Thank you Meester Bush

Re: Zeemax
The discussion is cold, but I need to put this picture which is worth a thousand words. Its a chart showing the US debt vs, income.
It is also a test to see if pictures can be posted here…
…SR

Ref Sudalaikkannu #125

[You must be from the macheesmo tradition that says a man without a mustache is feminine. You should start a local chapter of the DMK.]

But then I will have to change my name to Kulamutrathuthunchiya Killivalavan or Imayavaramban Neduncheralathan AND name my daughter Love Queen or Tamil Arasi AND attempt to get a bogus certicate certifying me to be brain-dead -- oops, I meant a member of a Most Backward Caste.

Does your last sentence mean that you belong to the ADMK or its supporter, the DK? That would be funny in the extreme, don`t you think, having to bow down to a Karnataka-born Iyengar brahmin as the leader of the Tamils? But the frikking Tamils never had any self-respect despite the pretentious sounding Self-Respect Movement led, as usual, by the Karnataka-born Father Big Man. Even ideas about self-respect have to be given to you by a Kannadiga.

#126 by SR

Ok I didn`t know it supported html tags .. let me try ..

test

Re: Zeemax

Sorry for not getting back earlier. You had asked how to highlight words, make bold fonts and italics? Well, here is the weblink that tells you how:
http://hotwired.lycos.com/webmonkey/reference/html_cheatsheet/ Hope it helps.

...SR

#119 unkalji
What`s that again? You must be from the macheesmo tradition that says a man without a mustache is feminine. You should start a local chapter of the DMK.

#120 by SR
#122 by sac

[Remember, when shoe polish boys and taxi drivers own brokerage accounts at Schwab and start giving you hot stock tips, you know you`ve reached the top of the stock market bubble. Similarly, when there are enough excess dollars floating around in the air to even fill up the coffers of chronically broke countries like Pakistan, if not, of Djubuti or Rawanda, you know its the very peak of the dollar`s popularity. :) Zeemax, please don`t come after me with a pistol, I`m just making a light hearted observation.]

Sure. Fair enough. But you’re confusing the two issues. Of-course when the Rickshaw Walla and housemaids start to give tips about stocks; its time to sell. I’ve seen a lot of that. But it has no relevance to the Country Treasuries. Country Treasuries are not speculative stock markets. If Pakistan’s dollar reserves went up, these weren’t for speculative reasons. From your post it appears you rate Pakistan lower than even Djibouti or Rwanda. On what grounds? I don’t know. But that’s a misconception on any grounds you may have.

I`ll say my two bits.

First, Pakistan is not broke. It`s the Government that`s broke because of an inefficient revenue system. The country has a lot of money though. The Dollars didn`t come from any Government Policy; it was just insecurity on the part of Pakistani resident public as well as non-resident Pakistanis holding dollars abroad, coupled with an appreciating trend of the Rupee. 9/11 was the only reason. The workers remittances were in the range of $ 900 million a year before 9/11, this fiscal year it will cross $ 4 billion.

Next, the individual equity tied up in real estate here in the whole country, residential or commercial, is FULL. No mortgages here as you know. Thus the low saving/investment ratio. If that equity is leveraged, how much money will be available for investment by the public? The problem is that there is no long-term yield curve in Pakistan. Maximum is 10 year Pakistan Investment Bonds that are rarely available in the secondary market and the primary issues are few and far between. Banks accordingly lend for no more than three years max as they can price and hedge their lending with three-year sovereign or prime corporate debt, while mortgage financing requires at-least a 15 year term to enable the monthly installments to be equal or less than monthly rental value. These are the problems but there’s a lot of work being done on that. The first asset securitization issue of receivables of Paktel worth Rs 850 million was all taken up and privately placed. It works through a Special Purpose Vehicle mechanism like Fannie Mae etc. That’s what we need, to unlock the equity in privately held property. Asset Securitization.

Sac, your analogy of the Dollar as akin to the Microsoft operating system is right on the dot. I remember the first word processor I used was by Lotus (I even forget the name now) and it was great, much better than Microsoft Word, but I can’t use it anymore, as Microsoft won’t let me. I can’t even install Netscape, undeniably the best browser and whom had invented browsers in the first place, because it conflicts with the MS Operating system and other MS software. So I agree with your analogy. Dollar and the US administration may be crooks but the world will have to live with them for the foreseeable future. As for Euro, it may be the ‘Netscape’ of currencies. Gold is definitely akin to the DOS operating system. Perfect but outdated. Too cumbersome and restrictive in application. Dead in other words, even though it started the whole thing.

