Upside Down Mortgage

Us Subprime Market

Question: Why is the US dollar weak this week?

We have subprime scare causing credit and recession concerns and a falling stock market. Why is the US dollar gaining on foreign currencies? Thanks.

Answer: Everyone misread your question. Simply because securities range in value doesn't necessarily mean a direct relationship to the value of money.

In this market people are selling assets and buying money in the capital or money markets. Inflation doesn't appear to be a threat and the Federal Reserve indicates a prolonged period of value study going forward to the next meeting in late September (I believe that is the next one) where the next value of the base loan rate issued by the national bank will be set.

So the value of the money increases since there is a new demand for actual cash or money. The asset value of the securities declines as that value moves to buy cash.

This indicates too that despite the present problems encountered by the US economy. The money position, the book value of other countries is doing worse than the USA. Another background reason is that the money buyers can buy any money denomination they want, but they want dollars before that of any other currency.

Another reason is that other nations may also have too much foreign currencies in their vaults. As cash hits the banks foreign money is taken out of the national circulation and put into the vaults of their national bank.

Another effect is the amount of money held in national banks globally.

On the one hand it is not a bad thing to hold onto money if the currency is declining but a nation also has a problem because its currency is being held in another national bank. As Americans trend to curtail foreign visits the amount of money going overseas declines so the amount of money held in foreign locations declines too.

Suppose country Awah needs to either print money to keep the demand circulation circulating. It must get control of some of its money inventory aka money supply. It knows that X amount of Awah Lire is being held in a country called Brat. Awah requests an exchange because it has Y amount of Brat Kopecs in its vaults.

A note at this point. Every finance department in every nation occupies itself with many things but the most important thing it does is manage its money inventory. If a country prints too much cash to counter a demand or outflow of actual money to other nations then it means that globally there is an increase in the physical money supply specific to that nation. To control inflation, to retain or stabilize the value of the currency the best place for cash is to be circulating inside the nation or if not needed sitting in its own vaults.

Brat says that the value of the money Y (Kopecs) held in the Awah Bank is insufficient in value. Awah will say yes okay we will give you X amount of Kopecs plus U amount of US Dollars. Brat says okay done deal.

While polite on the surface a nation which issues a currency must assure that On Demand criteria. If Awah wants Brat to take its currency then Brat must comply. And vice versa. To close the deal then Awah buys its Lire back and to buy it back sends Brat its currency and balanced out with an appropriate value of X and U.

If Awah has insufficient amounts of U then it is confronted with the need to go borrow that money from an international financial lending institution to top up the transaction. It can do this because Awah can control most of its circulating cash within its boundaries and in doing so control things like inflation.

The bottom line to this is that countries are going through extraordinary measures to keep its money inside its borders. This is the sketch version of this by the way.

So with the decline of the American economy and that in the last years since the Bush administration guides the American economy the US Dollar has reached a point of being undervalued. Americans are not going abroad. With the decline of value imports are more costly and this too suppresses demand. So really this is good.

Credit and recession concerns do come into play here. Currency exchanges allow many clients to speculate on currency values. And those traders also feel that the US dollar is undervalued then they want to ride the increasing value. They will buy US Dollars in the hope that the value of the currency will increase.

This artificial demand increases the value of the American Dollar because there is only so much currency inventory allowed. The demand by Awah for US Dollars to achieve the value of U in its deal with Brat increases the value of the Dollar.

The fact that fewer Americans are travelling abroad and more money is staying in America. Again the Dollar value increases.

The fact that with the lower incomes Americans curtailed their demand for goods and services from overseas or internationally. This means that more Americans spend that money inside their own boundaries. Again the Dollar value increases.

As investors sell their assets they are confronted with the prospect of either buying another investment quickly or convert that value to cash. Again when that value departs the securities exchange that puts pressure on the money supply or inventory. The Dollar value increases.

All these examples are causes for the Dollar to increase in value when other economic factors are throw the rest of the economy under the bus. Indeed an increase in value may now indicate a long and deep economic depression.

US Subprime Market Effect Globally

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