[Fearful]

[quote=kewp]
But there’s the catch, why would they want to dump a currency that is gaining purchasing power against everything else? [/quote]
They might well be inclined to bias against adding more of a currency that has recently gained purchasing power.

No one will fully divest their foreign exchange reserves of dollars. Doing so, particularly when they hold nearly two trillion dollars, would devalue the remainder of the holdings; not even the largest market is that liquid.

They might do it solely for purposes of diversification. A trade-weighted or GDP weighted currency basket would hold only about a quarter in dollars.

[Fearful]

[quote=kewp]
But there’s the catch, why would they want to dump a currency that is gaining purchasing power against everything else? [/quote]
They might well be inclined to bias against adding more of a currency that has recently gained purchasing power.

No one will fully divest their foreign exchange reserves of dollars. Doing so, particularly when they hold nearly two trillion dollars, would devalue the remainder of the holdings; not even the largest market is that liquid.

They might do it solely for purposes of diversification. A trade-weighted or GDP weighted currency basket would hold only about a quarter in dollars.

[Fearful]

[quote=kewp]
But there’s the catch, why would they want to dump a currency that is gaining purchasing power against everything else? [/quote]
They might well be inclined to bias against adding more of a currency that has recently gained purchasing power.

No one will fully divest their foreign exchange reserves of dollars. Doing so, particularly when they hold nearly two trillion dollars, would devalue the remainder of the holdings; not even the largest market is that liquid.

They might do it solely for purposes of diversification. A trade-weighted or GDP weighted currency basket would hold only about a quarter in dollars.

[Fearful]

[quote=qwerty007]
Presumably it’s the Asian reserves that are the lion’s share, that would ultimately be the cause of a dollar collapse. But we are led to believe that the symbiosis between the US and Chinese economies make this unlikely? A crashing dollar sounds like a severe loss of value, but I guess that means basically it becomes unstable against a basket of currencies and can undulate, and whichever way it goes it’s bad right?
[/quote]

The Chinese-American symbiosis only needs to shift a little to have great impact. Over the last year there has been an increasing amount of grumbling from the Chinese. Earlier, when rogue speakers would complain about the situation, Party officials would quickly deny. We do not see that anymore, and the critical voices are becoming louder. The gist of the dissenting voices seems to be that the current situation is not in China’s long term interests; it has served them well so far, but now the Chinese economy needs to develop in ways that are not so dependent on U.S. consumption. Even a small bias toward banking their current account surplus in currencies other than the dollar would hurt the dollar greatly.

The Gulf states, and Japan, are also significant holders of dollar reserves. Their actions play a role. None of them wants to break the dollar hegemony, yet if that breaking starts, all will want to break first. So the situation seems unstable.

However, the interest in preserving the status quo will help. But this interest, and risk aversion, which is included in “speculation” because it implies forecasts of future risk, do not make a very strong foundation for a currency. One would prefer to see a healthy current account surplus, and a government with low debt and low deficit spending, when looking for a reserve currency. The status quo will prevail but will erode, in what we hope is not too volatile a fashion. Volatility will hurt our domestic economy – risk is bad – and shifting import prices may create deflationary expectations via risk fear.

It is difficult to see many factors, besides risk aversion and inertia, that support the dollar.

[Fearful]

[quote=qwerty007]
Presumably it’s the Asian reserves that are the lion’s share, that would ultimately be the cause of a dollar collapse. But we are led to believe that the symbiosis between the US and Chinese economies make this unlikely? A crashing dollar sounds like a severe loss of value, but I guess that means basically it becomes unstable against a basket of currencies and can undulate, and whichever way it goes it’s bad right?
[/quote]

The Chinese-American symbiosis only needs to shift a little to have great impact. Over the last year there has been an increasing amount of grumbling from the Chinese. Earlier, when rogue speakers would complain about the situation, Party officials would quickly deny. We do not see that anymore, and the critical voices are becoming louder. The gist of the dissenting voices seems to be that the current situation is not in China’s long term interests; it has served them well so far, but now the Chinese economy needs to develop in ways that are not so dependent on U.S. consumption. Even a small bias toward banking their current account surplus in currencies other than the dollar would hurt the dollar greatly.

