The Dollar, and Other Stuff

By: Gabe Harris | Thu, Jul 17, 2003
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I've thought of more to say about Alan Greenspan, since I wrote my biographical piece on him. His saga is one of the more interesting stories of our time if you ask me... as long as saga does not have any positive connotations, if it does then replace sage with story.

Ever since him in his buddies first started using the term "UNCONVENTIONAL MEASURES" on the record back a few months ago the term has been popping up more and more. At first a few hair brained paranoids like me were shocked that Greenspan would actually tell everyone that they had some tricks up their sleeve to keep long term interest rates moving down even if they eventually pushed the fed funds rate down to zero. I figured this kind of statement should send tremors through the market, because the fed had never let it be known that they would engage in "UNCONVENTIONAL MEASURES". However most people yawned or never even heard about it and even fewer people gave a crap about why geniuses at the fed would need "UNCONVENTIONAL MEASURES" since they had been telling us they had recently figured everything out and were making the exact right decisions the entire time thank you. And even fewer people were whacked out of their skulls enough to think this was anything worth getting their panties in a wad about.

As time went on over the winter and spring of 2003 some people did pay some attention Over the course of months some fund managers with billions of dollars under management got around to reading the official statements of the men who single handedly manage the worlds reserve currency and thus have a profound affect on all of the worlds markets...or at least these fund managers got memos from people who read the statements or at least the read summaries of memos or at least they saw something mentioned on CNBC in between ads for instructional golfing videos and day trading systems. Anyway as time went one interest rates kept dropping.... all the way down the yield curve they kept falling and falling to new lows.... because Greenspan said that if just buying short-term government debt until they yield zero percent wasn't enough to get the economy going and if prices for some stuff went down then the Fed would go out and start buying debt that had a longer time frame (possibly 2yr-5yr-10yr and 30 yr debt) and they wouldn't necessarily to just buy government debt. His friends said they might buy debt from just about anybody...even companies that were issuing billions and billions of dollars of debt without much probability of making much profit for the next decade or so.... or even debt from foreign countries.... he said they could buy more debt than we could count if they wanted to. So since the fed was issuing these reassuring statements to the world and all the pension fund managers etc....people started buying debt.

As most people who read this know, when people buy debt (bonds) interest rates fall. Oh ya I forgot to say that since interest rates were falling so much especially the 10yr rates, people were able to refinance all over the country and this is one of the main reasons the fed made the statements about "UNCONVENTIONAL MEASURES", they wanted to make sure that we could refinance, seriously. And before they started talking about "UNCONVENTIONAL MEASURES", the fed was having a hard time getting the longer term rates to fall, they were only effectively lowering the short term rates, but when they promised to buy the longer term debt they got the longer term rates to fall...the kind that affect our mortgage rates.

And the reason all this is interesting is that all this is interesting is that last week Greenspan came out from his cave or down from the mountain, I'm not sure which it is and he said that he was giving extremely long odds that he would really ever do the "UNCONVENTIONAL MEASURES"...so this got all the pension fund managers scared because interest rates were at all time lows and if the fed wasn't going to back them up then maybe they were betting all of the life savings of a bunch of dummies and old people on a pretty stupid idea, that is " that the fed would do what they said". And when the pension fun managers and mutual fund managers started to feel like the fed might not back them up they decided they might sell the bonds they had bought and let some other suckers deal with the risky investments.

Then something funny happened a couple days later after the bond market had basically crashed a little bit, Greenspan came out and said that he didn't really mean that he wouldn't do the "UNCONVENTIONAL MEASURES", he just meant he thought things looked so good that he probably wouldn't have to do anything weird, so please be a good person and go buy some more bonds because they are really a good investment even though you will get your money back in dollars which are little green pieces of paper which some of my friends have promised to print a whole lot of(btw I'm paraphrasing now and I have decided that you don't pay me enough to footnote anymore like I used to, but this is all accurate I promise otherwise it wouldn't be fun to write about it).

You may ask, "When did Greenspan and gang promise to print a bunch of dollars?". Well back when they were describing the "UNCONVENTIONAL MEASURES" they were talking about buying debt (bonds). When the fed buys anything they do it with fresh cash that is just created out of thin air (if they wire you the money) or some organic material and a printing press otherwise. I'm not telling most of you anything new, but the fed doesn't buy things the same way me and you do, nope that is because they are the managers of the world's reserve currency which is a fiat currency which means they just make money whenever they want and they used to be kinda restricted (in tradition only) in spending it only on short term government debt, but not anymore they just announced they might start spending it on whatever kinda debt they feel like and nobody important really raised much of a stink about that unless you think I'm important but if you think that then you have other problems so since they mentioned it before and nobody cared they probably figure that they can spend it on whatever they want now.

Other stuff:

In the meantime the fed and everyone else is starting to pressure the Chinese to unpeg their currency (Yuan) from the dollar and this is really big news because it means that the government is scared that our entire manufacturing base seems to be exiting the country and heading to China. China will make about a million cars a year now even though they have only made about 1 million cars in all of the history of the world up until now. So you can see that that kind of growth in the car industry might eventually have a negative impact on over indebted companies like Ford and GM that are better at making things called notes and bonds than they are at making cars especially since these companies take all of the money they borrow and put it in a pension fund to pay for a bunch of old fat guys in Michigan and Florida who are retired and don't even make cars anymore and GM and Ford don't invest any of the borrowed money in car making unless they have some parts supplying shop in China and if this keeps up then obviously these two big companies are gonna go bankrupt unless the government steps in and starts buying bonds that they issue and that would probably lead to something bad eventually happening although it probably wouldn't hurt me too bad since I am long gold. Anyway I advise you keep an eye on the Yuan thing so that I can say I told you so when the dollar depreciates against the Yuan. If you don't pay attention you won't know what I'm talking about when I remind you that I knew the dollar was going to depreciate against the Yuan.


 

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