Why i'm long the USD
10-30-2010
, 05:02 AM
10-30-2010
, 12:39 PM
10-30-2010
, 12:59 PM
11-04-2010
, 02:55 PM
11-04-2010
, 06:06 PM
11-05-2010
, 11:50 AM
11-05-2010
, 04:09 PM
11-06-2010
, 12:29 AM
11-06-2010
, 05:46 PM
11-07-2010
, 12:35 PM
Its all about international trade:
http://forumserver.twoplustwo.com/sh...88&postcount=5
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Dilemma
Ever hear about the Triffin dilemma:
...
The USA contradictorily needed to 1) have enough dollars for international convertibility of gold into dollars, yet 2) to keep the quantity of dollars in check so international people would still believe they were "as good as gold, or good as gold at $35 ounce.
So why is Wiki citing China's central bank head/Ben.B equivalent about the Triffin Dilemma if we no longer have USA dollar gold convertibility?
Because now the USA issues treasury debt instead of gold, and this treasury debt is held as the international reserves on CB balance sheets:
FOFOA describing Bretton Woods gold convertibility. Gold flowed to supplement trade imbalances.
But if the USA ran a trade surplus and (like China now) exported more than they imported, they would end up owning all the gold. That wouldn't work, and a dollar/gold parity revalaution would be forced, with gold up and the dollar down.
so
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RS
Quote:
Jim Rickards says:
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His point being, only USAers and those in contracts governed by USA law have to use dollars. The real deal is international trade and the settlement and clearing of trade flows among central banks. Right now must of that is done via the dollar.
Jim Rickards is suggesting that current policy (creating base reserves to pay over market price for crap and then burying said crap on the balance sheet at mark-to-fantasy valuation till term, or playing a game of hide the ball) may lead to that no longer being the case. Which isn't good for the FED, because they really just have dollars. If nobody wants what you have, you're broke.
Quote:
http://kingworldnews.com/kingworldne..._Bankrupt.html
Can someone explain to me how the fed can go bankrupt if they control the printing press?
Can someone explain to me how the fed can go bankrupt if they control the printing press?
Quote:
If inflation takes off, the Fed will have to choose between holding bonds and letting inflation get worse or selling bonds and going bankrupt in the process. Since no entity goes down without a fight, the Fed will naturally hold the bonds and let inflation take off
His point being, only USAers and those in contracts governed by USA law have to use dollars. The real deal is international trade and the settlement and clearing of trade flows among central banks. Right now must of that is done via the dollar.
Jim Rickards is suggesting that current policy (creating base reserves to pay over market price for crap and then burying said crap on the balance sheet at mark-to-fantasy valuation till term, or playing a game of hide the ball) may lead to that no longer being the case. Which isn't good for the FED, because they really just have dollars. If nobody wants what you have, you're broke.
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Dilemma
Ever hear about the Triffin dilemma:
Quote:
The Triffin dilemma (less commonly the Triffin paradox) is the observation that when a national currency also serves as an international reserve currency (as the US dollar does today), there are fundamental conflicts of interest between short-term domestic and long-term international economic objectives. This dilemma was first identified by Belgian-American economist Robert Triffin in the 1960s, who pointed out that the country issuing the global reserve currency must be willing to run large trade deficits in order to supply the world with enough of its currency to fulfill world demand for foreign exchange reserves.
The use of a national currency as global reserve currency leads to a tension between national monetary policy and global monetary policy. This is reflected in fundamental imbalances in the balance of payments, specifically the current account: some goals require an overall flow of dollars out of the United States, while others require an overall flow of dollars in to the United States. Currency inflows and outflows of equal magnitudes cannot both happen at once.
The Triffin dilemma is usually used to articulate the problems with the US dollar's role as the reserve currency under the Bretton Woods system, or more generally of using a national currency as an international reserve currency
The use of a national currency as global reserve currency leads to a tension between national monetary policy and global monetary policy. This is reflected in fundamental imbalances in the balance of payments, specifically the current account: some goals require an overall flow of dollars out of the United States, while others require an overall flow of dollars in to the United States. Currency inflows and outflows of equal magnitudes cannot both happen at once.
The Triffin dilemma is usually used to articulate the problems with the US dollar's role as the reserve currency under the Bretton Woods system, or more generally of using a national currency as an international reserve currency
Quote:
Onset during Bretton Woods Era
Due to money flowing out of the country through the Marshall Plan, US defense-spending and Americans buying foreign goods, the number of U.S. dollars in circulation began to exceed the amount of gold backing them up in 1959.
