Stock scream room

Discussion of the Stock portion of the Permanent Portfolio

Moderator: Global Moderator

Libertarian666
Executive Member
Executive Member
Posts: 5994
Joined: Wed Dec 31, 1969 6:00 pm

Re: Stock scream room

Post by Libertarian666 » Tue Mar 03, 2020 1:38 pm

dualstow wrote:
Tue Mar 03, 2020 11:37 am
Cortopassi wrote:
Tue Mar 03, 2020 11:28 am
And, yeah, all you retired 60 and 70 and 80 year olds living on a bit of interest from your savings and bonds, because you're trying to be safe, sorry. The market is way more important than you.
Are you saying the fed should prop up interest rates for retirees who shun stocks?
"Not keeping rates on the floor by heroic means" != "propping up interest rates".

But of course we know they can never let rates reach their natural levels because that would add at least $1 trillion to the deficit almost instantly.

It's pretty hard to see how this ends without some sort of financial disaster.
Libertarian666
Executive Member
Executive Member
Posts: 5994
Joined: Wed Dec 31, 1969 6:00 pm

Re: Stock scream room

Post by Libertarian666 » Tue Mar 03, 2020 1:39 pm

Cortopassi wrote:
Tue Mar 03, 2020 1:37 pm
The old give me one penny, then two pennies then four pennies thing for a month.... :D
Or the story about the invention of chess...
User avatar
dualstow
Executive Member
Executive Member
Posts: 14232
Joined: Wed Oct 27, 2010 10:18 am
Location: synagogue of Satan
Contact:

Re: Stock scream room

Post by dualstow » Tue Mar 03, 2020 1:46 pm

Cortopassi wrote:
Tue Mar 03, 2020 1:26 pm
dualstow wrote:
Tue Mar 03, 2020 11:37 am
Cortopassi wrote:
Tue Mar 03, 2020 11:28 am
And, yeah, all you retired 60 and 70 and 80 year olds living on a bit of interest from your savings and bonds, because you're trying to be safe, sorry. The market is way more important than you.
Are you saying the fed should prop up interest rates for retirees who shun stocks?
I am saying if the economy has been as good as everyone has been saying for the last few years, we never even got close to normalizing interest rates (I assume "normal" is closer to 5%) and we started cutting last year when the economy was apparently humming along on the surface. Why is that?

(chart)
I do wonder what a normal interest rate is, now that you said that. We have kind of hit the normal or at least desired inflation rate of 2%, and passed it a little, but I guess I don't know what a normal interest rate is.
Libertarian666 wrote:"Not keeping rates on the floor by heroic means" != "propping up interest rates".
Of course, I agree. I was reacting to the line, "the market is more important than (retiree savers who played it safe)."
Sam Bankman-Fried sentenced to 25 years
pmward
Executive Member
Executive Member
Posts: 1731
Joined: Thu Jan 24, 2019 4:39 pm

Re: Stock scream room

Post by pmward » Tue Mar 03, 2020 1:51 pm

dualstow wrote:
Tue Mar 03, 2020 1:46 pm

I do wonder what a normal interest rate is, now that you said that. We have kind of hit the normal or at least desired inflation rate of 2%, and passed it a little, but I guess I don't know what a normal interest rate is.
The Fed's target inflation rate is 2%, therefore I personally would say that by definition "normal" should be around that 2% marker. If they are targeting 2% and yields are at 1% or 3%, there is a problem. I don't think the Fed accepts this though, as they clearly wanted to get rates back to 5%, while having a 2% inflation target. You cannot get 5% rates without having fear of inflation, and the only way to generate fear of inflation is to overshoot that 2% by a good amount.
User avatar
dualstow
Executive Member
Executive Member
Posts: 14232
Joined: Wed Oct 27, 2010 10:18 am
Location: synagogue of Satan
Contact:

Re: Stock scream room

Post by dualstow » Tue Mar 03, 2020 2:41 pm

I don't know if I should make this a general poll but for now, pmward, what would you do differently, if anything, if you were Powell?

