Dollar vs. Baht

[MrPlum]

We've just had huge 'Quantitive Easing' (QE) where liquidity has been pumped into the markets to, we are told, grease the wheels of industry but which have in fact been swallowed up by the 'too big to fail' banks. There has also been massive monetization to provide dollars to countries to meet their dollar-denominated commitments. My reading of the Triffin Dilemma was that, while you can't have huge currency inflows and outflows at the same time, you can if you are pulling money out of thin air. Monetization is the end result and has taken place, to supply liquidity to U.S. and international central banks, including the FED, essentially an international private central bank. (Correct me if I'm wrong). Reserve requirements have been increased but these won't be met by some banks until 2015. So they will be soaking up cash for a few years yet.

Essentially, cash has gone to the central banks, to foreign creditors, to provide cash to purchase oil and to keep some major industries on life support, such as GM, Fannie Mae and Freddie Mac. Little has gone to breathe life into domestic manufacturing or domestic needs, such as infrastructure. As has been said, wars have to be paid for and if property prices take another dip, all those derivatives sitting on top of 'liars loan' mortgages will implode once again.

The markets are doing okay right now, due to the activities of the PPT (plunge protection team) until the next elections in the U.S. are over. They are trying to keep Obama in place. While the banks have taken those trillions and continued to play the same game that got us into trouble in the first place. Playing the markets both long and short, but still creating a bubble. Great if you are insiders like Goldman Sachs, front-running every trade.

The FED is buying it's own debt, stepping in because other countries are pulling back from buying U.S. treasuries. In other words the massive debt that has caused the crisis has been exacerbated by piling on even more debt. Can these immense debts be paid off? How? Either devaluation has to take place or the debt has to be 'forgiven' or even defaulted on.

Without any means to create wealth, the UK and US are dead on their feet, while the PIGS countries are a burden on the EC. Manufacturing needs to be resurrected, preferably in green energy projects. Without available credit though, it's hard to get any industry off the ground and the banks are still insolvent. Shipping all the jobs off to China was a huge mistake. Corporate fat cats benefit but the rest of us are being turned into the third world. Asia will fare better since it's not so insolvent.

I would be more than happy to see the pound go back above 50 but can't see any reason why it should.

Social programs will be sacrificed and government jobs will increase, hence the socialist state grows. When governments shed jobs, then it's time to really worry. The concern is that the kitty is empty and the crooks running the government will raid the rest of our savings. Social Security, 501ks? while increasing taxes. It's possible they may even confiscate gold again to save the fiat currencies and introduce capital controls to stop a flight of capital from the U.S. or UK. If they do that, get out while you can! The introduction of 'carbon taxes' is madness IMO while all this is happening and only increase the burden of taxation on the poor. Me!

'Korky' seems to understand this better than I, so perhaps he will comment again.

[Korkenzieher]

'Korky' seems to understand this better than I, so perhaps he will comment again.

Oo-er. Sounds like I'm being set up for a slagging off

OK. Where I differ from the above:

The FED is buying it's own debt

No. The FED is buying Government debt. The FED is a private company in which almost all banks in the US are shareholders. It is the government's banker. It is soaking up the treasuries issued by central government though the Treasury Department as a mechanism of pumping liquidity into the system. At its most basic, the money-go-round has 2 elements - the leveraged cash quantity [The Keynsian Multiplier] in the economy and the speed with which it circulates [The Velocity of Money]. Flooding the market with cash makes up in some respects for a reduced velocity. This is because as cash is withheld (to rebuild balance sheets and as savings) the multiplier isn't sufficient to cover the corporate finance requirements to do even such mundane jobs as pay salaries.

To remove that liquidity, the FED simply has to monitor the velocity of money and sell the governments paper back into the market to cut the liquidity. It isn't clear to me how it does that exactly. However what is clear is that if that liquidity gains traction in the economy, and isn't removed, the result is inflation. My personal interpretation of the market rally at the moment, which has confused the heck out of me, is that it is the first signs of all that liquidity gaining traction.

because other countries are pulling back from buying U.S. treasuries

Clearly not correct. By implication the trade deficit is marked by treasury sales. To ensure local tradesmen are paid, the government debt market effectivly takes over all the requirements of paying the intermediaries in the economy. If that wasn't the case then companies couldn't get paid by their customers except directly and international trade deficits could not happen. The score card is marked in effect by the foreign exchange markets, but the numbers are in trade-deficit terms and treasury holdings in China, Japan representing that.

Can these immense debts be paid off? How?

