the fed and the economy and the credit crunch

Archived discussion from Toril-2.
kiryan
Sojourner
Posts: 7275
Joined: Sat Apr 14, 2001 5:01 am
Location: Los Angeles, CA and Flagstaff, AZ
Contact:

the fed and the economy and the credit crunch

Postby kiryan » Wed Oct 17, 2007 9:03 pm

So this is basically is going to be about the economy and the fed and indirectly about the housing market.

http://money.cnn.com/2007/10/17/news/ec ... tm?cnn=yes

Third, there has to be a complete discrediting of the view that says asset prices are not that out of line and it's only a matter of time before liquidity comes back to the market. The opposing view - that, in fact, liquidity can't return in earnest till bond prices fall to levels that look enticing - has to become the new orthodoxy, all the way up to the Fed.

Bernanke seems to be a committed proponent of the former view. In explaining the Fed's recent actions Monday, he said a central bank has to do things that will prevent sales of assets that "will drive the prices of those assets well below their longer-term fundamental values, raising the risk of widespread insolvency and intensifying the crisis."


Banks basically loan out your money. When you go to the bank and make a deposit, they take your money and make loans on it. To be FDIC insured, government guaranteeing you against loss, they are required to keep a certain amount of assets on hand so that if you come and want to withdraw $100 of your $10,000 you can.

What has been interesting is how the definition of assets has changed or been loosely regulated. For instance, some people estimate that for every $1 in assets on the books, there are 20 loans counting this asset as backing. This happens because a dollar allows you to turn around and loan a portion of that out, then that loan is taken repackaged and now claimed as an asset which is again leveraged to make another loan ect... Debt supporting debt, are you scared yet?

So what is going on now, and has been all summer regardless of how its been portrayed as a sub prime crisis, is that suddenly no one knows really what this repackaged debt is worth. Used to be that people could only use high quality loans as assets, but repackaged debt has taken good loans and subprime loans and comingled them into a unit with a somewhat arbitrary value. These were being traded on the stock market and between that and each bank's extensive pricing model a value was determined and used to make new loans. Now the market for subprime loans, and really most real estate period is non existent, so you can't see this restructured debt at all, yet banks are stuck with tons of it backing other loans.

What happens if the banks write down the value of these assets? They can't make any loans. The backing of debt with debt multiples the effect... perhaps 20x. So people feel that Ben of the Fed is basically going to try and prop up the values of this repackaged debt so the banks don't have to write down their assets and effectively create the real "credit crunch" (where people with good credit can't get loans because there is no money to loan). More than simply propping up the values of this debt, they are propping up home prices because even if you have high quality loans (based on credit score) if you have a $400k mortgage on a houes that is worth $300k on the market you don't have a high quality asset.

The only way to avoid a credit crunch is to either allow banks to lend more money than they have assets to back (forcing the tax payer to take on additional risk because FDIC is the government) or force the banks to sell off all these poor assets (at fire sale prices) so that they can start all over again at zero (and some going bankrupt / getting bought out in the process).

You want to know whats really funny other than the people proclaiming that this was a sub prime problem all summer and Greenspan claiming even up to 2 years ago that there was not a bubble market in real estate? Remember the Japanese buying up America in the 80s and the decade long recession in south east asian economies? That was japanese banks lending stupid amounts of money to people to buy american property at inflated prices then refusing to write down their assets after it became apparent that the loans were not going to be repaid and the assets were not worth the purchase price so that the economy had no capital for investment loans. American banks were forced to write down and this is largely credited with the success we've had in our economy relative to the stagnation in south east asia. Along the way, a bunch of American banks consolidated and got bought up or ceased operation.

