Even with current EUR/USD rate I feel I would be much better living in the US than in Europe. From eggs, to fuel, to real estate everything is much cheaper in the US relative to my shity southern EU country where wages are really low. But we have the german's fx purchase power... Economically, it would be rational for everybody here to relocate to the US.QuoteIf it goes to 2 then the world will be flood by US products and services and unemployment will rise in Europe. Also, the prices of goods in the US are becoming extremely cheap for EU citizens. So? This is a good chance for a big bath in Europe. Do you think that the US people who currently buy audis, mercedes, porsche, french and italian fashion etc will refrain from their habit if the the rate goes to 2USD/EUR? I think no, they wont. QuoteIf the EUR/USD goes to 2 everybody in Europe should try to relocate to the US. Generating income or savings in one country, unless it is for a lifetime, implies a bullish view on its currency.

1. If I can buy higher quality products (broad range of products) in the US for 1€ and the same product (or with lower quality) costs 1.75€ in the EU then it's not rational to live in the later.For example:. My EU country (and lots of other EU countries) is a big bullshit. Real estate is extremely expensive, wages are the lowest in the Eurozone, fuel is expensive, cars are expensive, unemployment is high and rising, we almost don't have any quality products/brands, taxes are really high, healthcare sucks, education sucks, law sucks, .... In the US I could have: cheaper real estate, cheaper 1st necessity products, high quality products, lower taxes, better healthcare, better education, faster application of law, ...One should always search for the place offering higher quality of life. If there's a massive relocation of people from the EU to the US then we'll sell the EUR and buy the USD bringing the fx rate to equilibrium (up to the point there's no incentive for relocation from the EU to the US or vice-versa). The question here are political and social barriers to the flow of people which is preventing this from happening..........2. Generating income is bullish (not savings per se). In microeconomics it's like generating profits vs. holding cash. It also has to do with the growth rate of either side of your balance sheet and the leverage effect (ROE vs. ROA).One can generate savings by cutting in long-term profitable projects thus having less risk but ruining the long-term growth prospects. You can choose to gear up your economy/activity and use leverage now to generate higher profits in the long-run and after unwinding it you'll generate lots of cash (savings). If you can grow the value of assets at a faster pace than the value of debt you'll be fine. It's the leverage/gear effect. But you have to be able to make it. It needs to be done in a sustainable economy with high quality products, innovation and productivity. (Historically, the USA has been a winning horse. I like to bet on winning horses not loosers)........3. The logic underneath my arguments can be elucidated by a very simple example taught in multinational business finance called the big mac index (Surely, it's just a very simple example but if you apply the same logic to a broad range of products of two similar economic areas like the EU and the US then you can make a better bet on where you'll have higher quality of life and what is the equilibrium fx rate.)bigmac index.........4. The shity EUR/USD and crude oil correlationIt's done on speculator's perspective and not on real economic activity. Probably designed by arb trading desks from the EU focused on fx.Why?Because if crude oil prices are rising it should be due to more demand for oil including EU countries demand (The EU is not a producer of oil). If there's more demand for oil, EU countries will have to sell EUR and buy USD to buy commodities which are denominated in USD. If they buy more USD and sell EUR then there's more demand for USD. Higher demand for crude oil = higher prices for oil & higher demand for USD = higher price for USD vs. the EURMy arguments are being applied for the Eurozone only since the EU is not a producer of commodites.

This whole thread is nonsense. Why are you people so ready to parrot popular theories about the impact of various events on the dollar as fact?QuoteTo the extent that the USD loses reserve status, it will decline in value because fewer people will need USD for global trade and lending.This is ridiculous. First of all, the price of dollars is manipulated by the Federal Reserve. If the supply or demand for dollars rises or falls, they can erase or even reverse the effect with changes in interest rates.But I would think you, t4a, would more than anyone subscribe to a theory of arbitrage where the price of something is not affected by what currency you write on a piece of paper.I people stopped needing dollar bills for drug trade in South America, and their extra supply drove up the price of commodities and currencies in dollars, the Fed would contract the supply proportionately.What if people stopped trading everything in dollars except Picasso paintings? The exchange rate of dollars would probably go up. And yet it is no longer the reserve currency. Amazing!So far as the original statement, how do you know these events which affect the absolute value of the dollar are not already price in? Even if you people understood the dynamics of currency cross rates, 1) you would have no way of knowing if the effects were already priced in, and 2) you lack complete information required to arrive at a correct relative value.