PREV. PAGE
pmward wrote:
Tue Mar 03, 2020 1:51 pm
dualstow wrote:
Tue Mar 03, 2020 1:46 pm

I do wonder what a normal interest rate is, now that you said that. We have kind of hit the normal or at least desired inflation rate of 2%, and passed it a little, but I guess I don't know what a normal interest rate is.
The Fed's target inflation rate is 2%, therefore I personally would say that by definition "normal" should be around that 2% marker. If they are targeting 2% and yields are at 1% or 3%, there is a problem. I don't think the Fed accepts this though, as they clearly wanted to get rates back to 5%, while having a 2% inflation target. You cannot get 5% rates without having fear of inflation, and the only way to generate fear of inflation is to overshoot that 2% by a good amount.
Sam Bankman-Fried sentenced to 25 years
pmward
Executive Member
Executive Member
Posts: 1731
Joined: Thu Jan 24, 2019 4:39 pm

Re: Stock scream room

Post by pmward » Tue Mar 03, 2020 3:04 pm

dualstow wrote:
Tue Mar 03, 2020 2:41 pm
I don't know if I should make this a general poll but for now, pmward, what would you do differently, if anything, if you were Powell?
Unfortunately, Powell was dealt a crap hand. He didn't make the mess, he inherited it. I really think he has done a pretty good job on the whole, considering the unprecedented interference of the president and a market that likes to go on temper tantrums.

BUT, it is clear that something is broken under the hood. Why do bonds and U.S. dollars keep getting squeezed? I'm starting to think that there is something to Luke Gromen's dollar short squeeze theory. What can be done to fix that? Well the ultimate fix is getting trade off of the U.S. dollar... but let's be real here, no other currency is currently capable of handling that strain. Powell also does not have any real say in creating an unbiased trade currency. I also do not think Trump would ever want to go that route.

So what can he do? He can do nothing more than stop the bleeding. The only thing he can do is provide the dollars. He would essentially be bailing out the Eurodollar shadow banking market. This means basically cutting rates to 0 and providing massive amounts of QE to bring the dollar down. This is also what Trump wants, though ironically he also throws a temper tantrum and labels any other country that tries to do this as a currency manipulator. Unfortunately, this isn't a clean fix either, for every action there is an equal and opposite reaction. What does QE do? It continues to blow up the wealth divide... which eventually pushes the political climate over the edge and we eventually wind up with a socialist president and MMT (although, with our current deficit, liquidity injections, and tax cuts, let's be real Trump is the first MMT president ever). We are already too far into this thing for a clean break. There is no fix. It will run its course. It won't end well. Bonds and stocks will eventually both blow up simultaneously. But the end is not today. The craziness can keep going on much longer than anyone thinks possible.

Also, speaking of wealth divide, Yellen came out back in Sept saying that the Fed should start buying stocks and corporate bonds in the next downturn. If QE into the bond market creates a wealth divide, just imagine what this would do?
Libertarian666
Executive Member
Executive Member
Posts: 5994
Joined: Wed Dec 31, 1969 6:00 pm

Re: Stock scream room

Post by Libertarian666 » Tue Mar 03, 2020 5:12 pm

MangoMan wrote:
Tue Mar 03, 2020 1:42 pm
Libertarian666 wrote:
Tue Mar 03, 2020 1:39 pm
Cortopassi wrote:
Tue Mar 03, 2020 1:37 pm
The old give me one penny, then two pennies then four pennies thing for a month.... :D
Or the story about the invention of chess...
Never heard that story; do tell. Or provide link.
https://www.chess.com/blog/MatBobula/an ... n-of-chess
Libertarian666
Executive Member
Executive Member
Posts: 5994
Joined: Wed Dec 31, 1969 6:00 pm