China made a bid for a large stake in Bear Sterns. We're in for a painful history lesson unless Ben pulls his head out of his ass.
sok
Sojourner
Posts: 1578
Joined: Mon May 21, 2001 5:01 am
Location: santa ana, ca, usa
Contact:

Postby sok » Wed Oct 17, 2007 11:44 pm

i thought, i read somewhere that they are trying to free up more money by allowing the bank to keep less asset.
Corth
Sojourner
Posts: 6002
Joined: Sat Jan 27, 2001 6:01 am
Location: NY, USA

Postby Corth » Thu Oct 18, 2007 12:39 am

The value of most mortgage backed securities on the balance sheets of major banks, hedge funds, and institutions have not been marked down, despite the fact that everyone knows they are worth significantly less than what they were originally purchased for. The purpose of the proposed $100 billion so-called 'super SIV' is to bail out these entities by creating a buyer of last resort who will pay above market value. The reason the Treasury along with major financial institutions want to buy SOME assets for more than they are worth is that if such assets sold at their actual market value, everyone else would have to mark them ALL down and a crisis would ensue.

At the same time that this is happening on a big stage, you hear numerous stories about homeowners losing 30-40% of the 'value' of their home overnight because their homebuilder dropped prices by that amount in order to sell the rest of their inventory in the subdivision. Its funny how these homeowners often characterize the builder as the entity that is devaluing their homes. Never mind that the builder couldn't sell the home for anything more than they ended up selling it for. Could the homeowner get any more? Of course not. But so long as no houses are selling, on paper, its still worth as much as the last one sold for.

What you have here on both a big stage and on a little one is a desire by just about everyone to conceal the true value of the assets they own.. hoping that eventually things return to 'normal'.
Last edited by Corth on Thu Oct 18, 2007 12:51 am, edited 1 time in total.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth

Goddamned slippery mage.
Corth
Sojourner
Posts: 6002
Joined: Sat Jan 27, 2001 6:01 am
Location: NY, USA

Postby Corth » Thu Oct 18, 2007 12:49 am

Two points..

What resulted after Japan entered the hangover phase of its credit euphoria? 2 decades of DEFLATION.

According to the Austrian school of economics, money defined broadly includes both cash and credit. The expansion of money supply is inflation, and the contraction of money supply is deflation. When credit is extinguished through bankruptcy and foreclosure, this is a contraction of money supply. DEFLATION.

Not many people would make THAT bold prediction given the weakness of the dollar and the incentive the government has to inflate away its own debts and the debts of its citizens. I don't doubt that the Fed will load up the proverbial helicopters (google helicopter ben bernanke!), but I think that a) it won't necessarily be able to get new money into the economy, as nobody will WANT to borrow in an environment of decreasing asset values, and b) even if it can somehow inject the money into the economy, at some point it will have to choose between destroying the dollar or not, and it will choose not to.

Corth
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



Goddamned slippery mage.
rylan
Sojourner
Posts: 2903
Joined: Fri Jan 26, 2001 6:01 am
Location: Hudson, MA

Postby rylan » Thu Oct 18, 2007 1:06 am

But wouldn't we end up with Stagflation, which is the worst of both worlds, instead of just straight deflation? Available money drops, but prices on consumable goods continue to go up.
Corth
Sojourner
Posts: 6002
Joined: Sat Jan 27, 2001 6:01 am
Location: NY, USA

Postby Corth » Thu Oct 18, 2007 3:51 am

Not sure why prices necessarily need to continue rising if we have a serious bout of credit destruction. I think the exact opposite is more likely to occur. I don't believe the Fed will be able to inflate as it would like to.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



Goddamned slippery mage.
kiryan
Sojourner
Posts: 7275
Joined: Sat Apr 14, 2001 5:01 am
Location: Los Angeles, CA and Flagstaff, AZ
Contact:

Postby kiryan » Thu Oct 18, 2007 4:10 am

I heard san fran builders had a half off sale last week. That's bad, but if the builders are selling at half price, imagine what the banks are going to be selling these homes for when the home owners decide they would rather take the credit hit than lose several hundreds of thousands over 40 years.