By the fall of 1960, an ounce of gold could be exchanged for $40 in London, even though the price in the U.S. was $35. This difference showed that investors knew the dollar was overvalued and that time was running out.
The Nixon Shock
In August 1971, President Richard Nixon acknowledged the demise of the Bretton Woods system. He announced that the dollar could no longer be exchanged for gold, which soon became known as the Nixon shock. The "gold window" was closed.
In order to maintain the Bretton Woods system the US had to:
a) run a balance of payments current account deficit to provide liquidity for the conversion of gold into US dollars. With more US dollars in the system the citizens began to speculate, thinking that the US Dollar was overvalued. This meant that the US had less gold as people starting converting the US dollars to gold and taking it offshore. With less gold in the country there was even more speculation that the US Dollar was overvalued.
b) run a balance of payments current account surplus to maintain confidence in the US Dollar.
Obviously, the US was faced with a dilemma because it is not possible to run a balance of payments current account deficit and surplus at the same time.
Due to money flowing out of the country through the Marshall Plan, US defense-spending and Americans buying foreign goods, the number of U.S. dollars in circulation began to exceed the amount of gold backing them up in 1959.
By the fall of 1960, an ounce of gold could be exchanged for $40 in London, even though the price in the U.S. was $35. This difference showed that investors knew the dollar was overvalued and that time was running out.
The Nixon Shock
In August 1971, President Richard Nixon acknowledged the demise of the Bretton Woods system. He announced that the dollar could no longer be exchanged for gold, which soon became known as the Nixon shock. The "gold window" was closed.
In order to maintain the Bretton Woods system the US had to:
a) run a balance of payments current account deficit to provide liquidity for the conversion of gold into US dollars. With more US dollars in the system the citizens began to speculate, thinking that the US Dollar was overvalued. This meant that the US had less gold as people starting converting the US dollars to gold and taking it offshore. With less gold in the country there was even more speculation that the US Dollar was overvalued.
b) run a balance of payments current account surplus to maintain confidence in the US Dollar.
Obviously, the US was faced with a dilemma because it is not possible to run a balance of payments current account deficit and surplus at the same time.
Quote:
...Implication in 2008 meltdown
In the wake of the Financial crisis of 2007-2008, the governor of the People's Bank of China explicitly named the Triffin Dilemma as the root cause of the economic disorder, in a speech titled Reform the International Monetary System.
In the wake of the Financial crisis of 2007-2008, the governor of the People's Bank of China explicitly named the Triffin Dilemma as the root cause of the economic disorder, in a speech titled Reform the International Monetary System.
Because now the USA issues treasury debt instead of gold, and this treasury debt is held as the international reserves on CB balance sheets:
FOFOA describing Bretton Woods gold convertibility. Gold flowed to supplement trade imbalances.
Quote:
From 1933 until 1971 the US dollar outside of the United States had value from its being equal to 1/35th of an ounce of gold. In fact, dollars outside the U.S. were more valuable than dollars inside. They purchased more real goods than internal "fiat 33" dollars because they were "golden."
But the U.S. Treasury had most of the world's monetary gold. At the peak of Bretton Woods the U.S. had about 22,000 tonnes while all the other central banks only held about 8,000 tonnes combined.
Can you imagine (hypothetically) perfectly balanced trade, (no deficit or surplus)? That would mean a perfectly equal value of real goods flowing in and out of the U.S. No net gold flow in either direction would exist because the flow of real goods in either direction is perfectly balanced by the flow of goods in the other direction. Gold flows to balance (supplement) the flow of real goods. If you don't produce enough goods you ship some gold as well. Foreign central banks collect the excess dollars in their zone (when foreign exporters exchange them at the bank) and then those central banks either hold those dollars in reserve or cash them in for gold to balance their zone's trade surplus.
But the U.S. Treasury had most of the world's monetary gold. At the peak of Bretton Woods the U.S. had about 22,000 tonnes while all the other central banks only held about 8,000 tonnes combined.
Can you imagine (hypothetically) perfectly balanced trade, (no deficit or surplus)? That would mean a perfectly equal value of real goods flowing in and out of the U.S. No net gold flow in either direction would exist because the flow of real goods in either direction is perfectly balanced by the flow of goods in the other direction. Gold flows to balance (supplement) the flow of real goods. If you don't produce enough goods you ship some gold as well. Foreign central banks collect the excess dollars in their zone (when foreign exporters exchange them at the bank) and then those central banks either hold those dollars in reserve or cash them in for gold to balance their zone's trade surplus.