Re: Stock scream room

Post by Libertarian666 » Tue Mar 03, 2020 5:16 pm

dualstow wrote:
Tue Mar 03, 2020 1:46 pm
Cortopassi wrote:
Tue Mar 03, 2020 1:26 pm
dualstow wrote:
Tue Mar 03, 2020 11:37 am
Cortopassi wrote:
Tue Mar 03, 2020 11:28 am
And, yeah, all you retired 60 and 70 and 80 year olds living on a bit of interest from your savings and bonds, because you're trying to be safe, sorry. The market is way more important than you.
Are you saying the fed should prop up interest rates for retirees who shun stocks?
I am saying if the economy has been as good as everyone has been saying for the last few years, we never even got close to normalizing interest rates (I assume "normal" is closer to 5%) and we started cutting last year when the economy was apparently humming along on the surface. Why is that?

(chart)
I do wonder what a normal interest rate is, now that you said that. We have kind of hit the normal or at least desired inflation rate of 2%, and passed it a little, but I guess I don't know what a normal interest rate is.
Libertarian666 wrote:"Not keeping rates on the floor by heroic means" != "propping up interest rates".
Of course, I agree. I was reacting to the line, "the market is more important than (retiree savers who played it safe)."
A normal interest rate is whatever the rate would be in the absence of Fed intervention.
I'm guessing it would be much higher than it is now, maybe 5% or 6% higher, maybe more.
But that would cause an enormous increase in the US government deficit, which would make interest rates go even higher, resulting in a death spiral.
That's why they can't allow it to happen.
pmward
Executive Member
Executive Member
Posts: 1731
Joined: Thu Jan 24, 2019 4:39 pm

Re: Stock scream room

Post by pmward » Tue Mar 03, 2020 5:37 pm

Libertarian666 wrote:
Tue Mar 03, 2020 5:16 pm
I'm guessing it would be much higher than it is now, maybe 5% or 6% higher, maybe more.
See I disagree with this quite strongly. The problem is that the demand for U.S. dollars and treasuries outstrips the supply. This mainly caused by the fact that all global trade is denominated in U.S. dollars and requires some form of U.S. dollar denominated asset as collateral, of which there is not enough currently in existence. I think that even if they stopped setting a Fed funds rate the market would drag the rates lower, as is evidenced by the 10 year bond being inverted from the Fed Funds rate. Right now the Fed is holding rates up, not holding rates down. This is clearly evidenced in the bond market. The Fed has been bulled around and forced to follow the market, not the other way around. The Fed wants rates up, not rates down.

For better or worse, U.S. treasuries are primarily a collateral instrument these days, not an investment instrument. The post crisis regulations also have a hand in that as well, forcing big banks and investment banks to hold more reserves and collateral respectively. Believe it or not, the U.S. does not have enough debt to satisfy the appetite and needs of our economy, the current financial regulations, and the entire world's trade. This forces rates down in treasuries, corporate bonds, and junk bonds. I also forces investors to chase risk, which is why risk assets like stocks keep going up even though economic growth has been weak for over 12 years now.
pmward
Executive Member
Executive Member
Posts: 1731
Joined: Thu Jan 24, 2019 4:39 pm

Re: Stock scream room

Post by pmward » Tue Mar 03, 2020 6:08 pm

To add to that a bit. In the past banks would readily use their balance sheets to create Eurodollars (nothing to do with the Euro, this is simply a catch all term for U.S. dollar derivative of a banks balance sheet located somewhere other than the U.S.) which were used in trade. This is a completely unregulated shadow banking industry that the Fed does not fully understand. Well, it's so complicated that to be honest nobody really fully understands it. This Eurodollar market is the most important market in the world though, as almost all trade rolls through this. The trade collateral that other countries use are usually not literally U.S. treasuries or dollars, they are Eurodollars.

