Follow @PoliticsIE
 
 
 
Page 1 of 16 1234511 ... LastLast
Results 1 to 10 of 151

Thread: Do posters understand why defaulting and reverting to an old currency is near-impossible?

  1. #1
    Politics.ie Member
    Join Date
    Dec 2006
    Posts
    4,996
    Mentioned
    0 Post(s)

    Default Do posters understand why defaulting and reverting to an old currency is near-impossible?

    I've posted on this before and the ignorance of this topic is alarmingly widespread, given how eager people are to opine on the matter.

    Posters appear to have this idea that a small nation like Ireland or Greece or Portugal can simply exit the Euro, set up a new version of their old currency, and merrily continue trading.

    Sadly, it's not that simple.

    We can, of course, introduce a new currency, but the problem is when we try to buy stuff using the new currency.

    Market speculators can, and will, chew this new currency to shreds. The only way to prevent this is by having a huge mountain of money, several tens of billions of US dollars, to use to defeat the speculators. But, paradoxically, if we had such a mountain of money, we wouldn't be in a crisis.

    One easy way for speculators to kill the new currency is via naked short selling.

    Short selling is a trick that speculators use to profit from a fall in the price of an asset. Imagine you know the Japanese yen is going to fall in price by 10%. To profit from this, you borrow a billion yen from a bank, for example, with a promise to return the yen 10 days later. Then you sell the yen for US$100m. Then the yen falls 10%. You buy back the billion yen for US$90m. Then you give back the billion yen to the bank, and keep the US$10m.

    The naked version of the above short sale is the same, except you don't have any yen. Instead of trading actual yen, you trade a contract, a promise, to supply yen. It's not entirely different to bluffing in poker. You convince the opponent that you have a great hand, even though you have nothing, and you gain lots of money despite having a losing hand.

    As investopedia points out, "Naked shorting is illegal because it allows manipulators a chance to force stock prices down without regard for normal stock supply/demand patterns."

    So what happens to a Wall Street trader who is discovered illegally selling short naked? Typically, he will be fined maybe $200,000, which his multi-billion-dollar employer will pay. Then he'll go back to business as usual. So the fact that it is technically illegal is very, very, VERY little protection.

    So how do you fight a naked short seller who wants to force down the value of the Punt Nua? The same way you fight a bluffer in poker: you put down the money to see his hand.

    And what if you don't have enough money to see him? The bluffer wins.

    So for Ireland or Portugal or Greece to set up a new currency on their own, they need to have a big mountain of US dollars to call the bluff of the short sellers.

    Imagine we want the punt nua to be worth half a dollar, in order to make our exports more competitive. But the short sellers offer eighty billion punt nua for only $20bn US dollars. If we had $20bn US dollars, we could call their bluff. The short sellers would be forced to find eighty billion punt nua in order to honour the contract. They would have to pay a premium to get the eighty billion punt nua.

    But if the Irish central bank doesn't have the $20bn US dollars, they can't call the bluff, and this kind of process can force down the value of the punt nua until it's totally worthless.

    This is why I've suggested pooling our resources with other nations in a debt crisis. By putting our resources together, we could have enough reserves to maintain the value of the new currency.

    This would only be temporary, for about a decade. We would use this time to build up a large US dollar reserve (like China did). Then, Portugal and Greece could re-launch their own currencies, with enough reserves to defend them.

    But right now, none of us have sufficient reserves to defend a new currency on our own, so either we pool our resources, or we just accept Germany's current programme of never-ending economic collapse.
    When you see the words "Mises" or "Hayek" in someone's post, just ask yourself: do I really want to ban paper money and go back to gold?

    You have to pity the kind of people who buy into conspiracy theories. I find the following to be the saddest words on the internet: "Re: connection between Bilderberg puppet lady gaga and viral outbreak in ukraine "

  2. #2
    Politics.ie Member Howya's Avatar
    Join Date
    Feb 2012
    Location
    Lass' sie nach Irland kommen
    Posts
    1,686
    Mentioned
    0 Post(s)

    Default

    The title includes a reference to defaulting which is not necessarily connected to establishing a new currency. However, the main problem with the argument is that it assumes that the central bank has a pre-determined view of the value of punt nua relative to the euro or US$. I would argue that there should be no such pre-determination. Instead, if (a big IF) we went down this route, then the currency should be allowed to free float. There is no reason to support a particular currency value - we are not in the old ESM or fixed rate regime. The speculators can bet against each other. Our exports will benefit. The down side is that import costs will rise rapidly forcing up inflation.
    “Still paying, still to owe. Eternal woe! ” ― Paradise Lost, John Milton

