The General Economics Thread

"The doctor was saying that the US dollar gradually gets weaker and weaker with each year, and therefore it's best to invest in other currencies or things such as gold."

I dont see any evidence that that is true. For example, it seems to have held pretty steady against the rupee going back to 2000.

Arbitrage as a phenomenon generally means that currency speculation will get you nowhere, unless you have up-to-the-minute feedback on brokerage houses all over the planet. As information flows around the system, discrepancies between rates (for instance, that one place will give you 102 Yen to the dollar, but the other place will give you 105 Yen to the dollar, so you buy a dollar from the first guy and buy the Yen back from the second guy, making 3 Yen out of nothing) will vanish in the blink of an eye.

Currency speculation only really works with the long game, either with a failed state who's currency is in the shitter now but will recover drastically in the next 15 years or so, or if Central Bank X declares a long-term deflationary policy, so you transfer some of your savings to X-dollars and hope that your country does not deflate over the same rate in the next few years, pulling out when signs change. But even then, you're better off in some more conservative financial instruments in your own currency.

@Bonsai: Singapore doesn't exercise direct control over the private sector. Roughly half of the economy, however, is owned by Temasek Holdings, one of Singapore's two sovereign wealth funds; this includes many of Singapore's largest companies (such as Singapore Airlines and MediaCorp, which is Singapore's largest broadcaster).

It's true that simply holding cash is a bad investment. Treasury bonds are a safe investment, but their rate of return is pretty low.

Key points of Budget 2014: At-a-glance^note  Full, Official 2014 Budget.

edited 19th Mar '14 6:53:27 AM by Greenmantle

Keep Rolling On

These days, investors are flocking to T-bills because there is such a dearth of quality investment opportunities in the marketplace. This, of course, is due to slack demand, which is not causing any pressure on production capacity.

I'm hardly an expert on Britain but those deficit and GDP projections look awfully optimistic given the current economic environment.

edited 19th Mar '14 7:28:15 AM by Fighteer

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"

Regarding the aspects of Singapore's welfare state, how does that work?

I looked at the historical exchange rate table. Looks like the Singapore dollar and Japanese yen have been gaining on the US dollar, but the Indian rupee isn't so great.

The exchange rate matters in two key respects: for currency speculators and for international trade balances. The mechanism for the latter is that when the value of your currency rises, it makes foreign goods cheaper and your own goods less competitive, causing a net cash outflow. Over time, this tends to sap money from your domestic economy, weakening your currency, which reverses the trade balance and so the cycle repeats.

Again, your brother's Indian friend sounds like one of those people contaminated by the "Evils of Fiat Currency" meme.

edited 19th Mar '14 2:32:45 PM by Fighteer

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"

Regarding the currency questions a few pages ago: I think I got the gist of it, but one last question... How do stock exchange institutions like the New York Stock Exchange determine the exchange rates at any given time? I think it's pretty much impossible to track down the exact number of Syrian pounds that have been dumped by Syrian refugees during the ongoing civil war, for example.

PS: When you say "nobody wants to buy US dollars", you basically mean "nobody wants to exchange their native currency with US dollars", right?

edited 20th Mar '14 4:28:19 AM by MarqFJA

Fiat iustitia, et pereat mundus.

The exchange rates are set by what currency traders are willing to pay. The NYSE and other exchanges are mainly places where trades occur; they don't wave a magic wand and set prices.

With respect to your second question, yes, except that it could be any currency that you trade for dollars, not just your own.

One of the things that makes the dollar so important is that it acts as an intermediary in almost all transactions. If you want to trade British pounds for Russian rubles, you don't usually do it directly. Instead, you trade your pounds for dollars, and then your dollars for rubles.

This vastly simplifies trading because you don't need to maintain a huge grid of every currency's value compared to every other. All values are expressed in dollars, making it a kind of super-currency.

edited 20th Mar '14 5:04:26 AM by Fighteer

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"

OK, so I suppose that the "official" exchange rates for currencies given in, say, Wikipedia with no reference to any stock exchange is simply a calculated average of the last-recorded exchange rates in each major stock exchange?

Of course, that has the glaring problem of hinging on the US economy's health. As we have seen in the last few years, the US is still very much vulnerable to major economic crises rivalling the Great Depression of the last century, and this last one did end up exacerbating the Eurozone's already emerging debt crisis.

Fiat iustitia, et pereat mundus.

To your first question, more or less. The actual calculation is a lot more complex, but basically it's the last price anyone paid for the stock, bond, currency, or commodity in question.

To your second, you're still thinking about this wrong. For the dollar to function as a medium of exchange in global trading, it must merely have a value. What that value is doesn't matter so much because all other prices rise and fall with respect to it. It helps for it to be reasonably stable, of course, but the very fact that it's so widely used helps to make it stable, as nobody wants to be the one to rock the boat and make everyone else have to adjust.