Before 2008 these banks using their balance sheets to create Eurodollars was a low risk / high reward kind of proposition. It was like printing money for free. Post crisis this has changed. You can even see evidence of banks reluctance to lend to each other in our own repo markets... it's why the repo rate hit 10% back in October and the Fed had to step in and start supplying the liquidity. Well the same thing is happening in the Eurodollar market, only the Fed does not actively supply liquidity to those markets. If these countries cannot get their hands on Eurodollars, they have to turn to actual dollars and treasuries, and it creates a massive squeeze. This is what is going on under the covers. This squeeze is bad for the global economy, not just us. Matter of fact, we are probably the least effected country so far. There is simply no way interest rates can go up meaningfully when demand is this far ahead of supply.

So what happens when the virus hits? People chase U.S. dollar denominated assets in a safety bid, which further exacerbates the issue, leads to a liquidity squeeze, a bond melt-up, and a stock market crash. As soon as adequate liquidity is provided things calm back down. We've seen this same story play out many times in the last decade. It's why I stated a few days ago that liquidity is the only thing that matters these days. When the liquidity is being supplied the party continues. When the liquidity gets squeezed the party comes to a sudden stop until the Fed finally comes to the rescue with more booze. There is unrelenting demand there, and when the supply gets tight the drunks in the market get angry and start to riot until they get what they want... which is simply more booze to keep the party going longer.
User avatar
vnatale
Executive Member
Executive Member
Posts: 9423
Joined: Fri Apr 12, 2019 8:56 pm
Location: Massachusetts
Contact:

Re: Stock scream room

Post by vnatale » Tue Mar 03, 2020 8:56 pm

Libertarian666 wrote:
Tue Mar 03, 2020 1:35 pm
sophie wrote:
Tue Mar 03, 2020 8:21 am
People are nuts.

My coop sent out a bulletin about "coronavirus preparedness" where they talk about what they'll do in the event that many of the staff can't come to work. Something about halting all renovations and asking residents to help with things like taking out the trash. Good that they have a policy worked out, but announcing it like this just fans the flames of panic.

So I wondered what the odds were. Wuhan has 11,000,000 population, and China (the entire country) has had 80K coronavirus cases. Making the ridiculous assumptions that 1) they are all sick at once, 2) twice as many people would actually test positive and be quarantined or hospitalized, and 3) they were all in Wuhan, that's an infection rate of 1.4%. The chance of *any* of the 16 staff members in my coop getting coronavirus would then be 28% (likely an overestimate). It would probably take at least 3 or 4 of them getting sick to seriously disable normal function.

it really helps to be able to do math, ha.
If there's a lily pond in a lake that doubles in size every day, and it covers the lake at the end of day 30, when did it cover half the lake?
Day 29

Vinny
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
Libertarian666
Executive Member
Executive Member
Posts: 5994
Joined: Wed Dec 31, 1969 6:00 pm

Re: Stock scream room

Post by Libertarian666 » Tue Mar 03, 2020 9:52 pm

vnatale wrote:
Tue Mar 03, 2020 8:56 pm
Libertarian666 wrote:
Tue Mar 03, 2020 1:35 pm
sophie wrote:
Tue Mar 03, 2020 8:21 am
People are nuts.

My coop sent out a bulletin about "coronavirus preparedness" where they talk about what they'll do in the event that many of the staff can't come to work. Something about halting all renovations and asking residents to help with things like taking out the trash. Good that they have a policy worked out, but announcing it like this just fans the flames of panic.

So I wondered what the odds were. Wuhan has 11,000,000 population, and China (the entire country) has had 80K coronavirus cases. Making the ridiculous assumptions that 1) they are all sick at once, 2) twice as many people would actually test positive and be quarantined or hospitalized, and 3) they were all in Wuhan, that's an infection rate of 1.4%. The chance of *any* of the 16 staff members in my coop getting coronavirus would then be 28% (likely an overestimate). It would probably take at least 3 or 4 of them getting sick to seriously disable normal function.

it really helps to be able to do math, ha.
If there's a lily pond in a lake that doubles in size every day, and it covers the lake at the end of day 30, when did it cover half the lake?
Day 29