I'm sure they will do everything they can to prop up these prices and avoid an ugly unwind. The only questions is can they actually pull it off and how do I make a killing when they do?
Corth
Sojourner
Posts: 6002
Joined: Sat Jan 27, 2001 6:01 am
Location: NY, USA

Postby Corth » Thu Oct 18, 2007 4:32 am

They won't pull it off. The cat is out of the bag. They can only temporarily delay the inevitable. The winners will be those who have few assets and lots of cash or cash equivalents. The better to buy assets at pennies on the dollar. Imho.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



Goddamned slippery mage.
Kifle
Sojourner
Posts: 3830
Joined: Wed Jan 30, 2002 6:01 am
Location: Huntington, IN USA
Contact:

Postby Kifle » Thu Oct 18, 2007 1:27 pm

Wouldn't investing in forclosed realestate be a safe move right now? There are quite a few properties around here going for dirt cheap (three bedroom houses for 8k). With sub-prime being what it is now, I would imagine you could turn those properties around and make rentals out of them and rent to these people that have no chance in hell to get a home loan.
Fotex group-says 'Behold! penis!'

Kifle puts on his robe and wizard hat.

Thalidyrr tells you 'Yeah, you know, getting it like a jackhammer wears you out.'

Teflor "You can beat a tank with a shovel!!1!1!!one!!1!uno!!"
Corth
Sojourner
Posts: 6002
Joined: Sat Jan 27, 2001 6:01 am
Location: NY, USA

Postby Corth » Thu Oct 18, 2007 1:55 pm

It might be.. or it might not. Even if real estate was declining in a uniform manner nationwide (it isn't. 30-40% down in some places, not down at all in others), it would be difficult to determine whether we have reached a 'bottom'. My own feeling is that people who are bargain hunting right now might just end up being the next round of bagholders. Personally, I am putting my money where my mouth is by continuing to rent while trying to save capital so that I can buy up a lot of assets in the coming years at pennies on the dollar.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



Goddamned slippery mage.
Latreg
Sojourner
Posts: 481
Joined: Thu Apr 07, 2005 9:47 pm
Location: Roanoke,Va

Postby Latreg » Thu Oct 18, 2007 1:58 pm

Kifle wrote:Wouldn't investing in forclosed realestate be a safe move right now? There are quite a few properties around here going for dirt cheap (three bedroom houses for 8k). With sub-prime being what it is now, I would imagine you could turn those properties around and make rentals out of them and rent to these people that have no chance in hell to get a home loan.


how funny would that be, default on your mortgage and buy another house with cash or a credit card. It is my understanding banks take a big hit when they have to foreclose, especially now when the housing market is so bad.
Talona responds to your petition with 'Sweet, I fixed something!'
Talona LFG: [55 Evil Human Nec] 'Don't make me mud castrate you all.'
Some people are like slinkies, not really good for anything but you still cant help smile when you see one tumble down the stairs.
rylan
Sojourner
Posts: 2903
Joined: Fri Jan 26, 2001 6:01 am
Location: Hudson, MA

Postby rylan » Thu Oct 18, 2007 2:38 pm

Well thats pretty much my view also... I'm saving up cash/equivalents in a high yield account and waiting. I bought a condo a few years ago, so if things really do tank I'll use my cash to buy a new property for cheap. If at that time my condo is way underwater, I'll just move to the new place and send in the keys to my mortgage company.
Shar
FORGER ADMIN
Posts: 791
Joined: Wed Dec 12, 2001 6:01 am

Postby Shar » Thu Oct 18, 2007 4:05 pm

This thread has given me a lot to think about.

Right now my family and I are in the process of saving up to purchase a home. We currently rent a home in a great neighborhood at an artificially high rate. I'm curious to see what will happen when the homeowners of this place we are living in come to us again in January to inquire over our availability to buy from them. They no longer live in the state and they believe they can get a price for their home that *nobody* is willing to pay. Heck, when we moved in a year and a half ago, the house had been empty and for sale 18 months. They only rented to us because they could not sell.

