
4/12/02 3:25:05 AM
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Not so easy.
Falling back on the gold standard would require a lot of credit-based industries and credit-originated wealth to vanish. Ben posted a really good piece about how money is "created". On a simplistic note, this "creation" of money contributes heavily towards the existence of inflation.
Wade.
"All around me are nothing but fakes
Come with me on the biggest fake of all!"
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Post #35,236
4/12/02 6:54:06 AM
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What Wade said
We don't have the resources to back our dollar at anything near current exchange rates. We don't have enough, nor do we produce enough.
Our annual shortfall of trade for last year alone was $420 billion. That figure has been rising. Putting it in more visualizable terms, at the LA port, fully half of containers have been arriving full, and leaving empty.
If foreigners stop believing that our dollar is valuable, the US government doesn't have the resources to continue to fund that imbalance. Nobody does.
Cheers,
Ben
"... I couldn't see how anyone could be educated by this self-propagating system in which people pass exams, teach others to pass exams, but nobody knows anything."
--Richard Feynman
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Post #35,246
4/12/02 10:42:40 AM
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Ah, got it.
Nevermind. Ya see? English *IS* my second language - I just don't have the proper reading comprehension. :)
"He who fights with monsters might take care lest he thereby become a monster. And if you gaze for long into an abyss, the abyss gazes also into you." - Friedrich Nietzsche
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Post #35,276
4/12/02 4:59:45 PM
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There are some big misunderstandings here....
It's just as accurate to call America's trade deficit it's investment surplus. A little thought will reveal that the following equation has to be true:
savings - investment = exports - imports
This is really an accounting identity derived from the fact that dollar flows into an economy have to be balanced with a flow of goods in the other direction. (For more details Google "balance of payments". (savings - investment) is called the "capital account", and (exports - imports) is called the "current account".)
Now, what happens when the dollar falls? That means that a) exports rise and imports fall, as American goods become cheaper, and foreign goods become more expensive. Likewise, investment in the US economy will rise, because the value of American assets drops (meaning ROI goes up), and the value of savings will decline. The reverse happens when the dollar rises. So the balance of payments doesn't have a big effect on the overall behavior US economy -- it will rearrange which sectors of the economy do well, but the whole economy is unaffected. (Wild currency swings are bad, because an economy can't adjust instantly, but a slow drift up or down is basically harmless.)
Now, how does the status of the dollar as the reserve currency affect the US economy? First, it increases demand for the dollar, and makes dollars more expensive vis-a-vis other currencies. No big deal.
Second, there's a large stock of dollars held outside the US. This does have a small economic impact: since no interest is paid on currency holdings, dollars held as reserves outside the US are effectively a zero-interest loan to the Treasury. This benefit is called seignorage. What are the effects of seignorage on the US economy? There are approximately $200 billion held outside the US as reserves. Assuming a rate of return of 5%, that reserve stock is effectively a contribution of $10 billion/year to US economy. The US GDP is about $10 trillion per year. So if every single dollar held as a reserve were replaced with gold, Euros, or Yendorian zorkmids, the effect on the US economy would be to reduce GDP growth by .1% for one year. And that's it. This is not a big deal.
Incidentally, you can see how this works by looking at different economies around the world. Take Japan -- they have a really high savings rate, but a sluggish, low-investment economy. Unsurprisingly, they have a very large trade surplus. You can also figure out whether a country is cooking its growth numbers by examining the balance of payments: China, for example, has been running a trade surplus for years, implying that it saves more than it invests. Since it's a high-growth developing nation, this is very suspicious-looking. And indeed, it turns out that Chinese growth statistics for the last few years probably have been falsified. (See [link|http://www.pitt.edu/~tgrawski/papers2001/gdp912f.pdf|[link|http://www.pitt.edu/~tgrawski/papers2001/gdp912f.pdf|http://www.pitt.edu.../gdp912f.pdf]])
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Post #35,370
4/14/02 1:00:28 PM
4/15/02 7:11:24 AM
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No misunderstanding
I am perfectly aware that the US trade balance is supported by the outside world investing in the US. I am also aware that savings are low. Neither of these facts make me more comfortable.