What good is intrinsic value if you can’t carry it around in your pocket? The Malaysian Gold Dinar envisages a settlement system where the physical gold rests in some bank vault in London with quarterly, bi-annual or annual settlements through book entries of transfer of title. What if the London bank goes bust? Or UK and US freeze all Malaysian assets in UK?

It’s a hopeless dream of an aspiring resident of Utopia.

We’re working on that dream, but in realistic terms.

Rgds

#120 by SR, #122 by sac

I`ll have to read your posts very carefully and respond, so it`s befitting of Sac`s and SR`s immense intellect. I join with you Sac in wishing SR a speedy recovery. Will get back tomorrow. And SR I`ll most probably land up to see you in early July. You`re my brother remember?

Cheers & Regards.

re zeemax #116:

Thanks for your kind words. This has definitely been a very informative thread. You`ve asked me about my statement regarding atoms and molecules, SR has already picked up on it in his post #117, so I`ll leave it at that. You`ve also asked about where I stand on the dollar vs. gold issue. So here it goes.

Till a decade or two ago, traders on Wall St. were told to focus on a couple of indicators to make their trading decisions. For instance old-timers still insist that all they need to know is on the yield curve. Kind of like doctors who insist that the stethoscope is all they need to make a diagnosis. Things have difinitely changed now. One needs to look at auction dates, M3 numbers, GNPs, gap numbers, housing starts and what not to even think about making a trading decision. Pick any of these indicators and I`ll be more than happy to supply you with enough literature that will cast doubt on their utility. Money market funds don`t enter the money supply, service allocations don`t enter the GNP blah blah blah.

Some may argue that it is more instructive to filter out this `noise` and focus only on one or two `true` indictors to base our decisions on. Folklore says a certain player in the stock market used to let the ticker run through his fingers every day and he would gauge the market sentiment by looking at the amount of stain his fingers got on them. Perfectly valid strategy at a time when support and volume and 60 day moving averages were unheard of.

If we agree that there is no single indicator worth hanging our hat on and indicators often give conflicting signals what do we do? That is where the dollar comes in. Putting aside all talk of the US institutional backing, it is one constant in the comic scheme of global finance. SR is right in that it is open to manipulation to everyone from Greenspan to Summers. He favors gold because he believes(and rightly so) that the PPP holds for gold. There is a finite supply for it and it has `intrinsic` value. He sees less room for its manipulation. What in my view he forgets is the value of the `consensus` there is on the utility of the dollar as a settlement mechanism that has been achieved after decades of trial and error.

The debate is like discussing the pros and cons of Microsoft`s monopoly. Everyone knows that Micosoft does not produce the best products but does that justify breaking it up? Does paying Bill Gates a few extra dollars each time irk one so much that one is willing to go with Linux? Maybe at some point in time CIOs will stop giving in to Ballmer and order mass migrations to Linux. A similar game is being played out in the financial markets. The US has decided that its prosperity depends on being a monopoly. Not even a duoply it can share with the Euro not to talk of the gold standard. It is willing to send its young men and women into battle to enable its treasury to print green peices of paper in any quantity it desires.

The rest of the world thinks it can beat the US at its own game by stealthily moving to the Euro or other schemes like the Malaysian gold standard concoction. It opens up these countries to strong US pressure in the form of loss of confidence and the `risk premium` for doing business with these countries goes way up. Witness Russia with all its hopes of the $20 billion contracts from the Iraqis. Does that mean that the dollar is invincible? An suitable analogy once again would be the Windows operating system. Will we see another dominant operating system in our lifetime? Maybe, maybe not. But will it be Gold....errrr Mac OS? I don`t think so.

Now over to you.

SR:

Would like to wish you a speedy recovery and hope to see you here more often.

later
-sac

re: the great game
What SR says about US going to war to preserve the value of Dollar is relevant. Iraq had started transacting in Euro and paid the price. Syria is the other culprit. Already, i hear noises in US media about Syrian complicity in terrorism. Syria may go the Iraq way.
Venezuela is another country which was using or threatening to use Euro instead of the dollar. So, if in months to come, you hear Syria and Venezuela are in trouble, do not be surprised.
Relevant URL: (go to the section: The great game by N.Rajaram)
http://www.the-week.com/23apr27/events1.htm
Sridhar

ferozk, sac
Well gentlemen, I am humbled that you ask me to write more on the subject. Please bear with me, for I am not too efficient, especially not at present.

