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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Jim Willie CB who wrote (1948)	3/13/2004 2:27:55 PM
From: Tommaso	Read Replies (2) \| Respond to of 116555

I should have said "real interest rate," meaning that the income available from government bonds denominated in a given country's currency is backed by real productive assets of that country or its accumulated credits with other countries. Also, as with individuals, a country's credit-worthiness and hence its currency depends on it ability and willingness to pay bills and debts. That includes the political and military power to influence other countries to take on some of those debts. Japan with its vast reserves of foreign currency is the ultimate in credit-worthiness. Incidentally, back when the Swiss Franc was fully backed by gold, people were willing to pay negative interest--fees--just for the privilege of keeping their money in Swiss Francs, somewhat as people are willing to buy the closed-end gold fund, CEF, at a high premium now. I do think that Volcker proved that if you are willing to raise real interest rates high enough--well above the inflation rate--you can restore value to a declining currency. Right now, real interest rates in the United States are about zero officially, and I think are actually several perecentage points below zero. That is, I think inflation is a lot worse than govnernment figures show it to be. Those figures include rent but not house prices. For a stable USD, short term interest rates should be nominally at about 6% right now. Until US interest rates are at Least 4% ahead of the real rate of inflation, the USD will sink against currencies whose interest rates are above their countries' actual inflation rate. In the case of deflationary Japan, this could mean that an official rate of less than 1% is an actual rate of 4%. Prices have been declining inside Japan for a decade. All these interdepencies are too complex to predict or even to measure accurately. And there may be other factors that I, at least, have not seen taken into account. For example, the tremendous convenience (and --so far-- apparent security) with which transactions denominated in USD can be executed. With a few clicks of a mouse I can have something shipped to me from Hong Kong, pay for it, even bargain for it, have the payment made with a credit card, and then pay off the credit card balance from my bank account. Sure is easier than bringing back fabrics and spices overland from the Far East and paying gold for them. To me, that convenience is terrifically valuable. That makes that particular form of money much more valuable than gold.