No it isn't 'capital flight' Noah - that's a fixed exchange rate concept. There are no fewer dollars in the US dollar currency area after the sale than before.
Specifically "Normally, when Treasuries get sold off, people park their money in cash, instead of moving it overseas. This time, a bunch of investors actually pulled their money out of America entirely."
They didn't, because to get out you require a bunch of other investors putting their money into America, otherwise there would be no exchange in the first place.
It's a fallacy of composition. Individual investors can sell their dollars and buy euros, but investors overall cannot. Somebody has to be selling euros and buying dollars, and the question has to be asked "what did they do with those dollars when they got them, and why were they coming in that direction in the first place?".
Liquidating static savings and pushing them back into the flow tends to cause more physical transactions to occur. It's taking money out of a drawer and spending it. That's likely stimulative.
There are no fewer dollars in the US dollar currency area after the sale than before… but those dollars are worth less than before. If capital has not left the area, it has been destroyed. That’s not to say that the US economy is inevitably doomed… but you sound very bullish.
They are not worth less in dollar terms. The same number of dollars will still settle next months mortgage bill, or tax bill regardless of what it may or may not exchange into Euros.
And the exchange rate of barrels to tomatoes hasn’t changed as that is a productivity issue.
There is no universal chart against which value is determined. Instead there are ever moving currency zone orbits, possibly shifting financial savings around.
> They are not worth less in dollar terms. The same number of dollars will still settle next months mortgage bill, or tax bill regardless of what it may or may not exchange into Euros
By that logic you are saying if the US dollar to Euro went 10 to 1 or even 100 to 1 there would be no impact because the same number of dollars will still settle the mortgage or tax bill.
I didn’t say my disaster scenario was going to happen, I’m using it as an example to show that if it does, surely there will be an impact.
Like when you graph something and you say, ok, what happens as it approaches zero or infinity. We learn from the extreme cases and use that to inform our understanding of the middle ground.
In concrete terms, the US is not an island. It does not manufacture, grow and produce everything it needs. Many things are imported. If the US dollar keeps going down, all of those things get more expensive. The dollar number of the mortgage won’t go up (until it is renewed) but everything coming from outside the country will.
Currencies go up and down all the time, making things more or less expensive.
>They are not worth less in dollar terms. The same number of dollars will still settle next months mortgage bill, or tax bill regardless of what it may or may not exchange into Euros.
If only our living expenses were just taxes and mortgages, amiright?
This take reminds me of the old joke:
“I don’t get why people complain about gas prices going up. I used to put in 40 bucks, and I still put in 40 bucks.”
Do your living expenses consist entirely of imports, and why would the price of that be going up given there is nowhere else for them to sell their stuff?
Prices go up if there is scarcity and no effective competition for your purchases. Is that is what is going to happen?
Living expenses are pretty tied to your 'scarcity', yes.
Transportation and home heating or cooling costs will go up when petro products rise. Oil is scarce and globally priced. Gas for the car is 3% of household income. Utilities are 6-7% of income
Fertilizer costs rise. Nitrogen-based fertilizers come from natural gas, and phosphate and potash are globally priced and often imported. That means higher costs for farmers, stacked on top of rising fuel and transport expenses. That's foods already 10-15% of income.
So food gets more expensive from every angle. Inputs, shipping, storage. All of it.
So that's 20%+ of household expenses hit.
Education costs go up too. Foreign students now effectively get a discount if their home currency strengthens and universities are expert at making that squeeze when they have room to raise prices without losing demand (if students still come, if they don't come well...education costs also go up to make up the shortfall of high paying foreign students).
> The same number of dollars will still settle next months mortgage bill, or tax bill regardless of what it may or may not exchange into Euros.
If nobody wants dollars, then to import things it's necessary to send more unwanted dollars, so the exchange rate does up, so everything imported is more expensive, so you have inflation, so the interest in the mortaje goes up, so you have to pay more.
[Hi from Argentina! Been there, done that, got a pile of worthless bills as souvenirs.]
"You will have higher prices because stuff you buy is more expensive."
Why? Why won't the supplier have lower income because they have no other alternative than to sell for the same USD amount as they did before?
Why is the supplier always the price setter? Can you always charge your customers anything you want to and they keep buying?
The customer is king, but not when FX is involved? How does that work?
"What do you think inflation is?"
It's a general rise in the entire price range. If the price of eggs goes up, but your wage didn't then that is a redistribution of scarce resources, not inflation.
I don't mean to suggest that the current American devaluation is as large as the UK's 1967 devaluation, at least so far. Just that your reasoning here is wrong: when your currency falls, that has a domestic inflationary effect precisely because your currency is worth less than before.
What has that got to do with this thread? A devaluation's a devaluation, whether you're forced into changing a fixed rate, or have it imposed on you by the markets.
On the mortgage and tax bill specifically, sure there is no impact.
But I (an American) pay for some European services in Euros, meaning those got 10% more expensive. I understand this might be the intended effect, but it's not good for me.
>But I (an American) pay for some European services in Euros, meaning those got 10% more expensive.
European services would be the least of issues. The main issue would be the tons of foreign imported food, cars, products, clothes, gadgets, and so on - including tons of component parts for "american" products (not to mention materials and tooling to make even the increasingly rarer "100% made in US" products).
Where else are they going to sell all that stuff given there isn't an untapped source of demand to absorb it (or that demand would already be serviced).
So what you have is a production glut, and nowhere to shift it to. Which usually causes a price collapse and production collapse.
Which then causes unemployment in the source nation and interest rate cuts...
But that’s because you decided to take on currency risk without hedging or having a matched foreign income stream.
That’s not what anybody with scale will have done.
And now you have to reevaluate the cost of that service relative to the alternatives - including letting them know they need to take fewer Euros to retain your custom vs the competitive alternatives.
Customers are hard to come by. Are they prepared to let you go?
"You were arguing that the same number of dollars will get me the same number of goods and services, which is not true."
In aggregate within a rational competitive framework.
It is true for those that are rational and subject to competition.
Where else are they going to sell their stuff? Why would you agree to pay more?
Your behaviour will change, as will everybody elses - and you're the customer. So you go back to them and say no I won't pay any more. Haggle. Are they going to turn you away?
Why is you agreeing to pay more more important than the other person who decides it is too much and cancels the service?
Changing the goalposts is assuming you, and everybody else, are always a price taker, passively accepting what you are given. That's describing a monopoly/oligopoly scenario.
"They didn't, because to get out you require a bunch of other investors putting their money into America, otherwise there would be no exchange in the first place."
And when those other investors bought those dollars they did so for a lower price in another currency than they previously would have, which results in the overall value of the total dollars to fall. This alone does not signify capital flight, but the combination with rising yields does. There's simply less demand both for US dollars and all dollar-denominated assets.
It doesn’t cause the value of dollars to fall in dollar terms.
Again you’re implying a fixed exchange and there isn’t one. The exchange rate of barrels to tomatoes hasn’t altered since that is a matter of productivity
This is why “devaluations” in the fixed exchange rate period didn’t work
> exchange rate of barrels to tomatoes hasn’t altered since that is a matter of productivity
Of course it has. We are one of the world’s largest importers of tomatoes [1]. The dollar devaluing makes them more expensive. That, in turn, means the internal price of tomatoes goes up. We’re a net oil exporter, on the other hand. So yeah—the “exchange rate of barrels [of oil] to tomatoes” has been altered. In part because the productive benefits of comparative advantage are being slashed. In part because trade frictions are being introduced that reduce our economy’s productivity.
> How does it make them more expensive. Where else are they going to sell the already produced tomatoes?
It’s currently cheaper for me to take a vacation to Canada to buy next year’s skis than it is to buy them domestically. That’s demand transfer.
On the other hand, car factories that used to export to America are being idled in Canada and Mexico. That’s supply contraction.
More pointedly, if you have an unreliable trading partner, it makes sense to offer discounts to other buyers who will make up for the price cut in the long term. (Either with increased quantities demanded or a less-volatile trading relationship.)
> We already know from history that devaluations don’t work. What has changed that suggests they have suddenly started working?
We’re not in a controlled devaluation. This is America facing its first semblance of a currency crisis. Far from fully blown. But if a large foreign holder of Treasuries started dumping them, for example, and were to co-ordinate it with our erstwhile allies, that could create problems.
What's the policy response to supply contraction causing people to lose their jobs? What does that tend to do to exchange rates?
" it makes sense to offer discounts to other buyers"
If they are offering discounts to other buyers, then won't those buyers then take the advantage and re-export to the US?
There's an arbitrage opportunity right there - as we've seen with Russian oil.
Why won't that happen?
Plus why go through the problem of trying to obtain new customers for less money, when you could just pay the 10% tariff and get the same amount of less money for less effort?
"But if a large foreign holder of Treasuries started dumping them, for example, and were to co-ordinate it with our erstwhile allies, that could create problems."
How would it create problems? Run through it precisely at the transaction level please.
Then you'll find it doesn't.
To 'dump' Treasuries somebody else has to buy them - so no fewer Treasuries. To 'dump' US dollars somebody else has to buy them - so no fewer dollars. Same number of dollars chasing the same number of Treasuries?
The somebody that took on the dollars and the Treasuries wanted to buy them or the transaction would never have happened. Why did they want to buy them?
> What's the policy response to supply contraction causing people to lose their jobs? What does that tend to do to exchange rates?
You’re acting like the Asian financial crisis or like Argentina haven’t existed.
> If they are offering discounts to other buyers, then won't those buyers then take the advantage and re-export to the US?
Across-the-board tariffs.
> when you could just pay the 10% tariff and get the same amount of less money for less effort?
Stability. Again, you’re acting like Smoot-Hawley didn’t happen.
> To 'dump' Treasuries somebody else has to buy them - so no fewer Treasuries
Nobody…said as much. In this case, look at Russia in the late 90s.
> where's the problem?
People buy the treasuries on the secondary market and then have less demand on the primary. That lowers their price which raises yields. That, in turn, makes the policy remedy you suggested at the top—for unemployment—more difficult as it requires monetising the debt.
To elaborate on your last point, high yields are macroeconomically detrimental on several fronts. On one hand, They provide a safe haven for Capital which diminishes investment and growth. On the other end, servicing that higher debt interest means more taxes and again lower growth.
Yup. Basically supply contraction puts people out of work, which requires lowering rates by selling bonds, but exporters under duress are also dumping their bonds, which means you need to print more money than you otherwise would to push rates down. Those dollars create inflationary pressure whose solution is raising rates. But you can’t because of the supply disruption. Basically, Trump and Musk have engineered stagflation.
Specifically "Normally, when Treasuries get sold off, people park their money in cash, instead of moving it overseas. This time, a bunch of investors actually pulled their money out of America entirely."
They didn't, because to get out you require a bunch of other investors putting their money into America, otherwise there would be no exchange in the first place.
It's a fallacy of composition. Individual investors can sell their dollars and buy euros, but investors overall cannot. Somebody has to be selling euros and buying dollars, and the question has to be asked "what did they do with those dollars when they got them, and why were they coming in that direction in the first place?".
Liquidating static savings and pushing them back into the flow tends to cause more physical transactions to occur. It's taking money out of a drawer and spending it. That's likely stimulative.