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Strategies & Market Trends : Currencies and the Global Capital Markets -- Ignore unavailable to you. Want to Upgrade?

To: see clearly now who wrote (223)	6/18/1998 11:22:00 PM
From: Chip McVickar	Read Replies (1) \| Respond to of 3536

Arnold, Your question is the basis for a great deal of economic thinking. Liquidity: consisting of or capable of ready conversion into cash <~assets> It is used to describe many aspects of financial conversions. Here we are looking at Bank Liquidity: measure of cash reserves and capital reserves against debt liabilities and asset values [realestate, loan values, etc] A deposited dollar in a bank becomes a measure of that banks liquidity. AAA banks have higher cash reserves (assets) and C banks less value. This higher degree of assets and cash implies the bank has a greater chance of returning the full value of the dollar you deposited. Now here's the catch: todays banks are required by law to maintain a certain percentage of cash and capital as reserves to back-up that dollar you deposited. In 1904 banks had capital equivalent to total liabilities---100% By 1983 4.3% ratio for capital and 9% for cash. What is it at your bank today..? What is the rating of your bank..? Mine is AA+ So banks can loan 80% of your dollar to someone else. Catch: they can loan that same $0.80 cents many-times-over through margin, derivatives, swaps--an endless array of debt vehicles. Now this dollar before deposite is worth something else....it is a reflection of your countries monitary policies, debt structures, trade balances and fair value of the goods and services the country produces....and other measured economic factors. So here too is an inherant value measured in various manners against other currencies. Finally....what then becomes of value? Today that value is an "agreement to repay in kind"....that's all. Before Richard Nixon in 1971 severed the link between US dollar and hard assets----all currencies were linked to something of hard value like silver or gold or a commodity of trade. This event is also a significant topic of discourse. The value of your dollar floats against the value of other curriencs which changes through-out a trading day. There is No hard value to that dollar, only the perception that one will get it back and it will be exchangeable. The biggest concern for Japan is that the Liquidity of their banking system by any measure has fallen below levels able to return your dollar at the value it was loaned. Just the possibility of drawning down reserves below certain levels will cause new money to stop flowing into the bank, loans will cease and deposits withdrawn further lowering the available liquidity.....producing in the the end....no value. There is an excellant book by Judy Shelton "Money Meltdown" that is worth reading if you are interested in international monetary policies. She is well worth the read. Hope this helps.....there is a great deal left out. Chip