The Gulf states, and Japan, are also significant holders of dollar reserves. Their actions play a role. None of them wants to break the dollar hegemony, yet if that breaking starts, all will want to break first. So the situation seems unstable.

However, the interest in preserving the status quo will help. But this interest, and risk aversion, which is included in “speculation” because it implies forecasts of future risk, do not make a very strong foundation for a currency. One would prefer to see a healthy current account surplus, and a government with low debt and low deficit spending, when looking for a reserve currency. The status quo will prevail but will erode, in what we hope is not too volatile a fashion. Volatility will hurt our domestic economy – risk is bad – and shifting import prices may create deflationary expectations via risk fear.

It is difficult to see many factors, besides risk aversion and inertia, that support the dollar.

[Fearful]

[quote=qwerty007]
Presumably it’s the Asian reserves that are the lion’s share, that would ultimately be the cause of a dollar collapse. But we are led to believe that the symbiosis between the US and Chinese economies make this unlikely? A crashing dollar sounds like a severe loss of value, but I guess that means basically it becomes unstable against a basket of currencies and can undulate, and whichever way it goes it’s bad right?
[/quote]

The Chinese-American symbiosis only needs to shift a little to have great impact. Over the last year there has been an increasing amount of grumbling from the Chinese. Earlier, when rogue speakers would complain about the situation, Party officials would quickly deny. We do not see that anymore, and the critical voices are becoming louder. The gist of the dissenting voices seems to be that the current situation is not in China’s long term interests; it has served them well so far, but now the Chinese economy needs to develop in ways that are not so dependent on U.S. consumption. Even a small bias toward banking their current account surplus in currencies other than the dollar would hurt the dollar greatly.

The Gulf states, and Japan, are also significant holders of dollar reserves. Their actions play a role. None of them wants to break the dollar hegemony, yet if that breaking starts, all will want to break first. So the situation seems unstable.

However, the interest in preserving the status quo will help. But this interest, and risk aversion, which is included in “speculation” because it implies forecasts of future risk, do not make a very strong foundation for a currency. One would prefer to see a healthy current account surplus, and a government with low debt and low deficit spending, when looking for a reserve currency. The status quo will prevail but will erode, in what we hope is not too volatile a fashion. Volatility will hurt our domestic economy – risk is bad – and shifting import prices may create deflationary expectations via risk fear.

It is difficult to see many factors, besides risk aversion and inertia, that support the dollar.

[Fearful]

[quote=qwerty007]
Presumably it’s the Asian reserves that are the lion’s share, that would ultimately be the cause of a dollar collapse. But we are led to believe that the symbiosis between the US and Chinese economies make this unlikely? A crashing dollar sounds like a severe loss of value, but I guess that means basically it becomes unstable against a basket of currencies and can undulate, and whichever way it goes it’s bad right?
[/quote]

The Chinese-American symbiosis only needs to shift a little to have great impact. Over the last year there has been an increasing amount of grumbling from the Chinese. Earlier, when rogue speakers would complain about the situation, Party officials would quickly deny. We do not see that anymore, and the critical voices are becoming louder. The gist of the dissenting voices seems to be that the current situation is not in China’s long term interests; it has served them well so far, but now the Chinese economy needs to develop in ways that are not so dependent on U.S. consumption. Even a small bias toward banking their current account surplus in currencies other than the dollar would hurt the dollar greatly.

The Gulf states, and Japan, are also significant holders of dollar reserves. Their actions play a role. None of them wants to break the dollar hegemony, yet if that breaking starts, all will want to break first. So the situation seems unstable.

However, the interest in preserving the status quo will help. But this interest, and risk aversion, which is included in “speculation” because it implies forecasts of future risk, do not make a very strong foundation for a currency. One would prefer to see a healthy current account surplus, and a government with low debt and low deficit spending, when looking for a reserve currency. The status quo will prevail but will erode, in what we hope is not too volatile a fashion. Volatility will hurt our domestic economy – risk is bad – and shifting import prices may create deflationary expectations via risk fear.

It is difficult to see many factors, besides risk aversion and inertia, that support the dollar.