By the FED selling the government paper to the Treasury and the Treasury cancelling it. Devaluation doesn't have to take place, or the debt be 'forgiven' or defaulted unless the government can no longer service it. That is, pay the interest rate. At the current time, the interest rate on Treasuries is so low that that isn't a problem. Should inflation take hold, due to mis-calculation by the FED, and interest rates rise rapidly, then it becomes an issue. But not before.

Reserve requirement increases mainly have the effect of reducing lending banks ability to leverage capital. They implicitly reduce the money multiplier effect, and therefore should dampen the effect the excess liquidity has in the system if we get into bubble territory. But it is no guarantee. It also attempts to prevent them over-leveraging and therefore creating the same situation again in the future.


With currency cross rates, I'm just looking at graphs. Interpreting them tends for me to come after the fact but I certainly do feel the bottom is in for the pound. It is a significantly stronger currency and economy than it is often given credit for. However, pinched as it is between the US and Euro, it is largely a hostage to fortune. There is every chance that my call here could prove to be incorrect but I am looking for the pound in particular to track higher and I will say here and now that I think the technicals suggest that 52 will be reached by Christmas, with a fall back in the New Year.

The final paragraph on asset seizures deserves more time than I can give to it here, but just to create a framework of where my views lie: I am very much of the opinion that the net outcome of Globalisation is a tendency dowards the de-construction of the Nation State. That is a good thing for some and not for others. However it is clearly a bad thing for governments as the Nation State is their Raison d'Etre. The consequence therefore is that the individual freedoms offered to the wealthy and mobile will be resisted by government in the name of the poor and choice-restricted majority. What form that takes (asset seizures, globalisation of taxation such as Carbon taxes, an assault on the middle classes by the comparitively disadvantaged aka class war) is impossible for me to predict. But I don't want to be around when it happens!

[Condoking]

The Brazilian Finance Minister has let the proverbial cat out of the bag by stating publicly that the world is in the midddle of a Currency War with everyone out to devalue against each other. Where this ends is anyones guess

http://www.telegraph.co.uk/finance/econ ... y-war.html

Additionally the Bank of England appears to be deliberately allowing inflation into the economy whilst keeping interest rates deliberately low. They are now encouraging the public to spend their hard earnt savings to help the countries economy, ignoring the fact that people need their savings to supplement the wreckage of their pensions after Comrade Brown destroyed them.

Whatever happens the basic law of economics is that for someone to sell someone else has to buy and money usually changes hands for that to be achieved. All countries are trying to increase their exports to get out of debt and, at the same time, avoid importing as much. The ultimate solution would be for every country to have a zero Import Export balance sheet but this will never happen. As it is the Western world has to create significant surplus's, i.e. export more than they import, just to pay off the interest on their debts and stand still, paying down the debts will be for later.

The following brief may be of interest, whether fact or conjecture who knows:

In 1971 the USA printed far more money than it could cover by their Gold reserves. A few years later the French demanded redemption for all the paper dollars it held in Gold. The USA rejected the demand, as it did not have enough Gold to cover it, and effectively went Bankrupt.

To solve this the US went to the Saudis and cut a deal that OPEC would tade Oil in Dollars. This meant that the whole world had to have Dollars to trade with and the US simply printed more and more of them. The US effectively bought their oil for free, as they just printed more dollars to pay for it, at the expense of the rest of the world who had to "buy" dollars to buy oil and other commodities.

This scam started to unwind when Saddam Hussein started to trade Iraqi oil in Euros. This had to be stopped and 911 gave them the excuse they needed, off to war and, surprise surprise,no more oil was traded in Euros and the latest Dollar crisis averted. Just to rub salt into the wounds, they printed a load more dollars to pay for the war which the rest of the world bought up as debt.

Then Hugo Chavez of Venuzela got in on the act and started selling Oil in Euros, following which there were a number of attempts on his life, some of which were traced back to the CIA. Then along came President Armedinajhad of Iran to kick the US in the goolies and they offered to sell Oil in any currency the purchaser fancied except US Dollars. Hence the US pushed for and got a trade embargo on Iran.

If more countries sell their Oil in other currencies the US will truly be shafted and end up having to buy their imported oil in Roubles or Yuan or whatever. This will be the end of US power, military and the potential end game for the dollar as we know it.

[MrPlum]

The FED is buying it's own debt

No. The FED is buying Government debt.

Isn't it effectively the same thing? Where does the government get the money from to pay maturing securities (IOUs) if not from the FED? Isn't this just a shell game?

because other countries are pulling back from buying U.S. treasuries

Clearly not correct.