It was very much my intention to write about gold and other market related subjects when I wrote the Chowk FOMC piece about Wall Street back in the Fall... I had imagined that I`d be writing a piece per month. But the best laid plans of muce and men... First I was gone to Pakistan and Mid East and only returned in end January and we moved our residence which also takes a lot out of a person. And I also had a most inconveniently timed acute coronary episode followed by an unsuccessful attempt at angioplasty that led to an immediate quardruple CABG operation. A close call though it was, I didn`t escape unscathed as this was a most brutal savagery, err, I mean, surgery, that I will not recommend to friend or foe alike. So for the last few months I`ve been out of commission and am only now getting back on my feet so to speak. What I am trying to say is that the spirit is willing but the flesh is weak. Nonetheless, this discussion has reconnected me to Chowk. Although I`m still not running on all four cylinders, at least I don`t need a choke to start...

You mention (in jest, of course) that there are no euro reserves in Pakistan, only real estate. Speaking of real estate in Pakistan, yes, I noticed that there was a `glut` of commercial office space that had been built recently in Islamabad, Karachi and Lahore. This, to my outsider`s eyes, seemed like a gross miss-allocation of capital. Proportionate industrial or other commercial activity was not visible to me (and I did travel through a bit of the interior too -- mostly northwestrn Punjab, from the Salt Range to the Indus and adjoining areas). Only new restaurants were prominent signs of new commerce in the big cities, and that is not a good sign.

Another point, about land plots and defence officers` colonies. That is the Paki counterpart of ``executive stock options``... The `army chaps`, as they are called, consider it their `entitlement` much the same as corrupt US corporate executives consider their stock option grants (BTW, 75% of ALL employee stock options in corporate America, since 1995, are granted to the top five executives, 15% to the remaining top fifty, and the remaning 10% to all the rest of rank and file).

My distinct feeling after this visit to Pakistan was that the only way the `country` (i.e., people, land, economic resources and culture) had any hope of being liberated is if the `state` (i.e., bureaucratic institutions -that are in the colonial mould- and the military establishment -which is in the imperial mould) is abolished. The state is the parasite that has killed its host, the country, and is not feeding on its puterified remains. I see no hope of a rebirth without the total abolition of the existing state apparatus. And, of course, we know what happens when that is accomplished: complete anarchy in the resulting power void. The patient is brain dead and is `living` on an artificial respirator. In short, I returned extremely dismayed about the future there.

And interestingly, in Pakistan, everyone linked to the establishment will brag to you that the country`s dollar reserves are at their highest in history... Jest aside, this to me is another contrarian sign that may be the kiss of death for the dollar. Remember, when shoe polish boys and taxi drivers own brokerage accounts at Schwab and start giving you hot stock tips, you know you`ve reached the top of the stock market bubble. Similarly, when there are enough excess dollars floating around in the air to even fill up the coffers of chronically broke countries like Pakistan, if not, of Djubuti or Rawanda, you know its the very peak of the dollar`s popularity. :) [Zeemax, please don`t come after me with a pistol, I`m just making a light hearted observation.] ...Audious Gringos

...SR

Ref Maasanamuthu #111

[You can click on my handle to see if i`m a he, she or an it.]

So why are you hiding behind your wife`s picture?

Re: SR # 115

True! Tommy is no Scipio! Tommy wants to be a MacArthur. MacArthur ruled Japan as a shogun and Tommy wants to rule Iraq as a satrap! Yes! We are going to be living out that Chinese curse about interesting times!!! LOL

I second Sac`s suggestion (# 117) that, if you have time, please write an article on the subject of gold versus dollar! It will be really interesting. In Pakistan, we put our money in real estate and that is why, Pakistan might just get away...we have no euros...but land owned by the army, which has been rented out to the Americans!

