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To: Henry Volquardsen who wrote (367)	7/30/1998 1:00:00 PM
From: Robert Douglas	Read Replies (1) \| Respond to of 3536

Henry, Wow! Great Post. Your description of professional money being skittish is so very accurate. This not only applies to money market deposits but to equities as well. Having worked in the profession, my only explanation is that people EXPECT the professionals to be savvy and well informed. What basically this translates into is that the professionally managed money flees at any and all perceived risks under the guise of being prudent. It works the same way in reverse, where the professionals all flock in the same herd to those investments considered "safe" by consensus of their peers. You remember those safe investments. The list includes Latin American countries in the 80s, leveraged buyouts, over-priced real estate in California and Japan. All of these were big losers after they were labeled safe and prudent places to park money. I would be interested in your thoughts on the deposits in Japan. Is there a large amount of money that is just sitting there earning paltry deposit rates? If so what do you know about the "big bang" in Japan and how it might bring competition into the market for deposits? Robert

To: Henry Volquardsen who wrote (367)	7/30/1998 3:35:00 PM
From: X Y Zebra	Read Replies (1) \| Respond to of 3536

I see your point in re: hot money. However, this "hot money syndrome" has a good effect, as for the first time it created a form of discipline forcing foreign governments to be fiscally more responsible. It is true that such discipline can turn around and become dangerous for the illiquidity that you indicate, putting these governments in dire straits, having to go to the US (the lender of last resort), for $$. Where is the right balance ? How do you "force" the foreign governments to behave ? I would vote to let the hot money do their voodoo and within reason "baby" these countries during their cash crunches, making sure that they do not get too attached to the easy money spout.... while I personally do not advocate this "policies", the alternatives are worse. The solution most feasible, given that many of these markets are not neither large enough nor free of corruption to pull themselves of the gigantic messes they get into, would be to a global integrations of their markets, perhaps via the regional pools as Nafta, Mercosur, the Euro etc. (and we have discussed what the risks of these "unions" will be)..... Hard line to walk I guess.

To: Henry Volquardsen who wrote (367)	7/31/1998 9:16:00 AM
From: Chip McVickar	Respond to of 3536

Henry, Thank You for that excellant discussion on "hot money." The clarity of your thinking and writting are always impressive. The next questions...where did this money come from and will this hot money regulate itself..? For banks as in your example, after developing a depositor base, having money in their vaults is a liability, they pay interest on it....so it is in their "interest" to lend and they can do this for about $85 out of every $100. I think reserve requirements are at about 15%. Now if bank-A loans to bank-B and bank-B loans to bank-C, the original $100 has grown to $255 and this can get multiplied out even further....they do this with every form of deposit. This is farely easy to understand on a local basis and is at the heart of the problems in Japan....the multiplier effect has grown out of proportion to the ability of the financial insitutions to account for their reserves and asset base (deposits). Japan is essential insolvent except for the abstraction of fiancial accounting. The Japanese high savings rate has been leveraged beyond the actual real value. As a matter of fact...if every one of these bank loans to bank-A,B,C were all payed back to the original $100 the whole system would be even in more trouble. This is not difficult to see in a local-traditional lending....but central bank and international lending is more difficult for me understand. When Nixon abandoned gold in 1971 he enlarged and created a whole new dimension to the 'finance economy' and created an international pool of autonomous money supply that you call "Hot Money." But this money is not controled by or regulated by anyone....it has become known as the "Currency Markets." We cannot define or measure this mix of international monies. We cannot measure the the number of times this money has been turned over and the velocity of this has increased dramatically over the last 10 years. It has created the requirement to seek a continuous "better rate of return." I do not believe any institution anywhere understands these markets and certainly doesn't control them. This is not necessarily a "Bad Thing". It has created a more democratic accessability to wealth. The down side has been the volitility and problems like October 1987 when the systems in place failed...ie: specialists required to equalize trading on the floor did not follow their directives and provide a balance. They were essentially overwhelmed by the electronic markets. The question for these new electronic markets is weither the freedom of this "Hot Money" can regulate itself..? Can derivatives and other forms of hedging provide the balance...the safe guards within this free system and abstract methods of accounting..? Will another Oct 1987 be inevetable as the method of choice to regualate the creation of "Hot Money"..? Can professional money and premiums on wholesale money provide sufficient regulatory requirements...it certainly was not the in Asia..? Will the budget balancing of Clinton and Rubin assure that the dollar will remain a stable source of currency for thew world to measure the value of their money..? Wonder what is next? Chip