This stems from articles highlighting 'increases of purchases by 'Indirect bidders', believed to be foreign central banks, who are basically acting as proxies for the FED' to maintain the illusion there is International demand for U.S. debt securities. The tactic is explained here... http://www.chrismartenson.com/blog/shel ... debt/25806

Can these immense debts be paid off? How?

By the FED selling the government paper to the Treasury and the Treasury cancelling it.

Not sure I've got my head around this. I thought the government issue debt instruments, such as treasuries, and when the treasuries mature, the government borrows the money from the FED to honour it. How can government paper be sold to the treasury, when the government IS the treasury? Isn't this the same as taking the money from your left pocket and sticking it in your right?

I am looking for the pound in particular to track higher and I will say here and now that I think the technicals suggest that 52 will be reached by Christmas, with a fall back in the New Year.

I hope you are right.

Many thanks for responding by the way.

[Korkenzieher]

Not sure I've got my head around this. I thought the government issue debt instruments, such as treasuries, and when the treasuries mature, the government borrows the money from the FED to honour it. How can government paper be sold to the treasury, when the government IS the treasury? Isn't this the same as taking the money from your left pocket and sticking it in your right?

No, because the government doesn't issue the currency, the bank does.

An arm of government, the Treasury, has written a bunch of IOU's on the governments behalf. Government has basically taken them to its banker, the FED, who has cashed them. There is no implicit risk, because as Sovereign debt of a AAA state, that IOU is backed by the entire wealth of the nation. Normally those IOU's go to people that hold cash that the FED prints, so there is a sort of zero-sum game where people's cash buys them a government IOU. But when the FED buys the IOU's it simply creates the cash (essentially virtually in computers) to pay for them. That process of monetising the IOU means there is more cash in the system. There are several ways of measuring the money in the economy, and by coincidence there is a relevant article in today's Telegraph, which I will link to rather than quote. http://blogs.telegraph.co.uk/finance/am ... d-part-ii/. Also take a look at http://en.wikipedia.org/wiki/Money_supply where various measures are explained quite clearly.

The FED would ordinarily do this as part of its Open Market Operations, essentially to control the money supply in exactly the same manner. The difference is that the amounts involved are huge, and the monetisation of the IOU's is a direct response to vastly slowed velocity (the recycling factor of credit). In effect, the idea is to try and keep broad money stable.

When the FED wants to remove that extra cash, in effect all it needs to do is change the numbers back, and give the IOU's back to the government who can then tear them up. Nothing wrong with cancelling the IOU's there is nothing to say they have to be kept to maturity unless that is a condition of issuance. They do that as the supply of money gains traction, by moving faster as the multiplier increases.

I take your point about the left and right pocket, and even in an independant central bank like the FED it can be seen as financial slight of hand, but given that money is in effect just another IOU, try looking at it instead as available credit in the system.

[Korkenzieher]

@Condoking

Brazil has an interesting problem because it has relatively little external trade to worry about, much of it's currency appreciation is solidly based in hard asset (commodities) valuations, and almost all of that imbalance in currency is in relation to China, the major purchaser of those commodities. I will be very interested to watch that one develop as it is one of my favourite markets.

[MrPlum]

... and by coincidence there is a relevant article in today's Telegraph, which I will link to rather than quote. http://blogs.telegraph.co.uk/finance/am ... d-part-ii/.

Interesting language in the article... 'drug addiction', 'political abuse', 'mad intoxicated debauchery', 'moral hazard', 'decadent', 'defaulting on their debts by stealth', '...lurch into monetary la la land'. Even the title 'Shut down the FED'.

And...

'So all those hillsmen in Idaho, with their Colt 45s and boxes of krugerrands, who sent furious emails to the Telegraph accusing me of defending a hyperinflating establishment cabal were right all along. The Fed is indeed out of control.'

So 'wacky' internet sites with 'tin foil hat' economic pundits 'making up stuff' to sell books or newsletters are conceded as having been 'right all along'? I'm shocked.

At least $12+ Trillion dollars has disappeared down a rat hole and that's just in the U.S. The true extent of their 'sleight of hand' is unknown since they refuse to open their books for examination.

Greenspan, Geithner, Paulson, Bernanke, Summers. What Muslim could achieve the financial 'terrorism' this 'den of thieves' has wreaked upon the world? Economic 'wizards' of larceny, deceit and speculative bubbles. Now practiced on a global scale.