Ciao

re SR #115:

I may be asking a little too much here but would you mind penning down a submission or an article when you have some time that talks a little bit about why you think the Gold standard has the potential to make a comeback. I know you are a strong proponent of the idea as you`ve talked about in the previous submissions and I see some merit in them. But my beef is the same as zeemax`s. It has taken a long time to reach a consensus on modes of settlement and the US has been the major beneficiary no doubt. But can a change in the rules of the game be justified at the altar of `intrinsic` value? Do the potential benefits outweigh the potential costs?

Your fan
later
-sac

#112 by sac

Sac, it`s people like you who make me go. Thanks. People like us need each other to understand these technical things. I`m grateful for your input and I was wondering where you were? Thanks again. Do continue. Black Shoals defined options pricing. But what about the Dollar`s value? SR insists the Dollar is dead and Gold will reign. I disagree. What do you think?

[Everything is just atoms and molecules. They are just rearranged differently.]

Pls elaborate sac.


Warm Regards.

The popular press says the US military found no weapons of mass destruction (MWDs) in Iraq...Lies! Damned lies!

Did the US military not find bank vaults full of euros? And did the military not topple a regime that threatened to use euros, even on their own people? What weapon could possibly inflict greater mass destruction than the euro? Iraq flaunted its contempt for dollars by insisting that it receive euros for its oil production. The evil regime subsequently stockpiled these monetary MWDs. Fortunately, our noble military stepped in to put an end to this dangerous proliferation...and not a moment too soon. In the hands of the wrong people, euros could undermine the dollar`s influence and blow apart our nation`s financial underpinnings. Euro hegemony could inflict mass financial destruction here at home.

Thank goodness for America`s new ``gunboat monetary policy.`` We have dollarized the Iraqi economy at gunpoint. With the nascent threat to dollar hegemony eliminated, we may continue to safely borrow from foreigners and repay them with the paper and ink of our choosing.A little bit of advice to Syria: Don`t bother expelling your chemical scientists, but get rid of your euro stockpiles at once!

Re: sac Good to see you here, though belatedly...
I couldn`t agree with you more about ``models`` and PPP, of course, is also based on `economic modeling`. The only reason I even mentioned PPP was because zeemax brought up the issue. There are no `studies` agreed, nor is there uncontroversial empirical data, it is just thoery that ``over time rates revert to the mean``... So no debate from me. Again, it was only a secondary argument and then only in response to zeemax. My personal belief is that economics is a pseudo-science. It is really all about human behavior and the academia has unnecessarily complicated the issue by creating all the mathametical mumbo jumbo in order to gain respectability for the ``profession.`` I find that Ludwig von Meise makes more sense to me than Milton Freedman or Keynes. But that, as you know, is a heretical stance to take as far as the establishment is concerned.

I also, empirically, agree about paper as well as gold just being atoms and molecules differently arranged and that it is human perception that ultimately ascribes value to any of it. No question. My only contention is that government interference with the free market forces has the potebtial to distort the picture and that, ultimately, can undermine confidence and effect perceptions. Governments have their own political agendas which may or may not be based on realistic and economic objectives. The risk of the government ``manipulating`` paper is far greater than the manipulation of gold. Gold cannot be ``created`` at will as can be paper. THAT is the crux of my preference for gold over paper. It is more likely to be ``honest`` than currency which is regulated by politicians and bureaucrats.

ferozk Loved your grandiose analogy and synthesis vis a vis Rome. But if you equate the present US to the Rome of 200 BC. You mean Tommy Franks is Scipio Africanus? :) That would make Saddam todays Hannibal... Hardly...!! But, fo course, it is unfair to stretch the analogy like I am trying to do. I quite see your point though. But if this is the early stage then we are is deep trouble. There are 6 more centuries of this imperialism... which is today`s acclerated world would be something like 6 decades. Yes, I can beleive that.

Zeemax I`m glad you`ll be coming over. Please try and make it for real and don`t come up with last minute excuses. I am not going anywhere as my travel has been restricted for the forseeable future.

...SR

#107 by SR, #109 by einsteinwallah

Ok. Last word on the subject, though I would have wanted it to continue as we`re all learning one thing or the other. I think this article was already off the front page for a day but placed back somehow. Could it be because Chowk felt it was a worthy topic?