Vinny
Right. That's why I don't draw any comfort from the relatively low rate of infection in the general population. This virus is extremely contagious even while it is asymptomatic. That's a perfect recipe for a pandemic of epic proportions.
User avatar
vnatale
Executive Member
Executive Member
Posts: 9423
Joined: Fri Apr 12, 2019 8:56 pm
Location: Massachusetts
Contact:

Re: Stock scream room

Post by vnatale » Tue Mar 03, 2020 10:05 pm

Libertarian666 wrote:
Tue Mar 03, 2020 9:52 pm
vnatale wrote:
Tue Mar 03, 2020 8:56 pm
Libertarian666 wrote:
Tue Mar 03, 2020 1:35 pm
sophie wrote:
Tue Mar 03, 2020 8:21 am
People are nuts.

My coop sent out a bulletin about "coronavirus preparedness" where they talk about what they'll do in the event that many of the staff can't come to work. Something about halting all renovations and asking residents to help with things like taking out the trash. Good that they have a policy worked out, but announcing it like this just fans the flames of panic.

So I wondered what the odds were. Wuhan has 11,000,000 population, and China (the entire country) has had 80K coronavirus cases. Making the ridiculous assumptions that 1) they are all sick at once, 2) twice as many people would actually test positive and be quarantined or hospitalized, and 3) they were all in Wuhan, that's an infection rate of 1.4%. The chance of *any* of the 16 staff members in my coop getting coronavirus would then be 28% (likely an overestimate). It would probably take at least 3 or 4 of them getting sick to seriously disable normal function.

it really helps to be able to do math, ha.
If there's a lily pond in a lake that doubles in size every day, and it covers the lake at the end of day 30, when did it cover half the lake?
Day 29

Vinny
Right. That's why I don't draw any comfort from the relatively low rate of infection in the general population. This virus is extremely contagious even while it is asymptomatic. That's a perfect recipe for a pandemic of epic proportions.
"Epic" proportions would be the Spanish Flu of 1918...https://en.wikipedia.org/wiki/Spanish_flu

It was made much worse then by a lack of knowledge of how it was actually being spread. This time around it is well known how it spreads.

Vinny
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
boglerdude
Executive Member
Executive Member
Posts: 1313
Joined: Wed Aug 10, 2016 1:40 am
Contact:

Re: Stock scream room

Post by boglerdude » Tue Mar 03, 2020 10:13 pm

> demand for U.S. dollars and treasuries outstrips the supply

Why then does the Fed need to buy bonds from the treasury (indirectly) . They should be able to sell off their balance sheet to all these global bond-hungry investors
Libertarian666
Executive Member
Executive Member
Posts: 5994
Joined: Wed Dec 31, 1969 6:00 pm

Re: Stock scream room

Post by Libertarian666 » Wed Mar 04, 2020 7:33 am

vnatale wrote:
Tue Mar 03, 2020 10:05 pm
Libertarian666 wrote:
Tue Mar 03, 2020 9:52 pm
vnatale wrote:
Tue Mar 03, 2020 8:56 pm
Libertarian666 wrote:
Tue Mar 03, 2020 1:35 pm
sophie wrote:
Tue Mar 03, 2020 8:21 am
People are nuts.

My coop sent out a bulletin about "coronavirus preparedness" where they talk about what they'll do in the event that many of the staff can't come to work. Something about halting all renovations and asking residents to help with things like taking out the trash. Good that they have a policy worked out, but announcing it like this just fans the flames of panic.

So I wondered what the odds were. Wuhan has 11,000,000 population, and China (the entire country) has had 80K coronavirus cases. Making the ridiculous assumptions that 1) they are all sick at once, 2) twice as many people would actually test positive and be quarantined or hospitalized, and 3) they were all in Wuhan, that's an infection rate of 1.4%. The chance of *any* of the 16 staff members in my coop getting coronavirus would then be 28% (likely an overestimate). It would probably take at least 3 or 4 of them getting sick to seriously disable normal function.

it really helps to be able to do math, ha.
If there's a lily pond in a lake that doubles in size every day, and it covers the lake at the end of day 30, when did it cover half the lake?
Day 29

Vinny
Right. That's why I don't draw any comfort from the relatively low rate of infection in the general population. This virus is extremely contagious even while it is asymptomatic. That's a perfect recipe for a pandemic of epic proportions.
"Epic" proportions would be the Spanish Flu of 1918...https://en.wikipedia.org/wiki/Spanish_flu

It was made much worse then by a lack of knowledge of how it was actually being spread. This time around it is well known how it spreads.

