Silent Service Method

Maybe I should add that the article did imply that it was cheap oil we are running out of not oil per se.

If it costs more to produce oil from oil sand(and I believe it does ATM) than its worth then the price will go up - How does $200/250 oil sound.

Don't quote me, but I believe the actual cost to make oil sands pay is something closer to $100. Of course, that is existing operations, not starting one up. But if we can throw Trillions at fake stimulus, certainly the Chinese will allow us to develop oil fields.

This pair has broken resistance, ignored that, and bounced back. Interesting.

NZD/USD is still on my radar.....

You know what I find interesting????

NZD has an earth quake and it goes down, JPY has an earth quake and it goes up lol wtf

JPY is like the ultimate safe currency. This causes market unease, so everyone is just running to the safest currency for the time being.

thx men, the market has made my weekend, on thursday i was left out, but 2 day made nice 102 pips, no more taking trade until confirmed by my systems. thx too for being there to share..
i wish u Greens ( take profit) in ya account history.

I have been away from trading for the past two weeks, but decided to take a trade in the GBP/AUD today. I was just going to stand on the sidelines and watch as I geared up for trading on Monday, but I saw the break of 1.60 and THEN I saw it break 1.5950 and close below it with not much to stop it below. So I sold it and closed it @ 1.5850 when it bounced off of the rising TL @ 1.5823. A few nice, safe pips for the weekend.

I'll be back in it on Monday full speed ahead with a couple of new approaches. We'll see how they go!

Have a safe and relaxing weekend all!

Hi all,

I would like to ask a philosophical question of this august body for you to ponder over the weekend. I'm sure it's been asked(and answered) before but can someone tell me why gov'ts borrow money from banks when they have the authority to print it interest free.

I know the arguments about debasing the currency, but isn't that what they are doing anyway and it costs them a lot more interest.

The custodian/owner of a country's money supply is the gov't surely so they have the power to print it at zero cost.

I just don't understand this fundamental part of currencies and it's really bugging me.

When currencies were first introduced the King of England would mint gold/silver coins and they were then legal tender used to pay taxes and buy stuff. Because gold/silver had intrisic value people were happy to accept it as payment.

Then we moved to fiat currencies and the govt started printing 'money'(initially backed by gold/silver). At first the ppl didn't like this arrangement so a law was passed making it illegal to refuse payment in this worthless paper. Thats where the term legal tender came from.

So where/when/why did the banks get involved - why didn't the govt's just do the printing themselves.

Sorry if I'm being dumb again but I would really appreciate your thoughts on this.

Is anyone here an economist.

Hi Stew,

This is the most basic way that I can explain this issue. Sure I am leaving out many layers of complexity however for the purposes of understanding in the simplest terms this is the best I can do

The reason that paper money works is that it is essentially an implicit guarantee of the government producing it to run their economies well. People using it are essentially buying into the idea of future prosperity and growth in that economy that will maintain the value of the currency (within reason of course). When the gold standard was removed you are right, the physical measure of value was traded for a value that is calculated against the value of a basket of other governments - all making the same undertaking to run their countries well and maintain growth in their economies.

The reason governments can't print money directly themselves is both a legal and a fiscal issue. The power to print is separated from the government itself as a legal safeguard to stop in it's simplest form, a despot leader coming in to power and going Mugabe. It just provides another layer of control to protect the country's legal tender from easy manipulation. In Australia this is called the Separation of Powers from a constitutional perspective however there is no doubt an equivalent term in the US as you have a tiered government system also.

From a fiscal perspective, governments do not really just borrow from banks but rather from the debt markets that the banks create matching big money investors with government debt sellers. Banks may be buying debt but it is most commonly being done on behalf of large clients like foreign governments, mutual funds etc who are looking for low risk returns on portions of their portfolios. The banks invest themselves also but their holdings are comparably very small

Each government has a certain level of money supply (the amount in circulation both paper and in electronic form in bank accounts) and this is normally geared to the state of the economy and the level of growth that it is experiencing. I wont go into money supply but if you google it and even look on the bastion of misinformation wikipedia you will still get a half decent explanation.

As an economy grows, more money is needed due to the economy growing and more value/equity being created. The market buys into the positive future outlook and the currency will maintain its value against its comparable basket of currencies (all things equal of course and assuming the other countries are all running their economies well too).

