Post #35,180
4/11/02 5:30:38 PM
|
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
|
Post #35,191
4/11/02 6:17:28 PM
|
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
|
Post #35,209
4/11/02 8:47:19 PM
|
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
|
Post #35,210
4/11/02 8:48:48 PM
|
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
|
Post #35,215
4/11/02 9:30:36 PM
|
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
|
Post #35,235
4/12/02 3:25:05 AM
|
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!"
|
Post #35,236
4/12/02 6:54:06 AM
|
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
|
Post #35,246
4/12/02 10:42:40 AM
|
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
|
Post #35,276
4/12/02 4:59:45 PM
|
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]])
|
Post #35,370
4/14/02 1:00:28 PM
4/15/02 7:11:24 AM
|
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
|
Post #35,455
4/15/02 1:23:18 PM
|
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?
|
Post #35,530
4/15/02 9:32:17 PM
|
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
|
Post #35,575
4/16/02 9:22:30 AM
|
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.
|
Post #35,692
4/16/02 7:28:04 PM
|
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
|
Post #35,344
4/13/02 11:06:35 PM
|
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.
|
Post #35,350
4/14/02 1:25:18 AM
|
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
|
Post #35,357
4/14/02 11:00:36 AM
|
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
|
Post #35,396
4/14/02 8:01:39 PM
|
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!"
|
Post #35,366
4/14/02 12:25:18 PM
|
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.
|
Post #35,413
4/14/02 11:44:35 PM
|
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
|