The reason that outside investments continue to be made is that the rest of the world thinks that the US will be a good investment opportunity. For instance bonds in US dollars can have a low yield, but if you think that the US dollar will continue to rise, it may be a much better investment than a high-yielding bond in another currency. And if the dollar has a habit of surprising in strength, it makes sense to invest in the US. So the present investment flow into the US is a form of credit - it comes in now and we will have to pay the piper in the future.
In other words, whether you look at it in terms of a trade imbalance or an investment imbalance, you are lead to the same conclusion. The current US lifestyle is being actively supported by expectations in the rest of the world, and not by actual production in the US.
With that in mind, my point is that I simply cannot believe that this situation can last. The US cannot indefinitely consume without having corresponding production levels. And I don't think that the reversion to the norm will be fun. (Financial markets have this disconcerting tendancy to try to figure out now where they will wind up in the long term, and try to get there in a hurry.) Furthermore after reverting, we will be left with a lot of people with investments they still want to be paid.
Allow me to make this point with a concrete, extreme example. The basic accounting identities that you are talking about hold at any level. Normally we talk about them with countries, but we can talk about them with companies instead. Say, with dot coms.
It is true that for the dot coms, savings minus investments were indeed exports minus imports. Like the US - but more extremely - savings were poor, investments were strong, exports (ie actual product sold) were poor, and imports (ie purchases) were strong. What could be looked at as an imbalance between consumption and production could be looked at as confidence by the rest of the world about eventual performance. Like the US, though again more extremely, the result was conspicuous consumption beyond a level sustainable from internal production. And it was much nicer to be inside than outside while the going was good.
I didn't think then, and I don't think now, that such a situation could be stable. And in that case it wasn't stable, nor was the ending of the fun very pleasant.
I fear the same will be true for the US. (Albeit on a larger but less extreme scale.)
As for the reserves, my concern is not with the advantages of having them be there. Or how big an impact it would have on us if they weren't. My concern is that there is a very large amount of US currency tied up in the belief that the US dollar is, and will remain indefinitely, strong. Markets have demonstrated that when they re-evaluate beliefs like that, they tend to do so quite suddenly. (Everyone tries to predict the future reality and move there ahead of everyone else.) Therefore if that belief was to receive a sudden shock, there are large potential supplies available to imbalance the old supply/demand ratio.
In other words we have an economy which is based on a belief that I see as unsustainable in the long-term. We have a lifestyle maintained by that belief. And if that belief changes, we have a large and potentially volatile supply of money that can start moving.
With that let me close with a comment that I heard a vice-president of Moodys make last week. And here is what keeps Alan Greenspan awake at night. The amount of money tied up in the swaps market is 9 times the US economy. Any major failure there would ripple through a lot of companies.
Need I mention that swaps were one of the ways that LTCM managed to aquire a set of positions that nearly took down the Western World in 1998? They were also a favorite tool of Enron, various dot bombs, etc?
Cheers,
Ben
PS You live in Boston, don't you? Any chance of your coming down to Bill's party July 6? I would be willing to help cover your ticket if you did...
"... I couldn't see how anyone could be educated by this self-propagating system in which people pass exams, teach others to pass exams, but nobody knows anything."
--Richard Feynman
Edited by ben_tilly
April 15, 2002, 07:11:24 AM EDT
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Post #35,455
4/15/02 1:23:18 PM
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Re: No misunderstanding
The reason that outside investments continue to be made is that the rest of the world thinks that the US will be a good investment opportunity. For instance bonds in US dollars can have a low yield, but if you think that the US dollar will continue to rise, it may be a much better investment than a high-yielding bond in another currency. And if the dollar has a habit of surprising in strength, it makes sense to invest in the US. So the present investment flow into the US is a form of credit - it comes in now and we will have to pay the piper in the future. Your statement about bonds is true, /if/ you think that the currency markets expect the US dollar to continue to appreciate. But I don't think that's a rational expectation to have about the markets (so to speak). At the end of 1987, at the height of the Japanese bubble, the US dollar traded for 128.24 yen to the dollar. At the end of March 2002, the US dollar traded for 131.06 yen to the dollar. Furthermore, between 1998 and the present the yen has gone from 144.68 to a high of 102.58 in Dec 1999 back up to 131.06 in March. So I don't think the exchange rate history should lead anyone to form the belief that the US dollar is in a long-term appreciation pattern. So I don't think the currency traders have formed that belief. So, no currency bubble. If you mean the weaker statement that the currency markets expect the US dollar to remain at the same historically high level is true, then there's no such implication, because the expected rate of return on a dollar bond is the bond's nominal rate plus the expected currency appreciation. If there's no expected appreciation, then the ROI on the bond is just the face rate. If you think that the markets are likely to suddenly and unexpectedly drop the price level of the US dollar, then there won't be any investment flight. If the price of the dollar fell suddenly, then for foreign investors the price of assets in the US would fall, too. The drop in the asset price would increase the return on investment in the US, making it more attractive to invest in the US. Sure, the current foreign investors in the US would take a bath, but that's what currency hedges are for. Allow me to make this point with a concrete, extreme example. The basic accounting identities that you are talking about hold at any level. Normally we talk about them with countries, but we can talk about them with companies instead. Say, with dot coms.
