(from my diary on the "savings glut theory") The brainless should not be in banking. — Willem Buitler
But once you have three or four currencies in the basket that float against each other, the individual exchange rates start fluctuating simply due to internal movements within the basket. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
If it is gross, then I must buy assets in just about any currency.
If it is net, then I must only buy assets in the country I have the biggest trade surplus in (I believe this is what you mean?)
What I really wanted to say was that whatever currencies I must invest in as the central bank of China, I can still chose the asset class. If that is the case then something besides government bonds or quasi government bonds such as Freddie Mac and Fannie Mae might be the smarter choice, depending on what I think will happen regarding inflation, GDP growth etc.
When I buy government debt of a country which can do whatever it wants with its monetary base, I am betting that they are prudent and don't do anything stupid and preserve the value of the fiat money. And currently I would be worried about that.
I would rather invest, no sorry, lend, my savings to things which I might have more or real use of (e.g. natural resources, energy, arable land,...) or to governemnts where I can be sure that they don't screw me through inflation.
And with that in mind I would rather invest in EUR because the ECB is a lot harder to manipulate / armtwist and in control of (chose: wall street, main street, lobbyists, congress, elections, whatever) than the ecb.
So in the end I think the US goverment is going to have a tough time finding lenders (unless it is the Fed which will then only compound the whole problem of inflation and in the end hurt China again)...
If you spend too much, you're in debt and usually you have to pay it back. Or you're a government which can control money supply, then there's an easy way out, just watch out who you screw...
Migeru, I will give your saving glut story a thorough read. Maybe I will be smarter.
But if you invest in physical plant and resources, you have to worry about the government of that country taking them away from you.
Don't be fooled by the fact that the official American religion is worship of the free market - that's just bullcrap for public consumption. As soon as the wheels hit the rail, the free market goes out of the window if it's inconvenient.
Welcome to ET by the way.
- Jake If you only spend 20 minutes of the rest of your life on economics, go spend them here.
An ex-colleague of mine in Munich had a grandfather who owned a whole street in Munich. During the height of the hyperinflation he sold it for many many millions. They actually found a whole chest full of money after he died tucked away in the basement. Everytime my colleague tells that story he gets really sad because today the rent would suffice to easily pay for anything he could ever dream of. So he is still working and paying off his house...
And those took stuff away from citizens, nevermind furriners who speak funny.
The sum total of the domestic currency used for financial investment into, foreign direct investment into receipt of incomes, and purchase of exports from a country is the sum total of domestic currency used for financial investment by, foreign direct investment by, payment of foreign incomes, and imports.
And for the main world currencies, over 90% of the transactions are the capital flows. So treating the exchange rates as being driven by trade flows is a gross oversimplification.
For the pegged currencies, what determines the exchange rate is that if total demand and supply for the currency results in an exchange rate "above the peg", new domestic currency is issued and used to purchase assets in the foreign exchange. Doing that "accumulates foreign exchange", but its a side effect.
If total demand for and supply of the currency results in an exchange rate "below the peg", existing foreign exchange reserves must be sold for domestic currency.
Since new domestic currency can be created, but existing foreign exchange must be used, an undervalued exchange rate is easier to maintain at a stable level than a neutral (or overvalued) exchange rate. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
