Forex Futures Forum Archive for 02/23/2003

London hpm 21:00 GMT February 23, 2003 Reply   
nh - your views have been much appreciated by this lurker over the past 3 years.

Athens 19:57 GMT February 23, 2003 Reply   
nh, thanks again. Very interesting approach.

Livingston nh 19:37 GMT February 23, 2003 Reply   
Most traders live in their own time bubble - their systems are geared to that time bubble and for the most part the time
bubble is much smaller than that of an economist - BUT sometimes traders see trends and ride them, but cautiously,
trying to determine whether corrections are really reversals - every market has analysts/economists (Fools give you
Reasons, Wise Men never try) -- SO if you listen to these folks be sure their conclusions are based on REALITY and
not some market myth (the late lamented Stock Market Bubble is a recent example) - the world has gone thru a lot of
change since Bretton Woods and the USD role has changed and will continue to change so strong / weak remain
relative (note strong Rubin dollar never approached 1985 lvl)

NOW the analysts/economists are almost universally spouting Iraq war, budget deficit, current account deficit as the
basis for the performance of the USD - a couple of things to keep in mind - most of these folks don't understand how
much the currency world changed from 1971 to 1974 (NIXON, Saddam even then and OPEC) - the USD (or any paper
money) as a Reserve currency will result in a much different FOREX world than a rigid WIDGET reserve (regardless of
gold or seashells or whatever) - keep in mind that foreign currency is not money - there are two current issues that are far more influential on the USD than the three espoused by most commentators - these two are (1) the consequences of the largest foreign holder of the reserve currency (China-HK) and major trading nation using a "pegged" rate (no float) for its own currency and restricting the convertibility/availability (control) of its currency and (2) the recent introduction of the EUR which violates a governing principle that all currency is political and must therefore be issued by a "viable" political entity (the EU is a trade zone not a political entity)

As far as Iraq war/no war is concerned it is not a major economic contributor to the USD fkuctuations - any real impact will depend on the oil consequences either of which would be USD positive (higher oil price requires more USD by
foreigners to pay OR a lower oil price has a stimulative impact on US markets) - from a monetary perspective the Fed
has not monetized the higher price of oil - had it done so the resulting inflation would have required other majors to
match the inflation rate or suffer slower economic growth

The budget deficit can affect the USD only indirectly and modestly - government debt is a form of money umless it is
held by foreigners - it is basically a trade good (export) that can be purchased or not by foreigners - a deficit is usually
better than a surplus (of course size matters but that is not a currency issue) and the interest rate effects of either are
relative to the economic source of the surplus or deficit (there is also a distortion in the US budget caused by "interest" paid to the SSA for bonds issued to social security)

Now the current account factor is where the function of a Reserve Currency really shows up - Remeber the J-curve
myth of the late '80s? - well the new myth on the market is the US must "attract" 1.5 bio a day from overseas to fund
this CA deficit - WHY? what happens if it doesn't? - when gold could be demanded in payment (or converted USD) by
a trading partner there was a bit of a problem so Nixon closed the gold window and the next year Iraq (#2 Saddam)
nationalized oil and then it was followed by the OPEC price hikes -- the USD declined as the Fed monetized the price
hikes and gold surged (bubble) as the demise of paper money was widely predicted (Bad info) - by the mid 80s the
USD had risen again and our domestic industries were DOOMED (again Bad Info) as the CA slipped into deficit //
everybody knows about the decline in USD from 1985 to 95 and its rescue by the strong USD policy of Bob Rubin (a
great policy but what exactly was it?? more Bad info) - Oh, and don't start w/ the Budget deficit declining the USD
strengthened in the early 80s as the Budget deficit expanded) // consider that the Fed would create more USD if
needed to pay off foreigners whether they are holding bonds or accounts receivable so the 1.5 bio a day (worst case) is
no big deal - also consider that the US economy is a service based economy so the trade deficit w/ other countries is
the equivalent of outsourcing so that resources w/i the economy can be better utilized (comparative advantage in
econmics speak) - this outsourcing is a problem for nonreserve based currencies but it is most efficint for the US - and finally consider that the key is whether world trade is expanding (the CA deficit could disappear w/ a reduction of
imports and a modest contraction in exports but that is Beggar thy Neighbor trade)

In a simplistic short term time bubble the USD movement over the last year is a function of China's redeployment of
USD (strong hands) and repatriation by troubled EU economy (weak hands) -- don't get caught by the Bad info being
peddled by analysts trying to explain things they don't understand