It is true that for the dot coms, savings minus investments were indeed exports minus imports. Like the US - but more extremely - savings were poor, investments were strong, exports (ie actual product sold) were poor, and imports (ie purchases) were strong. What could be looked at as an imbalance between consumption and production could be looked at as confidence by the rest of the world about eventual performance. Like the US, though again more extremely, the result was conspicuous consumption beyond a level sustainable from internal production. And it was much nicer to be inside than outside while the going was good. The dot-coms failed because people misjudged the ROI on internet companies. I have a hard time believing that people are systematically making the same error across dozens of different industries. Especially when the underlying economic statistics like labor productivity growth are at levels not seen in 30 years -- in Q4 2001, productivity grew at an annualized rate of 5% a year. That's an amazing number: in most recessions productivity falls, because companies cut production but retain their most productive workers, so that they can ramp up in the recovery. I think people are investing in the US economy because it is in fact extraordinarily productive, not because of expectations about the price level of the US dollar. The price history of the US dollar doesn't seem to offer any evidence to create expectations for price increases in the dollar, and the economic statistics suggest that the US economy is growing much faster than any other industrialized nation (except Korea, Ireland and Finland). So it's real economic activity that's driving investment. In other words, whether you look at it in terms of a trade imbalance or an investment imbalance, you are lead to the same conclusion. The current US lifestyle is being actively supported by expectations in the rest of the world, and not by actual production in the US. Hold on! Investment inside the US means there's increased production inside the US. It doesn't matter whether the automobile factory has Honda or Ford on the big sign on the outside: the workers get paid and the cars get built just the same. Now, let's take your example of the LA port dropping goods off in the US and taking nothing out. Now assume that what they are bringing in Japanese robots and German machine tools: in what sense is this a hollowing-out of the US economy? This is increasing its productive capability! As for the reserves, my concern is not with the advantages of having them be there. Or how big an impact it would have on us if they weren't. My concern is that there is a very large amount of US currency tied up in the belief that the US dollar is, and will remain indefinitely, strong. Markets have demonstrated that when they re-evaluate beliefs like that, they tend to do so quite suddenly. (Everyone tries to predict the future reality and move there ahead of everyone else.) Therefore if that belief was to receive a sudden shock, there are large potential supplies available to imbalance the old supply/demand ratio. I don't think this is a big deal. The dollar forex markets are among the most liquid in the world, and the US government has committed to a free float, so everyone is used to coping with really big fluctuations in the price of a dollar. Eg, in the two years the US dollar has traded with the euro, there's been a ~30% shift in their relative prices. In the past 15 years, the yen has had about a factor of 2 band it's traded in. (Over 20 years, it's a factor of 3 band.) PS You live in Boston, don't you? Any chance of your coming down to Bill's party July 6? I would be willing to help cover your ticket if you did... I follow the Open Forum only intermittently, so this is actually the first I've heard of it. When and where is it?
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Post #35,530
4/15/02 9:32:17 PM
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I may have a narrowly focussed view
My direct exposure to finance is almost all within the context of securitizing loans into bonds. Thus I am rather aware of the fundamental shift in how debt is being funded as securitization becomes accepted in more and more markets. What I see are historically amazing debt levels, and fundamental increases in how much debt there can be. However I don't deal with macro-economics much, so see that out of context.
