James Lewis

The King Canute Economy: Governments' Futile Attempt to Stem the Tide

this is a very good article...
can the masters of the universe hold back the tides indeed.

of coruse as negative as all this is, if the OECD countries can generate enrgey using clean technology and take away flows of USD to the oil countries. Then we could see a re-emergence of wealth back to the west. Also if the west shuts off imports into their markets, more domestic manufacturing could fuel added value in the western economies.

The point here is that the USA has more faith in making money in the Chinese market and by doing so become closer to China. Then to block off chinese exports and make them in their own country.

I agree that the asset bubbles created a veil of untruth and hid the underlying weaknesses of the west economies but be clear these asset bubbles were financed by the east as well. So in effect the east paid a great deal towards this fake wealth. Also the IT and technology revolution did add a great deal of real value to the western economies.

Innovation and technological advancement adds so much to an economy. More than economists can ever believe. This is why R+D pays off. The USA strategy of getting low value added goods madeinthe East while spending its time/money on R+D may pay off.

From where the US is standing I belive they know they have to create real value added to their economy. So I do not think their arrogance is blinding them. They better hurry up and they better hope they can generate 2-3 trillion/year from clean energy. If they create enough money through QE and hyperinflate the money supply by 100-150%. Then in 2020 they may be able to wipe out all their debt.

Will the U.S. Remain China’s Biggest Export Destination?

If the USA effectively bails out all the non-performing loans of its banks. And creates a few more trillion through QE, it is highly likely that they will have the ability to import high quanitities of chinese goods.

Lets just hope that the USA wakes up to protectionism, because without it. China will carry on its monopoly of free trade. My guess is that we will have a contraction of protectionism short term while the USA gives China one last chance and carries on printing money and getting Iran under control. But next spring we could see some unprecedented protectionsim coming from the USA.

If I am wrong and the USA carries on letting the trade surplus with China, to get bigger. Then you can pretty much wave goodbye to americas economic supremacy.

I get the sense that Obama is a very tough individual underneath.
So with a bit of luck the USA will be OK

Better Listen What China Has to Say

I think the author does not understand the basic tenents of the balanace of payments. Nor does he understand how gdp is calculated in China. In China 6.1% GDP growth (which is around 4.5% after the lies have been factored out) is indicative of a recession. In terms of China's reserves, the reason why the Chinese Government has so much reserves because they run China like a business, not like a non-for-profit organisation with the PEOPLE'S best interests at heart. I'm sure most countries could build up reserves by holding down the living standards of a great majority of its people in order to fully exploit and profit from its human resources.

Also do we not think China is getting a little head of itself talking about the Yuan being a reserve currency and the need for them to buy more gold. Most of the worlds population dont even know what the yuan looks it.

And China is not a Dragon..it's hungry Tiger.
Europe is the Dragon.

Tom E, nice thoughts. Seems to me the speculative stock-piling is also a short-term trading hedge against the dollar weakening. Some days I feel that China is talking the dollar down to make their speculative stock-piles rise in value (in USD terms).

Looming Currency Devaluations

X-15 if other countires do not step up and buy Treasuries, then the Fed will expand their balance sheet and buy them. This is the modern form of printing of money.

Please everyone note that countries around the world need to be holding a developed currency backed by large debt market in order to be involved in world trade. Therefore you are not going to see the major currencies Euro, USD and Yen all drop in tandem and all money repatritaed into local currency. This could only happen if globalistation contracted back to where it was 100 years ago.

So one of the currencies needs to move up.
Central Banks are funneling money to Gold to spread their holdings.
But you can not trade using gold so its really only a hedge.

Everyone keep son talking about how much Treasuries are coming on the market and the deficits the USA has but it is all relative to their huge GNP/GDP. And people always refer to the 30 trillion they owe on their balance sheet, but never consider the value of their assets (people, technology, financial colonial power, military network, domestic infrastructure). This is worth far far far in excess of 30 trillion, therefore assets exceed liabilities. And lets be fair there is certainly no cash flow problem as long as they control the system (which they do)

I think Europe is in far worse shape so yo'll get a situation that money flows out of Euros and supports the dollar. I also question whether it would be wise for the Europeans to sell some of their gold holdings a these levels to shore up their financial situation. This could offer an interesting counter-intuitive move.

A Crack in China's Great Wall

Huangjin, you are certainly correct of the effect of an undervalued currency when you look at Hong Kong; where the HKD has become the natural exchange rate and everything has priced itself accordingly.

However the Chinese Economy is vastly bigger and the export ratio is vastly bigger as well. So this presents a very different picture and cause and effect realtionship.

