Thought Bubbles from the Deep

[McLovin]

That's really scary actually (for the Greek people). I do remember an FT article talking about issuing government IOUs in lieu of another currency, but that's all I heard of it.
Surely you'd be readying another currency incase all these deals go south.

Serious question: How were they ever going to print such a currency? I don't know the mechanics of printing money but AFAIK they only print 10 euro bank notes currently and it's not like you could pay De La Rue with IOU's that they've just printed for you. So did they even have enough money to print their own currency?

 

[sinner]

Serious question: How were they ever going to print such a currency? I don't know the mechanics of printing money but AFAIK they only print 10 euro bank notes currently and it's not like you could pay De La Rue with IOU's that they've just printed for you. So did they even have enough money to print their own currency?

Easily. The physical portion of base money is the smallest portion and can be handled last of all.

As soon as the bank accounts get "bailed in" to the new currency, the FX rate for the new currency would drop and have a market value that De La Rue or Securency could take to the foreign exchange.

That is of course, if you believe such a thing is the possible outcome. I have a lot of faith in the Euro and ECB and don't assign a high probability to Grexit.

 

[McLovin]

Easily. The physical portion of base money is the smallest portion and can be handled last of all.

As soon as the bank accounts get "bailed in" to the new currency, the FX rate for the new currency would drop and have a market value that De La Rue or Securency could take to the foreign exchange.

That is of course, if you believe such a thing is the possible outcome. I have a lot of faith in the Euro and ECB and don't assign a high probability to Grexit.

Makes sense. Thanks, Sinner.

 

[Klogg]

Easily. The physical portion of base money is the smallest portion and can be handled last of all.

As soon as the bank accounts get "bailed in" to the new currency, the FX rate for the new currency would drop and have a market value that De La Rue or Securency could take to the foreign exchange.

That is of course, if you believe such a thing is the possible outcome. I have a lot of faith in the Euro and ECB and don't assign a high probability to Grexit.

Interesting...

You may not know the answer, but I'll ask anyway - is this how Argentina did it in the 90s?

 

[DeepState]

Interesting...

You may not know the answer, but I'll ask anyway - is this how Argentina did it in the 90s?

Argentina had its own currency before and after the debt problems of the 1990s. It was the peg vs USD which broke. This is unlike the situation in Greece, where debt is denominated in Euro (as opposed to in Drachma which is pegged to Euro, which would be the Argentinian analog). If Greece cannot borrow sufficiently in Euro from foreign 'investors', and yet needs finance sourced internally via printing in large part, it will have to create a new currency and force the populace to accept it as payment by the government for services and require that this currency is used when tax is paid (haha..tax being paid!! chortle).

 

[Klogg]

Argentina had its own currency before and after the debt problems of the 1990s. It was the peg vs USD which broke. This is unlike the situation in Greece, where debt is denominated in Euro (as opposed to in Drachma which is pegged to Euro, which would be the Argentinian analog). If Greece cannot borrow sufficiently in Euro from foreign 'investors', and yet needs finance sourced internally via printing in large part, it will have to create a new currency and force the populace to accept it as payment by the government for services and require that this currency is used when tax is paid (haha..tax being paid!! chortle).

Thanks, DeepState. I understand that the situation is somewhat different (i.e. 'shared' vs own currency), but my question was around printing of paper currency in its most literal sense, rather than the 'printing' which is referred to commonly in the media (being the expansion of a Reserve Bank's balance sheet).

I guess to state it more generically - if a country defaults, does it issue a new currency (in a logical sense), capitalise the banks, then use this to print the physical currency?

Or perhaps I've completely misunderstood the response - apologies if I have.

 

[DeepState]

Thanks, DeepState. I understand that the situation is somewhat different (i.e. 'shared' vs own currency), but my question was around printing of paper currency in its most literal sense, rather than the 'printing' which is referred to commonly in the media (being the expansion of a Reserve Bank's balance sheet).

I guess to state it more generically - if a country defaults, does it issue a new currency (in a logical sense), capitalise the banks, then use this to print the physical currency?

Or perhaps I've completely misunderstood the response - apologies if I have.

If a country defaults, it does not immediately mean it has to issue a new currency. For example, Argentina defaulted. It could not pay its debts, yet it did not have to create a new currency. It just could not pay its debts. Leading into that crisis, Russia also defaulted...and still kept the same currency.

In today's world, literal printing of paper money is not a feature. If Australia were to default on its debt obligations and the banking system collapsed, and both were effectively shut out of the capital markets, after a bit of argy bargy the government would 'borrow' from the RBA and use those proceeds to recapitalise the banks. The amount of physical notes and coin in circulation does not need to change one iota for this to occur. The Aussie Dollar would remain the currency of the realm.

The banks being bailed out do not print currency. They can only create deposits and loans..and offer other financial services like financial planning. Currency is only issued by the central bank. It could still do so even if the deposit taking institutions were completely obliterated and there were no regular banks left standing.

 

[Klogg]

If a country defaults, it does not immediately mean it has to issue a new currency

Perfect, this is the point I was missing.