And what will be the likely effect of rising USD interest rates on current and future USD debt?

QuoteOriginally posted by: farmerThis whole thread is nonsense. Why are you people so ready to parrot popular theories about the impact of various events on the dollar as fact?QuoteTo the extent that the USD loses reserve status, it will decline in value because fewer people will need USD for global trade and lending.This is ridiculous. First of all, the price of dollars is manipulated by the Federal Reserve. If the supply or demand for dollars rises or falls, they can erase or even reverse the effect with changes in interest rates.But I would think you, t4a, would more than anyone subscribe to a theory of arbitrage where the price of something is not affected by what currency you write on a piece of paper.I people stopped needing dollar bills for drug trade in South America, and their extra supply drove up the price of commodities and currencies in dollars, the Fed would contract the supply proportionately.What if people stopped trading everything in dollars except Picasso paintings? The exchange rate of dollars would probably go up. And yet it is no longer the reserve currency. Amazing!So far as the original statement, how do you know these events which affect the absolute value of the dollar are not already price in? Even if you people understood the dynamics of currency cross rates, 1) you would have no way of knowing if the effects were already priced in, and 2) you lack complete information required to arrive at a correct relative value.Inflation doesn't go up one-to-one with money supply. Essentially US is writing checks (to buy real goods) that never get cashed. Even ignoring seigniorage, just the savings from the liquidity premium US treasuries generate by being the most liquid security in the world is in the billions of dollars a year. YOu can't get that if all the treasuries can buy is picasso paintings.

Farmer raises some interesting points, as usual!Regarding Fed Manipulation: I do agree that the Fed can adjust the aggregate supply of dollars and can modulate the attractiveness of USD via interest rates but these controls have four significant limitations. First, the Fed has imperfect knowledge of key economic numbers such as the current circulating supply of dollars (i.e., dollars not locked in vaults, mattresses, etc.), the true future price elasticity for dollars, and the inflation perceptions of ordinary folks. Second, Gardener3 noted that the coupling between Fed action and economic reaction is neither exact nor instantaneous. Even if the Fed could measure the economy perfectly, it couldn't predict the exact action that would have the exactly desired consequences. Thus, the Fed can't help but take the wrong action because it can never know what the right action is. Third, the Fed has almost no control of where/who has the supply of dollars -- removing a presumed surfeit of currency from the total system could lead to a dearth of dollars in some key part of the system (e.g., consumer credit). Increasing interest rates to boost the USD (and to help the US govt sell it's trillions in debt) will raise mortgage rates to kill housing and new consumer lending. Fourth, the Fed is not immune from political pressures, especially these days! The overall result is that Fed has far less control than might first appear and suffers from systemic biases in it's policies.Regarding the "Priced-In" Phenomenon: the current speculative participants of the fx market (those that have the capital and risk-tolerance to take speculative positions in USD rates) have, no doubt, attempted to price-in all the contingencies of inflation/deflation, future dollar reserve/non-reserve-status, interest rate policy, dollar policy, flight-to/from-quality, etc. But the potential for speculators to remove all price inefficiencies does not imply the actual removal of all price inefficiencies. The speculative participants may not have the capital to offset more fundamental phenomena (e.g., patterns of global utilization of dollar for non-speculative purposes such as trade, dollar-denominated foreign debts, commodities, etc.). To the extent that the market contains players that buy/sell the dollar regardless of the speculative contingencies, the price will move independently of the proper contingent price. In fact, to the extent that non-speculative players dominate, the speculative players may leave the market (because the market can remain irrational longer than the speculators remain solvent). The point is that I'm not sure the theory of arbitrage applies, especially in times of market stress. In theory, the currency shouldn't matter because one can always hedge the currency risks. In practice, limitations in access to risk capital, liquidity risks, and counterparty risks, all degrade market completeness and violate the arbitrage-free assumption to create semi-inaccessible arbitrage.

