Tetrapod

Why Krugman Is Wrong About the Yuan

I keep hearing people say that the US has nothing to export.
The US (as of 2008) is the 3rd largest exporter in the world:
1) Germany $1,466,137,472
2) China $1,428,686,080
3) USA $1,299,898,880
4) Japan $781,412,160
Our exports are still only 10% lower than China's.
If China's currency manipulation is ended, millions of jobs will return to the USA, and we will be buying capital equipment from China's bloated manufacturing infrastructure at a fraction of their cost, as manufacturing is repatriated.
The US Administration is playing this correctly, forcing the dollar down in a big game of Chicken, until China is forced to drop or loosen their peg.


On Nov 20 08:33 AM Old Hand wrote:

> Of the points made in this piece, perhaps the most telling is that
> the US has very little to export to China, or to anywhere else for
> that matter. This situation will not change quickly; because, like
> a large vessel, it has a large turning radius that requires product
> redesign, process re-engineering, and distribution systems. None
> of this changes quickly. So, once again, US companies will continue
> to suffer from horrendous mistakes made by short sighted leaders
> and boards of directors.
>
> Moreover, companies that can benefit from a weak dollar, such as
> heavy equipment and commercial aircraft manufactures, simply do not
> employ a significant percentage of the work force in the US. Why?
> Something like 80 percent of all jobs in the US are created by smaller
> companies, and there are more than 10 million of these. With few
> exceptions, these companies do business within the US.
>
> A weak dollar does, in fact, impact all companies and all individuals
> in the US. The most pervasive impact is that of the cost of importing
> oil. This cost shows up literally everywhere in the US economy.
>
>
> There is nothing I can see to suggest that the US can in any way
> export its way out of this recession. To become competitive, the
> US will need to go through a fairly long period of internal adjustment,
> and in the process, US workers and families will need to adjust to
> a new reality, a lower standard of living.
>
> The price we will pay is a direct result of horrendous economic policies
> of the right wing from 2000 - 2008, and the wastage of national treasure
> on wars without end and without benefit.
>
> Sadly, Obama and his crew are simply performing damage control.
> Political wrangling about financial system reform in congress and
> massive expenditures by financial firms on lobbyists is criminal.
> Of all things, the US economy absolutely depends upon a stable and
> predictable banking and financial system. It is, in effect, the
> circulatory system of the economy.
>
> I think the reality is that a real global change in the strategic
> position of the US is going to be some time off. Meanwhile, we must
> find ways to get out own house and order and recover from the body
> blows of the past two years.
>
> There is no other choice. Devaluing the US dollar is not the answer.
> A devalued currency is always the sign of internal weaknesses in
> an economy. That is what world markets are telling us.

Banning Derivatives and Other Such Foolishness

Capitalism without government created rules that level the playing field and prevent fraud is nothing more than piracy. When someone finds a new loophole in the rules that allows legal fraud, it is the responsibility of the regulators to fix the rules to eliminate the loophole.
When certain parties (pirates?) that have benefited heavily from the loophole whine and fight so much about closing it, even after seeing the damage it's caused, it only encourages heavy-handed lawmakers to overshoot and throw out the baby with the bathwater. Regulation is not the enemy of Capitalism. Fraud and piracy are the enemies of Capitalism.

Saving the Global Economy: Try a Dollar Peg to the Renminbi

Thanks for the article.
I like the idea, and believe we are currently pursuing an equivalent solution to the problem.
China values jobs over wealth, and thus far, the US has been willing to allow China to steal our core manufacturing jobs using their artificially suppressed Yuan. These are the jobs that enable movement into the middle class.
I think that our two governments are currently engaged in a big game of Chicken (see seekingalpha.com/user/... The US is intentionally weakening the Dollar, to try to break China's peg. China refuses to relinquish their death-grip. Sure, a badly weakened dollar will hurt the US, but it will hurt Beijing even more, as they are forced to buy more and more weakening dollars to keep their currency artificially low. The ones who are getting hurt the most are Europe and Japan, as their currencies are being forced up to unsustainable levels.
Until either Washington or Beijing relent, it's going to be a very ugly, but necessary contest. I believe we have the upper hand on this one, as we can print money faster than China can buy it all, and if China dumps the dollar, it hurts them more than us.