Vinny
Yes, that's the scale I was thinking of.
And as far as knowledge of how it spreads, that is good.
Unfortunately, we have the disadvantage that the speed of travel is many times faster than it was in 1918. An infected person can be anywhere in the world in 24 hours.
pmward
Executive Member
Executive Member
Posts: 1731
Joined: Thu Jan 24, 2019 4:39 pm

Re: Stock scream room

Post by pmward » Wed Mar 04, 2020 8:07 am

boglerdude wrote:
Tue Mar 03, 2020 10:13 pm
> demand for U.S. dollars and treasuries outstrips the supply

Why then does the Fed need to buy bonds from the treasury (indirectly) . They should be able to sell off their balance sheet to all these global bond-hungry investors
They do so to supply liquidity to the repo markets. They do this because of the limitations of their powers. They have no lawful ability to provide liquidity to foreign entities. Debt is money itself. Both sides of the balance sheet have to match. One persons liability is another persons asset.

Also I did not say anything about "global bond-hungry investors" I said that this is all because of global trade. What do you think they use as collateral in global trade? Bond hungry investors, which come out the woodwork when things like the virus create fear, exacerbate the issue. But they are not the root cause.

All paths eventually lead to currency debasement. When we actually get to that point though is anyone's guess.
User avatar
Cortopassi
Executive Member
Executive Member
Posts: 3338
Joined: Mon Feb 24, 2014 2:28 pm
Location: https://www.jwst.nasa.gov/content/webbL ... sWebb.html

Re: Stock scream room

Post by Cortopassi » Wed Mar 04, 2020 8:28 am

pmward wrote:
Wed Mar 04, 2020 8:07 am
All paths eventually lead to currency debasement. When we actually get to that point though is anyone's guess.
Aren't we on a continuing path of debasement? I liked this graph.

Image
pmward
Executive Member
Executive Member
Posts: 1731
Joined: Thu Jan 24, 2019 4:39 pm

Re: Stock scream room

Post by pmward » Wed Mar 04, 2020 10:05 am

Well I use the term debasement as different than inflation. Inflation is a slow burn local devaluing of purchasing power. Debasement that I'm referring to though is more inline with the large scale debasements of the 1930s and 1970s, more with the intent to intentionally devalue the currency vs other currencies. Only this time, other countries will be cheering us on because they are tired of having to pay more and more money in local terms to buy dollars just so they can acquire the goods they need in trade. This is like a hidden tariff to them, which is especially penalizing for small emerging markets. Now this debasement can take place in many forms. We don't have a gold peg these days to devalue against, so they will have to get a bit more creative in their measures. Likely it also won't be sold as a debasement, it will be sold as something like MMT for social spending, helicopter money to fix the wealth divide, or forgiveness of existing debt (potentially even the QE debt on the Fed's balance sheet itself). At first it will also work incredibly well, and people will love it, both here and globally. Eventually though... well I think everyone here on this forum is aware how that ends.
User avatar
Xan
Administrator
Administrator
Posts: 4393
Joined: Tue Mar 13, 2012 1:51 pm

Re: Stock scream room

Post by Xan » Wed Mar 04, 2020 10:12 am

pmward,

Would you mind going into more detail on how Country A needs to buy US Dollars in order to acquire goods from Country B? You may have covered that earlier but I think I'm too dense for it to sink in.
pmward
Executive Member
Executive Member
Posts: 1731
Joined: Thu Jan 24, 2019 4:39 pm