This is really the basic underlying reason that governments can't just print cash, because without underlying prosperity and growth there is a substantially increased expectation in the debt markets (increased risk) that the economy will NOT be able to produce growth at a rate that will maintain the present value of the currency.

The more money they print and put into circulation without the economy growing proportionally, the greater the currency is devalued. The best example of this is in the US at the moment. Given the government is fresh out of options to resurrect the basket case economy they are overseeing - they have decided to try an create growth by increasing the money supply making credit cheaper. They figured that the good name of the US would be enough to keep investors drinking the koolaid however as the growth is not there in the economy to support this, the USD is getting its ass handed to it daily and will continue in this direction until they stop printing OR growth reappears.

I think from your questions that the most important distinction you are having difficulty with is between currency debasement through printing and borrowing from the debt markets.

Borrowing from the debt markets = government issuing treasurys
(treasury bonds being promises to repay borrowed capital in however many years time plus an interest rate on top of the capital)

The rate at which the government needs to pay interest is linked amongst other things to the likelihood of them repaying the debt in the longer term. You can see this with Greece at the moment where 2yr Greek bonds are paying over 17% per annum (normal credit card rates) as people perceive a very high likelihood that they will default on their repayment obligations and bond holders will need to write-off some of their investments.

The likelihood (risk) of a country being able to repay these debts is related most simply to political stability in a country, diplomatic relations between the bond issuer and the country in which the investor is located and most importantly the potential for growth and prosperity in the bond issuing country near and longer term.

As an economy grows more money is needed as the values of things increase due to demand (very simply - it's obviously a deal more complicated than just saying demand).

E.G - if real estate markets across the US increase by 10% on average then the money supply in effect needs to increase by this amount as wealth (money) has been created in property values.

This is the basic underlying difference between borrowing at an interest rate from debt markets and just printing cash. Printing cash indiscriminately without any causal link to the underlying state of an economy basically undermines the perceived strength and credibility of the currency issuer's promise to run their country for future prosperity.

This is why Bernanke and his posse producing economic numbers each week are pumping out such BS stats about the state of the US economy. Because if they acknowledge how bad things really are (and therefore how unlikely they are to see growth any time soon) the markets will crush the USD and will demand substantially higher interest rates from the US Gov in order to buy their treasury bonds. This will have flow on effects driving the costs of borrowing capital up substantially in the US domestic economy and roll it back into recession/depression which is arguably where it should be already so it can find a bottom and start working its way out.

Claiming unemployment is falling (due to not recording the impact of those who have given up looking for work) and claiming inflation is not rampant (by not considering key consumer items like food and gasoline in those figures) may placate the naive idiots out there however anyone with a brain sees straight through this which is what is causing the major crisis of confidence amongst investors both at home and abroad when being asked to invest in the US economic story.

I am going on a tangent now and you are all in danger of witnessing a rant so I will cut myself off now. Happy to answer anything further for you.

Also, if anyone disagrees or sees blaring omissions please point them out for me.

A bit of ignorant conjecture for you all - I think we saw or are seeing a last shakeout of the weak short positions in the market. Yesterday's climb at the death looks suspicious at best. We could see things leg it down substantially from here in the coming weeks. Not saying the USD will double in value but I see it catching a bid off these lows soon and the markets down at least 15% in order for Bernanke to be able to justify that the economy needs more QE.

Enjoy your weekend all.

4x.

Thanks FX,

I had an idea you'd have a good answer.

Good job I'm not an economist lol - So in order to give a currency some legitimacy the Gov't borrows it's own money from the banks and pays interest on it.

They(Ben) then tell the banks to print as much as they like and this saves the currency from being Mugabe-ised.

Hmmm Makes sense to me?

Essentially the US gov is borrowing amounts denominated in USD however this may be from China converting some of their gold to USD to lend to the US gov or Canadian Teachers Pension Fund pulling money out of the UK stock market and converting their GBPs into USD to lend to the US gov. They are just borrowing their own currency from these other investors in the bond markets to avoid attracting exchange rate risks on their borrowings.