[Fearful]

[quote=qwerty007]
Presumably it’s the Asian reserves that are the lion’s share, that would ultimately be the cause of a dollar collapse. But we are led to believe that the symbiosis between the US and Chinese economies make this unlikely? A crashing dollar sounds like a severe loss of value, but I guess that means basically it becomes unstable against a basket of currencies and can undulate, and whichever way it goes it’s bad right?
[/quote]

The Chinese-American symbiosis only needs to shift a little to have great impact. Over the last year there has been an increasing amount of grumbling from the Chinese. Earlier, when rogue speakers would complain about the situation, Party officials would quickly deny. We do not see that anymore, and the critical voices are becoming louder. The gist of the dissenting voices seems to be that the current situation is not in China’s long term interests; it has served them well so far, but now the Chinese economy needs to develop in ways that are not so dependent on U.S. consumption. Even a small bias toward banking their current account surplus in currencies other than the dollar would hurt the dollar greatly.

The Gulf states, and Japan, are also significant holders of dollar reserves. Their actions play a role. None of them wants to break the dollar hegemony, yet if that breaking starts, all will want to break first. So the situation seems unstable.

However, the interest in preserving the status quo will help. But this interest, and risk aversion, which is included in “speculation” because it implies forecasts of future risk, do not make a very strong foundation for a currency. One would prefer to see a healthy current account surplus, and a government with low debt and low deficit spending, when looking for a reserve currency. The status quo will prevail but will erode, in what we hope is not too volatile a fashion. Volatility will hurt our domestic economy – risk is bad – and shifting import prices may create deflationary expectations via risk fear.

It is difficult to see many factors, besides risk aversion and inertia, that support the dollar.

[Fearful]

[quote=kewp]

Baranaby33 is not correct. Repaying debt is not deflationary in the classic sense. [/quote]

Yes and no. If the money borrowed to fund consumption comes from a pool of financial assets, then the borrowing is price inflationary. If the money borrowed to fund consumption comes from workers’ wages, then it is not price inflationary.

The fallacy comes from thinking of all money as one pool that is being used for consumption. If that were the case, price inflation would have been horrendous as total debt increased dramatically over the last decade.

When the government borrows money – issues treasuries – to fund a stimulus payment, it is inflationary to the extent that the stimulus payments are spent and used to fund consumption. If recipients of the payments use them to pay down debt or otherwise save and do not consume with the money, the stimulus payments are not inflationary. Of course, the reverse happens when the debt matures and is paid off. This ties to the great debate of the impact of mortgage equity withdrawal, which effectively acted as an ongoing stimulus payment over the last eight to ten years.

On the original topic: Deflation leads to a stronger currency, which decreases import prices and weakens the export sector. The former creates deflationary expectations, and the latter decreases the velocity of money. Both result in deflation. Whether this feedback loop, which also works for inflation and a weakening currency, starts with prices or the currency is a moot point, though currency changes might come first, driven by speculation or risk aversion.

In any event, it is hard for me to imagine Fed and Treasury not intervening to weaken the dollar to ward off deflation. Right now things look awfully deflationary. Watch for a lowered Fed Funds Rate or – not sure how this would work – U.S. open market operations to sell dollars and buy foreign currencies.

Problem is, if the Chinese, or any other net accumulators of dollar reserves, develop any bias away from the dollar, there would be a rapid devaluation. Fed and Treasury might not be able to intervene fast enough to stop the dollar from crashing.

[Fearful]

[quote=kewp]

Baranaby33 is not correct. Repaying debt is not deflationary in the classic sense. [/quote]

Yes and no. If the money borrowed to fund consumption comes from a pool of financial assets, then the borrowing is price inflationary. If the money borrowed to fund consumption comes from workers’ wages, then it is not price inflationary.

The fallacy comes from thinking of all money as one pool that is being used for consumption. If that were the case, price inflation would have been horrendous as total debt increased dramatically over the last decade.

When the government borrows money – issues treasuries – to fund a stimulus payment, it is inflationary to the extent that the stimulus payments are spent and used to fund consumption. If recipients of the payments use them to pay down debt or otherwise save and do not consume with the money, the stimulus payments are not inflationary. Of course, the reverse happens when the debt matures and is paid off. This ties to the great debate of the impact of mortgage equity withdrawal, which effectively acted as an ongoing stimulus payment over the last eight to ten years.