Re: Stock scream room

Post by pmward » Wed Mar 04, 2020 10:51 am

Xan wrote:
Wed Mar 04, 2020 10:12 am
pmward,

Would you mind going into more detail on how Country A needs to buy US Dollars in order to acquire goods from Country B? You may have covered that earlier but I think I'm too dense for it to sink in.
Absolutely. I'll give a quick TLDR here. This podcast here goes really in depth with it, so this is also worth a listen if this is something you wish to understand. It was indeed difficult to wrap my head around at first because it's so complicated: https://www.macrovoices.com/547-jeff-sn ... m-overview

TLDR version: If country A needs to buy U.S. dollars where do they go? Markets. U.S. Dollars are a commodity basically. Typically these come from the Eurodollar commodity markets. So what is a Eurodollar? It is a derivative of the U.S. dollar. What is it a derivative of? Banks balance sheets denominated in U.S. Dollars. These are banks all over the world that supply these Eurodollars, even U.S. banks. Heck, you can even buy Eurodollar futures on the Chicago mercantile exchange. This is a completely ad hoc and unregulated industry that has been going on since around the 1960s. This is the most important market in the world. Until 2008 everything was great. Banks saw creating Eurodollars as a risk free return. It kept trade going on without the need for Federal regulation, intervention, or even consideration to foreign markets. This also allowed the Fed to focus exclusively on local liquidity supply, and ignore all foreign liquidity supply.

However, in 2008, obviously destruction was wrought across the financial industry. After the bank collapses here the Fed locally stepped up and bailed the banks out. However, nobody was there to bail the Eurodollar markets out. Banks took massive losses in defaults. So, these days, banks are not as keen to create Eurodollars, as they see the inherent risks. You can even see this playing out locally, as repo markets have to have the Fed step in and provide liquidity because even locally banks are much more hesitant to provide short term liquidity to each other here in the U.S. Since the Eurodollar market is a completely ad hoc market, there is nobody there to backstop it. There are trillions of dollars needed each and every day to support all global trade. So what happens when these countries cannot get the dollars they need? Or when the rising price of the dollar makes the cost of acquiring dollars more and more? For one, it causes countries and banks to hoard the dollars they do have, which further tightens liquidity. Secondly, it makes countries and banks have to go to other markets.... like the U.S. treasury market in order to acquire the U.S. dollar liquidity they need. Treasuries are being purchased on massive scale, not for the yield, but simply for as a means of collateral. Yield could be -10% and they would still purchase them, because they don't care about the yield, they are only renting them as a means of collateral. Add into this the increased banking regulation, which requires big banks to hold more reserves, and increased the collateral requirements on investment banks against any derivatives they issue, and it just squeezes the supply. This not to mention the fact that U.S. Treasuries are one of the most popular bank reserve currencies held by central banks across the world to stabilize their currencies. The bond markets are no longer primarily investment markets, as the demand for collateral FAR outweighs the demand for investment. But, who suffers? The people that depend on bonds as a fixed income investment. They are basically the ones currently paying the bill. The cost of bonds goes up, and the yields go down. This is not sustainable forever obviously.
User avatar
Xan
Administrator
Administrator
Posts: 4393
Joined: Tue Mar 13, 2012 1:51 pm

Re: Stock scream room

Post by Xan » Wed Mar 04, 2020 11:02 am

pmward wrote:
Wed Mar 04, 2020 10:51 am
TLDR version: If country A needs to buy U.S. dollars where do they go?
I appreciate the time you're taking and the podcast link. But I'm still missing it. Your answer starts off skipping over my question. WHY does Country A need US Dollars in order to conduct trade? Are we talking about trade with the US? It sounded to me like you were saying Country A needed US Dollars in order to trade with Country B, both of which I assumed were not the US.
User avatar
mathjak107
Executive Member
Executive Member
Posts: 4456
Joined: Fri Jun 19, 2015 2:54 am
Location: bayside queens ny
Contact:

Re: Stock scream room

Post by mathjak107 » Wed Mar 04, 2020 11:17 am

The only reason a foreign currency is accepted by someone is because they know someone who they can pass it to .
So ultimately the only reason a US DOLLAR is accepted is because eventually someone needs something from us ...I could not spend a dollar in Tokyo .