So my first question is, is there a smart way to figure a projected time line and budget for a future home purchase? and secondly, how much liquid assets does one need (in percentage) to be able to buy smartly for the upcoming massive fall? Third, what type of loan can I expect to be offered when the time comes, considering I have excellent credit?
Shar - Forger Administrator, TorilMUD

Brandobaris : (51) [ would a forgotten realms zombie be interested in brains? ]

Shevarash tells you 'Never gonna give you up, never gonna let you down..... groan'
kiryan
Sojourner
Posts: 7275
Joined: Sat Apr 14, 2001 5:01 am
Location: Los Angeles, CA and Flagstaff, AZ
Contact:

Postby kiryan » Thu Oct 18, 2007 11:19 pm

im with the doomsday camp as you may have guessed. i'm still scared that they will figure out some way to prop up prices and they are trying their damndest.

the best position you can have is cash. second best position would be extremely good credit, but if you follow what I was talking about, in a credit crunch NO ONE can get credit to buy anything because the banks are tapped out. Now this will probably never happen, especially given the global financial markets, but you're going to want better than excellent credit.

What we will probably see is a huge influx of foreign investment in real estate when things start to get really bad because the dollar is cheap and getting cheaper.

---

i read a really great article on CNN money about renting. I've read articles trumpeting the value of renting several times but this one was unique because it compared buying houses to buying stocks even going so far as to calculating a P/E for houses in terms of rent and appreciation. End result, P/E ratio is worse for houses than what stocks generally trade at.

Historically stocks have averaged 7% gains over houses (which have managed 0% gain over inflation). Plus you save maintenance (plubming, reroofing, siding ect its all expensive), taxes, sewer hookup, your random levy, and often some auxiliary services are included in your rent (like electricity or garbage or water or cable).

I'm not convinced, I am still planning on building a 20-30 unit apartment complex, but it is very intriguing. The only negative to renting I can see is that you can be asked to move, so how deep can the roots be that you put down.

I certainly wouldn't spend more than 300k on a house on a city lot (.25 acre or less) because the extra luxury you get just isn't worth the interest in the long term imo. I might go up to 400k if I could cut my commute to 10 minutes or less, but I'd really have to see myself at a company for a long long time and be deepy rooted.

At present rates, you're paying 250-300% of the purchase price before you're done with a standard 30-40 year loan. I'm a big fan of buying something you can pay off quickly (10-15 years, but I'd still take out a 30-40 so im not locked in) then upgrading. That way you can keep "speculating" in the market and avoid paying too much interest. I was doing some calculations about 6 months ago and if I made an extra $500 a month in payments, I was saving about $49k in interest and cutting 11 years off a mortgage. Paying $1,000 extra saved like $75k, and 14 years. You already owe the money... just get it paid off (or borrow less so you can pay it off faster).
Ambar
Sojourner
Posts: 2872
Joined: Tue Jul 02, 2002 5:01 am
Location: Our House in Va.
Contact:

Postby Ambar » Fri Oct 19, 2007 2:20 am

You cannot generalize and tell someone what they cant afford not knowing prices in their town and area .. Here 300k would buy you a 2400 square foot house, basics, nothing fancy .. Other places that would be a mansion .. hell our little 1800 square foot house would sell for upwards of 250k, probably closer to 275 and trust me it aint all that!

Any reputable mortgage company will start you out by asking what you are looking for in square footage and how many bedrooms or other things you are looking for .. They will sit down and tell you what you need for a downpayment and what to expect in fees ..

Expect to put down 10% at the minimum, closer to 20-30% depending ont he type loan you get .. expect 300-500 for inspections and 3-4k on closing costs which these days they can roll into the payments ..

By smart paying you can shorten the life of the standard loan by 8-10 years simply by paying every two weeks .. also one extra payment per year can make all the difference in the world .. unless you plan on staying in a house for a LONG time, or REALLY have that much cash to blow, make your standard payment .. If you are planning on moving in 5 years why not invest or save that extra cash .. I dontt hink the average family stays ina house for ever like we used to ..