Quote:
If the U.S. ran a trade surplus, if it moved from this (hypothetical) perfect balance into surplus territory, that would mean more real goods value flowing OUT of the U.S. than in. It would mean the U.S. was like China, making stuff for the rest of the world. All external dollars would be used to purchase this excess of U.S. exports abroad and the CB's would not accumulate ANY dollars. In fact, they would face a SHORTAGE of dollars (shortage of liquidity) and a DEMAND for dollars as people went into banks to BUY dollars to purchase U.S. exports.
So the foreign CB's would then have to buy more dollars from the U.S. with their meager gold stocks, $35 for every ounce of gold they shipped to the U.S. Treasury. Now remember, the U.S. already had more than 70% of the world's "official" gold. So how long do you think Bretton Woods would have lasted under this scenario? Until the U.S. had ALL the gold? Or would the U.S. trading partners have forced a revaluation of the gold so that it wouldn't run out so fast? And a revaluation of gold would have meant a DEVALUATION of the dollar!
So, in order to keep the dollar valued at 1/35th of an ounce of gold, to prevent a dollar devaluation, the U.S. had to run a trade deficit, so that more real goods flowed INTO the U.S. than out, and the outflow deficit could be supplemented by shipping gold to the foreign CB's. This is what Wikipedia means by, "run a balance of payments current account deficit to provide liquidity for the conversion of gold into US dollars." Of course this ended in 1971 for obvious reasons.
So the foreign CB's would then have to buy more dollars from the U.S. with their meager gold stocks, $35 for every ounce of gold they shipped to the U.S. Treasury. Now remember, the U.S. already had more than 70% of the world's "official" gold. So how long do you think Bretton Woods would have lasted under this scenario? Until the U.S. had ALL the gold? Or would the U.S. trading partners have forced a revaluation of the gold so that it wouldn't run out so fast? And a revaluation of gold would have meant a DEVALUATION of the dollar!
So, in order to keep the dollar valued at 1/35th of an ounce of gold, to prevent a dollar devaluation, the U.S. had to run a trade deficit, so that more real goods flowed INTO the U.S. than out, and the outflow deficit could be supplemented by shipping gold to the foreign CB's. This is what Wikipedia means by, "run a balance of payments current account deficit to provide liquidity for the conversion of gold into US dollars." Of course this ended in 1971 for obvious reasons.
Quote:
But today, the U.S. still runs its deficit, shipping U.S. Treasury debt now instead of gold. Apparently Treasury debt never runs out, unlike gold. Therefore it never gets revalued upward like gold does. Instead it gets devalued downward once it exceeds a level that can be reasonably returned at present real goods prices.
The interesting thing about Freegold is that when gold floats in price to its fiat currency, it never runs out either. Kinda like Treasury debt, only without systemic shocks every few decades.
You see, the government IS the deficit for any currency zone. Governments spend money and import lots of stuff like oil and airplanes, but they don't create any export goods. So a currency zone with a really big government (read: deficit) that runs a really big trade surplus (read: China) must be keeping its citizens in poverty.
On the other hand, a currency zone that MUST run a trade deficit in order to keep its currency valuable as the global reserve currency can grow both a really big government AND keep its population living large. Strangely, this continued for the U.S. even after 1971. How could this be?
The reason it continued is that the shocks of the 1970's gave the world a glimpse of what a global economic failure might look like. So right around 1979 the European CB's decided to speed up the process of creating a backup system (the euro) to avoid future global economic failure. And in order to do so, they had to support the U.S. dollar in its reserve currency role until their backup was brought online. And since gold was no longer being shipped from the U.S. Treasury, these European CB's agreed to buy U.S. Treasury debt in lieu of gold, at least until they had their new backup system up and running.
This process was expected to take about 10 years, but it took twice that long, from 1979 until 1999. And while they knew it was quite wasteful of their local zone's economic efforts to support the dollar by buying paper promises, they made the judgment that this was better than the alternative: a dollar collapse without a backup system in place.
And by the time the euro finally rolled out, the Chinese had picked up the Treasury debt accumulation role, and the dollar's paper gold market had blossomed into its majestic fullness. Which brings us to the present.
