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"Pour water into your wine to create more wine" sort of scenario. Why nobody is talking about the USD being diluted and the inflation effects are embodied in vi

"Pour water into your wine to create more wine" sort of scenario. Why nobody is talking about the USD being diluted and the inflation effects are embodied in virtual equity valuations?

KMag 6y ago
If that's the case, one would expect the FX rate changes to equally increase European market valuations, if USD is the unit of account (numerare). If the Euro were being diluted at a rate that kept FX rates in check, then one would expect that to equally buoy European market valuations. So, there may well be something to be said about USD dilution, but I don't see how it affects the relative market capitalizations of the US tech sector vs. the Eurozone markets.
- Rury 6y ago
  Not necessarily. It's all supply/demand driven. Just because there's a sudden increase in money available, doesn't necessarily mean everything is going to inflate in valuations. Only things that are in demand will inflate. Take it this way: If everyone who received a stimulus check this year went "Awesome I'm going to go buy 30 turkeys with this stimulus money!" - The price of turkeys would skyrocket as the demand for turkey's skyrocketed with all the additional money available, but the supply of turkeys didn't proportionally increase. However, the price of shirts would remain relatively the same as the demand didn't skyrocket for shirts. And this effect applies to foreign currencies/foreign stocks... as they're just another thing you can trade dollars for. This is also why CPI is a garbage metric for inflation. It only tracks certain things, it doesn't track things like stocks or real estate... Today people mostly have what they need. With all this additional money they received, most go "where do I put this money? Eh may as well put it into stocks..." And they buy stocks that they think are stable and good investments - and only those stock valuations inflate.
- sirmoveon 6y ago
  Most world economies keep their reserves in USD or are highly leveraged with USD transactions. The denominator by which everyone has to abide by is the USD and its probably why the relative advantage you are speaking of doesn't present itself.
QuesnayJr 6y ago
Because most investors don't believe that the USD is being significantly diluted? I know the idea that inflation is just around the corner is big here on HN, but it's not a big concern on financial markets. The inflation implied by TIPS is only 2% (the Fed target). The value of the dollar is down maybe 10% from last year.
- nemo44x 6y ago
  > The value of the dollar is down maybe 10% from last year. Which makes USA tech companies even more valuable as they do a significant amount of business overseas. They report in USD and converting those Euros, etc into USD means more USD. All the while not having to pay more for imported materials, etc.
deleted 6y ago
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monksy 6y ago
Because the chickens haven't come to roost yet and they're following trends.
stuntkite 6y ago
Virtually no one is talking about us moving to "zero reserve banking" in March. It happened under the radar. I'm not an economist, but at the very least this seems like it is a huge deal and at most an indicator of impending catastrophe. https://medium.com/navigating-life/we-just-went-from-fractional-reserve-banking-to-zero-reserve-banking-and-its-a-pretty-big-deal-c501432e9be6 https://medium.com/navigating-life/we-just-went-from-fractio...

"Pour water into your wine to create more wine" sort of scenario. Why nobody is talking about the USD being diluted and the inflation effects are embodied in virtual equity valuations?

KMag 6y ago

If that's the case, one would expect the FX rate changes to equally increase European market valuations, if USD is the unit of account (numerare). If the Euro were being diluted at a rate that kept FX rates in check, then one would expect that to equally buoy European market valuations. So, there may well be something to be said about USD dilution, but I don't see how it affects the relative market capitalizations of the US tech sector vs. the Eurozone markets.

Rury 6y ago
Not necessarily. It's all supply/demand driven. Just because there's a sudden increase in money available, doesn't necessarily mean everything is going to inflate in valuations. Only things that are in demand will inflate. Take it this way: If everyone who received a stimulus check this year went "Awesome I'm going to go buy 30 turkeys with this stimulus money!" - The price of turkeys would skyrocket as the demand for turkey's skyrocketed with all the additional money available, but the supply of turkeys didn't proportionally increase. However, the price of shirts would remain relatively the same as the demand didn't skyrocket for shirts. And this effect applies to foreign currencies/foreign stocks... as they're just another thing you can trade dollars for. This is also why CPI is a garbage metric for inflation. It only tracks certain things, it doesn't track things like stocks or real estate... Today people mostly have what they need. With all this additional money they received, most go "where do I put this money? Eh may as well put it into stocks..." And they buy stocks that they think are stable and good investments - and only those stock valuations inflate.
sirmoveon 6y ago
Most world economies keep their reserves in USD or are highly leveraged with USD transactions. The denominator by which everyone has to abide by is the USD and its probably why the relative advantage you are speaking of doesn't present itself.

QuesnayJr 6y ago

Because most investors don't believe that the USD is being significantly diluted? I know the idea that inflation is just around the corner is big here on HN, but it's not a big concern on financial markets. The inflation implied by TIPS is only 2% (the Fed target). The value of the dollar is down maybe 10% from last year.

nemo44x 6y ago
> The value of the dollar is down maybe 10% from last year. Which makes USA tech companies even more valuable as they do a significant amount of business overseas. They report in USD and converting those Euros, etc into USD means more USD. All the while not having to pay more for imported materials, etc.

deleted 6y ago

[deleted]

monksy 6y ago

Because the chickens haven't come to roost yet and they're following trends.

stuntkite 6y ago

Virtually no one is talking about us moving to "zero reserve banking" in March. It happened under the radar. I'm not an economist, but at the very least this seems like it is a huge deal and at most an indicator of impending catastrophe. https://medium.com/navigating-life/we-just-went-from-fractional-reserve-banking-to-zero-reserve-banking-and-its-a-pretty-big-deal-c501432e9be6 https://medium.com/navigating-life/we-just-went-from-fractio...