QuoteOriginally posted by: Traden4AlphaFarmer raises some interesting points, as usual!Regarding Fed Manipulation: I do agree that the Fed can adjust the aggregate supply of dollars and can modulate the attractiveness of USD via interest rates but these controls have four significant limitations. First, the Fed has imperfect knowledge of key economic numbers such as the current circulating supply of dollars (i.e., dollars not locked in vaults, mattresses, etc.), the true future price elasticity for dollars, and the inflation perceptions of ordinary folks. Second, Gardener3 noted that the coupling between Fed action and economic reaction is neither exact nor instantaneous. Even if the Fed could measure the economy perfectly, it couldn't predict the exact action that would have the exactly desired consequences. Thus, the Fed can't help but take the wrong action because it can never know what the right action is. Third, the Fed has almost no control of where/who has the supply of dollars -- removing a presumed surfeit of currency from the total system could lead to a dearth of dollars in some key part of the system (e.g., consumer credit). Increasing interest rates to boost the USD (and to help the US govt sell it's trillions in debt) will raise mortgage rates to kill housing and new consumer lending. Fourth, the Fed is not immune from political pressures, especially these days! The overall result is that Fed has far less control than might first appear and suffers from systemic biases in it's policies.Regarding the "Priced-In" Phenomenon: the current speculative participants of the fx market (those that have the capital and risk-tolerance to take speculative positions in USD rates) have, no doubt, attempted to price-in all the contingencies of inflation/deflation, future dollar reserve/non-reserve-status, interest rate policy, dollar policy, flight-to/from-quality, etc. But the potential for speculators to remove all price inefficiencies does not imply the actual removal of all price inefficiencies. The speculative participants may not have the capital to offset more fundamental phenomena (e.g., patterns of global utilization of dollar for non-speculative purposes such as trade, dollar-denominated foreign debts, commodities, etc.). To the extent that the market contains players that buy/sell the dollar regardless of the speculative contingencies, the price will move independently of the proper contingent price. In fact, to the extent that non-speculative players dominate, the speculative players may leave the market (because the market can remain irrational longer than the speculators remain solvent). The point is that I'm not sure the theory of arbitrage applies, especially in times of market stress. In theory, the currency shouldn't matter because one can always hedge the currency risks. In practice, limitations in access to risk capital, liquidity risks, and counterparty risks, all degrade market completeness and violate the arbitrage-free assumption to create semi-inaccessible arbitrage.In short, there is no good reason for the USD interest rates to increase.

QuoteOriginally posted by: AnthisQuoteOriginally posted by: Traden4AlphaFarmer raises some interesting points, as usual!Regarding Fed Manipulation: I do agree that the Fed can adjust the aggregate supply of dollars and can modulate the attractiveness of USD via interest rates but these controls have four significant limitations: .... imperfect knowledge of key economic numbers .... imperfect coupling between Fed action and economic reaction .... no control of where/who has the supply of dollars .... not immune from political pressures. The overall result is that Fed has far less control than might first appear and suffers from systemic biases in it's policies.Regarding the "Priced-In" Phenomenon: the current speculative participants of the fx market (those that have the capital and risk-tolerance to take speculative positions in USD rates) have, no doubt, attempted to price-in all the contingencies of inflation/deflation, future dollar reserve/non-reserve-status, interest rate policy, dollar policy, flight-to/from-quality, etc. But the potential for speculators to remove all price inefficiencies does not imply the actual removal of all price inefficiencies. .... In theory, the currency shouldn't matter because one can always hedge the currency risks. In practice, limitations in access to risk capital, liquidity risks, and counterparty risks, all degrade market completeness and violate the arbitrage-free assumption to create semi-inaccessible arbitrage.In short, there is no good reason for the USD interest rates to increase.Interesting conclusion! Why do you think that?