As far as banking and banking practices, i thought it was generally known that banks are in it to make money just like every other business. Employees are typically required to generate sales, with new accounts, mortgages, investments, etc .. They borrow on our money, they invest on our money, basically they have an insurance company, the FDIC, who insures lenders for $100,000 PER deposit account .. It is no shock to me that this collapses ever few years, it sems like a system designed to fail ..
"When a child is born, so is a grandmother."

-Italian Proverb
Corth
Sojourner
Posts: 6002
Joined: Sat Jan 27, 2001 6:01 am
Location: NY, USA

Postby Corth » Fri Oct 19, 2007 3:14 am

Kiryan,

People have made a lot of money from their houses as a result of leverage. Yes, RE might only increase on average 3% per year or so over the long haul - well below the stock market. But when you take into account that most people end up borrowing 80% of the purchase price of their home, and are achieving appreciation on the borrowed portion of their home's value along with the portion they actually invested capital into, you can see why home ownership is the foundation of a lot of personal wealth in this country. Of course, as we both know, leverage is a blessing on the way up, and hellish on the way down.

Shar,

Some good questions in your final paragraph. I would simply save as much as possible. Its impossible to predict when RE markets will stabilize, so the best thing you can do is try to be prepared to move when the stars are aligned. Depending upon the economy, with good credit you may be able to borrow 95% of the purchase price.. OR.. if we have a serious credit crunch, which I agree with Kiryan is likely to happen, there simply might be no money available to borrow.. which might be a very good thing if you have enough cash on hand.

My own guage for when its right to buy real estate is admittedly very subjective. When the time comes that your average joe shmo stands by the water cooler at work and tells you that buying real estate is a HORRIBLE idea and you should just simply rent and save the hassle.. that will be exactly the right time to buy. Or.. if you start seeing the equivalent of helicopters dumping cash (urgent inflationary policies).. spend your money ASAP.. on RE or anything else.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



Goddamned slippery mage.
Latreg
Sojourner
Posts: 481
Joined: Thu Apr 07, 2005 9:47 pm
Location: Roanoke,Va

Postby Latreg » Fri Oct 19, 2007 1:04 pm

it really is an interesting mess when you think about it. Many people are hot to refinance for a lower rate which usually is done with a different lender. So a lender who gave out a lot of variable/high rate mortgages could be left with very few accounts. I checked out lendingtree and you can still get mortgages for under 7%

We purchased our house a little over 2 years ago when the market was very hot. We offered a few thousand more than the asking price because there were so few houses for sale and we really liked this one. We paid 185k for it, it's now worth about 246, not that I want to sell or anything. It's a big house in a very upper class area and has a huge yard. I wasn't concerned with getting a "great deal" because I wanted a "home" I hate moving and plan on living here a very long time. In which case it should gain more and more value.
Talona responds to your petition with 'Sweet, I fixed something!'

Talona LFG: [55 Evil Human Nec] 'Don't make me mud castrate you all.'

Some people are like slinkies, not really good for anything but you still cant help smile when you see one tumble down the stairs.
kiryan
Sojourner
Posts: 7275
Joined: Sat Apr 14, 2001 5:01 am
Location: Los Angeles, CA and Flagstaff, AZ
Contact:

Postby kiryan » Fri Oct 19, 2007 7:50 pm

Corth. Sure you are "gaining" on the appreciation of the money you borrowed however at the same time you are paying interest. End of the day, the bank is sucking up the appreciation and you're insuring them against a decline imo.

Case in point, you pay 300k for a house 6% ($2,500 a month). What you actually pay in 15 years is 455k or 655k for a 30. At 2% growth per year, you're house would be worth 405k after 15 or 545k after 30 assuming you maintain it (extra cost).

http://mortgages.interest.com/content/c ... ple_js.asp

--

Ambar, first, I didn't tell anyone what they could afford. I said I certianly wouldn't spend more than 300k, becaues that is what I feel I can reasonably afford to pay off in 10-15 years. I could qualify for a 750k loan if I wanted to pay it off in 30-40, but it would be a somewhat risky proposition if I were to lose my job or become disabled and it would cost me a fortune in interest. It doesn't matter to me if houses around here are going for 500k, I'll find somewhere cheaper to live and commute.
Xisiqomelir
Sojourner
Posts: 870
Joined: Sun Aug 25, 2002 5:01 am
Location: Ixarkon
Contact:

Re: the fed and the economy and the credit crunch

Postby Xisiqomelir » Fri Oct 19, 2007 8:29 pm

Two words:

Gold Standard

EDIT: lol you made a thread already
Last edited by Xisiqomelir on Fri Oct 19, 2007 8:34 pm, edited 1 time in total.
Thus spake Shevarash: "Invokers are not going to be removed"

Gura: ..btw, being a dick is my god given right as an evil.
Corth
Sojourner
Posts: 6002
Joined: Sat Jan 27, 2001 6:01 am
Location: NY, USA

Postby Corth » Fri Oct 19, 2007 8:33 pm

Uh-oh. Bernanke is up to mischief again!

<img src="http://rathipon.com/heli-ben.png">
Last edited by Corth on Fri Oct 19, 2007 8:39 pm, edited 1 time in total.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



Goddamned slippery mage.
Corth
Sojourner
Posts: 6002
Joined: Sat Jan 27, 2001 6:01 am
Location: NY, USA

Postby Corth » Fri Oct 19, 2007 8:37 pm

kiryan wrote:Corth. Sure you are "gaining" on the appreciation of the money you borrowed however at the same time you are paying interest. End of the day, the bank is sucking up the appreciation and you're insuring them against a decline imo.

Case in point, you pay 300k for a house 6% ($2,500 a month). What you actually pay in 15 years is 455k or 655k for a 30. At 2% growth per year, you're house would be worth 405k after 15 or 545k after 30 assuming you maintain it (extra cost).


2 percent appreciation is low. Residential home prices tend to track inflation over the long term, so approximately 3 or 3.5% would be more accurate. I think the baby boom generation did particularly good because the value of their debt was seriously inflated away in the 70's.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



Goddamned slippery mage.
kiryan
Sojourner
Posts: 7275
Joined: Sat Apr 14, 2001 5:01 am
Location: Los Angeles, CA and Flagstaff, AZ
Contact:

Postby kiryan » Fri Oct 19, 2007 9:21 pm

467k for 15, 728k for 30 at 3%. You're doing better now, but basically you're still paying "market" for the house and haven't gained anything. You just took posession earlier.

2% is low, 3% is probably more accurate. I'm using a figure that I read that inflation on average was 2%. Based on the CPI inflation figures, 3% is probably better.

There have been market bubbles (since the creation of the fed), and the baby boomers have been lucky to retire now at the end of a bubble and to have had their debt inflated away during those years of double digit inflation. Course it remains to be seen when they will cash out their houses, if the market crashes and they end up selling predominately in a low period then the paper gains will have disappeared.

Also, I think inflation has been systemically understated and is really a couple percent higher than the official figures.
Lathander
Staff Member - Areas
Posts: 781
Joined: Thu Feb 17, 2005 9:18 pm

Postby Lathander » Sat Oct 20, 2007 3:24 pm

I tend to agree with Corth that the real risk is deflation not inflation.

In regard to buying a house now or not, it depends on your time horizon. If you plan to sell in six months, it doesn't make sense, but if someone is looking at 20 to 30 years, it doesn't make a big difference. This is especially true if you have a fixed 30 year mortgage.

Basically save for the downpayment (more is better). Use what you pay for rent as a benchmark for what you can afford in a house. Keep in mind there is a little more expense with owning rather than renting, but this is offset by the tax benefit of deducting the mortgage interest.