  3. #3
    Politics.ie Member Shpake's Avatar
    Join Date
    Oct 2012
    Location
    Dublin-Male-Hetero-ABFF but worried about FGLab
    Posts
    5,229
    Mentioned
    0 Post(s)

    Default

    I sure hope we are on the right road.
    I think this will only be clear as the years go by. Time will tell. It would seem that there are winners and losers in every policy and in every system. The winners here are those in permanent employment such as the high tech sector and pharmacy as long as they can hold down their jobs. The 14% who might find work in the tourist, low tech manufacture, construction etc. will not be helped by the high value of the euro. Some of the profits of doom... sorry prophets of doom foretell a decade of low growth, high unemployment and probable emigration. I aggree to leave the euro would result in a sytemic shock... which one is worst? you're asking the wrong person.... and the ones who say they know are probably protecting their lobby or interest group.

  4. #4
    Politics.ie Member
    Join Date
    Sep 2012
    Posts
    26,763
    Mentioned
    0 Post(s)

    Default

    Quote Originally Posted by feargach View Post
    I've posted on this before and the ignorance of this topic is alarmingly widespread, given how eager people are to opine on the matter.

    Posters appear to have this idea that a small nation like Ireland or Greece or Portugal can simply exit the Euro, set up a new version of their old currency, and merrily continue trading.

    Sadly, it's not that simple.

    We can, of course, introduce a new currency, but the problem is when we try to buy stuff using the new currency.

    Market speculators can, and will, chew this new currency to shreds. The only way to prevent this is by having a huge mountain of money, several tens of billions of US dollars, to use to defeat the speculators. But, paradoxically, if we had such a mountain of money, we wouldn't be in a crisis.

    One easy way for speculators to kill the new currency is via naked short selling.

    Short selling is a trick that speculators use to profit from a fall in the price of an asset. Imagine you know the Japanese yen is going to fall in price by 10%. To profit from this, you borrow a billion yen from a bank, for example, with a promise to return the yen 10 days later. Then you sell the yen for US$100m. Then the yen falls 10%. You buy back the billion yen for US$90m. Then you give back the billion yen to the bank, and keep the US$10m.

    The naked version of the above short sale is the same, except you don't have any yen. Instead of trading actual yen, you trade a contract, a promise, to supply yen. It's not entirely different to bluffing in poker. You convince the opponent that you have a great hand, even though you have nothing, and you gain lots of money despite having a losing hand.

    As investopedia points out, "Naked shorting is illegal because it allows manipulators a chance to force stock prices down without regard for normal stock supply/demand patterns."

    So what happens to a Wall Street trader who is discovered illegally selling short naked? Typically, he will be fined maybe $200,000, which his multi-billion-dollar employer will pay. Then he'll go back to business as usual. So the fact that it is technically illegal is very, very, VERY little protection.

    So how do you fight a naked short seller who wants to force down the value of the Punt Nua? The same way you fight a bluffer in poker: you put down the money to see his hand.

    And what if you don't have enough money to see him? The bluffer wins.

    So for Ireland or Portugal or Greece to set up a new currency on their own, they need to have a big mountain of US dollars to call the bluff of the short sellers.

    Imagine we want the punt nua to be worth half a dollar, in order to make our exports more competitive. But the short sellers offer eighty billion punt nua for only $20bn US dollars. If we had $20bn US dollars, we could call their bluff. The short sellers would be forced to find eighty billion punt nua in order to honour the contract. They would have to pay a premium to get the eighty billion punt nua.

    But if the Irish central bank doesn't have the $20bn US dollars, they can't call the bluff, and this kind of process can force down the value of the punt nua until it's totally worthless.

    This is why I've suggested pooling our resources with other nations in a debt crisis. By putting our resources together, we could have enough reserves to maintain the value of the new currency.

    This would only be temporary, for about a decade. We would use this time to build up a large US dollar reserve (like China did). Then, Portugal and Greece could re-launch their own currencies, with enough reserves to defend them.

    But right now, none of us have sufficient reserves to defend a new currency on our own, so either we pool our resources, or we just accept Germany's current programme of never-ending economic collapse.

    Let them keep short selling. The lower the currency goes the more enticing our exports are, the more is purchased the larger the weight of money leaning against the short sellers.

    It is for this scenario that Maynard Keyenes uttered his famous words "the market can stay irrational longer than you can remain solvent".