As for the party, it is at Bill Patient's house (bepatient), near Philadelphia, on July 6. It has been a tradition for a long time, and the last couple of years some IWETHEYers have started coming. People who have shown include bepatient, myself, broomberg, imric, jb4, boxley, kmself, and Dhyana Wood. (I know I have missed some...)
I would expect some postings closer to the time around the water cooler...
Cheers,
Ben
"... I couldn't see how anyone could be educated by this self-propagating system in which people pass exams, teach others to pass exams, but nobody knows anything."
--Richard Feynman
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Post #35,575
4/16/02 9:22:30 AM
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Re: I may have a narrowly focussed view
My direct exposure to finance is almost all within the context of securitizing loans into bonds. Thus I am rather aware of the fundamental shift in how debt is being funded as securitization becomes accepted in more and more markets. What I see are historically amazing debt levels, and fundamental increases in how much debt there can be. However I don't deal with macro-economics much, so see that out of context. That's so cool! What I do is program automated valuation mechanisms, and one of the big feedback loops for our business is the increasing securitzation of the mortgage industry. Banks and mortgage companies with mortgage securities are really interested in our AVM because it gives them a way to estimate the risk exposure of their portfolios. (In turn the banks' loan origination and compliance people realized that they could use AVMs themselves.) It's really cool that you are on the other end of that. I don't think there's any question that real estate is doing something funny, and that the something is quite possibly a bubble. Real estate is an extremely incomplete and inefficient market, so price bubbles and busts are pretty much par for the course. Debt and price levels in the real estate market are at decade-long highs, and we're amazingly lucky that the real estate and stock markets didn't come down at the same time. God clearly still favors drunks and Americans. From my perspective, securitization is on the whole a good thing, because it offers banks a way of dispersing risk. Ten thousand investors losing a million bucks is a lot less dangerous than 10 banks losing a billion each. If leads to products that let homeowners reduce their risk exposure -- like home price insurance or shared-appreciation mortgages -- then it's wonderful. A home is almost always the single largest piece of undiversified risk a family has. When I think about it, that fact gives me the willies. As for the party, it is at Bill Patient's house (bepatient), near Philadelphia, on July 6. It has been a tradition for a long time, and the last couple of years some IWETHEYers have started coming. People who have shown include bepatient, myself, broomberg, imric, jb4, boxley, kmself, and Dhyana Wood. (I know I have missed some...) Cool.
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Post #35,692
4/16/02 7:28:04 PM
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What kind of real estate loans?
I suspect we aren't actually on the opposite sides of the same industry, but we aren't far from it.
If you want to take this offlist, my email is my user name at operamail dot com.
Cheers,
Ben
"... I couldn't see how anyone could be educated by this self-propagating system in which people pass exams, teach others to pass exams, but nobody knows anything."
--Richard Feynman
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Post #35,344
4/13/02 11:06:35 PM
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Ft. Knox
Because I was stationed there in the seventies, I have some info that isn't generally known. Mine was the only Infantry unit on base and our primary duty was to have a full platoon ready in case we ever got a "Eldorado alert". From the time of the alert, we had 7 minutes to be armed and transported to the vault perimeter. The interesting thing about this guard duty were our specific instructions; Until ordered to stand down, anyone leaving the vault was in a weapons free zone and was to be shot on sight. Our Top gave us some of the reasoning behind this. Since the most valuable thing being stored in the vault was the stockpile of drugs for frontline troops, a single man could carry a lot of valuable drugs, much more in value than a similar weight of gold. A guy with a backpack on a motorcycle could carry off more value than a pickup truck loaded with gold.
Ft. Knox has more Morphine both in dollar amount and relative mass than gold. There are many other drugs stockpiled there; Penicillan, vaccines, various anti-nerve agents and others.
An interesting historical tidbit (also told to us by our Top)- The vault was succesfully broken into in the fifties by two kids from town who figured out how to enter using the sewer system. They did not, however, succesfully escape. They were caught before they had taken 10 smelly steps from the sewer pipe.
For you non-army types, a Top is a First Sergeant, The highest ranking non comissioned officer (NCO) in the Army, and is usually considered the voice of god by any relativly sane grunt.
Taiwan is a country. Anyone who says otherwise is a communist.
