and I'm showing just [INAUDIBLE] there in this chart here this, this is the the dollar exchange rate. the, the blue, the blue one is the dollar against gold, so this is the price of gold in dollars and you can see that from 2003 to the present. It's been sort of increasing with some fluctuation and that's on the left hand, on the left hand side there. So the price of gold is about, is about $1,800 an ounce right, right now. in red, that's the price of a Euro in dollars and you can see that the Euro has. Fallen quite a bit became quite cheap. It's risen more recently. The price of a Euro is about a dollar, a dollar 30. I note here, there are two ways, and you need to be a little careful of this whenever you read something about exchange rates. There's two ways to think about an exchange rate. You can either think of the dollar-Euro exchange rate as, how many dollars does it take to buy a Euro, okay? Which is this quote. That's called Amer-, the American convention. Okay? Or, how many Euros does it take to buy a dollar, okay? That's called the European convention and of course all of the theory is the same. The theory isn't is not doesn't isn't affected by how you quote prices, but all the equations will be a little bit different. Because if you have the equation in one sense, and then you switch to the other exchange rate, it's just going to be the inverse. To date, in this class, I've been using the European convention, just so you're aware, but here. This is the American convention. US dollars to 1 Euro. Okay, and, and that's because this, this, this data is drawn from the, St. Louis Fed website, where you can. It's just fabulous, you can create little charts like this in 30 seconds, And then download them on your laptop and show them to your class, and it's a wonderful, it's a wonderful service. So, we're going to be trying to understand these fluctuations, and also possibly the movement of the price of gold as, as well. Now, So far in this class we've been focusing very much on the money markets, and I want to emphasize that the foreign exchange is the relative price of money. So really is a money market it's not a capital market that we, that we're are talking about here. we've been thinking about the the best money in the system, as being Reserves at the, at the central bank which are liabilities of the central bank. but that's the best money we've been thinking of and, or, or, currency you could say. Because that's also just a liability of the Fed. And then somewhat below that we were thinking of Fed funds. Which are promises to pay reserves by banks, maybe one, one over the other. And then somewhat below that maybe Eurodollars. These are international dollars. They're promises to pay accounts in New York or something like that. So the, the, all of these things sort of trades at a very similar price, but they're. They're all, all these things, Eurodollars and Fed funds, are both promises to pay reserves, the ultimate, the ultimate money here. One of the things I want to talk about today, sort of philosophical issue is, is what kind of things are these? Okay? We, we're mostly. Pointing on the issue of what is money because we're focusing on credit. We're focusing on promises to pay money. but once, once you start to think about exchange rates you're talking about the price of one money in terms of another money. And you have to really sort of confront this issue. And there are two traditions that we're going to talk about, chartalism and metala, and metallism that, that lead to two different theoretical traditions. But so it's going to be what sort of, what sort of a thing is, is money? Before we get into that philosophy though, I want to just give you another, another sort of sense of the hierarchy of international money that we are going to be trying to understand. that is to say the stuff that's above this, what's above this. Okay. [COUGH] It's, this is, this is just This is just a stylized description. Okay, this isn't theory or anything. This is just when you look out in the world. and you're expecting to see hierarchy. Which all students in this class do. Okay? What, where do you see it? What, what are the, what are the symptoms of hierarchy? What are the things that we want to, want to map this world that we're going to try to understand here? There's, definitely, there's, there's a reserve currency which is the international dollar, okay? Which is the world reserve currency. I, most trade is, is, is denominated and settled in the international dollar. and then there are various significant currencies. There's the domestic dollar, which trades at par with the international dollar. Although, as, as you may remember we looked in the, during the crisis there was some difficulty with that. And it turned out the interest rate had to move quite a bit in order to hold, hold that par relationship. There's a key currency is the Yen which we just heard about. Sort of in, in, in Asia. Maybe eventually the Renminbi we'll be talking about the Renminbi. And in Europe, we have the pound. And the Euro. So these are, these are the four most, most widely traded currencies in the, in the world. there's also the There's also the Swiss franc. There's the Canadian dollar, and there's the Australian dollar. These are all, well you can tell what they are. They're, they're currencies of different countries, Australia, Canada, Switzerland. I'm writing, this is all, all these currencies that I just have on the board here are called majors. Okay. in the, in the sense that they are, they're deep in liquid markets traded against the dollar. And you can, you can do very large trades without moving the price at all in these, in these currencies. I have some facts for you. I think it is 51% of the volume of foreign exchange trading. involves only, only a few currencies. The Dollar, Euro, Yen and Sterling, so these 51% as one leg of the trade okay? So there'll be the, it, it'll be that currency against some other currency. and And a fully 85% of trading volume has the dollar as one leg of the trade. Okay, so it really, it really is a dollar system here, okay. There's a bunch of other currencies. You know, there's hundreds of, hundreds of countries, okay? But these currencies are minor currencies and if they don't trade against each other, you have to trade If you wanted to trade the the. Hungarian forint okay, against the Mexican peso, you would have to go through dollars. You'd have to change, change, change one of them into dollars and then ge, buy, use dollars to buy the other. There, there sort of isn't a cross currency there, there. So, this is a hierarchical system with the dollar at the top, a bunch of other significant key currencies These four here, okay, and then some significant currencies, here. And then a whole bunch of others. So it's pretty clear, just from the volume, that this is a, it's a hierarchical, hierarchical system. Did, the fact that it's the dollar in the center makes it a little difficult for Americans to think about foreign exchange, okay? Because we're sort of in the middle, in the middle of it all. Our currency is the best currency. and so we tend not to think about it. Europeans, people in other countries, think about foreign exchange all the time, okay, in their normal lives. And so, it's it's, they have better intuitions about it. [BLANK_AUDIO]