    You strike me as a young pup who has only ever experienced the artificial exchange rate regimes of the EMS/ERM/Euro.

  5. #5
    Politics.ie Member Eoin Coir's Avatar
    Join Date
    Jun 2012
    Posts
    16,522
    Mentioned
    0 Post(s)

    Default

    I agree it is almost impossible. But it makes good therapy for insomniacs and those loons at home on the keyboard in their pyjamas in the middle of the day.

  6. #6
    Politics.ie Member
    Join Date
    Dec 2006
    Posts
    4,996
    Mentioned
    0 Post(s)

    Default

    Quote Originally Posted by Howya View Post
    The title includes a reference to defaulting which is not necessarily connected to establishing a new currency. However, the main problem with the argument is that it assumes that the central bank has a pre-determined view of the value of punt nua relative to the euro or US$. I would argue that there should be no such pre-determination. Instead, if (a big IF) we went down this route, then the currency should be allowed to free float. There is no reason to support a particular currency value - we are not in the old ESM or fixed rate regime. The speculators can bet against each other. Our exports will benefit. The down side is that import costs will rise rapidly forcing up inflation.
    You're missing most of the downside: if we are unable to afford imports of oil, our economy will stop dead.

    We HAVE to maintain the value of the currency so that it is sufficient to allow companies to continue running. We are a widely-dispersed population and over 98% of businesses will be unable to remain in business if a fall in the currency means we cannot import sufficient petroleum to keep things moving.

    Your post apparently assumes that, for no particular reason, the longs will balance out the shorts in the medium term. But 2009 is proof positive that that is simply not what happens. Sometimes the shorts just win outright.

    The Argentine peso has remained very steady for most of the last decade. Is this because the markets found that level? No. It's because the Argentine central bank threw mountains of foreign reserves into preventing an exchange rate crisis.

    If you don't have that, forget about having a reliable supply of necessary imported commodities.
    When you see the words "Mises" or "Hayek" in someone's post, just ask yourself: do I really want to ban paper money and go back to gold?

    You have to pity the kind of people who buy into conspiracy theories. I find the following to be the saddest words on the internet: "Re: connection between Bilderberg puppet lady gaga and viral outbreak in ukraine "

  7. #7
    Politics.ie Member
    Join Date
    Dec 2006
    Posts
    4,996
    Mentioned
    0 Post(s)

    Default

    Quote Originally Posted by Trainwreck View Post
    Let them keep short selling. The lower the currency goes the more enticing our exports are
    How do we get our exports out of the country if we can't afford petrol?

    How will we manufacture the exports and get them to the port, without petrol?

    How do workers get to the factory to produce the export goods, without petrol?
    When you see the words "Mises" or "Hayek" in someone's post, just ask yourself: do I really want to ban paper money and go back to gold?

    You have to pity the kind of people who buy into conspiracy theories. I find the following to be the saddest words on the internet: "Re: connection between Bilderberg puppet lady gaga and viral outbreak in ukraine "

  8. #8
    Politics.ie Member kerdasi amaq's Avatar
    Join Date
    Aug 2009
    Location
    M.O. BÁC
    Posts
    4,582
    Mentioned
    0 Post(s)

    Default

    My, oh my, how did we ever manage when we had our own currency?

    We will not be buying foreign goods with Punt nua.

    You know, it's possible that a Punt nua could be like the Swiss Franc.
    We have got as much as we are going to get out of Europe; it is, now, time to leave!
    EUROPA CONVENTUS DELENDA EST!...Whistle out the marching tune.....27

  9. #9
    Politics.ie Member Ulster-Lad's Avatar
    Join Date
    Oct 2006
    Location
    Dún na nGall
    Posts
    10,090
    Mentioned
    0 Post(s)

    Default

    Quote Originally Posted by feargach View Post
    How do we get our exports out of the country if we can't afford petrol?

    How will we manufacture the exports and get them to the port, without petrol?

    How do workers get to the factory to produce the export goods, without petrol?
    The government could lower their 70% take on every litre of fuel.
    ‘The Great only appear great because we are on our knees: Let Us Rise!’ “ (James Larkin)

  10. #10
    Politics.ie Member Sister Mercedes's Avatar
    Join Date
    Dec 2011
    Posts
    20,663
    Mentioned
    0 Post(s)

    Default

    The Legal Establishment in Ireland worrying that their Cookie Jar might empty.

Page 1 of 16 1234511 ... LastLast

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •