the meaning of money

Doug Henwood dhenwood at
Tue Sep 8 07:00:24 PDT 1998

pms wrote:

>I don't grasp the currency thing. Why does the dollar decline because
>Greenspan says he might cut interest rates. I would think that would mean
>that anyone who wanted into Tresaries would snatch them now...are currency
>values connected to the bond market? Do people like Soro's actually buy
>money or is it a country's bonds that get bought.

All other things being equal (and when are they, really?), lower interest rates mean that capital will leave a country in search of higher rates elsewhere; higher interest rates attract capital. So, the knee-jerk reaction to Greenspan's hints of ease (which were only hints, and not of ease, but of shifting the Fed's stance for a bias towards tightness towards a neutral position) is a lower dollar.

And Soros & Co. don't buy cash - they buy assets denominated in the target currency, like government bills or bonds. With short-term instruments like bills, you're speculating mostly on the currency move, since short-term rates don't move that much; with bonds, though, you're dealing with something that can be very volatile, so you're making a double bet, on the currency and its interest rate markets.

>And I read somewhere that gold was up because Treasuries were no longer
>looking "invulnerable". Does that mean the bond market thinks the guv will
>default. What are they, closet Marxists. Really, do they just make this
>stuff up for the rubes.

In many ways, they're the rubes, or lots of them are. Never overestimate the sophistication of a trader. They don't fear default by the U.S. Treasury. Well, a few lunatics might, but that's not a serious possibility.


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