Dollar vs. Yuan: Exchange Rates Aren't the Problem. Or the Solution

Thanks for the article.
I agree that the currency peg isn't everything, but I think removing it is a pre-requisite to any healing of the world's economic system, especially that of the US.
China values jobs over wealth, and thus far, the US has been willing to allow China to steal our core manufacturing jobs using their artificially suppressed Yuan.
I think that our two governments are currently engaged in a big game of Chicken (see seekingalpha.com/user/...). The US is intentionally weakening the Dollar, to try to break China's peg. China refuses to relinquish their death-grip. Sure, a badly weakened dollar will hurt the US, but it will hurt Beijing even more, as they are forced to buy more and more weakening dollars to keep their currency artificially low. The ones who are getting hurt the most are Europe and Japan, as their currencies are being forced up to unsustainable levels.
Until either Washington or Beijing relent, it's going to be a very ugly, but necessary contest. I believe we have the upper hand on this one, as we can print money faster than China can buy it all, and if China dumps the dollar, it hurts them more than us.

Time for the U.S. Economy to Reindustrialize

I don't see how we can re-industrialize until we get China to release the death grip of its under-priced Yuan. See seekingalpha.com/user/..., The Worlds Biggest Game of Chicken.
It has sucked the industrial lifeblood from our economy.

International Energy Association: Forced to Eat Their Optimistic Data on Future Oil Supply?

Wait just a darn second. We were talking about peak oil, and now you blur it with coal and "hydrocarbons". No one said peak hydrocarbon. We've got lots of very cheap natural gas, and it makes fine fuel for trucks, busses, and hybrids. If oil gets too expensive, it won't take all that much effort to convert to nat gas, which is plentiful and ridiculously cheap already vs oil. Electricity will get generated by coal and nat gas, with supplementation from wind and solar. I agree with Bigelk. I think there will be a rapid decline in the demand for oil, once a certain price threshold is reached. We may have experienced "peak oil demand" rather than "peak oil supply".



On Nov 12 11:30 AM MudEngineer wrote:

> Just how do you think electricity is made? It comes at least 98%
> so far from hydrocarbons and coal. Still almost nothing from solar
> or wind relative to hydrocarbons. Electric cars may be somewhat
> more efficiency, but oil and coal will still be burned to produce
> the electricity.

The Unsustainable Lie of Inflation

Exactly right, Steve. Inflation is a mixed bag, but mild inflation tends to benefit the middle class, which I think is why governments everywhere try to keep it that way.

It feels good and is not significantly destructive, as wages increase in nominal terms along with asset values (e.g. houses). It also keeps the nominal tax rates down, so taxes don't feel so harsh compared to the benefits government provides. What's not to like about that?

Admittedly, if it gets out of hand, it becomes destructive to commerce and then everyone suffers, but IF it is contained, it's a pretty good system for creating middle class wealth, and allowing upward mobility for a lot of people.


On Nov 09 09:26 PM Steve in Greensboro wrote:

> On Nov 09 02:25 PM Michael Clark wrote: "...Inflation is the rich
> stealing from the poor....Deflation is the poor getting even with
> the rich...."
>
> On Nov 09 04:23 PM ThirtyNineWinks wrote: "You've got it backwards.
> Inflation robs from people with money, and helps people with debt..."
>
>
> ThirtyNineWinks has it right. Mr. Clark has it exactly backwards.
> Speaking generally, the rich are generally creditors and the poor
> are debtors.
>
> Monetary inflation make the dollar-denominated assets and liabilities
> both worth less. The positive net worth of the rich gets smaller
> and the negative net worth of the poor, while still negative gets
> smaller too. Deflation works the opposite way, helping the rich
> and hurting the poor.
>
> Inflation helps the poor by reducing the value of their debt compared
> to their wages. The fact that it also reduces the debt of the biggest
> debtor on the planet, the U.S. government, makes it a certainty that
> there will be inflation, because the U.S. government controls the
> money supply and will guarantee inflation.
>
> But in the end, inflation hurts everybody, because the primary unit
> of account (the USD) becomes corrupted and unreliable, making business
> decision-making, capital accumulation and resulting wage increases
> impossible.

