Fundamental Trades

[MRC & Co]

Whoa, you got me there MRC, they can adjust interest rates to make borrowing cheaper, that's monetary policy to me....

This could go pretty deep, and well beyond my knowledge of macro economics.

These guys have plenty of currency reserves, of the depreciating sort...and they're spending it on assets, causing asset appreciation....what does this mean for them???

I need some help here I'm afraid.

CanOz

lol, yes, it goes beyond my macro economic skills too (and to think I was once an economomist, unfortunately, not in this area). Someone like Dhukka or Uncle Festivus would be a real help now............? Any of you reading and interested to explain..........

An alteration of interest rates, is effectively monetary policy, and as the Yuan is pegged, they cannot adjust rates (from my understanding). Therefore, they only have one option, fiscal policy, a budget deficit. Borrowing from the world to spend and stimulate their own economy. I gather this is credit, as liquidity relates to money supply and hence, interest rates...........? Perhaps I am wrong, but this is my understanding.

Personally, I am going to learn this myself, as I believe it's a vital area in trying to predict global economic relationships. Bonds, currencies, commodities and equities all go hand in hand, and all are influenced by both fiscal and monetary policy and all influence eachother. So..........much........information!

But a good thread to start the learning curve in.

 

[julius]

China imposes controls on foreign in flows and out flows of capital -- this allows them to adjust internal interest rates while still maintaining the pegged yuan.

 

[mazzatelli1000]

Personally, I am going to learn this myself, as I believe it's a vital area in trying to predict global economic relationships. Bonds, currencies, commodities and equities all go hand in hand, and all are influenced by both fiscal and monetary policy and all influence eachother. So..........much........information!

The information is overwhelming and those 4 areas you have mentioned tend to loop and affect each other. The other issue I have noticed is that once you have developed a model taking into account the movements, there is issue of quantifying lagging effects of one intermakret relationship to the other.

It is causing me headaches as well

 

[MRC & Co]

China imposes controls on foreign in flows and out flows of capital -- this allows them to adjust internal interest rates while still maintaining the pegged yuan.

So by allowing less in flows of capital relative to out flows, they can increase the internal money supply by the net difference?

Mazza completely agree, a tough gig. But all trading is I guess.

 

[MS+Tradesim]

Therefore, they only have one option, fiscal policy, a budget deficit. Borrowing from the world to spend and stimulate their own economy.

I don't know about the economics you're getting into there. It's beyond me. But China have vast forex reserves. Why would they need to get into debt when they can just spend out of what they're holding?

 

[haunting]

Here is a write up by Henry Liu that might provide a partial explanation on quantitative easing (QE), liquidity and its impact on inflation and the overall economy.

The conventional terms of inflation and deflation are no longer adequate for describing the overall monetary effect of excess liquidity recently released by the US Federal Reserve, the nation's central bank, to deal with the year-long credit crunch.

This is because the approach adopted by the Treasury and the Fed to deal with a financial crisis of unsustainable debt created by excess liquidity is to inject more liquidity in the form of both new public debt and newly created money into the economy and to channel it to debt-laden institutions to reflate a burst debt-driven asset price bubble.

The Treasury does not have any power to create new money. It has to borrow from the credit market, thus shifting private debt into public debt. The Fed has the authority to create new money. Unfortunately, the Fed's new money has not been going to consumers in the form of full employment with rising wages to restore fallen demand, but instead is going only to debt-infested distressed institutions to allow them to deleverage from toxic debt. Thus deflation in the equity market (falling share prices) has been cushioned by newly issued money, while aggregate wage income continues to fall to further reduce aggregate demand.

Falling demand deflates commodity prices, but not enough to restore demand because aggregate wages are falling faster. When financial institutions deleverage with free money from the central bank, the creditors receive the money while the Fed assumes the toxic liability by expanding its balance sheet. Deleverage reduces financial costs while increasing cash flow to allow zombie financial institutions to return to nominal profitability with unearned income and while laying off workers to cut operational cost. Thus we have financial profit inflation with price deflation in a shrinking economy.

What we will have going forward is not Weimar Republic-type price hyperinflation, but a financial profit inflation in which zombie financial institutions turn nominally profitable in a collapsing economy. The danger is that this unearned nominal financial profit is mistaken as a sign of economic recovery, inducing the public to invest what remaining wealth they still hold, only to lose more of it at the next market meltdown, which will come when the profit bubble bursts.

Hyperinflation is fatal because hedging against it causes market failures to destroy wealth. Normally, when markets are functioning, unhedged inflation favors debtors by reducing the value of liabilities they owe to creditors. Instead of destroying wealth, unhedged inflation merely transfers wealth from creditors to debtors. But with government intervention in the financial market, both debtors and creditors are the taxpayers. In such circumstances, even moderate inflation destroys wealth because there are no winning parties.

Debt denominated in fiat currency is borrowed wealth to be repaid later with wealth stored in money protected by monetary policy. Bank deleveraging with Fed new money cancels private debt at full face value with money that has not been earned by anyone, that is with no stored wealth. That kind of money is toxic in that the more valuable it is (with increased purchasing power to buy more as prices deflate), the more it degrades wealth because no wealth has been put into the money to be stored, thus negating the fundamental prerequisite of money as a storer of value.

This is not demand destruction because decline in demand is temporarily slowed by the new money. Rather, it is money destruction as a restorer of value while it produces a misleading and confusing effect on aggregate demand.

Thinking about the value of any real asset (gold, oil, and so forth) in money (dollar) terms is misleading. The correct way is to think about the value of the money (dollars) in asset (gold, oil) terms, because assets (gold, oil, and so on) are wealth. The Fed can create money, but it cannot create wealth...more.

Who is Henry Liu?

Articles by Henry Liu

 

[CanOz]

Great link Haunting. I particularly like his remedy:

All the stimulus spending by all governments perpetuates this dysfunctionality. There will be no recovery from this dysfunctional financial system. Only reform toward full employment with rising wages will save this severely impaired economy.

How can that be done? Simple. Make the cost of wage increases deductible from corporate income tax and make the savings from layoffs taxable as corporate income.

....and you know what, only China could make something like that succeed, because they don't need to get re-elected.

Not only will this crisis show us the flaws in the financial systems, but also the political systems.



CanOz