Fed rate up---> Pressure for stocks down, house prices down, deliquencies, foreclosures, bankrupties up, consumer credit down, employment down, consumption down, tax revenues down, government debt and deficits up^2.Plus the feedback effects of those variables on each other. Is this desirable?

Good points, Anthis. I do agree about the Fed's need maintain low short-term rates for the foreseeable future (I'll not touch the issue of how far one can foresee the future, though). But what about the long-term rates? These are less controllable by the Fed and more important to both the "inflate-our-way-out-of-debt" and "kill-the-housing-market-with-high-rates" inflation scenarios. Can the Fed effectively suppress long-term rates by buying LT treasuries? Or will China and other LT treasury note holders become so nervous that they dump Treasuries?

If the long rate is short real rate+inflation expectation+credit spread+term premium-seigniorage effect+liquidity premium, then what do you think is the largest component that should be controled first?Second, given that a large % of US treasury holders are foreign entities that most probably have liabilities in other currencies, I would start worring when typical structures of mid and long term treasury issues get auctioned well below par.

Isn't there one more term to the long rate -- some sort of supply/demand imbalance term? U.S. needs to borrow about $3 trillion over the next two years (and I suspect that some other countries will also be borrowing money). I'm wondering about the implementation shortfall for trying to sell that much debt as well as long-term competition for capital. I agree that watching for below par auctions will indicate something is afoot, but will it represent rising inflation expectations or declining demand for "risk free" assets?

QuoteOriginally posted by: Traden4AlphaIsn't there one more term to the long rate -- some sort of supply/demand imbalance term? ?If, according to theory an interest rate is the price of capital denominated in a given currency, then supply/demand forces should be factored in the components of the yields. QuoteU.S. needs to borrow about $3 trillion over the next two years (and I suspect that some other countries will also be borrowing money). I'm wondering about the implementation shortfall for trying to sell that much debt as well as long-term competition for capital. The US, harder or easier will succeed borrowing this amount. It controls both the short rate and the money supply. The point is at what cost and from whom, and who will have the burden to pay it back, how, and when? For example will it be borrowed from domestic investors or foreign ones mainly? Will it be paid back by additional taxes and fines or by privatisations of public assets? What will be the effect on private sector's access to capital? Will a weak dollar encourage repatriation of american firms? Will encourage FDI?QuoteI agree that watching for below par auctions will indicate something is afoot, but will it represent rising inflation expectations or declining demand for "risk free" assets Domestic investors care more about inflation, foreign investors care more about currency rates. Thus the relative composition of treasury holders matters a lot here. Demanding higher premiums doesnt mean people are more risk averse, it likely means they are more risk aware.

QuoteOriginally posted by: AnthisFed rate up---> Pressure for stocks down, house prices down, deliquencies, foreclosures, bankrupties up, consumer credit down, employment down, consumption down, tax revenues down, government debt and deficits up^2.Plus the feedback effects of those variables on each other. Is this desirable?If people are leaving dollar bills on the sidewalk because you can't use them to buy oil anymore, then people won't need to borrow from the Fed to buy homes and stocks, they will just pick it up off the sidewalk.Geez, give it up.

QuoteOriginally posted by: farmerQuoteOriginally posted by: AnthisFed rate up---> Pressure for stocks down, house prices down, deliquencies, foreclosures, bankrupties up, consumer credit down, employment down, consumption down, tax revenues down, government debt and deficits up^2.Plus the feedback effects of those variables on each other. Is this desirable?If people are leaving dollar bills on the sidewalk because you can't use them to buy oil anymore, then people won't need to borrow from the Fed to buy homes and stocks, they will just pick it up off the sidewalk.Geez, give it up.If you think that USD is only good for buying oil...then you maybe right