Strong Currency
There is an automatic assumption that a strong currency (in particular against the USD) leads to a difficult exporting position because goods become ‘more expensive’ for other countries to buy, but – and certainly from an island perspective – our imports will generally get cheaper for dollar based commodities- so there are self balancing factors, borrowing also gets cheaper, although there is an asymmetry in Europe whereby only Germany seems to get that benefit.
Strong currency has often been the prevail of strong economies, buyers are naturally attracted to the currency and buy into it, for this reason the Venetian Ducat (a type of gold coin) was a standard in international markets for over 500 years from the late 13th century until the middle of the 19th century, this happened because the coin was never debased.
Debasement and re-minting were the metallurgical currency versions of monetarism today, if you wanted to increase the money supply you didn’t make a sanction to place more zero’s in somebody’s computer, instead you mixed lesser value metals with the coin of the realm.
The …
Competitive devaluation?
Anybody who follows the well known finance blog Credit Writedowns will know that one of the trends coming about (according to author Ed Harrison) is that we are going to see a competitive devaluation, where USD and Euro purposely look to go lower, the other alternative is that the Chinese opt to float their currency and allow some appreciation. This is happening right now, it is no coincidence that the Yuan is going to see some rule loosening, it is that or face the alternative which is a move by USD as low as it can go to re-establish equilibrium between the surplus/deficit nations.
While competitive devaluation is not the subject, it is touched on by several different facets of the conversation, well worth viewing.
Federal Reserve news
The Federal Open Market committee (FOMC) have decided to keep ‘exceptionally low levels of the federal funds rate for an extended period’. Below is a verbatim excerpt:
“Activity in the housing sector has increased over recent months. Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.
With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some …
Economics: Monetary theory & policy
Mark Thoma talking about monetary economics from a theory and policy perspective, there are about 20hrs in total on this topic! It is a huge amount of work and information on the topic, well worth looking at if you have the time.
Can Theory and Jargon destroy your net worth?
This is an interesting vlog on some simple monetary economics ideas, the classical definition of inflation is discussed in terms of ‘money supply’ but then it turns towards some of the other issues such ‘what is money supply?’ there is no set agreement on which count should generally be used (in USD it used to be M3 which is no longer published). That has an interesting implication in the fact that banks are ‘hoarding’ money, the fact is that they are holding huge amounts of capital which isn’t monetized, but it can be and that means a return to ‘credit flowing’ could actually cause some serious inflation as the money flows into the real economy minus any increase in real purchasing power.
Inflation… ‘when’ not ‘if’…
The endurance of gold at above $900, rising oil prices, the weakening dollar and a Treasury/Fed combo that is increasing the money in circulation will lead us where?
I hate to harp on about inflation but it just doesn’t seem that further down the line we won’t see a lot of it, the market is pricing it in, the yield curve is suggesting it, and yet it remains on the periphery of commentary for the most part.
One important statement in this talk is the bit where one of the guys talks about the fractional reserve system and the multiplier effect that can turn 800+ billion into 8 trillion.
When we are advising longer term fixed rates to avoid the pain this will bring (and it won’t be in 09′, it will be 10′ or 11′ but rest assured it will come), bear in mind that in the short term you will pay more than you have to, but that when everybody else is hurting you will be insulated. The reason for fixing now rather than later is that the …
Inflation… 'when' not 'if'…
The endurance of gold at above $900, rising oil prices, the weakening dollar and a Treasury/Fed combo that is increasing the money in circulation will lead us where?
I hate to harp on about inflation but it just doesn’t seem that further down the line we won’t see a lot of it, the market is pricing it in, the yield curve is suggesting it, and yet it remains on the periphery of commentary for the most part.
One important statement in this talk is the bit where one of the guys talks about the fractional reserve system and the multiplier effect that can turn 800+ billion into 8 trillion.
When we are advising longer term fixed rates to avoid the pain this will bring (and it won’t be in 09′, it will be 10′ or 11′ but rest assured it will come), bear in mind that in the short term you will pay more than you have to, but that when everybody else is hurting you will be insulated. The reason for fixing now rather than later is that the …
European stimulus plans
The ECB meeting is due to meet this week on the 7th and a further 0.25% rate cut is expected which will bring European base rate lending to 1% which is the lowest it will go according to guidance given in the past by Jean Claude Trichet. For mortgage holders this will be a further advantage for those on tracker mortgages and for those who hold variable rates where the cut is passed on.
The question currently is whether or not there will be any stimulus packages mentioned or any idea on what to expect in the coming months, with very concise plans afoot in the US, UK, China, and elsewhere it is likely that the Eurozone will need to make some formal plan as well and move beyond the monetary options of only playing with interest rates.
The EU has a problem other currency zones don’t, that of political cohesion, the USA is all dollar denominated and all under one flag, the UK is the same, as is Japan, …