Our Friends, the Chinese and Sheikhs

[Anonymous]

I think a lot of the ‘money’ disappears, MM/FSD.

The U.S. stock market goes down in value. The teacher in China has her U.S. stock portfolio go down. Her Chinese stock broker calls her to cover her margin loan. She cannot cover the margin loan. The broker sells her stock and closes her account.

Net effect: reduction in value of the U.S. stock market and reduction in Chinese ‘money’ (broker margin account).

I’m reading Von Mises’ “Theory of Money and Credit.” Well written (but, believe it or not, dry). He says that there are three types of money: commodity money (gold and silver), fiat money (e.g., U.S. dollar), and credit money (e.g., bank loans).

So, my understanding is that when the asset prices (stocks and bonds) go down, much of the ‘money’ (broker loans) will go ‘poof’ and evaporate.

Same thing for U.S. residential and commercial real estate, when home and building loans (‘credit money’) get written down to zero because folks can’t make their payments.

[Anonymous]

I think a lot of the ‘money’ disappears, MM/FSD.

The U.S. stock market goes down in value. The teacher in China has her U.S. stock portfolio go down. Her Chinese stock broker calls her to cover her margin loan. She cannot cover the margin loan. The broker sells her stock and closes her account.

Net effect: reduction in value of the U.S. stock market and reduction in Chinese ‘money’ (broker margin account).

I’m reading Von Mises’ “Theory of Money and Credit.” Well written (but, believe it or not, dry). He says that there are three types of money: commodity money (gold and silver), fiat money (e.g., U.S. dollar), and credit money (e.g., bank loans).

So, my understanding is that when the asset prices (stocks and bonds) go down, much of the ‘money’ (broker loans) will go ‘poof’ and evaporate.

Same thing for U.S. residential and commercial real estate, when home and building loans (‘credit money’) get written down to zero because folks can’t make their payments.

[NotCranky]

I think a lot of the ‘money’ disappears, MM/FSD.

Doesn’t the last seller of the asset have the money? The banks,brokers/ lender loses the ability to collect money on a obligation to pay from the margin buyer or the mortgagee but actual capital for the investment/purchase doesn’t disappear it goes in someone’s pocket. Maybe it gets converted to another currency or invested in another asset but it seems the actual money can’t go out of circulation.

[NotCranky]

I think a lot of the ‘money’ disappears, MM/FSD.

Doesn’t the last seller of the asset have the money? The banks,brokers/ lender loses the ability to collect money on a obligation to pay from the margin buyer or the mortgagee but actual capital for the investment/purchase doesn’t disappear it goes in someone’s pocket. Maybe it gets converted to another currency or invested in another asset but it seems the actual money can’t go out of circulation.

[Anonymous]

One of the three forms of money — ‘credit money’ — is fleeting in existence.

A house burns down. The owners had no insurance. They had a $100K mortgage against the house. They have no money to pay back the mortgage.

The bank writes down the loan to zero. The house, burned down, is worth zero.

Net effect — reduction in assets (house) to zero, reduction in money supply (mortgage = ‘credit money’) by $100K.

(This simplified example does not take into account the multiplier effect if the bank had to go beyond reserves in the write down.)

Some money — ‘credit money’ — actually does disappear when asset values drop.

[Anonymous]

One of the three forms of money — ‘credit money’ — is fleeting in existence.

A house burns down. The owners had no insurance. They had a $100K mortgage against the house. They have no money to pay back the mortgage.

The bank writes down the loan to zero. The house, burned down, is worth zero.

Net effect — reduction in assets (house) to zero, reduction in money supply (mortgage = ‘credit money’) by $100K.

(This simplified example does not take into account the multiplier effect if the bank had to go beyond reserves in the write down.)

Some money — ‘credit money’ — actually does disappear when asset values drop.

[(former)FormerSanDiegan]

jg – I thought that the danger was that the foreign holders of our debt would sell these bonds, putting downward pressure on bond prices (and upward pressure on rates).

For the bond collapse to happen the foreign holders have to sell (presumably to put the assets to work somewhere else) or simply stop putting new assets into US$-denominated bonds. If they don’t deploy these here and these funds would have to go somewhere. Wouldn’t they ?

Rustico – Money can go in/out of circulation. Effectively being created or destroyed. For example, US stock holdings dropped dramatically in value in 2000-2002. The only value preserved were the relatively small amounts that were sold at/near the top. Many $ in stock value were essentially eliminated from the planet, at least until central banks started pumping up the money supply.

[(former)FormerSanDiegan]

jg – I thought that the danger was that the foreign holders of our debt would sell these bonds, putting downward pressure on bond prices (and upward pressure on rates).

For the bond collapse to happen the foreign holders have to sell (presumably to put the assets to work somewhere else) or simply stop putting new assets into US$-denominated bonds. If they don’t deploy these here and these funds would have to go somewhere. Wouldn’t they ?

Rustico – Money can go in/out of circulation. Effectively being created or destroyed. For example, US stock holdings dropped dramatically in value in 2000-2002. The only value preserved were the relatively small amounts that were sold at/near the top. Many $ in stock value were essentially eliminated from the planet, at least until central banks started pumping up the money supply.

[(former)FormerSanDiegan]

Good topic jg… just trying to figure out where the assets will flow so that I can make lemonade from these lemons.

[(former)FormerSanDiegan]

Good topic jg… just trying to figure out where the assets will flow so that I can make lemonade from these lemons.

[Anonymous]

I absolutely agree with both of your points, MM/FSD, that such would put downward pressure on bond prices and that the money would get parked elsewhere.

Look at the today’s TIC report for April, and you’ll see that foreigners are now buying FNMA/GNMA bonds, corporate bonds, and corporate equities (lines 6-8 and 11-13) while selling their Treasury bonds (lines 5 and 10).

http://www.treas.gov/press/releases/hp460.htm

Do you read the data the same way?

[Anonymous]

I absolutely agree with both of your points, MM/FSD, that such would put downward pressure on bond prices and that the money would get parked elsewhere.

Look at the today’s TIC report for April, and you’ll see that foreigners are now buying FNMA/GNMA bonds, corporate bonds, and corporate equities (lines 6-8 and 11-13) while selling their Treasury bonds (lines 5 and 10).

http://www.treas.gov/press/releases/hp460.htm

Do you read the data the same way?

[Anonymous]

So, if such is indeed happening, we would expect U.S. Treasury prices to be falling (they are) and U.S. equity prices to be increasing (they are).

But, I would not want to jump onto that bandwagon. As soon as that Chinese stock market hiccups, or a major borrower can’t make their payments, the party is over.

[Anonymous]

So, if such is indeed happening, we would expect U.S. Treasury prices to be falling (they are) and U.S. equity prices to be increasing (they are).

But, I would not want to jump onto that bandwagon. As soon as that Chinese stock market hiccups, or a major borrower can’t make their payments, the party is over.

[(former)FormerSanDiegan]

Do you read the data the same way?
Yep.
Dumping US treasuries, slight pick up in gov’t agency bonds (I wouldn’t go there), and acceleration into equities and corporate bonds.

[Author]

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