On the original topic: Deflation leads to a stronger currency, which decreases import prices and weakens the export sector. The former creates deflationary expectations, and the latter decreases the velocity of money. Both result in deflation. Whether this feedback loop, which also works for inflation and a weakening currency, starts with prices or the currency is a moot point, though currency changes might come first, driven by speculation or risk aversion.

In any event, it is hard for me to imagine Fed and Treasury not intervening to weaken the dollar to ward off deflation. Right now things look awfully deflationary. Watch for a lowered Fed Funds Rate or – not sure how this would work – U.S. open market operations to sell dollars and buy foreign currencies.

Problem is, if the Chinese, or any other net accumulators of dollar reserves, develop any bias away from the dollar, there would be a rapid devaluation. Fed and Treasury might not be able to intervene fast enough to stop the dollar from crashing.

[Fearful]

[quote=kewp]

Baranaby33 is not correct. Repaying debt is not deflationary in the classic sense. [/quote]

Yes and no. If the money borrowed to fund consumption comes from a pool of financial assets, then the borrowing is price inflationary. If the money borrowed to fund consumption comes from workers’ wages, then it is not price inflationary.

The fallacy comes from thinking of all money as one pool that is being used for consumption. If that were the case, price inflation would have been horrendous as total debt increased dramatically over the last decade.

When the government borrows money – issues treasuries – to fund a stimulus payment, it is inflationary to the extent that the stimulus payments are spent and used to fund consumption. If recipients of the payments use them to pay down debt or otherwise save and do not consume with the money, the stimulus payments are not inflationary. Of course, the reverse happens when the debt matures and is paid off. This ties to the great debate of the impact of mortgage equity withdrawal, which effectively acted as an ongoing stimulus payment over the last eight to ten years.

On the original topic: Deflation leads to a stronger currency, which decreases import prices and weakens the export sector. The former creates deflationary expectations, and the latter decreases the velocity of money. Both result in deflation. Whether this feedback loop, which also works for inflation and a weakening currency, starts with prices or the currency is a moot point, though currency changes might come first, driven by speculation or risk aversion.

In any event, it is hard for me to imagine Fed and Treasury not intervening to weaken the dollar to ward off deflation. Right now things look awfully deflationary. Watch for a lowered Fed Funds Rate or – not sure how this would work – U.S. open market operations to sell dollars and buy foreign currencies.

Problem is, if the Chinese, or any other net accumulators of dollar reserves, develop any bias away from the dollar, there would be a rapid devaluation. Fed and Treasury might not be able to intervene fast enough to stop the dollar from crashing.

[Fearful]

[quote=kewp]

Baranaby33 is not correct. Repaying debt is not deflationary in the classic sense. [/quote]

Yes and no. If the money borrowed to fund consumption comes from a pool of financial assets, then the borrowing is price inflationary. If the money borrowed to fund consumption comes from workers’ wages, then it is not price inflationary.

The fallacy comes from thinking of all money as one pool that is being used for consumption. If that were the case, price inflation would have been horrendous as total debt increased dramatically over the last decade.

When the government borrows money – issues treasuries – to fund a stimulus payment, it is inflationary to the extent that the stimulus payments are spent and used to fund consumption. If recipients of the payments use them to pay down debt or otherwise save and do not consume with the money, the stimulus payments are not inflationary. Of course, the reverse happens when the debt matures and is paid off. This ties to the great debate of the impact of mortgage equity withdrawal, which effectively acted as an ongoing stimulus payment over the last eight to ten years.

On the original topic: Deflation leads to a stronger currency, which decreases import prices and weakens the export sector. The former creates deflationary expectations, and the latter decreases the velocity of money. Both result in deflation. Whether this feedback loop, which also works for inflation and a weakening currency, starts with prices or the currency is a moot point, though currency changes might come first, driven by speculation or risk aversion.

In any event, it is hard for me to imagine Fed and Treasury not intervening to weaken the dollar to ward off deflation. Right now things look awfully deflationary. Watch for a lowered Fed Funds Rate or – not sure how this would work – U.S. open market operations to sell dollars and buy foreign currencies.

Problem is, if the Chinese, or any other net accumulators of dollar reserves, develop any bias away from the dollar, there would be a rapid devaluation. Fed and Treasury might not be able to intervene fast enough to stop the dollar from crashing.