The recent global crisis was caused by the systemic failure of credit markets in response to a liquidity crunch brought on by toxic mortgage loans. Essentially, nobody had any money to lend any more. The dollar, far from being damaged by this, was instead vital to its recovery as the US government dumped unprecedented amounts of liquidity into markets to stabilize them. If we did not have a fiat currency, that couldn't have happened and we'd be in far worse shape right now.

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"

But what would happen if another currency became a major reserve currency, or a supranational currency, like Keynes and Schumacher's Bancor?

edited 20th Mar '14 6:09:21 AM by Greenmantle

Keep Rolling On

It's unlikely, because having two of them would make transactions more complicated. It depends on whether everyone invests in both currencies, or whether the global trading system was divided into two rival camps.

Did the Euro's rise appear to be leading to the second scenario, at least before said rise stalled with the recent debt crisis and the Eurozone's flaws finally making themselves known on the global scene?

Fiat iustitia, et pereat mundus.

The euro could possibly have been a contender, but as you pointed out, we have since seen the flaws in a currency union that is not also a political union.

The strength of the U.S. economy backs the dollar as a reserve currency. For another contender to take the dollar's place, it would have to either be backed by an equally strong economy or move in to fill the vacuum left by some hypothetical catastrophic collapse.

Bear in mind with the latter that the collapse of the U.S. would inevitably cripple the world's economy regardless of the dollar's role as a reserve currency, because we are such a huge player in it.

In other words, to supplant the dollar you must offer another currency that's equally strong, if not stronger. How you do that is left as an exercise for the student.

edited 20th Mar '14 7:24:36 AM by Fighteer

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"

<Fighteer> I'm not saying it's impossible ... but it's definitely impossible.

Not impossible, but a rather enormous case of "Who's going to bell the cat?" You do manage to capture the essence of my argument, though.

edited 20th Mar '14 11:04:00 AM by Fighteer

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"

What exactly is the problem with increased government deficit if one is a third world country?

That someone will ask you to pay your debts, bankrupting the country.

A country's First or Third World status doesn't really matter, except that a basic implication of being Third World is that one's economy cannot support adequate standards of living for one's people and that one's currency is considered fairly weak. Running large public deficits would seem to be difficult in that situation simply because there isn't a huge market for your bonds.

In that environment, it is typical to seek foreign aid in the form of loans, which are used to invest in production capacity to improve your ability to deliver goods and services to your people, boosting your economy and eventually allowing you to be productive enough to repay the loans with currency earned through trade.

If you instead spend the loan money on buying food and other consumables, you are, as I said a few pages back, doing the equivalent of a consumer putting grocery purchases on the credit card. You aren't improving your ability to repay the loans you're taking out, so they keep piling up, and the loans aren't in your own currency so you can't just create money to pay them off.

Your best bet in this situation is to attempt to devalue your currency to make your products more competitive in foreign trade, hoping to run a large enough surplus to stay afloat. If you cannot do this, then your economy eventually collapses in debt. Even if you do try it, you'll run the risk of entering a hyperinflationary death spiral.

edited 20th Mar '14 11:43:56 AM by Fighteer

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"

You know, that's another thing that I'm wondering about: How does a government go about devaluating their currency? Do they just declare to the public that they're decreasing the value of their currency with respect to foreign currencies?

Man, we need a panel of trustworthy economic science specialists to write a comprehensive guide to economics for laymen.

Fiat iustitia, et pereat mundus.

The simplest way to devalue one's currency in exchanges is to create more of it. More currency means any given unit of it is worth less.

Of course, for a large country like the United States that's immersed in a liquidity trap, that's not such an easy task. But it's done all the time in markets by other nations — China in particular makes large dollar purchases and attempts to sell renminbi at very low prices in an attempt to hold its currency down so that its exports will be cheaper.

The mechanisms of currency trading and arbitrage are opaque to me except at a very broad level, so I couldn't give you all the nitty gritty details.

As for your "economics for laymen" guide, you could do worse than read some of Krugman's books. I know that I shill him a lot, but he's really very good at this sort of thing. He teaches economics for a living.

edited 20th Mar '14 11:58:35 AM by Fighteer

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"

... Economics is weird. I used to think that being a major economic power translates to having a strong currency as well; that's what the German economy impressed upon me, at least. Everybody around here lauds the reliability and sturdiness of German industry's products (especially BMW's cars), at the same time that they lament the high prices associated with said products.

I'll see what I can do about acquiring those books of his.

edited 20th Mar '14 12:02:45 PM by MarqFJA

Fiat iustitia, et pereat mundus.

Again, I'm not an expert in this stuff, but Germany seems to have built a reputation as an exporter of high quality luxury goods that are worth the extra price you pay for them. But they do also enjoy a strong competitive advantage in exports relative to the rest of the Eurozone because they have managed to keep their labor costs low compared to other Eurozone nations.

Germany benefits from the lack of competitiveness of its neighbors, and it wants things to remain that way. This is a major underlying cause of the current Eurozone crisis.

Edit: If you have a Kindle or Kindle app, Amazon sells his books in electronic format for very reasonable prices.

edited 20th Mar '14 12:10:41 PM by Fighteer

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"