I had to trade it to someone who took it because they will trade it to someone else looking to spend it here ....I came home from Cuba with some money I forgot to convert back to dollars or euros ....

No one will accept it here because they don’t know anyone buying anything in Cuba
pmward
Executive Member
Executive Member
Posts: 1731
Joined: Thu Jan 24, 2019 4:39 pm

Re: Stock scream room

Post by pmward » Wed Mar 04, 2020 11:19 am

Xan wrote:
Wed Mar 04, 2020 11:02 am
pmward wrote:
Wed Mar 04, 2020 10:51 am
TLDR version: If country A needs to buy U.S. dollars where do they go?
I appreciate the time you're taking and the podcast link. But I'm still missing it. Your answer starts off skipping over my question. WHY does Country A need US Dollars in order to conduct trade? Are we talking about trade with the US? It sounded to me like you were saying Country A needed US Dollars in order to trade with Country B, both of which I assumed were not the US.
Yes, if country A is China and country B is France, both need U.S. Dollars to do trade. Why? There are many reasons:

Because that's simply the way it has been since Bretton Woods.

When we broke the Bretton Woods accord Nixon made sure that the Middle East oil countries would only supply oil in U.S. dollars.

All commodity market contracts worldwide are denominated in USD (with the exception that recently China did create an oil contract in RMB, but it's obviously not very popular, and this is also part of why Trump became hostile against China, as any country that threatens hegemony politically has traditionally been seen as a threat to the US as a whole).

What other currency has enough debt (i.e. money supply) to support the whole of global trade?

What other options that currently exist are there?

How long would it take to create, implement, and transition to a new system to replace the current one?

What countries currently exist that want to challenge the US, and do they have enough backing to create a threat big enough to actually succeed?

Obviously, this will change some day. But it won't be a quick nor smooth transition. The transition from the GBP to USD took decades, and the move from USD to whatever the future trade currency is (likely something electronic and country neutral) will be incredibly slow as well. The systems in place are extremely complex, it isn't something that can just be wholesale replaced one day on a whim. Like I mentioned, the whole Eurodollar market is ad hoc, and as such nobody truly understands the whole of it. It also requires the US to not be hostile against any attempts to break away from the USD. Currently, they view it as hostile, and like to use things like tariffs, embargos, ext for anybody that tries to threaten the status quo. Traditionally, the only way a country loses hedgemony is to lose a major war, at which time the victor asserts their might by demanding all other countries to use their currency. Bretton Woods, while GB didn't necessarily lose, it was the US that won the war, and they saw that as their opportunity to seize power of the global economy. Keynes in Bretton Woods brought up creating a neutral trade currency, but the US was going to have none of that, haha.
User avatar
Cortopassi
Executive Member
Executive Member
Posts: 3338
Joined: Mon Feb 24, 2014 2:28 pm
Location: https://www.jwst.nasa.gov/content/webbL ... sWebb.html

Re: Stock scream room

Post by Cortopassi » Wed Mar 04, 2020 12:25 pm

Pmward,

What’s your day job? Degree in something financial? Just curious. You dig in pretty deep.
User avatar
Xan
Administrator
Administrator
Posts: 4393
Joined: Tue Mar 13, 2012 1:51 pm

Re: Stock scream room

Post by Xan » Wed Mar 04, 2020 12:42 pm

So, maybe I'm getting close?

The barter system is unwieldy and impractical for an economy of any complexity. A currency is the solution: rather than keeping up with how many eggs a loaf of bread is worth, with combinations writ large times a million, we can keep everything denominated in a currency.

Is it the same for international trade? Do things have to be denominated in a common currency, in this case the USD, for things to flow smoothly? Rather than keeping track of how francs convert to pounds or marks to lire or whatever, everything's done in dollars?
Post Reply