Gold Bullion Is Rising in All Currencies

GotLife,
Good questions. Here are my answers for what it's worth:

1) No. Not at all. It means that confidence in all fiat currencies is eroding. That is reasonable and expected, as almost all central banks have been increasing liquidity (i.e. diluting the currency) to avoid deflationary forces. It is possible for all currencies to weaken (as today) or strengthen at the same time, and that can only be seen by looking at currencies versus hard assets (e.g. gold, copper, oil, etc.). Gold is probably the most stable asset since the supply can only increase at a slow steady rate due to its scarcity and cost of recovery, and its demand is mostly reflective of its monetary value, as very little is consumed. This makes it, probably, the purest monetary commodity.

2) Gold is only one form of wealth. Perhaps it is the best "zero" against which all other wealth can be measured, but regardless, all assets represent "real" wealth -- commodities, real estate, equities, even fiat currencies. The only question is which form will best retain or increase its value, and which will evaporate. Fiat currencies tend to evaporate over time by losing their value, because the temptation for governments to inflate seems too much to resist. This is not a modern phenomenon, but has happened throughout history whenever a currency becomes independent of a hard asset such as gold.





On Nov 06 03:39 PM GotLife wrote:

> These are questions, not rhetorical comments. Doesn't a rise in the
> price of gold against all currencies indicate a bubble? Will it protect
> erosion in your currency if all currencies are eroding simultaneously?
> If only individuals or countries holding gold truly have real wealth,
> how will business be conducted when 95% of the world holds zero gold,
> hence zero wealth?

The Aftershock: Where Does the Next Investment Opportunity Lie?

User,

I like your analysis and especially the list of likely important industries -- very insightful.

I have to have to disagree with the tone of your first paragraph, though. It almost kept me from reading further. You seem to imply that there is something sick or wrong with the American people, while I see what's happening as normal human reaction to excess liquidity. Combine that with shrinking real incomes, and borrowing against your home becomes the only way to remain in the middle class. There's nothing even slightly aberrant or surprising about it. It's not as if there was an announcement: "People, you're all going to be poorer in the future, so you should just all move down an economic level. Low-end home owners -- become renters. Comfortably wealthy -- move to a starter home. McMansions -- break them up into multi-unit rentals." -- or maybe I just missed the announcement?

Most people had to borrow against their home, just to maintain their existing life-style, and never suspected that maintaining their previous or even reduced lifestyles, without a quantum jump down would lead them to the verge of bankruptcy. Many are still hanging on, thinking things will get back to normal. How quickly will the next minor shock shake-off the millions of Americans that are trying to hold on?


On Oct 30 09:56 AM User 353732 wrote:

>
> I suggest that it is more than a bubble economy but a bubble culture
> or bubble social pathology. In my view, its organizing principle
> was and, for most, still is: “I am special. I am entitled to the
> undeserved instant gratification of appetites. I can take without
> merit, work or means. I transcend moral, economic and natural laws
> precisely because I am so special”. From this come all manner of
> sequential and parallel bubbles, inflating on fantastic vapors of
> vanity and greed.
>
> Of course, we know that there are laws that cannot be transcended
> or defied. If we ignore or break them, it is we not the law that
> will break. This is true for a person, a polity and a global power.
> The fake dollar and the fake US regime will, I think, both break
> but no one knows when. The dollar will be exposed for the fraud it
> is and be treated as frauds are and the Regime reformed or purged
> and maybe exiled. It may not be years away, however, so, thinking
> about the post collapse investment world is not a completely academic
> exercise.
>
> The investment thesis may be constructed by answering the omnibus
> question: “Post collapse, what will Americans do to reclaim prosperity,
> security, honor and high national purpose?” Different people will
> have different answers, naturally assuming they do not dismiss the
> notion of a dollar and regime collapse as a point of departure.<br/>
>
> One response is that “Americans will have to make real things and
> provide real services for real people all over the world and create
> real value in a big, competitive and sustained way”.
>
> These big things (and therefore investment areas or sectors) for
> Americans include:
>
> 1. Food, especially, protein. As the Global South rises above deep
> poverty, its demand for concentrated and appealing calories will
> rise faster than both population and income growth.
> 2. Energy. America has the greatest and most diversified endowment
> of energy resources in the world. America can and may well have to
> become one of the world’s major exporters of energy. If done, this
> will, literally create millions of jobs and transform both the economy
> and the structure of American trade, capital, talent and technology
> flows. Energy will be another great global growth industry and it
> offers a remarkable opportunity for American renewal
> 3. Life Sciences. As the Global South rises above subsistence and
> as the world ages, the demands for health preservation and life extension
> will soar. Goods and services based on advanced life sciences will
> increase dramatically.
> 4. Globally deployable, on scale, technologies based on bio-info-matics,
> robotics, and nano-engineering , improving and even transforming
> dozens of industries and adding value to millions of companies.<br/>5.
> National security, anti-terrorism and anti piracy goods and services.
> As America retreats it may be decades, even generations, before a
> replacement hyperpower
> emerges. The world is likely to be dangerous and fragmented. America
> can have a very large market share in providing defensive, reactive
> and preemptive goods and services.
> 6. Aerospace and space. The global demand for mobility, remote monitoring,
> analysis and intervention from a distance and rapid deployment of
> goods, people and force will also increase as the world is not only
> richer but more dangerous.
> 7. Practical education. Once again Americans will need to learn and
> keep perfecting practical skills in making real things. There will
> be a tremendous need for formal and quasi formal classroom (physical
> and virtual) as well as work based education, training and testing
> that is directly relevant. The current system of high school and
> college education is largely a failure in providing these skills
> and creating the right habits and attitudes for doing real work that
> the world values or will value. The legacy model of high school and
> college education will either collapse as the dollar and Regime collapse
> or will be greatly transformed ---or hugely replaced---- to make
> it much more responsive in terms of content, process, and cost to
> the new needs of a new America.

How to Play the Gold / Silver Ratio

I'm amazed that with all the fundamentals of silver so bullish, that the premiums for physical silver are so low. I've been able to buy 100 oz. silver bars below the spot price, even after commissions, on bulliondirect.com. These same bars were selling at about a $2 / ounce premium a few months back. Last week, they weren't selling, even at an ask of .50 / ounce below spot. Now they're asking .10 below spot, but that's still crazy low in my view.

Silver Unmasked

I'm amazed that with all the fundamentals of silver so bullish, that the premiums for physical silver are so low. I've been able to buy 100 oz. silver bars below the spot price, even after commissions, on bulliondirect.com. These same bars were selling at about a $2 / ounce premium a few months back. Last week, they weren't selling, even at an ask of .50 / ounce below spot. Now they're asking .10 below spot, but that's still crazy low in my view.

A Tale of Two Inflations: How We Arrived at Today's Economy

Great Article Steve!
This is one of the first articles I've seen that try to explain the causal difference between Consumer Inflation and Asset Inflation. We know both of these have the same root cause -- expansion of the monetary base relative to gdp. But your article explained why sometimes the Monetary Inflation results in CPI and sometimes in asset bubbles. It's a matter of who, in the society gets first use of the new money.
Thanks for the article!

