Comments on: The Dollar: It’s an Overhang, not a Hangover http://blogs.cfr.org/setser/2009/07/06/the-dollar-it%e2%80%99s-an-overhang-not-a-hangover/ Sat, 21 Nov 2009 16:40:10 -0500 http://wordpress.org/?v=2.8.4 hourly 1 By: Brad Setser: Follow the Money » Blog Archive » Nothing brings out buyers like higher prices, and other short stories http://blogs.cfr.org/setser/2009/07/06/the-dollar-it%e2%80%99s-an-overhang-not-a-hangover/#comment-133259 Brad Setser: Follow the Money » Blog Archive » Nothing brings out buyers like higher prices, and other short stories Wed, 15 Jul 2009 16:28:53 +0000 http://blogs.cfr.org/setser/?p=5829#comment-133259 [...] will change over time, and will contribute to the unwind of the dollar overhang that I wrote about here last week, but until it does, when investors reduce risk they buy dollars and “bring their assets [...] [...] will change over time, and will contribute to the unwind of the dollar overhang that I wrote about here last week, but until it does, when investors reduce risk they buy dollars and “bring their assets [...]

]]> By: Hot Links: « The Reformed Broker http://blogs.cfr.org/setser/2009/07/06/the-dollar-it%e2%80%99s-an-overhang-not-a-hangover/#comment-133155 Hot Links: « The Reformed Broker Sat, 11 Jul 2009 11:05:24 +0000 http://blogs.cfr.org/setser/?p=5829#comment-133155 [...] As everyone seems so convinced that “the printing presses are running overtime” and “dollars are flooding the system”, I though it was interesting to hear a contrary take from hedge fund manager Mark Dow.  (CFR) [...] [...] As everyone seems so convinced that “the printing presses are running overtime” and “dollars are flooding the system”, I though it was interesting to hear a contrary take from hedge fund manager Mark Dow.  (CFR) [...]

]]> By: Brad Setser: Follow the Money » Blog Archive » Chinese Handcuffs? No, Chinese trade deficit http://blogs.cfr.org/setser/2009/07/06/the-dollar-it%e2%80%99s-an-overhang-not-a-hangover/#comment-133118 Brad Setser: Follow the Money » Blog Archive » Chinese Handcuffs? No, Chinese trade deficit Fri, 10 Jul 2009 14:45:50 +0000 http://blogs.cfr.org/setser/?p=5829#comment-133118 [...] rate regime or Renminbi level that can stop this from happening. On Monday I posted a chart of the US trade balance, and we saw in it the dramatic swing that took hold as soon as the credit bubble popped. Overnight, [...] [...] rate regime or Renminbi level that can stop this from happening. On Monday I posted a chart of the US trade balance, and we saw in it the dramatic swing that took hold as soon as the credit bubble popped. Overnight, [...]

]]> By: baychev http://blogs.cfr.org/setser/2009/07/06/the-dollar-it%e2%80%99s-an-overhang-not-a-hangover/#comment-133108 baychev Fri, 10 Jul 2009 09:16:18 +0000 http://blogs.cfr.org/setser/?p=5829#comment-133108 mark, to talk about base money in times when everything but chewing gum is purchased on credit is so out of touch with reality. mark,
to talk about base money in times when everything but chewing gum is purchased on credit is so out of touch with reality.

]]> By: FX Internals http://blogs.cfr.org/setser/2009/07/06/the-dollar-it%e2%80%99s-an-overhang-not-a-hangover/#comment-133085 FX Internals Thu, 09 Jul 2009 14:45:50 +0000 http://blogs.cfr.org/setser/?p=5829#comment-133085 I think the better statement is that "economists examine history and traders bet on the future." But relatively absent from the comments is the fact that the value of the USD is always measured in relation to another currency. So it matters just as much what is happening in that other country as what is happening in the USA. Also, the value of the USD is directly tied to the inflation vs. deflation fight that is going on in the world economy. The massive credit bubble / deleveraging that is going on is being fought by the FED with inflationary weapons. Who will win? Will the FED succeed in inflating our way out of this and thus devaluing the dollar? Or will the forces of deflation win, which will actually increase the value of the dollar? My bet long term is that deflation will win, deleveraging will occur, and overall debt loads in the world will decrease. Less debt == less money == higher value of money that still exists. Japan is a pretty good example of this. The USDJPY was around 300 in 1975, fell to 175 by 1978, inflated its way to 277 by 1985 and then fell off a cliff all the way down to 84 by mid 1995. Just as the Nikkei was falling, so was the YEN. The deleveraging of their debt was a massive force during this time, and their gov't was desperate to stop it borrowing more than 1x GDP to fight that fight. And still they lost, Yen deflation won, and the Yen got massively stronger vs. the USD from 1975 through 1995. I think the better statement is that “economists examine history and traders bet on the future.”

But relatively absent from the comments is the fact that the value of the USD is always measured in relation to another currency. So it matters just as much what is happening in that other country as what is happening in the USA.

