another exchange on exchange
my interlocutor X
despite repeated dire warnings
of mayhem ahead
seems very reluctant
to stare down the pasage way
and
try to work out
a concrete scenario
with a catastrophic finale
for the imperial dollar
X u write
"A savings "supply shock"
that reduced the flow of global savings to the US could imply that US interest rates would rise even as the US economy slows"
please explain possible
sources of shock ???
on another point :
HZ writes :
"When Fed lowers policy rate,
won't US carry trade
pull down the market rates
even if there is foreign flight?
That is the huge difference
between borrowing in your own currency
and borrowing in foreign currency"
explain to my feeble retired traders mind
how in this instance carry trade
counter flows arise
strong enough to counter brad's supply shock
to me the tendency would be to exacrebate
them least the fed kills both birds with
a higher short rate to give a higher total return to the nasty hot specs
then they will find availible over at any "flight to" currency
and isn't that brads point
a forced fed hand
leading to the horroR
of BOTH
high policy rates
and and and
falling domestic demand
btw
i'm on to brad here
he's a smiling sadist
he's
trying to cook up
one of those policy
tit twisters
like 70's stagflation
-------------
ps :
hz :
thanxs
i must confess
any time some one mentions
uncle sam's
ability to borrow
exclusively in his own currency
i get a high
------------------------------------------
BRAD:
HZ -- I'll second GCS.
exchange rate moves can easily wipe out
a small dollar v. euro carry; plus,
I would not rule out an ECB cut in a us/ global slump scenario.
GCS -- fair question
on what would prompt the supply shock.
a big change in the marginal asset allocation
of Central banks
or oil exporter's investment funds is one.
Or
a general shift in the mindset
of private market investors
from
one where global imbalances don't matter
(morgan stanley macrovision conclusion)
and bad things won't happen to the US
'cause the fed won't let them happen (macrovision)
to
a slightly less complacent view
either works.
or a two step,
with
a shift in private portfolio preferences
putting pressure on the $,
more central bank intervention
and eventually,
central bank's hitting their breaking point ...
you pick.
-------------------------------------------------------
( i took this off site )
>
> i found your source
for the shock
> hard to swallow
> YOU WRITE
>"what would prompt the supply shock:
>
>number one
>
>". a big change in the marginal asset allocation
> of Central banks or oil exporter's investment funds"
>
> this then asks for a motivation
>that is not shooting yourself in the foot
>
>
>
>
> number two:
>"a general shift in the mindset of private market investors "
>
>this source i see as not complete and therefore not an origin
>
>the mind(s) set(s) change(s) you suggest
>
>" from one where global imbalances don't matter"
>
>or
>
>"bad things won't happen to the US
>'cause the fed won't let them happen"
>
> a determined collective cb stand
> CAN knock this run down NO ????
>
>as you say in your
>" two step"
>
>" a shift in private portfolio preferences "
>ie type TWO shock/run
>
>"leads to central bank intervention "
>
> the key in the end of the road
> is always this
>
>
>
>"eventually, central bank's hitting their breaking point "
>
> my question does this braking point exist
>for say the cbs behind
>the yen yuan dollar and euro ????
>
>is it a matter of an "involuntary brake point"
>a point where
>the evil hot money waves are so huge
>and so persistent
>they simply overwhelm the cb system ????
>
>or are you thinking of a loss of nerve under these conditions
> which leads to an
every cb for itself
braking of ranks
>followed by a period
of uncontroled ballistic dollar fall ???
>
>last time
>the dollar showed "its neck "
>to its rivals back when uncle closed his gold window in '71
>
>the cb's rallied around
>for their own sakes of course
> yes there was a run into gold
>>eventually and only lasting
> till every private player saw the dollar buttressed roof
> hadn't would'nt maybe couldn't fall in
> king midas after that grabbed some pine
>
------------------------------------------
last time short-term $ rates fell,
global reserve accumulation
went from something like $150 b a year,
maybe less,
to $600 b a year.
it maybe fell to $500 b
with an interest rate differential
that favored the dollar.
suppose fed funds goes back to 1%.
would central banks be willing to add $800b
to their reserves? For one year? For two?
I am not sure ...
----------------------------------------
>the question of cb reaction
needs a context and consequence
>
>the scenario at least as i assumed it
> was a view towards dire consequences
>in the worse case unforseen by rthe cb's
> the dollar gets driven down by the specs
>collapse and panic melt down hits the currency exchanges
>
>your example 800 bz AND 1%
IS numerically in the potential trigger range
>but
> why would the cb's risk an uncle crisis ....
>
>my point as always
>
>the rest of "the northside club"
>would bail uncle 's dollar out
>
>ie reverse the specs supply shock
>or for that mattter their own
>once they saw how "shocking "it was
>
>of course unforseen stuff
>leads to discovery of new states of affairs
>
>maybe a floundering uncle on the egde of drowning
>
>might sway a few club members to run too slowly
> for the bailing buckets
>
> and then .......
