Monetary/Foreign Exchange question

[KrazyHorse]

Az, you should learn some basic econ before critiquing the actions of the Israeli CB...

[Az]

I think it is you who got lost somewhere on the way, and it's either my english or your reading comprehension.

while long term changes in the cost of labor do influence the CPI, the relationship doesn't work backwards, especially not on short periods of time. On the other topics we seem to be in agreement.

[KrazyHorse]

I think it is you who got lost somewhere on the way, and it's either my english or your reading comprehension.

No, it's your understanding of truly basic economics.

while long term changes in the cost of labor do influence the CPI, the relationship doesn't work backwards

Of COURSE it "works backwards", you silly person. You can't devalue money and expect nominal wages to remain the same.

Seriously, go look up "neutrality of money" (I haven't made a claim as to the "superneutrality of money"; the idea that real variables are unaffected even by the growth rate of the money supply, instead of just its absolute level). I bet it even has its own Wikipedia page....

especially not on short periods of time

Nobody said it held true over "short periods of time". EVERY POST I'VE MADE has in it a clarification that what I say is only true IN EQUILIBRIUM. It can easily take months or even a couple of years to recover equilibrium after, say, a 10% shock in the money supply.

[ShaneWalter]

This actually isn't that bad since we were bordering deflation at times since 2008. the increase in money supply and inflationary pressure isn't that big an issue- and hasn't been for a year and a half - UP TO THIS POINT.

Dude, I'm not saying that inflation is an unmitigated evil. What I am saying is that buying dollars with newly printed shekels is a hell of a waste of seignorage.

KH, this is question is probably going to make you call me a "****", and I probably deserve it, but I'm curious as to exactly where seigniorage occurs in a fiat money system. I took a macro course a few years ago, but I've obviously forgotten most of it.

I guess inflation is seigniorage in a fiat money system? The currency devalues? But where I get confused is in a fiat money system, a shekel will always be worth a shekel. In this example, what would be a less wasteful use of seigniorage? If the CB used the shekels they printed to pay for government expenses, instead of buying US dollars, I guess that would be seigniorage? The value of the shekel would be decreasing relative to other goods and currencies. Wouldn't this cause hyperinflation like in Zimbabwe, though? Or is it an issue of quantity?

[KrazyHorse]

KH, this is question is probably going to make you call me a "****", and I probably deserve it, but I'm curious as to exactly where seigniorage occurs in a fiat money system. I took a macro course a few years ago, but I've obviously forgotten most of it.

Why would I call you a ****? You're quite bright, at least from what I've seen so far.

I don't know how the Israeli CB works, but if it works the way that most of the First World CBs work then the seigniorage earned is a combination of:

1) Interest payments on the assets purchased. If you assume uncovered interest rate parity then the Israeli CB still gets the same seigniorage from this part whether it buys Treasuries or Israeli gov't bonds

2) A drop in the outstanding real gov't debt, particularly that portion financed by longer-term securities. By buying US gov't securities the Israeli CB transfers this benefit from the gov't of Israel to the gov't of the US

[KrazyHorse]

I guess inflation is seigniorage in a fiat money system? The currency devalues? But where I get confused is in a fiat money system, a shekel will always be worth a shekel. In this example, what would be a less wasteful use of seigniorage? If the CB used the shekels they printed to pay for government expenses, instead of buying US dollars, I guess that would be seigniorage? The value of the shekel would be decreasing relative to other goods and currencies. Wouldn't this cause hyperinflation like in Zimbabwe, though? Or is it an issue of quantity?

A shekel may always be worth a shekel (see the zakudl thread!), but the inflation tax decreases the real value of shekels. My cash holdings of shekels can only buy 1 apple where yesterday they could buy 2. In the most straightforward fiat money system (the gov't prints money and buys things with it) they buy the other apple with the newly printed money. This doesn't NECESSARILY mean hyperinflation (it is, of course, a function of how much new money the gov't prints) but the temptation to crank the printing presses up to maximum is of course terribly strong when the monetary authority is so closely tied to the gov't.

[VetLegion]

questions:
1) what are the possible negative long-term consequences of the continuation of amassing foreign currency?
2) What do you think that head of the ICB should do?
3) are the industrialists right, in light of the fact that israel's exports are mostly not in the commodities or simple industrial goods sectors, but in complex manufacturing goods for which substitution is more difficult?