Also, the value of the USD is directly tied to the inflation vs. deflation fight that is going on in the world economy. The massive credit bubble / deleveraging that is going on is being fought by the FED with inflationary weapons. Who will win? Will the FED succeed in inflating our way out of this and thus devaluing the dollar? Or will the forces of deflation win, which will actually increase the value of the dollar?

My bet long term is that deflation will win, deleveraging will occur, and overall debt loads in the world will decrease. Less debt == less money == higher value of money that still exists.

Japan is a pretty good example of this. The USDJPY was around 300 in 1975, fell to 175 by 1978, inflated its way to 277 by 1985 and then fell off a cliff all the way down to 84 by mid 1995. Just as the Nikkei was falling, so was the YEN. The deleveraging of their debt was a massive force during this time, and their gov’t was desperate to stop it borrowing more than 1x GDP to fight that fight. And still they lost, Yen deflation won, and the Yen got massively stronger vs. the USD from 1975 through 1995.

]]> By: The End of Dollar « Economics Info http://blogs.cfr.org/setser/2009/07/06/the-dollar-it%e2%80%99s-an-overhang-not-a-hangover/#comment-133054 The End of Dollar « Economics Info Wed, 08 Jul 2009 18:08:13 +0000 http://blogs.cfr.org/setser/?p=5829#comment-133054 [...] Source [...] [...] Source [...]

]]> By: Brad Setser: Follow the Money » Blog Archive » The Monkey Multiplier http://blogs.cfr.org/setser/2009/07/06/the-dollar-it%e2%80%99s-an-overhang-not-a-hangover/#comment-133045 Brad Setser: Follow the Money » Blog Archive » The Monkey Multiplier Wed, 08 Jul 2009 13:54:54 +0000 http://blogs.cfr.org/setser/?p=5829#comment-133045 [...] has been a lot of response to the assertion I made the other day that base money has not been growing since December, and that the money multiplier is not passing [...] [...] has been a lot of response to the assertion I made the other day that base money has not been growing since December, and that the money multiplier is not passing [...]

]]> By: a http://blogs.cfr.org/setser/2009/07/06/the-dollar-it%e2%80%99s-an-overhang-not-a-hangover/#comment-133042 a Wed, 08 Jul 2009 11:16:10 +0000 http://blogs.cfr.org/setser/?p=5829#comment-133042 “Economists are never wrong, only early” Surely better would be, "Economists are never wrong, only early or late." This is false, but at least it's less false. “Economists are never wrong, only early”

Surely better would be, “Economists are never wrong, only early or late.” This is false, but at least it’s less false.

]]> By: lewy14 http://blogs.cfr.org/setser/2009/07/06/the-dollar-it%e2%80%99s-an-overhang-not-a-hangover/#comment-133029 lewy14 Wed, 08 Jul 2009 02:58:42 +0000 http://blogs.cfr.org/setser/?p=5829#comment-133029 Mark, It's true that base money is not increasing - but I'd claim that the assets on the Fed balance sheet have become <strike>crappier</strike> longer duration and lower credit quality than they were six months ago. MBS and longer duration Treasuries have replaced the swaps, CP, etc which are running off. This matters with respect to "exit strategy". By engaging in QE and CE at all, the Fed has put the prospect of monetizing the Federal deficits (and questionable mortgage debt) squarely on the table. The only claim the Fed can make against accusations of monetization is the credibility to reverse QE/CE. When real economic green shoots sprout, it will be politically very, very difficult to sell the Fed's assets on the market to mop up liquidity. The solvency of the Fed itself could be an issue here as well. Domestic fiscal discipline is honored exclusively in the breach and there is no evidence of this trend changing. This is the political reality the Fed operates in. Dollar stability is predicated on credibility, which is slowly eroded by the inexorable progression of the arithmetic of debt. Mark,

It’s true that base money is not increasing – but I’d claim that the assets on the Fed balance sheet have become crappier longer duration and lower credit quality than they were six months ago. MBS and longer duration Treasuries have replaced the swaps, CP, etc which are running off.

This matters with respect to “exit strategy”.

By engaging in QE and CE at all, the Fed has put the prospect of monetizing the Federal deficits (and questionable mortgage debt) squarely on the table.

The only claim the Fed can make against accusations of monetization is the credibility to reverse QE/CE.

When real economic green shoots sprout, it will be politically very, very difficult to sell the Fed’s assets on the market to mop up liquidity. The solvency of the Fed itself could be an issue here as well.

Domestic fiscal discipline is honored exclusively in the breach and there is no evidence of this trend changing.

This is the political reality the Fed operates in.

Dollar stability is predicated on credibility, which is slowly eroded by the inexorable progression of the arithmetic of debt.

]]> By: Too Much Fed http://blogs.cfr.org/setser/2009/07/06/the-dollar-it%e2%80%99s-an-overhang-not-a-hangover/#comment-133026 Too Much Fed Wed, 08 Jul 2009 02:02:15 +0000 http://blogs.cfr.org/setser/?p=5829#comment-133026 Cedric Regula said: "Where can you find data on the money multiplier?" Is this it? http://research.stlouisfed.org/fred2/series/MULT Cedric Regula said: “Where can you find data on the money multiplier?”

Is this it?

http://research.stlouisfed.org/fred2/series/MULT

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