[Name Taken]

It looks like there is going to be some financially tough times ahead for people that get paid in US dollars, that's not good news for me and i'm sure many other people to.

[hhfarang]

Dollar to Baht over last 120 days...

[Korkenzieher]

As I said - off to hell in a hand basket...

[MrPlum]

This article is projecting a sticky end for the dollar (hence the 10 year Gold bull run) with the pound faring better, ranging between $1.57 and $1.90

'British Pound Sterling GBP Currency Trend Forecast into Mid 2011'
http://www.marketoracle.co.uk/Article23203.html

[Aussie Mark]

Nearly there Aussie Dollar at 98.65 .Go you good thing

[hhfarang]

Thailand mulls new measures to ease baht hike

Policy-makers yesterday signalled the launch of new measures to counter the baht appreciation as well as help affected businesses, as the currency moves towards the pre-devaluation level.

Prime Minister Abhisit Vejjajiva said in an interview in the US that Thailand may do more to relax limits on money outflows and boost support for exporters most affected by the strengthening currency.

Without being specific, Finance Minister Korn Chatikavanij said before leaving for the World Bank/International Monetary Fund conference in Washington DC that a decision would be made next week about the steps the government should take to ease the impact. Both the PM and Korn admitted that the baht is on an appreciation course.

"In Washington, I will sit down and talk with the BOT governor about the baht appreciation as it has now exceeded the 30 level," Korn said. "The baht is more valuable to all but poses a problem to exporters. While the BOT is in charge of foreign exchange rates, the Finance Ministry is obliged to help exporters," he said.

The baht yesterday climbed 0.2 per cent to 29.88 per dollar as of 4.02pm in Bangkok and earlier touched 29.84, the strongest level since July 1997, according to data compiled by Bloomberg.

Anticipation that the US Federal Open Market Committee may announce the second round of quantitative easing, which would further boost liquidity in global markets, have led investors to seek better returns in countries with strong economic fundamentals like Thailand.

Exporters have appealed to the government for help, as some of them - particularly those who do not benefit from the cheaper import of raw materials - are witnessing a drop in revenue once the dollar income is converted into baht. The Bank of Thailand and the Finance Ministry, in September and this month, launched seven measures aimed at spurring outflows.

PM's secretary Ampon Kittiampon, as a member of the MPC, attributed the inflows to the expectation that the Thai economy would continue its positive performance. Not surprised with the current trend, he said this shows the correlation between interest rate, foreign exchange rate, capital flows and economic fundamentals.

With a better-than-expected economy, Thailand needs to raise the interest rate to keep inflation in check. But higher rates will draw greater inflows. The fiscal and monetary policies must be synchronised to appropriately address the inflows in the short and long term, to balance economic growth and inflation.

"It's the duty of governments and central banks to pursue fiscal and monetary policies that will prevent their currencies from appreciating further as that could cause damage," he said.

Many Asian countries have imposed measures to rein in the appreciation of their currency. However, they are aware that this could only slow down the pace of appreciation due to the weak dollar policy. The Japanese yen yesterday rose to a fresh 15-year high at 82.22 against the dollar despite intervention.

Praipol Khumsap, a Thammasat lecturer who is a member of the Monetary Policy Committee, said the central bank has done its best in intervening in the market. The policy rate and the foreign exchange rate will be the main issues that will be discussed at the MPC meeting on October 20. Earlier, inflation was a priority as robust economic growth, which could peak at 7.8 per cent this year, could spur inflation.

Pornthep Jubandhu, Siam Commercial Bank's economist, noted that most economists believe the MPC may delay the policy rate hike in this round, as the baht had passed the 30 level. Earlier, most believed the rate would be hiked by 0.25 percentage point.

Frederico Gil Sander, the World Bank economist responsible for Thailand, said Thailand's priority now is how to handle inflation and boost the domestic economy. He said that for now, the interest rate policy is irrelevant to rein in inflows.

-- The Nation 2010-10-08

[deepee]

Nearly there Aussie Dollar at 98.65 .Go you good thing

Even with the AUD at near parity to the USD last night the AUD is still not keeping pace with the Baht which still baffles me considering the AUD is one of the most sought after and heavily traded currencies around. It is still about 5 % behind where it was compared to a year or so ago( got to over 32 Baht)

[loverboy44]

Everyone living here is looking for a better currency rate. The trueth is, i think, that there will not be any improvement in the near future because at the moment there is a "war of currencies", meaning every country is looking for a low exchange rate to keep their exports running. This is a phaenomenon we had shortly before World War 2.