Monday, Nov 19, 2007
US reconstructed M3 growing at 17.9pc
Market Oracle: US Dollar Devaluation is a Supply and Demand Problem
17.9pc growth means a doubling rate of 4 years.
With wages and inflation less than 5pc this newly created money (which is debt) is not being eroded away. The final blow-off debt spkie continues.
Posted by sold 2 rent 1 @ 01:28 PM (318 views) Add Comment
3 Comments
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1. stillthinking said...
I don't fully follow this. If demand for dollars is low then why is the money supply increasing at an even greater rate? Is the author implying that the Fed are literally printing money without the backing of any form of debt?
What debt is backing the cash which issued? Only government borrowing? I can't see that the American consumer started to borrow even more recently.
2. sold 2 rent 1 said...
stillthinking,
I think you have hit the nail on the head
"First, the Fed can create electronic digits and infuse them directly into the banking system. Secondly, they can purchase assets of compromised value at par (near what they used to be worth). Third, they can purchase bonds directly from the Treasury, thereby monetizing our debt"
3. Aaron Mcdaid said...
Imagine a business wanted to expand in some sense - a farmer wanting to buy a tractor for example. The farmer doesn't want to save up to buy a tractor - he wants it now so that his productivity will improve now and he can pay the debt off quickly. If there was a shortage of money (e.g. if there was a requirement for all money to be backed by gold) then there would be a lot of demand to borrow money and the farmer would be ripped off and charged a high rate of interest. A "fair" rate of interest would be based on the risk associated with the farmer; therefore it is in everyone's interest to make sure the farmer can get a fair rate of interest. Therefore, in theory at least, printing money is just to create some paperwork to help farmers and banks come to a fair price (price = interest rate) for the money. Printing money and keeping it available is not a bad thing; the aim is to make it easier for people and institutions to borrow and lend.
While inflation has been managed well, we have seen over the last years (if not decades) a sloppy approach to risk management. The banks were lending indiscriminately. In effect, this meant that the banks were assigning resources to the wrong people and messing up the economy - the market is supposed to kill off bad ideas ASAP. I, like everybody else, could ramble for hours about this. The final result is the credit crunch.
The banks have remembered that they are supposed to kill off bad ideas and keep money from risky people. In the panic, they are withholding money from everybody. The continued functioning of the economy is dependant on the ability of safe borrowers to borrow money (e.g. for farmers to buy their tractors now instead of saving up for them first) so the Fed is pumping in money. Ideally, this means that as the likes of Citigroup are hammered and pull out, the surviving well-managed institutions will have enough money to be able to take up all the "safe" borrowers that are still out there.
But no matter what the Fed do now, the reality is that the damage is already done. The incompetent lending caused money to go to destroyers of wealth rather than creators of wealth, and the US imported heavily. The market, consciously or unconsciously, now "realises" that the US isn't as productive as once thought.
"They could have saved the dollar or the debt-reliant economy. They chose to save the economy. " -- I don't think the former option existed. The economy is going to feel the effects of the unproductive lending of the past, regardless of the exchange rate. There'd be nothing to gain by arbitrarily hampering debt in the US via large interest rates. A high dollar might seem like a nice way to be able to import stuff, but it will simply cut Americans ability to earn those dollars (leaving their ability to earn imports unchanged!). So the only option is to keep the banking system lubricated, and allow the market to make its judgement on the value of American work.
I suppose one advantage to letting the dollar drop is that it's a way to cut down exports by cutting the ability of foreigners to use their existing dollars to import (remember, exports are bad. It's only the foreign currency that is desirable). The banks and the market were of the opinion that US financial institutions had assets around the world. But those assets are less valuable than once thought - and as a direct result the US's abillity to import will be affected.
That's my (very humble) 2c (probably worth about 3c now though!).