If economics isn’t a ‘dismal science,’ it certainly is a weird one. I’m still attempting to understand a recent article I read, that says ‘high junk bond interest rates’ are the cause of the stock market decline. Now, I’m reading that the Japanese yen is the cause.
I’ll keep trying to figure this out.
Hey Chris from Florida…..GREAT MOVE…..the dollar is doomed and the Feds. know that…no cure here because of the greedy climate that was created by the ” GREEDY ” bankers,investment brokers, fund managers etc. in the , what once was known,as the great U.S. of America…Wonder what 2009 will bring ??? I believe you and I have a good idea about that…and it will come swiftly and it won’t matter who is elected president…..The GREED and lack of morals in our country reminds me of the Great Roman Empire…and I am certain we all remember how they ended….Good luck to you Chris and stay safe….
Yes, it’s DEFINITELY a cause for concern. For the very reasons that Sybil from Santa Rosa pointed out – Currency manipulation by influential and greedy investors.
The ‘free market’ fanatics have been proclaming the benefits of a Global economy now for a very long time. With this crisis, it should be clear to everyone that this is truly bulls***. If we’re going to have a true Global economy where everyone benefits, the only way to do that is with a single Global currency – And, yes, I’m aware of the difficulties involved there (can anyone say ‘Euro’?). But at least this nonsense would stop. And the people that have been profiting from carrytrade? Accept it, and find another way to make a living or feel free to jump off the nearest bridge or very tall building.
Sure, I am worried about ALL nations, and all people.
We live in an interdependent world.
The writer, Paul R. La Monica is right. Please read “Collateral Damage” at http://www.economist.com/daily/news/displaystory.cfm?story_id=12498399&fsrc=nwl
“On Monday October 27th the Nikkei 225-share index plunged by 6.4% to 7,162.90, the lowest level in 26 years.”
“In the past four trading days, the Nikkei 225-share index has tumbled by 23%.”
So Paul is right, but I am not sure about the other people he quotes.
Listen, Japan will do better than most. Save your tears for those who will be truly unable to defend themselves. Besides, those drops in the Japanese index are denominated in rising YEN terms.
We live in a world where currencies float against each other. The fact that the YEN is strong, in an economic report card sense, is proof that Japan has been doing relatively well as compared to other more profligate countries.
It also reflects the fact that there has been a “dirty float” of currencies against each other. Japan has preferred a weak YEN to promote its exports. It has been far too successful for too long. Now the chickens, hens, and YENS are coming home to roost.
Manipulation of your currency, even if the carry-traders help you, can only last so long.
Well you can’t blame them. We have a non-gold system. Everyone can try to do pretty much what they want. There is no pilot, auto- or otherwise at the bridge of the system in any holistic sense.
If you manipulate things so that you have all the manufacturing and then have all the resulting buying power, what happens? Other currencies fall against yours. That’s Economics 101.
The fact that our systems are so messed up that they would need “manual intervention” simply shows that we have built something that cannot take care of itself.
Odd, isn’t it? You construct a system that depends on Maestros and Wizards and Oracles to run it, and it stops working. What do you do then? Why you call in the Maestros, Wizards, and Oracles! What else?
Japan will do fine. A lot of her manufacturing is already offshore. If she had wanted to, Japan could have long ago stopped listening to our western Treasury Secretaries, allowed her YEN to strengthen “to the moon” and lived off her royalties.
“This is bad news for Japan”? Please. The Japanese have so much foreign currency they are effectively hedged against everyone else’s currencies. And as they sell goods that they manufacture in their own plants in various places in the world they earn even more of others’ currencies.
Here’s another gem: “If every other major country lowers their rates aggressively, that would help because the yen would no longer stand out as having the lowest short-term rates”.
So that would mean if we make other countries’ interest rates even less compelling for investors, they will move their money back to those countries FROM Japan. Right. Good logic.
This is a new morning. Wake up. “Investors” are putting their cash into income-earning securities. There are a lot of soon-to-retire people who wouldn’t go back to the stock market even if they knew that the government was in there buying stocks to set a ‘floor price’. (Which may soon happen if it is not already being done by the PPT — Plunge Protection Team.)
And trying to artificially lower the value of the YEN to protect the carry-trade? Man, what I am hearing here? The people who made money over the last 18 years doint this now have to be protected with a low-valued YEN so they can carry on with their carry-trade?
They were the ones who manipulated the imbalances in the first place or at least largely profited from them.
All of the world’s paper-monies, fiat currencies, are today essentially just scrip, essentially backed by nothing other than “confidence” — otherwise they would be worthless.
That confidence is that, up until now, when you offer your scrip for a good or service, the person on the other side of the transaction, takes your scrip, and provides you with the good or service you desire.
I will modify that — our paper-monies are today backed by nothing other than DEBT. Debt is what allows paper-money to be issued beyond a certain point.
Initially, when banking started, that “certain point” consisted of the total balance of gold that banks had in their safes. You put your gold into the bank — in those days, banks were just warehouses to safe-keep depositors’ gold — then the bank had that gold until you came back and claimed it. The bank gave you a receipt.
