04/12/2011 A new exchange rate pegging system based on and backed by each country’s total aggregate real estate and land value (TARELV)

This is an idea that first propped up in my head when I was a junior FX and gold options trader at Chemical Bank in the late 80’s. Puzzled and bewildered by the vague and imprecise ways that global currencies are valued, the quest for a viable alternative method has been with me throughout my entire career in the banking, risk management, financial services and real estate industries.

While I started the efforts to bring the economic advantages of financial derivatives to the mom and pop home owners after the turn of the millennium, these new exchange rate ideas have become more and more concrete but not at a degree that I could start talking about it without having a fear of being considered eccentric.

Efforts in residential real estate derivatives, institutional commercial property derivatives, SwapRent and then FARJHO have proved to be more acceptable by the masses and practical enough for making a living at the same time than devoting my spare time to creating a new jaw dropping financial instrument for the central banks. Having said that I did not foresee back then that I would be selling the SwapRent related concepts and methods as alternative economic policy management tools to many governments within the past few years either.

Rather than spending time on explaining the various problems of the existing exchange rate systems which are well known to many people already, I thought I should better focus on explaining why a new exchange rate system based on the total aggregate value of a country’s real estate and land could be better. Bear in mind that the proposed method is a suggested valuation methodology that may lead to a more precise and scientific consensus of a fair value of an exchange rate vs. that of any other currencies, the real operation of the exchange rate trading mechanism would of course continue to maintain a free market based operation.

So what are the positive arguments for a new exchange rate system based on a country’s total aggregate real estate value? Here a few starters.

1. First it simply reflects what a currency’s worth is much better with some real substance behind it. Total Aggregate Real Estate and Land Value (TARELV) reflects a country’s wealth better than a GDP number since the real estate value is more a passive investment than a GDP number that has too much volatility due to the human involvement factor. It is the same difference between an investment in a real estate property vs. an investment in a business (securities related). The business activities could go zero like a company stock could go to zero but properties would always maintain their utility value and never become zero.

2. Legally the real estate property value of a country could better serve as a collateral for the country’s currency (a form of debt) just the same way as a person’s house serves as collateral for his/her mortgage. This could inject the necessary confidence into the foreign persons that hold the country’s currency. This would serve better the financial markets better as the world moves from a one super power dominated monopolistic world to a oligopolistic world that has many economic and political powers. To further appreciate this point, one could simply imagine a person wishes to issue a currency or any negotiable instrument, it is much better if this currency is based on his house as the collateral rather than simply based on his words or his bluffing power.

3. Real estates and land are better than gold or any other commodities since real estate and land have real utility value. Gold may go back to become a useless metal when people suddenly start to realize that it is nothing more valuable than a tulip bulb. At most it could become another generic exchange medium like any other precious metals or stones in a barter like system. Its value to back other country’s paper currency from hoarding it does not make any economic sense.

4. The system may be subject to much less opportunities for manipulation by a country’s central bank’s scheming monetary policies or unscrupulous politicians’ wish to artificially depreciate and inflate out of their country’s external debts.

5. This new system would also automatically make the country’s government to direct its national resources to more productive uses to maintain the country’s economic health and steady growth by putting the Main Street economic activities on an even or higher priority with the non-productive financial asset manipulations in stock and bond markets on Wall Street.

6. The fluctuation of the exchange rates based on the real estate and land value would automatically adjust to the economic cycles in a “self-healing” fashion. When the real estate and land value declines and the exchange rate may become weak and hence may make the country’s exports more price competitive and increases its economic activities. It would also attract more foreign capital inflows. When the exchange rate increases vs. other currencies, the reverse would be true. It would become more expensive to export and hence reduced economic activities to prevent inflation from getting out of hand. There would also be more capital outflows based on enhanced investment opportunities in other countries. This would help create more global economic growth harmony since capital will flow to wherever it is cheaper to produce goods due to a temporary relatively weaker economy. This would be very different from the capital flight from a weak economy under the current exchange rate system.

To be continued …..

Filed under: Currencies, Economic Viewpoints, TARELV, Alternative currencies, Exchange rate mechanism, Exchange rate pegging system, Real estate based money, TARELV

04/02/2011 Dispelling harmful myths about the need of a weaker currency

No other economic topic is more confusing and has been least properly understood by the public than the exchange rate system. Politicians love to use it for the opportunistic advantage it offers to blame foreigners for their fellow countrymen’s failure to economically compete. Academics love to use it to make a point for a half baked truth.

They may all have a point. The problem is that the points will all have only half of the truth. The politicians’ opponents and the academic’s rivals could all be right at the same time since there are always two sides to an exchange rate’s impact on the economy more like there are always two sides of a coin. More often than not it is completely futile to make an argument on what is better to have, a stronger exchange rate or a weaker exchange rate, for a specific short term purpose.

For short term purposes, when a country’s currency is stronger it is good for the assets and when it is weaker it is good for the country’s liabilities. A weaker exchange rate may help stimulate the domestic economy by creating more foreign demands for its commodities and goods but it will cause a permanent wholesale destruction of the country’s aggregate wealth in the global market place. A stronger currency may serve to slow down its domestic economic activities and hence lower inflationary pressure by reducing foreign demand but it may create permanent wholesale advantage and sudden increased wealth for every one of its citizens.

Over the long run, a country with a stronger currency commands confidence and respect of every human being on earth, could easily afford to develop more leading edge scientific discoveries and engineering monuments, let alone a much stronger military defence force. It also naturally speaks much louder in global politics, attracts top talents to migrate and work for it to further enhance its competitiveness. Therefore the strength of a country’s exchange rate is really a report card of its government’s performance, as fully discussed in my prior blog post on 10/15/2010, “Foreign exchange rate is the competency report card of a government’s ability to manage a country’s economy”.

So next time you read an op-ed commentary, hear a comment by a guest speaker on TV, or study an academic paper arguing for weaker currency, perhaps you would like to find out whether the person has a political agenda trying to spin a story to confuse the public or perhaps he/she is simply a complete moron.

Hoping to gain short term export advantage to create temporary transient job opportunities instead of focusing the collective efforts on increasing longer term productivity or economic competitiveness by promoting diligence, hard working ethics and/or innovations will simply continue the wholesale destruction of our country’s wealth and eventually reduce us from a major league super power to a little league weenie power.

Filed under: Currencies, Economic Viewpoints, Exchange rate mechanism, Loose monetary policy