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Non-Tech : Derivatives: Darth Vader's Revenge -- Ignore unavailable to you. Want to Upgrade?

To: Freedom Fighter who wrote (857)	3/26/1999 12:09:00 PM
From: Henry Volquardsen	Read Replies (1) \| Respond to of 2794

Wayne Absolutely, the central banks often step in and act in the role of the investor. And fill in when other investors lose interest. But they do it in their self interest. Why does Japan support the dollar? Because if there are insufficient investors to buy dollars the currency will decline sufficiently to shrink the US trade deficit with Japan. They act to prevent this. The other problem I have is that it suggests that dollar assets are in some way superior to the other alternatives. No more than it suggests that when any other country has a trade deficits that their currency is superior to other investments. All it suggests, to me, is that currency valuation is more of a balancing act trying to find the equilibrium point between the net investor demand/supply and the overall trade competitiveness. It is not making value judgements, it is finding the point where the two influences offset. Why does the U.S. consistently have higher real interest rates than many of those countries? I don't think that is correct. US real interest rates are currently much lower than Japan's. I believe this is not a recent development and that Japanese real interest rates have been higher than the US for some time. And Japan has the largest current account surplus. Our real interest rates are higher than Europe's at the moment but there have been times when they are lower. So I don't think there is that much correlation between deficits and real interest rates. In fact it might be the opposite. I'm just thinking out loud here but perhaps the trade deficit by creating a large supply of offshore dollars helps generate excess demand for investment. Conversely a surplus will force the domestic investors to accept foreign investments thereby reducing the amount of investment available for the domestic market. The comparison of Japanese and US real interest rates would seem to support this. Intriguing. I'll fly it past some economist and see what they think. Henry