What they are borrowing is money/wealth that has been created/earned previously and is now being invested. The relationship is more like an individual customer with Bank of America. B of A lend the small guy cash for asset purchases but due to this size they need collateral as security

However the small guy can also lend B of A money for an interest rate return (putting money into a savings account or a savings bond) but asks no collateral from the Bank given it is such a large entity that it's solvency is expected to remain without question. This is how investors view government debt (as large enough an institution that default is very unlikely so no collateral is needed).

Treasury market investors are just like the B of A customer. For this reason there is no legal likelihood of China turning up with 100M people at the shores of the US to repossess underwater real estate held by the US gov should the US gov default on their debts. There may be a war or something but they are unsecured credit.

The government isn't really borrowing in their own currency to legitimise it (although it has that effect) but rather just to pay near term expenses with the promise that future tax revenues will be used to repay this money - this is borrowed for all manner of things from infrastructure projects to government pension funds and salaries on a weekly basis.

The government when they are working properly only really allow Bernanke to have the Fed print money in line with growth.

At the moment though, they are trying unusual and alternative means because everything they have tried already has failed.

The fiat money system in the end though is all based upon an understanding that governments will act lawfully and do everything in their power to maintain the integrity of their economies and financial systems. As long as this commitment is maintained then the system works fine, it's just in difficult times that people start asking why should be honour it as reneging on debts is easier than putting in the elbow grease to pay it off.

It's a broad issue at best.

The fiat money system in the end though is all based upon an understanding that governments will act lawfully and do everything in their power to maintain the integrity of their economies and financial systems. As long as this commitment is maintained then the system works fine, it's just in difficult times that people start asking why should be honour it as reneging on debts is easier than putting in the elbow grease to pay it off.

Think I understand the broader concept of why and how govt's borrow money - for infrastructure projects for instance.

But given that the Govt can print the money anyway - why do they need to borrow from anyone.

If they need another billion to build a bridge then just print the cash to pay the workers and contractors etc - job done.

Obviously if they do that to excess then eventually no-one will accept the currency and it will become worthless - but isn't that what's happening now anyway.

What I still struggle with is why the banks need to get involved buying govt bonds for instance. Why dont't the govt just skip the bonds and issue the currency.

They would(the govt) then become a de facto bank lending to itself and any interest, in the form of taxes would accrue to it and not the independent banksters.

I think I'm still missing a fundamental part of this equation and it would make much more sense to me if the Fed was the govt and not a private bank.

Chris sorry if this hi-jacked the thread a bit but I'm really fascinated by this stuff

You are not alone wanting to abolish the Fed, however it would in my opinion be better for the government to amend the Fed's mandate and define the core measures that it uses so as to more accurately reflect the underlying state of the economy.

The government lending to itself would not need to pay interest however but separating it's borrowing activities it removes the inclination to have its hands in the honey pot. It allows the market to keep it honest through price discovery i.e if they are doing a really poor job the rates of interest will rise. It is not the banks though who are making this interest, it is the interest demanded by the bond investors so as to accurately reflect the risk being taken on their part lending money to the US government.

Some services within a nations requirements are best suited to separation from the government bucket. Imagine if the US gov controlled monetary policy and every new election term the markets would 5h1t themselves because they have no idea what fundamental changes may occur on the whim of populist politics in a desperate grab for votes. The country needs continuity and stability which can only be achieved by keeping the honey jar well out of reach of the politicians and having a separate mandated institution in charge of managing this makes better sense to me from a legal perspective. The main issue however is that the mandate needs to be changed to bring the scope of activities available to the Fed into line with expectation rather than the carte blanche they have at the moment.

Having changes made to the approved methods for measuring housing market activity, inflation, employment, retail sales and business activity so that they are less able to be manipulated are a great place to start.

The basic idea is that there will be money flowing back into Japan. They will rebuild the infrastructure, and that will actually stimulate the economy.....they have to rebuild power plants, rails, roads, etc....At least that is what I have gathered from the bits I have read....

Thanks Wesh. Welcome to the thread by the way.....

Yeah.....what this guy said.

Thank God I didn't have to explain it, I would still be here typing it this weekend.

By all means, ask away. It is conversations like this that keep the thread interesting when the markets are closed. You haven't hi-jacked anything, you have simply broadened the thought process here.

Check it out...what I like about the idea of a long here is that it has distinct levels to watch...however, this won't be a quick trade if it works out. It will be a slow grind.