odin

Struggling with Divergences

Not sure about Fannie and Freddie but I have heard a variant of that explanation in China. Several retail punters claimed that lower priced equities were "cheaper" and thus a better value than higher-priced equities.

Can China Do Without the U.S. Dollar?

China extending credit is not the most critical thing to the strength of the US$. The respective strengths of the global and the US economies are what matter (and the Chinese economy, while growing rapidly, is still not significant portion of the global economy). Furthermore in a trade collapse (the environment prevalent at the moment), the export dependent, surplus nations suffer much more than any other nation.

The US does not "need" China to fund its fiscal deficit. By definition, if by any mechanism trade collapses (US buying fewer Chinese goods and China not buying treasuries), the US currents accounts deficit will shrink (with some minor assumptions about investment flows). As for funding the fiscal deficit, the increase in saving rates in the US will fund it, granted perhaps at higher rates.

China buying or selling treasuries over the long run I think will have minimal impact on the US$ relative to other currencies.

Looking at the +ve and -ve marks, its amazing to me how entrenched the $-bears are (undoubtedly political biases come into play here) and how unpopular the $-defenders are. But I draw strength from Ibsen: the majority is always wrong! (Yes, I am aware of the rest of the quote).

China's Investing in a New Currency... And It Ain't the Dollar

Commodities, like anything else, are not a perpetually rising asset. Contrary to popular belief, the supply of many commodities is not about to run out in our generation. Owning mining assets in other countries is subject to a great deal of risk (including appropriation).

China has a population which has given up current consumption for quite a while, and there is potential to cash in those savings. China is wise to acquire and develop resources to satisfy that demand and develop internal employment. However, buying assets willy-nilly in shady areas under shady regimes is not wise either.

Commodities only have value to the degree they are inputs in production. In the near-term, who is China producing for? Global trade will decline, the balance of payments will normalize one way or another.

The Russians Want Fewer Dollars - So They Say

Does anyone have any real data that this diversification is happening in any meaningful way? It seems that these stories make headlines with regularity but I dont see any meat behind them.

My questions to the Russians about IMF bonds -- how are IMF bonds a more secure play than Treasuries given that:
- US$ forms a significant part of the SDR basket (42%).
- IMF is using the proceeds to lend money to economies in trouble from Latvia to Ukraine to Pakistan. IMF has very little leverage over these economies (demonstrably less so than the US Treasury has over the likes of Citibank and GM). They cant force them to do anything except when these countries need a continuous flow of funds from the IMF (it is unsecured credit at low rates).
- IMF is selling part of its gold reserves (in an environment that Russia is afraid is $-inflationary).

Inflation by Shortage

Mr Ingram --

The conclusion that will have higher (nominal) profitability at the expense of the consumer comes with an assumption -- that they are able to pass on higher input costs (assuming inflation) to consumers.

I think this is the point that MHFT is making. There is an output gap. The pricing power of firms is eroding. I do get one point in your article: that the supply curve itself is shifting left as producers shut down production capacity but thats coupled with the reality that demand is falling as consumers deleverage and repair their b/s) . This is true especially in the energy sector (shutting down of nat gas wells for e.g.)...however, it remains to be seen whether the economy/demand recovers enough to cause a shortages.

As far as using leverage in real estate to play inflation goes -- real estate prices are sensitive to expectations of real appreciation. If inflation and rising rates affect affordability, what would be the impact on house prices? (Hint: the 1980s)

U.S. Hyperinflation: Is Faber's Prediction Realistic?

While it is politically difficult to rein in the monetary supply accomodations (esp. when a recovery is nascent), at least in theory, central bankers are supposed to be indepedent. Just as they have many tools of money creation, they have equally enough and potent tools to destroy fiat money.

It will be politically much more difficult to rein in public spending and the size of the government (fiscal policy), a distinction not made in the article above. However, the impact of that policy on inflation is a lot more indirect.

There is record amounts of overcapacity in the global economy. Unemployment rates are still rising. Commercial real estate and credit card default hits are yet to hit the bank's bottom lines (and further impact their ability to lend). The money multiplier has completely broken down. For several years, just as with private individuals, balance sheet repair will the primary goal of these banks and they will use the steep yield curve to rebuild the equity side of their balance sheets and deleverage...not lend the excess. The consumer cut off from credit, employment will be kept on life-support with government transfers but will save more rather than go on another spending binge. Against this backdrop, inflation-mongering doesnt make sense.

Education and Healthcare seem impervious to any deflation worries...and there might very well be inflation, even hyperinflation in our future. (and it depends of many 'ifs' and inflation expectations especially can rapidly materialize), however, when you've been starving for two weeks, it seems hardly prudent to keep worrying about the fat content on your next meal (i.e. being too early on a call is no different than being wrong).

Is the U.S. Dollar Headed for a Mighty Crash? Part I

The news of the demise of the dollar is greatly exaggerated.

The cause and consequence of the trade deficit (and need for its external funding) are interrelated. If China/nations with a net surplus did not fund the US, they would not run a surplus in the first place (at least until the US share of global trade drops dramatically and cross-trade between these nations and/or their domestic consumption increases) and secondly, the US will have to fund its fiscal deficits domestically. The question is: is there an alternative to the dollar for these nations?

It is likely that all fiat currencies may become weaker as nations race to the bottom to protect their share of global trade. In other words, a global inflationary environment. However, to look for the signs in rising commodities prices would be dangerous. Yes, China is stockpiling commodities. But unless it changes the export-oriented nature of its economy drastically, to whom will it sell its products (for which it is stockpiling the raw materials)? To the possesors of a devalued $, who will suddenly find themselves living a more frugal life and decide they can buying a lot fewer Chinese-made appliances and clothes funneled through the Walmart sales outlets?

The fiscal deficit run by the US is indeed concerning -- not so much for the impact on the value of the dollar, but for its potential to crowd out private investment. Public borrowing is taking up an increasing share of savings (domestic or foreign). It might be a band-aid to the current crisis but it is going to slow growth (or worse, if the financial lubricants to the economy get zombified) over the long run. Furthermore, these are promises that need to be paid back out of future consumption (which is constrained by this slower growth trajectory to begin with). That to me is the real danger.