------------------------------------
but he does seem to understand the imperial dollar
lirez vous
--------------------------------------
me gets the ball in play by
writing about
a "neutral currency/credit system:
"keynes'
bancor
was not backed by anything
at least not
in its heroically far sighted
first draft
keynes' proposed global clearing union
and its international reserve currency bancor
if implemented
would have
created a multilateral
policy based
global reserve currency
to deal
with the ups and downs
the imbalances
in national current account payments
its beauty:
it" sublated "
the pro creditor nation bias
built into all then
and
now existing
systems
well acutally not quite
uncle's dollar
has a unique role
as the one and only king pin currency
a creditor king (as post 46 )
or
a debtor king (as now )
uncle can be either
and do as he pleases
but
all else must if they run deficits
are ultimately
at the mercy
of their creditors
thru the offices of the private bankers
global fire department and wrecking crew
the IMF
THE TRICK WAS A SIMPLE ONE :
since bancor would have been
freely "printable"
its stock could be expanded ..at will
creating as much additional
global liquidity
as an expanding
international trading and credit system needed
very very
unlike the 19th century gold system
keynes wanted most of all to avoid two things
secular de flation
and
competitive devaluations
bancor would allow a nice steady optimal
global inflation rate
that lifted all ships
only varing each nations lift rate
to re balance accounts
bancor was the heart
of a payments system
based squarely
---in keynes' own words---
"on the banking principle
as applied within a closed system"
------------------------------------
X :
don't think the world is ready for
an international fiat currency
...
the euro is the closest thing we have,
and it is the currency of a subset
of a union of sorts (the EU).
Bancor, SDR, you name it
-- the institutions that determine global monetary policy
would need to be defined,
and the distribution of monetary power matters
plus, why would the world
want to give up currency flexibility
between the big zones now?
some currency adjustment seems to be
a big part of any benign rebalancing scenario
one currency
and one monetary policy
=
all adjustment comes through prices
so us prices need to fall/ chinese prices rise to equilibriate things
better for that to happen via changes
in the price of two fiat currencies
than via changes in lots of prices
at the micro level.
finally,
what's in it for the US.
Big debtor. Borrows in its own currency.
At low rates -- shifting all the risk
of a devaluation onto US creditors ...
What's not to like?
So long as the United States'
external debt is denominated
in its own (Fiat) currency,
the US has a few more options ...
no golden fetters here
----------------------------------
X WRITES:
" the distribution of monetary power matters"
exactly
and the US dollar
izzzzzzzzzzzz
the de facto
GLOBAL fiat money
right now
unilaterally controled nice set up eh ????
X WRITES ALSO:
"why would the world
want to give up currency flexibility
between the big zones now? "
in fact nothing prevents this with A RESERVE FIAT MONEY
bancor IS A RESERVE MONEY
A BETWEEN CBs ONLY CURRENCY
national currencies Could be
adjusting all the time
under keynes' bancor SYSTEM
and yes exactly
"some currency adjustment
seems to be a big part
of any benign rebalancing scenario"
and for pricisely your reason
" one currency and one monetary policy
= all adjustment comes through prices,
so us prices need to fall/ chinese prices
rise to equilibriate things.
better for that to happen via changes
in the price of two fiat currencies
than via changes in lots of prices
at the micro level. "
by the way james meade
said just that TO KEYNES
( side bar:
as you prolly know
keynes was very unhappy
at thoughts of devaluation
afraid britain
with inelastic imports
and elastic exports
would go further off course..
he was wrong of course
and partly because
the "model" in his note books
lacked any room for the benign effects
on import demand
of suddenly relatively cheaper
non traded goods
nice to see how far that sent him
towards a world currency )
my beef with the euro
which after all is indeed a mini run of a world currency
is not its unitary natur
but rather itsindependent constitution
which leaves it
a bankers lulu
a ante deluvian procrustian
brute
twisting ever tighter
just
to squeeze down euro real wage rate
imagine
doing that by squeezing
nominal wage growth
my my the seventies scared folks
no more
inflating away purchasing power
how old school
neo liberals as paleo capitalists
if i have a point here
its god bless our debtor status
at least so far we've readily expanded the dollar pool
even if we've let specs
zap too many emerging systems
to make non pproductive killings
--------------------------------------
my point as usual
is a qualitative one
even if its one that hinges
on refusing to except
the thesis
perhaps your thesis
that after some point
maybe 70 % maybe 110%
mere quantitative change
turns
into qualitative change
like arriving at long last
to the boiling point
or
the moment of avalanche
maybe there's such a point
and surely if there is
its lower
---far lower even---
in a non totalized non draconian
non war economy
but here we need to know why
certain
--let me call them
metropole states --
are able to run these
higher ratios
where other states can't and further if these states get wobbly
the other states rush to their aid
surely we've flogged to death
the notion that uncle sam ain't like any other player on the field today
my guess the "if"/"if not"
here
the modal operator
is
the absence of stand by
capital controls
laissez faire on hot money
out flows alone
probably make your
shakey turns to quakey barrier feasible
if not certain
even if both the brits and the nazis broke thru in the late 30s
that is not todays world
and
after all
sustainability is your castle keep here
and neither of those two states could have kept their game going
long term
so i'll not try storming that
fortress
as u know
i share your long run
sense the system must
correct itself
or massively sieze up
brad clearly we agree
short run and long run
its the longer medium run
sitting out there 20 to 30 quarters
where we seem to see
the existence of bear traps so very differently
----------------------------------------
Posted by pinky at January 28, 2006 02:15 AM