A recent conversation -- Understanding the Debt Default Consequences: Jonathan Walters Desi, the US dollar is the most liquid and most useful currency to have in the world. That liquidity means that one can safely park money in US dollars, and get it out quickly. That doesnt mean much for you, or even me, because we dont have enough money to really have that become a factor. However, when you are referring to an institutional investor, if you are looking to park say 10 billion dollars, are you going to park that in Canadian dollars or US dollars? (both are worth about the same right now). You are going to park it in US dollars, even though right now, the Canadian dollar is probably more secure. Why? because if you need to get that money out into your local currency, liquidating a billion dollars in Canadian dollars is going to drop the value of the Canadian dollar in itself, just on the volume, nothing else. Now that conversion of a billion dollars Canadian into US dollars (remember what I have been saying about how the foreign exchange transactions work, no matter what the actual true destination currency is, it will first be converted into US dollars) wont actually affect the value of the US dollar, because trillions of dollars get exchanged every day, so that billion is a blip. Now heres the other kicker in that. EVERY FOREX transaction settles in 2 days, meaning that a conversion from canadian to say sterling will take 4 days (2 for each conversion) and while most institutional investors will often do the whole thing in 2 days, they are doing so by having reserve money in USD. 12 minutes ago · Like Desirea Herrera So they actually already have money in USD.. and when the make the conversion there is no net effect because theyre just replacing whats there as they withdraw it? 10 minutes ago · Like Jonathan Walters Desi, if that is in the shortening from 2 days, no it means that they are using their US reserves to margin call the transaction from USD while the transaction from CAD is waiting to settle. (Its a mechanical thing) 8 minutes ago · Like Desirea Herrera So they are shortening 4 days to 2 days correct? 7 minutes ago · Like Jonathan Walters more like 2 and a bit, yes, but they are doing so by having a buffer in USD. 6 minutes ago · Like Desirea Herrera So how will a debt default here affect that transaction? 6 minutes ago · Like Jonathan Walters FOREX market will more than likely just freeze and nobody around the world will be able to do a currency conversion because the value of the US dollar will be in such a state of flux that nobody can actually agree on a value for the transaction. You go from Canadian to USD, then USD to say Euro, but you dont know what the spot price for the USD will be. A US default, once it cascades into the markets, will essentially create a global financial shutdown. 3 minutes ago ·
Posted on: Sat, 12 Oct 2013 17:02:53 +0000
Trending Topics
Recently Viewed Topics
© 2015