Euro almost at it's introductory value vs the Dollar!

[Kidlicious]

Originally posted by GP
You are such a puss, kid. You should APPRECIATE a kick in the teeth from somebody like Spike if it forces you to think and learn. Too bad, you never developed any intellectual toughness during your "BA".

He hasn't forced me to think and learn about anything, except about why I talk to people like you.

[DrSpike]

GP: Supply and demand is certainly the way to think of it, with the result being the market exchange rate. Most understand this I think.

The part that is less understood is the link between the capital and current accounts and the exchange rate.

People demand dollars for 2 reasons:

1) indirectly to purchase US exports
2) to invest in US assets.

Start from a postion of balance. Now lets say the US growth rate improves making US assets more attractive. Capital flows into the US (this is an increased demand for dollars), the exchange rate appreciates, there is a capital account surplus and an offsetting current account deficit brought about by the increased cost of US exports in other countries.

Now the important point is that such capital flows DWARF in size everything else. Some factors mentioned in your post and elsewhere of course exist, like the dollars that may be used in countries where it is seen as a more stable currency than the legal tender there, but these factors in practice turn out to have minimal impact.

[DrSpike]

Originally posted by Kidicious


I don't even know what the argument is about, because you just said that everything I said was nonsense without giving me specifics. That's not honest debate. I'm the only one here trying to participate in honest debate.

FFS........I gave you a point by point discussion of what I consider your major mistakes and pointed you to a lengthy and informative post that added further information.

[TCO]

Ok, let me play with this. Let's say there is some political/legal step change (it wouldn't have to be a step change but let's play with that) that makes the US a more attractive growth market. Now people (both in the US and overseas) want to invest in US companies (existing and new). This means dollars will go into various startups and such. Also means that stock prices of existing US companies serving the US market will appreciate. in a certain sense, the stock prices can just appreciate without exchange of one dollar or stock. They are just worth more the morning of the new trading day. (Assume the change occurs at night). But there will also be new activity occuring (this will take time, the stock price appreciation occurs immediately).

hmmm....will the capital influx have a deflationary impact? not just from capital influx, but i guess even just within the US if it were a cllosed system. If people are investing more/consuming less, wouldn't that be deflationary? So if the Fed prints more money to keep inflation constant, will that counteract the effect of the changing exchange rate?

Or conversely, let's say the Fed does nothing. There is more demand for dollars, since offshore capital is chasing better returns. What stops the euros from being returned for goods (even gold). Wouldn't that mean the exchange rate would stay constant? Of course there are transport costs and such...

Not really making an argument here, just tossing out a few things I am thinking about.

[Kidlicious]

Originally posted by DrSpike


FFS........I gave you a point by point discussion of what I consider your major mistakes and pointed you to a lengthy and informative post that added further information.

And the only thing that I can tell is that we disagree as to whether international trades are demonimated in dollars. And with your last answer to GP its confirmed. Although you did admit that they were. So I'll just leave it alone at this point.

[DrSpike]

GP: Remember the US is a country where structurally savings do not cover desired investment funds. So extra investment demand mean extra propensity for capital inflows. Everything else being equal extra capital inflows means an appreciation of the exchange rate.

In your hypothethical example with the step change the simplest case is one where everything relevant just increases by x%..........the increase in the capital stock is in line and there is no reason to worry about overcapitalisation and deflation.

Of course the worry is always there that capital inflows dry up leaving you with a plummeting currency and monetary policy that suddenly looks a little loose. But balanced against that risk is essentially the best of all worlds with high domestic consumption AND investment.

If you are American far from fearing the loss of the 'key currency' you actually want a nice even depreciation like the one that has recently occured.

[DrSpike]

Kid: Yes you forced me to 'admit' that people demand dollars for trading in American goods and assets.

SCORE!!!

You can now take your place aside Adam Smith (the real one not the American Journalist), Ricardo, Walras Marshall and Keynes on the pantheon of the world's greatest economists ever.

Meanwhile I shall kneel alongside and sob, haunted by the knowledge that I shall never join the distinguished group of 6.

[TCO]

I guess thinking about it a little more. (For the moment, I'm agnostic as to wether the perceived growth potential in the US market is sound or unsound.) What matters is that the market beleives it so.

Now, I am an American company CEO with a company that is positioned for this implied growth. Suddenly my stock price has shot through the roof. Being the CAPM slave that I am, I notice that my D/E ratio is now out of whack for what the optimum financing structure should be. So, I go out and raise a bunch of debt. That means I now have all kinds of cash on hand. (The debt coming froming overseas capital). That means that I have to either jump into a bunch of new projects or I have to declare a large dividend and disburse the money to my shareholders. hmmm, I guess if I just give the money to my shareholders, it will be put into circulation and there won't be much of an exchange rate effect. (The shareholders will just trade it for euros.) If the money goes into projects, some of it will be sitting in bank accounts for a bit, before the projects get going. And then it will start percolating out to pay for various projects. What will be the effect of that?