[Fearful]

[quote=kewp]

Baranaby33 is not correct. Repaying debt is not deflationary in the classic sense. [/quote]

Yes and no. If the money borrowed to fund consumption comes from a pool of financial assets, then the borrowing is price inflationary. If the money borrowed to fund consumption comes from workers’ wages, then it is not price inflationary.

The fallacy comes from thinking of all money as one pool that is being used for consumption. If that were the case, price inflation would have been horrendous as total debt increased dramatically over the last decade.

When the government borrows money – issues treasuries – to fund a stimulus payment, it is inflationary to the extent that the stimulus payments are spent and used to fund consumption. If recipients of the payments use them to pay down debt or otherwise save and do not consume with the money, the stimulus payments are not inflationary. Of course, the reverse happens when the debt matures and is paid off. This ties to the great debate of the impact of mortgage equity withdrawal, which effectively acted as an ongoing stimulus payment over the last eight to ten years.

On the original topic: Deflation leads to a stronger currency, which decreases import prices and weakens the export sector. The former creates deflationary expectations, and the latter decreases the velocity of money. Both result in deflation. Whether this feedback loop, which also works for inflation and a weakening currency, starts with prices or the currency is a moot point, though currency changes might come first, driven by speculation or risk aversion.

In any event, it is hard for me to imagine Fed and Treasury not intervening to weaken the dollar to ward off deflation. Right now things look awfully deflationary. Watch for a lowered Fed Funds Rate or – not sure how this would work – U.S. open market operations to sell dollars and buy foreign currencies.

Problem is, if the Chinese, or any other net accumulators of dollar reserves, develop any bias away from the dollar, there would be a rapid devaluation. Fed and Treasury might not be able to intervene fast enough to stop the dollar from crashing.

[Fearful]

There is some truth behind it; if I were in an underwater house, I would be sorely tempted to stop making payments and wait for the sheriff to come. I could easily see it being a year until they get around to me, and in the meantime, there may well be a bailout headed my way.

I think we are seeing asset deflation on an tremendous scale; how quickly that translates to consumer price deflation is a complete mystery to me.

Can’t Fed and Treasury directly pump the (consumer) money supply by distributing a stimulus payment, issuing Treasury notes, and then buying those Treasury notes right back? It seems to me that the money supply can be pumped in a number of different ways, especially if deflationary expectations have not yet taken hold. If deflationary expectations have taken hold, then if Treasury issues stimulus payments, consumers will save the money, or use it to pay down debt, and the money supply will not be inflated. This was Japan’s trap, no?

The speed with which dollar strength subsequently changes will illustrate the extent to which we are in consumer price deflation. I do not think either inflation or deflation sets in as quickly as exchange rates have recently changed.

Chaos. We are in the midst of chaos that I find frankly alarming. The Nikkei is down 5% as I write this. I suspect the drop in the Nikkei is partly due to Sony’s poor forecast, which is partly due to increasing Yen strength, which makes Japanese exporters less competitive.

Eric

[Fearful]

There is some truth behind it; if I were in an underwater house, I would be sorely tempted to stop making payments and wait for the sheriff to come. I could easily see it being a year until they get around to me, and in the meantime, there may well be a bailout headed my way.

I think we are seeing asset deflation on an tremendous scale; how quickly that translates to consumer price deflation is a complete mystery to me.

Can’t Fed and Treasury directly pump the (consumer) money supply by distributing a stimulus payment, issuing Treasury notes, and then buying those Treasury notes right back? It seems to me that the money supply can be pumped in a number of different ways, especially if deflationary expectations have not yet taken hold. If deflationary expectations have taken hold, then if Treasury issues stimulus payments, consumers will save the money, or use it to pay down debt, and the money supply will not be inflated. This was Japan’s trap, no?

The speed with which dollar strength subsequently changes will illustrate the extent to which we are in consumer price deflation. I do not think either inflation or deflation sets in as quickly as exchange rates have recently changed.

Chaos. We are in the midst of chaos that I find frankly alarming. The Nikkei is down 5% as I write this. I suspect the drop in the Nikkei is partly due to Sony’s poor forecast, which is partly due to increasing Yen strength, which makes Japanese exporters less competitive.

Eric

[Author]

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