Following on from this, my understand is that the only real triggers for issuing a new currency would be:
- hyperinflation (Germany post WW1)
- removal from the EU (Greece currently)

Am I missing any?


Thanks again.

 

[DeepState]

Perfect, this is the point I was missing.

Following on from this, my understand is that the only real triggers for issuing a new currency would be:
- hyperinflation (Germany post WW1)
- removal from the EU (Greece currently)

Am I missing any?


Thanks again.

Yes, you had Weimar and you've had Cyprus (kinda). I suspect there are other sorts of situations where currency gets flipped around. One route is not to issue a new currency but to adopt an existing one from elsewhere. For example, much business is done in USD within countries whose official currency often has the word 'peso' at the end of it. It is also arguable that when convertibility to gold was removed, that the outcome was a new currency....the US changed its notes to reflect that, for example.

Currency is one weird fish/fowl. And yet our financial system rides off it. When you look at this stuff, it is genuinely horrifying in its fragility.

 

[sinner]

Currency is one weird fish/fowl. And yet our financial system rides off it. When you look at this stuff, it is genuinely horrifying in its fragility.

I read FOFOAs blog and sleep well at night

 

[Klogg]

Yes, you had Weimar and you've had Cyprus (kinda). I suspect there are other sorts of situations where currency gets flipped around. One route is not to issue a new currency but to adopt an existing one from elsewhere. For example, much business is done in USD within countries whose official currency often has the word 'peso' at the end of it. It is also arguable that when convertibility to gold was removed, that the outcome was a new currency....the US changed its notes to reflect that, for example.

Currency is one weird fish/fowl. And yet our financial system rides off it. When you look at this stuff, it is genuinely horrifying in its fragility.

Thanks DS - appreciate your answers.

 

[DeepState]

I read FOFOAs blog and sleep well at night

BS. You can't possibly sleep given the volume of stuff you read.

 

[DeepState]

RBA Guv Stevens speech to the Anika Foundation reads pretty much that a lower AUD is all that's left in the tank to rebalance the economy. Lower interest rates are reaching a point where benefits of additional cuts are decreasing and risks may not be worth the benefits available. Market pricing ~20% chance of a further cut and that's it.

 

[Wysiwyg]

RBA Guv Stevens speech to the Anika Foundation reads pretty much that a lower AUD is all that's left in the tank to rebalance the economy. Lower interest rates are reaching a point where benefits of additional cuts are decreasing and risks may not be worth the benefits available. Market pricing ~20% chance of a further cut and that's it.

It is only in my latter years that I have begun listening to financial commentators and thought I would hear some profound wisdom but not so. I am sure he does more than read statistics and change official interest rates but what are the risks of lower interest rates in Aust. when other major economies have near zero? Please.

 

[qldfrog]

Inflating even more the RE bubble; which seems to be australian typical, as other countries on earth do remember that price can fall (drastically)..
something australians seems to have forgotten in general;
the other issue is that we are a 'beggar" country in perpetual need of O/S finances, and wo the assumed strength of the USD, even Euro;
So we always need to have higher rates than O/S otherwise our whole country falls in a heap as investment/lending to our banks (see point 10 would stop.
my 2c worth, DS would have a more knowledgeable input there but i believe these two points are a given

 

[Wysiwyg]

Inflating even more the RE bubble;

Parts of Sydney and Melbourne are over priced but nowhere else in Australia of significance. Price growth not extraordinary so I consider country wide house bubble as a fear rather than a reality.

 

[DeepState]

Parts of Sydney and Melbourne are over priced but nowhere else in Australia of significance. Price growth not extraordinary so I consider country wide house bubble as a fear rather than a reality.

How are you valuing property to arrive at the perspective that property is not overvalued?
Does recent price growth have to be strong for an asset to be over-valued?

Housing price rises in Europe are of concern to the ratings agencies.

This from the FT relating to a recent Moody's report:




In any case, this type of thing may not be relevant to your investment process. For me, I care because I manage the duration of my debt investments, have active FFX positions in place, hold a chunk of banks within the domestic equity part of my portfolio, have credit exposures whose spreads will be strongly affected by such matters, own a house and would consider investment properties if conditions were conducive.

 

[tech/a]

Perhaps the new " Over valued " price will become the new accepted price.

Question.

Over valued relative to?

In my view the only investment in property worth considering is development.
Creating profit rather than waiting for it to hit you.

 

[DeepState]

Over valued relative to?

Say, debt securities and equities.

 

[tech/a]

Say, debt securities and equities.

For Property have these been good indicators in the past?

Have we seen a so called bubble burst in housing before-----lead by these indicators?

I've been around for 60 yrs 40 of them with a strong interest in housing.

In that time I've heard moans and groans about affordability and how the bottom is going to drop out---followed by what a great investment housing is---- just keeps going up. (Think 92-94 where People were supposedly paying stupid prices for developments and getting ripped off blind---then 95-04 where the very same people with the very same developments are doubling the costs of their original investment and Laughing!!! ------ Complaints and doom and gloom stop!)

Ive seen banks tighten and slacken lending policy ----supply and demand I'm sure they evaluate risk just like everyone else---should