The receipt your bank gave you was “cash”. You could give it someone else, for some good or service. That next person became the owner of your gold, still residing in your bank. They could go to your bank and claim the gold that used to be yours.
So until you or the new owner of the original gold came back to the bank, the bank could lend out your gold, thus increasing the “money” in circulation in its totality. Thus was born “fractional reserve banking”.
It was always a bit of a Ponzi scheme. But it was never illegal. The risk was that the original owners of the gold might want their gold back all at the same time. Problem? The banks did not have that much gold in their vaults.
The social good? Well, it was thought that the banks could thereby stimulate additional economic activity, beyond what might be normally “stimulated” into life based only on the original total pile of gold in the system. (This works until it doesn’t.)
The people that the banks gave the newly-created money to now owed a DEBT to the bank. The bank in turn still owed the original commodity-money (gold) to the person who was now walking around with the earlier bank-issued receipt.
So debt slowly became the “backing” for “money”. This was finalized once we all moved off the “Gold Standard”. No need to have ANY gold in the bank. It was just the limits on how much paper money (artificially brought into existence) that tended to reflect in the “value” placed on any good or service.
Today, in our money-systems, there is no benchmark — i.e., no measure-of-relative worth — other than just the number of such paper scrip pieces sloshing around in our system.
The number of such pieces of scrip is continually being measured against the goods that our societies bring forth for sale.
When such scraps of scrip are in huge imbalance OVER the quantity and quality of goods and services supplied to the marketplace, we generally bid prices UP.
The reverse is true with respect to such scrip when they are in short supply relative to the goods & services supplied.
It;s Demand and Supply. Supply of Goods/Services versus the Supply of Artificial Money.
If our Central Banks (in cahoots with our National Treasuries) artificially GOOSE the money supply, they thereby artificially increase the DEMAND for Goods/Services.
Prices tend to rise.
These same actions may cause wrong investment decisions to be made — this is known as MALINVESTING.
What we have now is the quintessence, the most classic case of extreme malinvestment ever known to humans.
The system will revert to stasis regardless of what we do. We are puny. Our efforts are treating symptoms. We don’t even understand the causes for the illness. We are not seeing the illness for what it is.
We are living inside a system that is broken. It is in intensive care. The system’s doctors are frantic. Our ‘money’ which is the lifeblood of that system, feeding its nervous and cardiovascular parts, is not moving and is not giving the feedback information for the proper decision-making to occur.
This is not a single-issue problem to be addressed by force-feeding more debt into the arteries to get liquidity “moving again” — and to get banks to lend EVEN more, until the Debt Clock needs more and more additional digits to properly display the debts we are passing on to future generations.
No!!!
The major cause for concern is regulation – or the lack of it.
The stock market is there to serve business in the raising of capitol. It is – or should be a long term investment – with a fair return for the money outlaid. However, the lack of proper regulation has turned Wall Street into a casino.
It does not make sense to pass the blame.
America likes to see itself as the world leader. So LEAD. Tighten regulations to stop this betting on the market.
This is not speculation on an emerging company – it is betting – and with money that isn’t there.
No. The rising yen is a symptom of another ailment: Japan has a chronic trade surplus.
If Japan throttles back on exports and allows increased imports, their trade will move closer to balance and (eventually) stabilize the ratio of yen to dollars.
The Japanese yen is worth roughly one US penny.
So we should compare the Yen to the Penny, not the dollar.
Chris says he owns thousands of yen – or hundreds of dollars. Not enough money, Chris.
Story time :
Ted Smith works for BigBoxStore and orders 100,000 TVs for the nationwide selling season, each costing 10,000 yen, or 1 billion yen.
When the dollar is strong and the yen is weak (1 dollar = 110 yen), the cost would be 9.1 million dollars.
Three months later after the TVs have been delivered and invoiced, the yen is now strong and the dollar is weak (1 dollar = 95 yen), so the cost to BigBoxStore is now 10.5 million dollars.
The difference is 1.4 million dollars, or $14 increase per TV, which means the Store’s cost is higher, resulting in increased sale price or lower profits.
Since $14 is only a 6-pack of beer this won’t affect the Super Bowl audience.
———-
When you guys write articles about currencies varying against each other, give a more concrete example for those who haven’t done these calculations, because otherwise your story is just talking heads.
I would have used oil but Japan doesn’t sell oil to the United States and the recent plunge in oil prices would have boogered the calculations.
Paul, my understanding of the markets is not sophisticated enough to comment authoritatively on the minutia of the effects of carry trades etc. Still, my “spidy-senses are tingling”.
I am – in general – troubled with all aspects of the value of the dollar. I am deeply concerned that there is an empirical disconnect between what ought to be happening to the US dollar and what we see today. Put bluntly, given the conditions of today, the dollar should be tanking. Just as the housing run-up was unsustainable and was seen from a mile away for years and months prior to the collapse, so too may it be said with regards to the sustainability of dollar that this cannot endure.
Many of the same people who predicted the long-term problems with our levels of debt and housing valuations are sounding some very similar alarms regarding the dollar. As a nation we simply cannot borrow and borrow and borrow to infinitum. The dollar is destine to collapse if we do not change our ways.
