Tag Archives: currency

The Onion on temporary money

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If I share an article from The Onion, it is usually obviously a joke. But this one go me thinking:

WASHINGTON—In a unique and limited-time offer for residents of the United States only, Janet Yellen announced Tuesday that Americans could use the promo code “THANKS” for 10% off all U.S. goods and services. “This Thanksgiving, the Treasury Department is saying ‘thanks’ with an exclusive promotion just for taxpayers, whether you need a pack of gum or a new car,” said the Treasury Secretary, who urged Americans to redeem the incredible offer today, stating that she herself was a “huge fan” of U.S. goods and services, which she loved and used every day. “To activate the promo code, simply mention it to your Whataburger cashier, or visit treasury.gov/thanks. Remember, this amazing offer won’t last, so now’s the time to book that babysitter or finally get that Instant Pot! Again, that’s T-H-A-N-K-S, thanks.” At press time, Yellen added that the offer was for first-time U.S. consumers only.

The Onion

So we’ve had this massive economic stimulus – both monetary (low interest rates and “quantitative easing”, which they tell us is printing money but without the paper or coins, just willing it into existence in our computers collective imaginations) and fiscal (the government borrowing money from itself, which is another way of willing it into existence, and giving it back to us as “tax credits”, sometimes by writing numbers in our bank statements each month). A problem with just passing out money is that the poor spend it, but the middle class only spend some of it and the rich just squirrel it away. So you end up with a ton of money sitting around, and then when demand picks up people suddenly start spending it, and the real economy cannot ramp up supply instantly, so prices have to go up to put the brakes on demand and bring it down to what is actually supplied. Gradually, we hope supply will catch up and the rate of price increases will stabilize to something normal. The danger is that people can keep demanding higher wages, companies can raise prices to cover the higher wages, and the system can spiral from there. There are time lags built into the system so while prices can change quickly, the underlying real economy can’t.

So at least part of the root of the problem is people saving rather than spending stimulus money, then spending it unexpectedly. So what if you did have a kind of money that was more like a coupon with an expiration date, and could only be spent in a limited time frame, but not saved long term. Businesses would have to be willing to accept it. This might be accomplished easily if they knew they could use it to pay their taxes. The federal government would have to agree to accept the temporary money as tax payments, and get state and local governments to fall in line. People will speculate on anything given the chance, so the government might have to outlaw complex trading arrangements or derivatives based on the temporary currency.

what’s up with the U.S. dollar?

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The U.S. dollar has declined sharply against the Euro, a basket of major currencies, and gold since mid-May. What does it mean? I don’t know, you should ask the experts! But I’ll try to figure it out.

First, the actual numbers. The dollar has declined sharply, but the actual exchange rate at the moment is around the middle of a band the dollar has traded in since 2014 or so, and it has declined sharply during that time only to recover. So the fluctuations could be random about some long-term mean, or in response to events, but followed by a reversion to the mean with random fluctuations thrown in.

Second, the textbook answer to whether a strong (or weak) dollar is good or bad. All other things being equal (which they are not), investors would trade other currencies for U.S. dollars if they could get a better interest rate on U.S. dollars than on their home currencies. This might be the case in recent years, as interest rates have been low around the world, and even negative in Europe, but slightly higher in the U.S. All other things (including interest rates) being equal, investors in other countries would trade their currencies for U.S. dollars if they thought this was a safe place to put their long-term savings. Most governments (maybe the Swiss) don’t actually keep enormous vaults full of gold bars hidden under mountain fortresses any more. This has been exactly the case since the 1997 financial crisis, with developing countries and China in particular buying and stashing enormous quantities of U.S. dollars. This might be changing for a few reasons. China may be gaining more confidence in its own currency. Europe has decided to pull together and start backing its currency with EU bonds rather than just bonds from individual countries. Countries also have the option of holding baskets of foreign currency rather than just the U.S. dollar, and also the option of forming sovereign wealth funds with more diversification and potentially much higher returns than currency reserves alone. Finally, the long-term health and stability of the U.S. financial and political systems look shakier than they have in a century or so.

Third, is it good? It’s good for exporters, bad for ordinary people paying higher prices for things that have to be imported, maybe good for home-grown industry which could be more competitive with pricier imports. It’s bad for Americans living and traveling abroad, as I found out from personal experience, but that is a small fraction. So on balance, the main risk domestically seems to be price inflation, and that seems somewhat unlikely in the midst of a historic recession. Exploding debt and low or no growth for an extended period of time could lead to a problem making interest payments down the road, but we need to get through the current crisis before there is a long term to worry about.

the sinking dollar

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Barry Eichengreen points out that while the differential between growth and interest rates between the U.S. and most other countries should have predicted a stronger dollar in 2017, it actually fell by 8% and is still falling so far in 2018. Explaining exchange rate changes after the fact is a lot like explaining stock market changes after the fact – they are easy to rationalize after the fact, but if anyone really knew how to predict them accurately, that person would be a trillionaire. Somewhat humorously, Mr. Eichengreen links to an article that gives 17 possible reasons (with links to sources for many of them), which is essentially the same as giving none.

Finally he says the most likely explanation is just uncertainty. Foreign investors just don’t know where the U.S. and its economy are headed, or that it will continue to be the rock solid safe haven it has been for the past 50 years. This sounds about right to me. Foreigners have been willing to stuff U.S. dollars under their mattresses for 50 years, in the last couple decades with low or even no returns, and some may have decided it is time to diversify.