Industrialists are definitely right, devaluing the NIS has a positive effect on exports. If substitution isn't an issue with Israeli exports (as in, they don't have much competition), then elasticity of foreign demand certainly is. I'm not sure what is the bulk of the exports, but I know that you build microchips, for example. Demand for consumer electronics is sensitive to price. Most things are.

What should the ICB do? I have no idea, I don't know enough about the Israeli economy to guess. If you print money, you will get inflation, no way around it. I don't know how significant are the amounts you mention compared to the size of the economy. If you have savings in Shekel think about converting them to something else.

[KrazyHorse]

a) Vetlegion, by devaluing and attempting to stimulate exports you are running a Red Queen's race

b) Don't be silly (about converting to something else). Why is it exactly that you think Az can beat interest rate parity? There are large market participants that enforce covered interest rate parity, and to a first approximation uncovered parity is generally true.

[VetLegion]

a) Vetlegion, by devaluing and attempting to stimulate exports you are running a Red Queen's race

You mean the Chinese could do it too?
It is debatable whether Israel should devalue/depreciate NIS further or not (I don't know enough about that to say), but it is near certain that devaluing would help their exporters. They're not making it up.

b) Don't be silly (about converting to something else). Why is it exactly that you think Az can beat interest rate parity? There are large market participants that enforce covered interest rate parity, and to a first approximation uncovered parity is generally true.

From 3,2 to 4,1 NIS per dollar he already lost a third of his money, seen in dollars. How do you propose the interest rate in his bank adjusts to cover that? Exchange rate fluctuations are the clear & present danger for NIS savings and looming in the background is inflation, which depends on where did the newly printed NIS go. If they were all sterilized in some way, inflation need not occur, but if they weren't, it is sure to come.

[ShaneWalter]

Well, I figured posting this in this topic would be as good as creating a new topic, even though it is a bit of a derailment from the OP it still fits under the topic of "Monetary/Foreign Exchange Question."

There's been a lot of talk of how much power China has, since they (apparently) have huge reserves of American currency. The theory is that if China starts selling US dollars, the American economy would slide down the toilet and never recover. Generally this is followed by a conclusion that China (or sometimes the EU) would then become the most important economy in the world.

So I'm wondering, if China were to say tomorrow that they want to get rid of all their American currency, and from now on they intend to hold onto other currencies as reserves, what impact would this have on the American economy? I mean, it seems obvious the value of the US dollar would fall. Would it cause the recession to deepen / be prolonged? Would it cause the US economy irreparable damage?

[KrazyHorse]

From 3,2 to 4,1 NIS per dollar he already lost a third of his money, seen in dollars. How do you propose the interest rate in his bank adjusts to cover that? Exchange rate fluctuations are the clear & present danger for NIS savings and looming in the background is inflation, which depends on where did the newly printed NIS go. If they were all sterilized in some way, inflation need not occur, but if they weren't, it is sure to come.

OMFG. That drop is the result of the ALREADY FACTORED IN change in expectations!

Holy ****, man.

[Felch]

I question the wisdom of an economy that is reliant on exports for its well being. As hard hit as America has been by its own retardation, Germany, Japan, South Korea, and other big exporters have been hit about as badly over the past year. And they are countries with sensible and scrupulous populations.

China is apparently doing well, for one of two reasons. Either they're lying about their economy, or the low costs are keeping them in the game better than the big ticket items that Germany and Japan sell.

[Dinner]

If they have a hard target for a dollar to shekel trading range then they could very well be ****ed. I'm reminded of the early 90's when the EU tried to maintain a hard trading range prior to the introduction of the Euro and George Soros made massive amounts of cash breaking the trading range between the pound sterling and other Euro currencies.

[VetLegion]

Small countries' currencies don't trade on the FOREX market like USD or EUR do. That means that they aren't always as susceptible to speculative attacks from foreigners.
I don't know if it's the case with Israel.

[VetLegion]

I have to revise my "prognosis". In my defense, what I know about
Israel is about its history, not about its economy. Today I
stumbled upon an interesting video which convinced me that
Israel's export sector is very dynamic and not likely to
decline. Countries which have lots of exports naturally see
their currencies appreciating. This means that there is probably
little risk for Az if he holds his savings in Shekel, even if
the central bank keeps intervening. I hope he didn't take me up
on my earlier advice

Anyway, this is the video. I quite enjoyed it.