Concerned ??
Yes, given the inherent stupidity of the Market and the “investors” (a very high % of these being practically the self-interested and often dishonest traders and the supporting analysts, which prosper with the price swings theyselves provoke), which act basing on “ripple effect” without any serious analysis !!
NO, objectively . The overvaluation of the YEN will diminish the Japanese Exports and increase the imports, even
if this was not so years ago, where the
Yen strenghtened continuously without
such negative effects, but this was in a time when the competitors had a strong inflation and Japan not so. Today, it is not possible to compensate said overvaluation
And of course, the also very stupid people taking loan in YEN, trying to
profit from the low interests,ignoring the currency risk, will learn a good lesson paing back these loan spending a lot more Dollars and more so Euros
as they received !! A very needed sanitation !!
Oton
otontisch@yahoo.com
I own thousands of yen. I can’t wait for it to overtake the dollar! I’ll be able to pay off my house when I convert back over! Long live the yen! We couldn’t have a honest government and currency so i’m profiting off the failure of my country!
So now Toyotas become more expensive? So, this is the price they pay for artificially fixing the Yen years ago. Economics is just like physics: “For every action, there is an opposite and equal reaction”. Let them eat cake.
Anonymous – You seem to think that globalization was something some people “decided” to do. No. It is something that happened as the unavoidable result of global transportation (fast cheap shipping) and communication (anywhere anytime right now). The issue is not if it was a good idea, but how do we best deal with the new reality.
In that vein, I am worried about the rise of the Yen. Not because I feel sorry for Japan and the effect it will have on their economy, but because of what it represents and the consequences to US of it happening.
One view I see of our current mess is the ability of people, who have a position to do so, to manipulate monetary systems so they get to take a bunch of money out without any added value. Huge amounts of it. And when they screw up, the “real” economy suffers. I know that a lot of people are afraid of a single world money, (for fear we will get poorer out of it), but having a world economy (like it or no) with different moneys under different rules with different interest rates sets up on going problems like we are seeing with the Yen today.
As Paul pointed out, the rise of the yen has LITTLE to do with its actual value/security. It has to do with big money movers needing to unwind positions regardless of the quakes it might make in that strange virtual economy that is international investment but somehow MESSES WITH MY LIFE.
grrr
Did you guys even read what the author has to say?
Many institutional investors around the world have been shorting yens to finance their investments in other countries due to extremely low interest rate in Japan. In essence, they were borrowing from Japan to make a play in other economies and this is known as carrytrade. Now that the world economy has been going downhill and those investors are not finding any good investment to even worth the extremly cheap borrowing from Japan (<1%), they are closing their Yen shorts by buying yen back, thus Yen is stregening.
what does this tell us.
1) World economy is sputtering. (suprise!)
2) As Yen Strehgten, It becomes more expensive for those investors to unwind outstanding shorts and they will scramble (as it is now) to buy more yens now to avoid future loss. Thus driving Yen up even more and force even more to close out shorts. This can snowball quickly.
3) The money to buy back yen has to come from somewhere and that means pulling out investments from everywhere (including us and our customers). Couple this with the snowballing in 2). Already weakened world economy does not need this at all.
4) do I really need to tell you what may happen if this scenario comes true?
Where was the outrage when the carry trade was used to undervalue the yen? Now that positions are being reversed, the yen goes up.
I suppose when the Chinese stop undervaluing their currency and the yuan starts rising, CNN will run a headline crying about how the poor Chinese are being hurt by a strong currency.
We should be able to sale items manufactured in the U.S. Maybe manufacture a few textile items or auto parts with the very strange label, “Made in the U.S.A.” They once tried buy everything in NYC, but they found that they could not take it back home on the plan. Remember the CBS White Paper in 1979 – If Japan can why can’t we. I will answer as I did then, We are not Japanese or Asian. We are not one race, one group, one idea. We are the melting pot and we are still blending in new ores.
No….. I worry about the dollar in my pocket. Maybe this will stop people from buying crap that they don’t need with money they don’t have
Sorry. In my last post I meant to say that I think the Chinese Yuan has a good chance of becoming the new world reserve currency.
Yes, it is. The dollar will continue to weaken against the yen, and most other currencies. The current Dollar bull run against the Euro is really a false bull run because of the fall in value of the Euro. I believe the Yen has a very good chance of becoming the next world reserve currency. Maybe sooner than later.
Why is there worry about the Yen? Does Japan worry about the dollar? Does the U.S. government worry about OUR trade deficit? Or the loss of OUR manufacturing jobs? Boy do we have our priorities wrong.
Well. I suppose that bad news for some of Japanese manufacturers means good news for some of American ones. Couple of companies come to mind: Microsoft (vs. Sony) and GM (vs. Toyota). Theoretically, if say price of PS3 goes up it gives competitive advantage to MSFT, same for GM – if Toyota hurts no tears lost.
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What I don’t understand is that if America is in such financial trouble why have they just given a line of credit to Australia for 30 billion and to New Zealand for 15 Billion?
Shouldn’t they be looking after their own home fires?
What’s in it for the great USA?