[Kidlicious]

I recommend that anyone who wants to learn something about this subject read Paper Money.
It's recommended by Paul Samuelson and Wassily Leontief, both are Nobel Laureate in Economics. Learn it for yourself instead.

[TCO]

Well ignore the US for a second. Let's say you have a closed system, maybe the world. And there is a step change in the percieved growth opportunity. What is the fiscal impact of that. Let's assume that there were a world currency? Would anything happen? How would savings rates change? Would they increase? (because of higher return?)

Originally posted by DrSpike
GP: Remember the US is a country where structurally savings do not cover desired investment funds. So extra investment demand mean extra propensity for capital inflows. Everything else being equal extra capital inflows means an appreciation of the exchange rate.

In your hypothethical example with the step change the simplest case is one where everything relevant just increases by x%..........the increase in the capital stock is in line and there is no reason to worry about overcapitalisation and deflation.

Of course the worry is always there that capital inflows dry up leaving you with a plummeting currency and monetary policy that suddenly looks a little loose. But balanced against that risk is essentially the best of all worlds with high domestic consumption AND investment.

If you are American far from fearing the loss of the 'key currency' you actually want a nice even depreciation like the one that has recently occured.

[Kidlicious]

Originally posted by DrSpike
Kid: Yes you forced me to 'admit' that people demand dollars for trading in American goods and assets.

A ha! Here it is. You see dollars are demanded by other nations not only to buy US goods and services, but to make all international trades. So they have to keep a large account with dollars in it to make these transactions.

[TCO]

Originally posted by Kidicious


A ha! Here it is. You see dollars are demanded by other nations not only to buy US goods and services, but to make all international trades. So they have to keep a large account with dollars in it to make these transactions.

He said this effect was small in comparison to other things going on. (Of course I'm still interested in how it works in terms of effect from a theoretical standpoint.)

[DrSpike]

Originally posted by GP
I guess thinking about it a little more. (For the moment, I'm agnostic as to wether the perceived growth potential in the US market is sound or unsound.) What matters is that the market beleives it so.

Now, I am an American company CEO with a company that is positioned for this implied growth. Suddenly my stock price has shot through the roof. Being the CAPM slave that I am, I notice that my D/E ratio is now out of whack for what the optimum financing structure should be. So, I go out and raise a bunch of debt. That means I now have all kinds of cash on hand. (The debt coming froming overseas capital). That means that I have to either jump into a bunch of new projects or I have to declare a large dividend and disburse the money to my shareholders. hmmm, I guess if I just give the money to my shareholders, it will be put into circulation and there won't be much of an exchange rate effect. (The shareholders will just trade it for euros.) If the money goes into projects, some of it will be sitting in bank accounts for a bit, before the projects get going. And then it will start percolating out to pay for various projects. What will be the effect of that?

Interesting post. If I understand your point correctly there is no problem........either way you return the money to shareholders (or reinvest) the effect on wealth is the same. Also the impact of 'created' wealth is purely domesic as far as I can see.

The only role for capital infows is when companies raise funds, and if capital flows in as part of this the exchange rate (everything else being equal) appreciates like in the case I gave above.

[DrSpike]

Originally posted by Kidicious


A ha! Here it is. You see dollars are demanded by other nations not only to buy US goods and services, but to make all international trades. So they have to keep a large account with dollars in it to make these transactions.

So dollars are demanded to make trades between the UK and France? No, not all international trades. As I said, dollars are demanded to purchase US goods and assets.

And this idea you have about 'nations' keeping these huge stocks of dollars to make transactions is stupid. Everything is carried out on the forex markets. Central banks retain funds even today as a holdover from the days when interventions and exchange rate tunnels were more common, but that's a different point.

Kid the more you post the more I think you don't have a clue.

[TCO]

Originally posted by DrSpike


Interesting post. If I understand your point correctly there is no problem........either way you return the money to shareholders (or reinvest) the effect on wealth is the same. Also the impact of 'created' wealth is purely domesic as far as I can see.

I don't really have a point. Just trying to grapple with the problem.

The only role for capital infows is when companies raise funds, and if capital flows in as part of this the exchange rate (everything else being equal) appreciates like in the case I gave above.

So will the dollar also appreciate versus gold and such? And would it jump versus gold with the Euro maintaining the same position. Or would the jump versus gold for the dollare be counterbalenced by an equal drop of the euro? (assuming these the only two currencies, assuming nothing else happens independantly in terms of gold supply and demand and assuming the euro and dollar are about same size in terms of currency stores.)