The Intrinsic Value of Nothing, Part 1

Good article, Paco!
I think one of the things that confuses people is the modern definition of inflation, which most people think of in terms of CPI. This blurs together too many variables and removes clarity from our thinking.
If we think in terms of Austrian Monetary Inflation, it is, approximately: change-in-quantity-of-... / change-in-gdp. If our monetary base grows faster than our productive output, then we have inflation, whether we see it in CPI or not.

Monetary inflation always yields effects that reduce the value of the currency involved. Sometimes these produce what we think of as inflation (CPI increase), but only when the currency is devaluing faster than local labor and resources. If real labor rates and finished-goods prices are falling (as today), it doesn't show up in CPI. It shows up in currency weakness and increase of the price of globally traded assets (e.g. commodities). Even during the great depression, which most of us think of as a deflationary event, we had a 60% dollar devaluation in terms of gold, which is clearly Monetary Inflation.

This is why we argue about whether there's going to be inflation or deflation, because we are looking at if from a blurry and myopic perspective: that of locally produced asset prices and labor-rates.

Our labor-rates are decreasing right now in real terms, which we see as a decline in the value of the dollar. At the same time, the real price of local goods are declining, so CPI is neutral, and we feel it as stagnation or depression. But at the same time, the price of overseas labor and globally traded raw materials is rising, which is price inflation. It all depends what you're buying and where.

If our incomes stay the same while global incomes and globally priced commodities increase, that is known, technically, as getting poorer, which is what, in fact, is happening.

This is simply the result of imbalance in the system. We can't continue to send higher and higher wage jobs overseas, and magically get richer here. It's a fairy tale. There are exactly two ways to regain balance:
- Accept nominal (in dollars) reduction in pay and local prices, which is not politically tenable and causes a big problem with dollar denominated debt (debt deflation).
- Print more dollars, steadying or increasing our nominal incomes, while allowing our real incomes and local costs to fall.
Either one of these will eventually lead to our labor rates becoming once again competitive, and a return to full employment. At that point, and not until, we will begin to see CPI inflation, along with increased wealth.
The major difference in effect between the two approaches is subtle: a moderate and orderly transfer of wealth from those with higher net worth to those with lower net worth, will occur with the second, versus a disorderly transfer in the same direction via mass bankruptcies, business failures, draconian government actions, and civil unrest in the first case.
I, like the author, expect rapid inflation, though not necessarily in CPI in the short term. I see this as an important part of the cure. We won't be the first country to take this road: Argentina, Mexico, more recently Russia -- France and the UK several times. It's a painful period, but puts the affected country back on the road to recovery, and rarely results in hyper-inflation. It must be done gingerly, of course. I believe this is what our leaders are counting on, and working toward, though they naturally can't admit to it.

In the grand scheme of things it will be a ten or twenty year speed bump -- Hard knocks for this generation, but it's hard to envision a more optimistic outcome at this stage.

Bond Market Expects Inflation to Be Only 1.75%

Are you kidding? Have you priced an Apple 2e or a Commodore 64? Dirt Cheap! After you adjust for headrests, seat-belts, airbags, power windows and locks, CD player, catalytic converter, padded steering wheel, and all the other stuff that cars didn't have in 1964, cars are pretty cheap too! Same thing with food when you adjust for the cost of all the saturated fats and additives! ;-)

On Oct 17 08:33 PM rennert wrote:

> It is unbelievable how every thing from groceries to doc and vet
> has gone up. What planet are those people living on that tell us
> there is no inflation? Of course their Butler is doing all their
> buying for them while they dine at the splendidly delicious Hedge
> Fund Cafe up in the sky overlooking Washington and Wallstreet..

Debt Monetization: He's Heading for That Small Moon

Very good article! I don't think there's likely to be an opportunity to reverse the FED's purchases. I'm afraid that as the current stimulus runs down, the GDP and employment will run down with it. This will require additional stimulus and additional easing. This will continue until either we finally get inflation, or the political will runs out, and we end up in a deep deflationary depression.