If anything, the more important thing to home buying is to look at the demographics in the area. If the area is growing and has lots of good jobs, it should do fine. Places in the south are good examples of this. If the area is losing jobs and the demographics are a wreck such as Detriot, then it may not be a good idea to buy.
Xisiqomelir
Sojourner
Posts: 870
Joined: Sun Aug 25, 2002 5:01 am
Location: Ixarkon
Contact:

Postby Xisiqomelir » Sat Oct 20, 2007 3:44 pm

Lath, why do you hate Bretton Woods?
Thus spake Shevarash: "Invokers are not going to be removed"



Gura: ..btw, being a dick is my god given right as an evil.
Lathander
Staff Member - Areas
Posts: 781
Joined: Thu Feb 17, 2005 9:18 pm

Postby Lathander » Sat Oct 20, 2007 3:59 pm

We have moved beyond a pegged system that was needed after WW2. Today, markets determine the value of the currencies in relation to each other. This allows countries that build up big deficits from a high value currency to devalue to address that deficit. Allowing currencies to float gives each country a better chance of addressing their individual issues than feeling compelled to just take dislocations.
Xisiqomelir
Sojourner
Posts: 870
Joined: Sun Aug 25, 2002 5:01 am
Location: Ixarkon
Contact:

Postby Xisiqomelir » Sat Oct 20, 2007 4:09 pm

Lathander wrote:We have moved beyond a pegged system that was needed after WW2. Today, markets determine the value of the currencies in relation to each other. This allows countries that build up big deficits from a high value currency to devalue to address that deficit. Allowing currencies to float gives each country a better chance of addressing their individual issues than feeling compelled to just take dislocations.


You don't feel that real money values based on a scarce asset better reflect actual wealth?
Thus spake Shevarash: "Invokers are not going to be removed"



Gura: ..btw, being a dick is my god given right as an evil.
Lathander
Staff Member - Areas
Posts: 781
Joined: Thu Feb 17, 2005 9:18 pm

Postby Lathander » Sat Oct 20, 2007 4:23 pm

The question really is not wealth unless you are keeping score. The real issue is liquidity. Currencies' value is reflected in their demand for use whether to hold them as reserve as dollars were under Bretton Wood or to turn around and invest dollars back into the US. Where demand and supply meet determines the value of the currency. Pegged systems are doomed to failure as Bretton Woods failed. Just look at the economic dislocations resulting from China's effective peg to the dollar. Eventually, it will go away and float. Whether that is a good or bad thing though is very debatable.
Kifle
Sojourner
Posts: 3830
Joined: Wed Jan 30, 2002 6:01 am
Location: Huntington, IN USA
Contact:

Postby Kifle » Sat Oct 20, 2007 8:16 pm

Lathander wrote:We have moved beyond a pegged system that was needed after WW2


Now, this is an honestly curious question and not sarcastic: Didn't China peg their currency to ours or are you talking about us pegging our currency to something else?
Fotex group-says 'Behold! penis!'

Kifle puts on his robe and wizard hat.

Thalidyrr tells you 'Yeah, you know, getting it like a jackhammer wears you out.'

Teflor "You can beat a tank with a shovel!!1!1!!one!!1!uno!!"
Lathander
Staff Member - Areas
Posts: 781
Joined: Thu Feb 17, 2005 9:18 pm

Postby Lathander » Sat Oct 20, 2007 11:36 pm

Yes, China is pegged to a basket of currencies while it used to be just to the dollar. More or less, it isn't much different. The result though is that China's economy is artifically ballooning up. The problem with pegs is the problem of the dislocation goes on too long until you are where China now can not afford to take the peg off and let their currency appreciate.

Bretton Woods was the currency regime after WW2. The problem during the depression was a race between countries to devalue their currency. Bretton Woods created a "world currency" by pegging everything to the dollar. Also at the time, the dollar was pegged to gold making the dollar the only constant currency linked to gold.

It worked well in the beginning, but like any peg, it swung too much underneath to survive. What I mean is you have the dollar = gold and foreign currency = dollar. There was no set link between foreign currencies and gold. So if gold went down in value, you could essentially print money by buying gold low in the foreign currency and convert it to dollars. Finally, convert it from dollar back to the foreign currency. The dollar/gold equation was set so eventually it ran out of steam.

Return to “General Discussion Archive”

Who is online

Users browsing this forum: No registered users and 24 guests