Today the dollar's last two support structures, the Chinese fascination with official U.S. paper promises and the public's willingness to surrender physical gold in exchange for paper gold promises, appear to be contracting. Can they contract to zero smoothly? Or will we get a "shock" out of the blue? Did the U.S. gold stockpile contract to zero smoothly? Or did we get a Nixon shock out of the blue?
The interesting thing about Freegold is that when gold floats in price to its fiat currency, it never runs out either. Kinda like Treasury debt, only without systemic shocks every few decades.
You see, the government IS the deficit for any currency zone. Governments spend money and import lots of stuff like oil and airplanes, but they don't create any export goods. So a currency zone with a really big government (read: deficit) that runs a really big trade surplus (read: China) must be keeping its citizens in poverty.
On the other hand, a currency zone that MUST run a trade deficit in order to keep its currency valuable as the global reserve currency can grow both a really big government AND keep its population living large. Strangely, this continued for the U.S. even after 1971. How could this be?
The reason it continued is that the shocks of the 1970's gave the world a glimpse of what a global economic failure might look like. So right around 1979 the European CB's decided to speed up the process of creating a backup system (the euro) to avoid future global economic failure. And in order to do so, they had to support the U.S. dollar in its reserve currency role until their backup was brought online. And since gold was no longer being shipped from the U.S. Treasury, these European CB's agreed to buy U.S. Treasury debt in lieu of gold, at least until they had their new backup system up and running.
This process was expected to take about 10 years, but it took twice that long, from 1979 until 1999. And while they knew it was quite wasteful of their local zone's economic efforts to support the dollar by buying paper promises, they made the judgment that this was better than the alternative: a dollar collapse without a backup system in place.
And by the time the euro finally rolled out, the Chinese had picked up the Treasury debt accumulation role, and the dollar's paper gold market had blossomed into its majestic fullness. Which brings us to the present.
Today the dollar's last two support structures, the Chinese fascination with official U.S. paper promises and the public's willingness to surrender physical gold in exchange for paper gold promises, appear to be contracting. Can they contract to zero smoothly? Or will we get a "shock" out of the blue? Did the U.S. gold stockpile contract to zero smoothly? Or did we get a Nixon shock out of the blue?
RS
Quote:
Randy’s Comment: Central bankers will increasingly prefer gold reserves over the paper reserves created by other countries. Not only for the reasons of reliability/trust as cited in this article, but moreso because in choosing predominantly gold over foreign paper for central banking reserves will give those various national monetary officials an improved degree of latitude in their pursuit of an independent monetary policy.
WITH gold reserves, a central banker in a vibrant national economy can choose to enjoy a strong currency relative to gold, but, importantly, it can still alternatively choose to exercise loose monetary policy (for economic or political reasons) in which its currency is made weak as measured relative to gold. But regardless of choice for the relative strength or weakness of the national currency, the abiding benefit of choosing gold reserves is the superior stability — the systemic strength against procyclicality — that gold offers to the asset side central banking balance sheet.
WITHOUT gold reserves, pursuit of a national currency policy that is (according to their preference) generally strong OR generally weak is made less expedient either way because the health of the central bank’s balance sheet is subordinated to the quality of its foreign paper reserves which are themselves subordinated to the particular monetary policies being pursued by those foreign governments. Generally this structure of foreign paper reserves offers only the option for national monetary weakness built upon other international weaknesses, and worst of all it exposes the national monetary balance sheet to procyclical systemic failure — a domino whose fate is written largely in the hand of its neighbors.
WITH gold reserves, a central banker in a vibrant national economy can choose to enjoy a strong currency relative to gold, but, importantly, it can still alternatively choose to exercise loose monetary policy (for economic or political reasons) in which its currency is made weak as measured relative to gold. But regardless of choice for the relative strength or weakness of the national currency, the abiding benefit of choosing gold reserves is the superior stability — the systemic strength against procyclicality — that gold offers to the asset side central banking balance sheet.
WITHOUT gold reserves, pursuit of a national currency policy that is (according to their preference) generally strong OR generally weak is made less expedient either way because the health of the central bank’s balance sheet is subordinated to the quality of its foreign paper reserves which are themselves subordinated to the particular monetary policies being pursued by those foreign governments. Generally this structure of foreign paper reserves offers only the option for national monetary weakness built upon other international weaknesses, and worst of all it exposes the national monetary balance sheet to procyclical systemic failure — a domino whose fate is written largely in the hand of its neighbors.
11-07-2010
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