EPTOn September 23 2008 08:17 ahrara_ wrote:
So are you saying that the 700 bill bailout and the money market loans have eased up credit, and that's why the dollar is going down? This seems like the most credible explanation so far. So let me get this right. If demand for american goods go up, the demand for american dollars goes up, increasing its value. If aggregate demand for am. products falls, demand for american dollars goes down, hurting its value. So the reason the dollar is going down is because people are running away from american investments (demand goes down)? Shouldn't the opposite be happening after the bailout?
Still hella confused.
So are you saying that the 700 bill bailout and the money market loans have eased up credit, and that's why the dollar is going down? This seems like the most credible explanation so far. So let me get this right. If demand for american goods go up, the demand for american dollars goes up, increasing its value. If aggregate demand for am. products falls, demand for american dollars goes down, hurting its value. So the reason the dollar is going down is because people are running away from american investments (demand goes down)? Shouldn't the opposite be happening after the bailout?
Still hella confused.
One of the reasons that the American economy has been so historically strong and enticing for foreign investments is because there's a relatively low amount of government intervention and regulation. The bailouts change that. They represent part of a ongoing shift in the role of the government in the economy towards a much more centralized and powerful government role.
Markets don't like that. IMO, government intervention will often be beneficial for minorities, but on the whole it almost always hurts the overall strength of the economy. The fact that the government is bailing out companies left and right means that not only is it using taxpayer money to do so (hurting the long-term growth of the economy), but it's also artificially propping up many institutions and firms that have lost efficiency and need to be purged from the market because they're no longer viable. In the long-term, a history of bailouts will also distort risk-management, especially for "too big to fail" institutions, further weakening the vitality of the market. Also, there's the really large threat of increased regulations by Congress (aka like every speech and article nowadays).
So in my view, although the bailouts may help in the short-term, long-run investments are going to be looking a lot less positive when considering the growing role of of government.
Then I think that you can also add in the extremely low interest rates and current expansionary monetary policy; these are cutting into the potential profits of investments and reducing their viability. Of course, this is more of a contribution to the long-term trend than a short-term change.
And then I think that you can also always talk about "confidence" in the money; how much people believe that the money will keep it's value. The market is looking more and more unstable every day, and that has to degrade investors faith that the dollar will keep its value.
On September 23 2008 08:18 ahrara_ wrote:
So I guess what I'm looking for is:
What causes demand for american products to go down?
What causes demand to go up?
What causes increases in the money supply (besides printing money ffs)?
What causes decreases in the money supply?
How has the wall street crisis affected currency values, and how?
Why has the announced bailout reduced dollar value?
So I guess what I'm looking for is:
What causes demand for american products to go down?
What causes demand to go up?
What causes increases in the money supply (besides printing money ffs)?
What causes decreases in the money supply?
How has the wall street crisis affected currency values, and how?
Why has the announced bailout reduced dollar value?
I gave my thoughts on some of these up there, but I'll try my best again.
I've mainly focused on demand for American investments. I think products is a lot easier to understand, if we make things that foreigners want, then they're going to want more, fairly simple. Investments are mainly determined by future outlook; do people think that the economy will continue growing enough in real (inflation-adjusted) terms faster than other alternatives. If people think the outlook is good, they'll invest more, and vice versa.
Obviously money printing is part of it, but it also has to deal a lot with money multipliers you get from lending. Whenever you spend money, it eventually finds it's way back into a bank, which then lends it out again, in this way, existing money gets multiplied many times. The fed attempts to control how much money this is multiplied with a couple controls, of which the most used is the federal funds rate (rate at which banks charge each other for overnight loans). The lower this rate, the lower the punishment for lending too much and not having the federally mandated percentage in current holdings at the end of the day, so banks lend out more. Of course, you could have an entire discussion just on this rate and how the fed manipulates it/it's consequences, but that's the basics.
I think that the crisis has mostly just diminished faith in the American economy. Obviously people aren't going to be buying many short-run investments, and long-run ones aren't looking too good with all the proposed changes and regulations going into play.
Also, recently many analysts have come out denouncing the proposed bailout, saying that it will only prolong the difficulties. That can't help.
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