Thursday, June 14, 2007


We all use money to buy things. Our ability to buy things with our money is called purchasing power. We think because we buy things right here in this country that we use American money and we are unaffected by what happens in the World. Nothing could be farther from the truth.

Walmart and a huge number of retailers buy a huge amount of retail goods from China. The Chinese buy some things like software and movies from the United States, just not nearly as much. The same trade goes on with a large number of other countries of the World. The amount of trade going each way is added up and the difference is 'netted' out, so that the currency can be converted. In other words, the Central Banks in each country end up with the money. In terms of Economics, this is called the Trade Deficit. It was originally thought that the Trade Deficit didn't matter.

For about a year now, the American Dollar (you may remember lines from my childhood like solid as the dollar, as good as the greenback, and on and on) has been falling against most of the World's major currencys. The major exception was the Japanese Yen. There was a very long story but the Japanese were trying to come out of a decade long recession and were charging 0% interest rates on bank loans to get people to borrow money and do projects. If you think about it a moment, you could borrow money from Japan at 0% and buy U.S. Treasurys at 4.5% and make 4.5% risk free while you slept. The Insider Name for this Trade is called the "Carry Trade". Everything works well as long as neither interest rate fluctuates very much. if one or both interest rates starts fluctuating a lot, you sell your U.S. Treasuries and pay off your loan. When a lot of people do this around the same time, the markets go a little nuts when the amounts are in the billions. The speculators who play these games use more money than the Central Banks have. I'm not kidding here.No one knows for sure, but it is estimated that there is still an estimated $trillion still outstanding in Carry Trade Loans. No one knows for sure.

Meanwhile, it is estimated that approximately half of the U.S. debt, which is in the trillions, is owned by both China and Japan. The last two weeks or so has seen a lot of volatility in the US stock markets. In English, using the one index I am confident you all have heard of, the Dow Jones Industrial Average of 30 Stocks, the index has opened and moved both up and then down, or vice versa, three hundred (300) points several times. Why so much volatility you ask? The bond market is having problems. Interest rates are going up in the bond market. The market is demanding higher rates. You ask who is doing this? The answer is the people who buy bond in the bond market. The more sophisticated answer is that the Chinese and the Japanese are no longer buying bonds in our market, they are buying more attractive bonds overseas at higher interest rates, such as in Australia, or England. If you're astute, you might point and say, some of those rates aren't higher. and the response becomes, but the dollar is falling against their currency. Therein lies the problem.

The Chinese Yuan is pegged to the dollar. So we get the same Chinese gods at the same price. But if you want a British Aston Martin, it's getting more expensive. Also a BMW. If your Nissan is built here, it may be the same price, but if it was built in Japan, it's not clear what the price is today versus last month. This is eroding buying power as our currency depreciates against other currencies. Strangely enough, the cheaper currency is good for companies here that export. It makes their exports cheaper abroad, so you want to buy their stocks.

But you might want to talk to your Financial Advisor about putting some cash into the FXA Australian Currency where it earns about 5+% or the FXE which is the Euro, etc. There are several portfolios of different currencies.

Not as good as Hearts, she did two posts today. But, I'm working at it.


Glamourpuss said...

I had a dream the other night where the Chinese were trying to take over the Ritz...


The CEO said...

Puss, this post is about how you used your currency to pay for your trip to Las Vegas last year and saved so much money in the process. Most people don't know that you are/were a successful currency trader.

Wicked H said...

Can Puss give a seminar on how to save money? Or have I already missed out?

In any case, no extra cash here to invest but I will take notes. It could happen one day.


James Burnett said...

Damn! I kid you not when I say this was the best explanation, in layman's terms, that I've ever read about the trade deficit and the strength/weakness of currency.

Well done. Seriously, I want to print this out and put it on my fridge with a magnet.

Anonymous said...

It took every ounce of brain power to read this whole thing. You explain it well enough I understood it.

The CEO said...

Wicked, Puss was already making a trip to Las Vegas. she didn't convert her British Pounds to US Dollars until she landed. She did it by making purchases with her VISA card and getting change in dollars, getting the best possible exchange rate through VISA on the day of the exchange and cutting out a middle man. She also got the enormously favorable 2:1 exchange rate of pounds into dollars.

James, thank you, and welcome to my blog. Please make yourself at home, and do come back.

Pool, I'm glad you made the effort. Think about some cash in the FXA instead of a money market.

Matt said...

It can't be that our country is led by retards. Just the way we've organized.... everything in our country is for sale....