I did read your post carefully and had also read about that 45 billion increase in one week in business sections of n`papers. But I don`t see any relationship between US monetary aggregates and market cap of US Gold mining stocks. There would have been if the Gold Standard was still in place but it isn`t. However you`re more knowledgeable about Gold and it`s co-relation with rest of the economy so I don`t know. But the co-relation you draw still befuddles me.

Yes I stand guilty as charged for not responding to the portion you have repeated i.e:

[ The US current account deficit today is 70 – 80% of the whole world (G-7 included), where as the US GDP is only 30 – 33% of the whole world. Forget the absolute numbers, how can we justify these absurd disproportions? Furthermore, forgetting absolute numbers again, lest I should be ‘awed or shocked’ by them, how can we ignore that the US accounts are running red ink this year which adds up to 10% of its GDP?]

I felt it was neither here nor there so I didn`t comment. As, you stand equally guilty of ignoring my statement about the unlimited and UNIQUE advantage of US being able to use the WHOLE World`s Dollar Supply, whether in ordinary public`s bank accounts or with central banks, to meet its shortfalls. That is why US can go to these extremes and still not at risk of default on its commitments. When you look at the current account deficit, pls also look at the TOTAL US Dollars issued & outstanding in the Fed`s books. I think it will be a 20-figure number. That is what US has access to; barring only the dollar bills in people`s wallets and not on deposit anywhere. The current account deficit I assume is mostly due to trade imbalance with the rest of the world. But all they need to finance that deficit is not any one else`s currency, but their own HOME currency, of which they have plenty. I.e. if Pakistan has a current account deficit, it needs to finance it by borrowing Dollars. US don’t have to do that. It just needs to make a book entry and the deficit is met. It creates a liability, sure, but it can only hurt them if there`s ever a run on the Dollar and people start to convert Dollars into some other currency. That will devalue the dollar but what does US import anything of significance anyway other than Oil and French wines? They`ve taken care of the Oil problem so only the wines are left. They`ll probably take care of those too through the mechanism of WTO.

To further elaborate, a foreign currency becomes part of the country`s reserves ONLY when it`s converted to the local currency. E.g. if you have a dollar account in Pakistan, its not part of the central banks reserves, rather its the country`s dollar liability. But if you convert it to Rupee, the dollars you sold form the central bank`s reserves. Hence, all central bank`s Dollars on deposit with the Fed automatically become US reserves as they`re all in their own home currency. You could perhaps get the total figure on the BIS site.

I hope that sufficiently answers your observation above.

As for PPP. I have the Burgernomics figures as of 23rd April 2002 from the Economist. According to these the US Dollar was overvalued against most exotic currencies, but against the major currencies like Euro, it was overvalued by just 5%, which Euro has made up, and more since then (Euro was at $/0.89 then). So Dollar is undervalued now against the Euro. Against Pound Sterling, it is undervalued by 16%. Against Danish Krona it is undervalued by 19%. Against the Swedish Krona it is undervalued by 1%. Against the Swiss Franc, it is undervalued by a whopping 53%. Turkey and Venezuela`s currencies are overvalued against the Dollar at 21% and 17% respectively. I can send these charts copied/pasted from the Economist, as proof in .jpg format so there`s no element of doubt.

The Dollar`s demise is a myth. Gold is fine, but as women’s jewellery. Not as a monetary system. It can’t jumpstart economies through deficit financing nor creates money from thin air through book entries that can accelerate growth and everything comes into place given time. Remember, Nazi Germany financed all of its growth and power with deficit financing. I think we can live with the Dollar based system if WTO works as its intended to.

einsteinwallah You said [Doomsayers have been saying same thing about US$ for ages. But my take is that overvaluation has a lot to do with value people put on residence on US soil. Only the component which is based on unrealistic perception will be subject to correction. And such correction might already be under way. How does one figure out whether correction is under way?]

Well said. This is exactly what it is all about. Like I said a currency’s only value is the faith a person puts in it. That faith still resides in US Dollar. As for your question whether a correction is underway? No it isn’t. The Dollar’s value is manipulated by the Fed to manage its trade imbalance, sometimes up, sometimes down. Completely at will. There can’t be any correction, not even by unrealistic perceptions, as there’s no foe to the US Dollar in the world markets.

Cheers.

P.S. I’ve been nominated to attend a 5-day seminar on Derivatives at the Deutsche Bundesbank in the third week of June. That should be some experience, Maybe I’ll drop in to see you if I can, SR.

Rgds