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Post #35,350
4/14/02 1:25:18 AM
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In the Bond flic
(James Bond, that is) - were the inside shots and massive vault door - actual or Hollywood?
I imagine that the interior of that fort figured prominently in the dreams of Mr. Willie Sutton, among others. (er small dreams - everybody forgets Midas!)
Peripherally related "precious metals" story:
At the "Bevatron" (6.2 GeV particle accelerator), a pair of motors salvaged from a minesweeper and rewound, powered the guide field: 15 KGauss across a rather large gap where the vacuum system resided. The main buss bars for the currents involved (8+ KiloAmps-peak at 15 KV) -- were borrowed initially from Oak Ridge, who had 'borrowed' silver from govt. (maybe from Knox too?) during WW-II. Pure silver conductors! ~ 4" x \ufffd" cross-section IIRC.
When operations began and proved success of the design, the Ag buss bars were later progressively replaced with copper.. Story was that, all the silver was accounted for, down to ca nearest oz. Talk about bean counters...
Ashton
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Post #35,357
4/14/02 11:00:36 AM
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Silver xbars? kinda low meltpoint?
good conductor of coarse but any impedance down the line would create a puddle pretty quick wouldnt it?
thanx,
bill
TAM ARIS QUAM ARMIPOTENS
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Post #35,396
4/14/02 8:01:39 PM
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Not really.
Silver melts at 961C, Gold at 1064C, Copper at 1084C, Nickel at 1455C and Iron at 1538C, just to pick a representative group. Going the other way, Aluminium melts at 660C, Zinc at 420C, Lead at 327C and Tin at 231C.
[link|http://www.google.com/search?q=silver+melting+point&sourceid=opera&num=0&ie=utf-8&oe=utf-8|Google is your friend].
Wade.
"All around me are nothing but fakes
Come with me on the biggest fake of all!"
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Post #35,366
4/14/02 12:25:18 PM
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Hollywood? HOLLYWOOD?
Pinewood old chap.
As the production began to wind down, the crew staged the huge battle sequences inside Ken Adam's extraordinarily realised Fort Knox set. The production had been refused permission to use the real Fort Knox, though Adam was allowed to have a look around the outside of the building thanks to the intervention of Robert Kennedy.
[link|http://www.eofftv.com/notes/goldfinger_notes.htm|[link|http://www.eofftv.com/notes/goldfinger_notes.htm|http://www.eofftv.c...er_notes.htm]]
Taiwan is a country. Anyone who says otherwise is a communist.
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Post #35,413
4/14/02 11:44:35 PM
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Apologies to UK, Pinewood et al - dumbth :(
Glad to hear that Sean Connery had the presence of mind to snag an ongoing 5% of the phenom.. spread around some of that concentrated loot beyond the Suits, I say.
(Now as to the scene with gold paint all over the body, allegedly fatal - Gee.. when I rubbed gold powder all over a friend: she didn't die! and assured me that the safest removal method was to lick it off; less abrasion and all..)
Ashton Auric Assignations
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Post #35,280
4/12/02 5:25:32 PM
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The Economist on the strong dollar
For those of you who have an account there (or who want to pay per view):
[link|http://www.economist.com/library/articlesBySubject/displayStory.cfm?story_ID=1056789&subject=USA&CFID=3392592&CFTOKEN=1d9be57-c47066e7-475d-4c88-b22b-fe657b10c724|The Strong Dollar]
Regards,
-scott anderson
"Welcome to Rivendell, Mr. Anderson..."
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Post #35,373
4/14/02 1:55:34 PM
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Mind posting a synopsis?
"... I couldn't see how anyone could be educated by this self-propagating system in which people pass exams, teach others to pass exams, but nobody knows anything."
--Richard Feynman
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Post #35,377
4/14/02 3:26:39 PM
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Yep, I do.
Because that would require me registering and paying for it. ;-)
I read the story when it was current (and free). :-)
I don't recall enough of it to make a decent synopsis.
Regards,
-scott anderson
"Welcome to Rivendell, Mr. Anderson..."
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Post #35,391
4/14/02 7:24:11 PM
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Dang.
"... I couldn't see how anyone could be educated by this self-propagating system in which people pass exams, teach others to pass exams, but nobody knows anything."
--Richard Feynman
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