macroeconomics
these gems as no more than worthless pebbles. Voltaire makes the point that gold, silver, diamonds, gems nor any commodity have an inalienable guarantee of value.
In large part, it is the government’s ability
to repay in its debt plus
interest, which gives its currency value. Central banks purchase sovereign debt from the open market
exchange for
central bank issued notes. The notes are paper reminder that it is backed by a bond acquired by the central bank. It then flows through the economy via the private banking system. What it all amounts to is this: A central bank stores all the assets. It then issues notes representing the total value of those assets or in other words the memory of the total
value of those assets. The
more critical feature of the asset is not so much what it is, as much as what value it holds. The each note represents a small fraction of total assets, which in theory is owned by the citizens of the country. The central bank is legally empowered to represent the citizens hence the notes are essentially ‘proof
of deposit’ for any one citizen to another; something like a preprinted cheque.
If the assets were gold, silver and gems, a non-redeemable note representing a small fraction of total assets on deposit would perform exactly the same function. Either way it may be interpreted as ‘printing money’. In a more practical
FX
is poor, the value of circulating notes decreases. Thus many more will be demanded in a transaction: inflation. If it’s a bumper crop, the value of circulating notes increases. Thus far fewer will be offered in a transaction: deflation. Removing notes makes them scarcer, the value increases: anti-inflation. Adding notes makes them more plentiful, the value decreases: anti-deflation. Value is managed through available quantity of notes.
Central
often act as auctioneer
the
The concept of a printed note representing the value of the issuer gives rise to the evolution of central banks
sense those sovereign debt assets are actually increasing in value through interest on that debt. This is referred to as ‘cash flow’. Tangibles do not produce cash flow. So which then have greater value?
Harvests are unpredictable. There’s always a risk that a harvest will fall short or conversely, be a bumper crop. Either situation affects the value of the written bearer notes already in circulation. If the crop
banks the for
g o v er nm en t debt. As such, it
performs opposite
t r a n sact io n : it
sovereign
exchanges debt
for notes; it removes the supply of notes from the system. The relative
strength of auction demand is a good indicator of a paper note’s value, or as how well the memory of value is being preserved. The auction debt duration covers the very short to very long term. There are even fine- tuning debt mechanisms; short term repurchase agreements and the like6
.
Te idea is to maintain the value of the notes in circulation by controlling the supply.
Value worships Mnemosyne. FX TRADER MAGAZINE April - June 2016 45
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84 |
Page 85 |
Page 86 |
Page 87 |
Page 88 |
Page 89 |
Page 90 |
Page 91 |
Page 92 |
Page 93 |
Page 94 |
Page 95