Screen capture of current price at US Costco for 6L of Greek Olive oil at $60.00 for 6L:
If this represented the only trade between the US and Greece; and the Greeks re-established the drachma and set the initial exchange rate at 1 USD to 1 drachma.
If the Greek olive producers immediately faced reduced price competition in the US market, and reduced the price of this oil to the US market from $10/L to $9/L in order to maintain share, then the "exchange rate" would proceed directly to $.90 to 1 drachma; the drachma would be "devalued" by 10% (to USD).
It would not matter how many forex traders were long or short, or short or long, blah, blah.... or what M1 was or M2 or M16, "base money", blah, blah...... before these REAL events would transpire in this agricultural market and move the "exchange rate" in the banking system.
9 comments:
Matt, the producers and buyers of the oil are also 'forex traders' (once you remove the day trade noise, which is mostly machines vs. machines randomness anyway).
The movements in the currency are caused by exchange of the currency (obvious). But you are right that the causality of these moves come from real terms of trade, and not of the financial system shenanigans (this includes central bank OMO, specially in a world were central banks believe they can get bankrupt!).
I,
to me to think otherwise would be like thinking the bets placed on a sporting event could effect the play on the field...
There has been some discussion about a hypo "new drachma" and a potential for an immediate "devaluation"... I dont see how that could happen unless the mercantilists started to panic/get greedy and reduce/increase their cross-border prices in the different currencies.... the bankers wouldnt have much to do with it imo...
The prices are set within the context of the power relationships between the mercantilists imo.. the financing banks just deal with these moves as they seek to comply with banking regulations in the different jurisdictions and the "exchange rate" is then seen to adjust...
rsp,
And I would add, if the current crop of US "millennials" do not develop a "taste" for EUR "luxury" goods which has been present for the last 20 or 30 years here, and has let some EUR "exporters" enjoy a sort of "rent" because of this, then those "exporters" are in deep shit wrt real terms of trade with the US market going forward...
rsp,
It wouldn't necessarily
You need to follow the transactions through.
The Greek company isn't selling in Drachma. It is selling in USD.
So if it sells ten thousand litres of oil It would normally receive $100,000. However if the price moves it would receive $90,000 to maintain market share.
Back in Greece its outgoings haven't changed. It still needs, say, GRD50,000 to pay its staff/owners.
So it is only going to demand the same GRD50,000 from the currency market.
You're assuming a full swap back all the time, and that ain't necessarily the case. Export businesses tend to maintain a float in both currencies.
The hit here could be merely a transfer within the *USD* currency area. The Greek company is making less profit.
Don't make the mistake of thinking that currency areas end at country borders. They don't. Many entities have a leg in both camps.
And whatever the outcome you can't buy Drachma that don't exist. So you may be *forced* to maintain your surplus in US dollars.
It is possible to set up the currency and banking system so that the price goes to near infinity if there is extra demand for one more Drachma (which is how the inter-bank works on quantity if you remember).
"So it is only going to demand the same GRD50,000 from the currency market. "
Yes but Neil that G50k of work is now only worth $90k in USD terms rather than the $100k before... so a 10% decrease no? again in USD terms...
If there is existing inventory being financed in USDs and the price (in USDs) falls by 10%, then the US bank financing the inventory probably has to obtain addl USDs to maintain compliance ratios... so if they are a Greek bank, then they probably have to try to exchange some drachma for USDs and do a capital xfer of USDs into the US division...
So there would be increased demand for USDs vs drachma and those offering the USDs would have the power position and would demand MORE drachma for their USD balances, drachma bearish ... more drachma for a USD means drachma is "devalued" (in USD terms...)...
rsp,
Neil,
Consider the mercantilists and their banks are in "the game" and the "foreign exchange market" is the bookie....
No matter what is going on at "the bookie", it cannot change the outcome of "the game"...
rsp,
"Yes but Neil that G50k of work is now only worth $90k in USD terms rather than the $100k before... so a 10% decrease no?"
No. The market is supply and demand. It has nothing to do with the stock of money held. It is to do with the transaction demand.
Stop over thinking the problem. You keep adding assumption upon assumption to try and prove something that isn't so.
You *can't* get Drachma that don't exist. Somebody has to make them first and the Greek banks are not free to do that because the state hasn't authorised their issuance.
Just as you can't get Drachma today because nobody is issuing it.
Assuming Greek banks continue to operate in a new currency along current lines is a mistake. They may not be free to exchange Drachma or create it.
There is no financing of inventory. The purchaser paid less and has more dollars. The supplier has less and has less dollars. No change of overall position.
The Drachma does float and it will go in whatever direction supply and demand required. Not necessarily in the direction anybody expects.
Bill put together a reductio ad absurdam to show that it is possible that things can go in a different direction, and certainly taxing people more Drachma that has been injected or they can borrow will put the price up in all assets until somebody decides they prefer jail.
Because there *is no model* of foreign exchange that fits the dynamic system. Nobody knows how the prices are formed.
"There is no financing of inventory."
????????
All (significant) inventory is financed... (that's what banks do...)
rsp,
Neil I know people who were car dealers here in the US and all of their inventory is financed...
rsp,
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