Also we must not forget that undervalued currency breeds interest from de-stabilising trading strategies to take the peg out and profit from a return to equilibium.

In China's terms the undervalued dynamic peg has caused major structural imbalances in the economy and also the wage/income differential between its people.

Which is made more complicated by the fact that there are pockets where the dynamic peg has become the natural exchange rate and caused a revaluing in the prices of a lot of goods domestically.

The two points are the reason why the CCP are having so much difficulty predicting the outcome of revalution. Of course the positive side of the Yuan devaluing domestically due to monetary inflation is that it actually stimulates an artifical strengthening against international currencies without the price moving.

i.e. you print lots of yuan at home (to keep currency undervalued), it is worth less on the international market in real terms.

It is for this reason it is actually very hard to calculate the true equilibrium price.

Can China Carry the Post-Olympic Torch?

I have a question Mr Jefferson:

You state a revalution of the Yuan would:
''And this would, over time, make assets in China extra ordinarily undervalued such as real estate''

Can you explain in short terms what you mean.

Are you stating that currently in USD/Euro etc terms Chinese Fixed Assets (real estate) are cheap due to the undervalued yuan.

Or are you stating, as the Yuan strengthens against world currencies that this will create a wealth mechanism (from increased domestic buying power) that will make Chinese Fixed Assets more affordable.

Very interested in your opinion.

China's Impending Financial Crisis

The RMB NDF Implied Rates can be very volatile and has no real estimative value looking out longer than one year. There is no way that the RMB will be sitting at 6.0-6.3 in 3 years. The world will not Stand for it especially as in real terms the Yuan has not been revalued at all against the USD in real terms yet. The Euro has strengthend more against the USD than the Yuan. So far we have seen dollar weakness not Yuan strength. Indicative by looking at the other rates against the Yuan.

The RMB forwward market, FX swap markets are essentially closed and controlled by SAFE. SAFE have been closing access to the FX swap markets recently citing 'national security'. In other words they dont want the market pricing these instruments, the Government wants to be able to keep on manipulating the currency and its associated instruments.


Lots of very likely sceanrios could effect the RMB rate very strongly, the forward market does not price in these scenarios as it is lagging due to it essentially being a closed system.

For example it is becoming ever likely that the USD is going to start its next leg of weakness after consolidating for the past few months. We could see a 10% decline very quickly across the board. Especially with the solvency crisis hitting the USA financial institutions and the fact US interest rates are going nowhere this year.

This will have a direct effect on the RMB rate, especially with the Europeans demanding that China takes some of the FX pain that they are taking with the falling of the USD. This will not show up in the forward market until it hits the spot market. Really the spot market is the pricing mechanism for the forward market. Thats the reality.

The Chinese Central Bank is already very worried about high inflation, however I predict shortly that we are going to see a huge uptick in broad based inflation because now all producers are starting to raise their prices in line with the increase of their spiralling costs. Everything is going to go up. EVERYTHING


They will then be left witht he reality that RMB rate is the only way they are going to be able to get inflation under control. The second all the powers at be in China believe that they have an advantage in faster RMB revaluation, the rate will move very quickly in the spot market. This shift in desire can not be predicted far into the future in looking at RMB forward rate. In fact the totally opposite, SAFE will drive the RMB down to flush out speculatiors before any major revaluing upwards. If you watch the market like I do, you will know this happens a lot.

In terms of depreciation caused through otuflows, if the Chinese believe that Money Outflows will put the system at risk when the RMB hits an equilibrium rate. They will simply put in place measures to stop money going out of China. The Chinese really would not think twice about doing this. And believe me it will be a lot harder to get money out of China if they do this than getting it in.

I very strongly believe that if the USA does not have near term plans to convert the USD into the Amero. That they will be looking at a rate of 5rmb - 1 USD in the next two years. Threatening trade embargos if they dont get what they want. Their stance will become ever harder especially as they now realise China is not a friend at the UN table. As soon as Iran/Iraq situation is under control from the view of the US. And the fed have printed enough money to make the financial system solvent again, the USA approach towards China will change drastically. This is the risk I see in the Chinese system going forward.

Good Time to Buy Chinese Currency: Follow the 'Hot Money'

Think-About-It - all the USD/foreign currency that is sent to private corporations can not be taken out of the bank by the private corporations. Instead the government the government puts it in its pocket and prints RMB to give to the corporations.

To keep RMB low the Chinese Government holds the USD.

This is basic crude example. But it effects the closed currency system and gives an idea how they keep the yuan under control.