Devaluation of the dollar

[lawman]

I'm told that back around 1934 with the stroke of the pen FDR devalued the dollar against gold overnight..I don't understand how this can happen. Can someone explain it to me and tell me if it could happen again?

[Maurice]

Easy back then. Nixon did the same thing by the way in 1971.

The dollar was fixed to gold, meaning that you could exchange dollars for gold. One day the gov't decides they will pay less gold for a dollar. It was that easy.

Today its not fixed to anything so devaluation is more of a process than an act.

[lawman]

Quote:

Originally Posted by Maurice Easy back then. Nixon did the same thing by the way in 1971. The dollar was fixed to gold, meaning that you could exchange dollars for gold. One day the gov't decides they will pay less gold for a dollar. It was that easy. Today its not fixed to anything so devaluation is more of a process than an act.

So are you saying it could be done by way of printing more dollars resulting in high inflation and hence devaluing the dollar against everything?

[Maurice]

Sure. The Fed tells us they have an exit strategy for their 'quantitative easing' program (aka money-printing scheme) but it may end up being difficult to execute, especially if they find themselves needing to raise interest rates in a high-unemployment environment with an unsympathetic congress.


The dollar could get devalued by external forces just as easily. I personally think we're just one failed treasury auction away from a major slide.

[lawman]

Quote:

Originally Posted by Maurice Sure. The Fed tells us they have an exit strategy for their 'quantitative easing' program (aka money-printing scheme)

Once dollars are created and put into circulation how can the fed take them out of circulation?

I

[audreyh1]

Other countries (like China) can choose to change their fixed currency valuation with respect to the US dollar.

Audrey

[Maurice]

Quote:

Originally Posted by lawman Once dollars are created and put into circulation how can the fed take them out of circulation? I

They reverse the money creation process. Keep in mind these aren't paper bills.

The creation process of QE is to buy securities from primary dealers and credit their Fed accounts with money that came out of nowhere.

To reverse it, they sell securities back to those dealers, take payment from the banks, and 'delete' it (so to speak).



THe mechanics of the process are straightforward. The problem is that they could force down the price of those securities substantially if they sell enough of them. Lowing the price of those securities (bonds) will mean that medium and long term interest rates rise.

The real risk as i see it is that they may need to do this when unemployment is still pretty high. They may simply lack the courage to do it, and Congress could even try to intervene.

[IndependentlyPoor]

Another problem is that the Fed's inventory of securities has changed. Previously, when the Fed wanted to decrease the money supply they had treasuries to sell. Now they mainly have dodgey bonds, which might prove much harder to sell.

[lawman]

Quote:

Originally Posted by Maurice They reverse the money creation process. Keep in mind these aren't paper bills. The creation process of QE is to buy securities from primary dealers and credit their Fed accounts with money that came out of nowhere. To reverse it, they sell securities back to those dealers, take payment from the banks, and 'delete' it (so to speak).

So the fed adds numbers to their balance, buys treasuries from the U.S. govt. with the newly created bank balance that isn't really there and then to reverse this QE they sell the bonds back to the government or anyone who will buy them and then subtract the selling price from their balance sheets?

[clifp]

Quote:

Originally Posted by lawman So the fed adds numbers to their balance, buys treasuries from the U.S. govt. with the newly created bank balance that isn't really there and then to reverse this QE they sell the bonds back to the government or anyone who will buy them and then subtract the selling price from their balance sheets?

Pretty much. If sounds like it is all smoke mirrors well that's because it is.
On the hand the process has worked quite well upwards of 80% of the time.


Howstuffwork has pretty good write up pay particular attention to Open Market section.

[lawman]

Quote:

Originally Posted by clifp Howstuffwork has pretty good write up pay particular attention to Open Market section.

My head hurts...

[deserat]

Well, it certainly has devalued quite a bit against the Euro and some of the eastern European currencies - you really see the results over here as the prices on the economy become exorbitant at times. The way I see it is the more in circulation, the less they are worth. Also, the speculation regarding whether or not you can pay your bills - i.e. the credibility of the US gov't regarding their monetary policy - also plays into the currency value ratios. I was here when the euro was 1.1 to the dollar - now I get .68 euros for one dollar. Very sad. While I understand in the import/export scheme of things - a better balance is called for in my estimation. Additionally, there is a point at which one is just impoverishing the nation by deflating your currency so much.

[NYEXPAT]

Prechter (elliot wave theorist)recently called a major bottom in the Dollar. Hopefully this will ease the recent pressure on us "overseas members" that still receive Dollars!