CautiousInvestor's Comments RSS Syndication from SeekingAlpha.com http://seekingalpha.comuser/317799/comments http://seekingalpha.com/article/173097-why-government-deficits-don-t-affect-interest-rates?source=feed#comment-757729 757729 Thu, 12 Nov 2009 16:50:40 -0500 http://seekingalpha.com/article/173047-rogers-in-this-market-commodities-rule?source=feed#comment-757456 757456 Thu, 12 Nov 2009 13:31:30 -0500 http://seekingalpha.com/article/167859-big-banks-the-consensus-is-cracking?source=feed#comment-723647 723647 Wed, 21 Oct 2009 11:59:01 -0400 http://seekingalpha.com/article/167788-ultimately-who-benefits-from-too-big-to-fail?source=feed#comment-723268 723268 Wed, 21 Oct 2009 09:10:37 -0400 http://seekingalpha.com/article/167375-where-is-main-street-s-recovery?source=feed#comment-721141 721141 Mon, 19 Oct 2009 17:58:25 -0400 http://seekingalpha.com/article/167300-federal-reserve-exit-watch-part-3?source=feed#comment-720652 720652 Mon, 19 Oct 2009 12:27:24 -0400 http://seekingalpha.com/article/167217-inflation-and-the-hierarchy-of-needs?source=feed#comment-720416 720416
2) Bubbles be definition are an over allocation of resources to one or more asset groups leading to an unsustainable increase in prices. As the author suggests, the Fed simply provides the liquidity and controls the intensity of the flow sluicing into the asset categories. It is, however, most convenient we have a bubble today that confers a fairly broad based wealth effect. A suspicious person could be forgiven for thinking it was engineered.

3) If banks cannot be profitable while simultaneously being prepared for a fat tail event, the business model is inherently flawed and they should either rework the model or be allowed to fail upon the event.]]> Mon, 19 Oct 2009 10:12:14 -0400
2) Bubbles be definition are an over allocation of resources to one or more asset groups leading to an unsustainable increase in prices. As the author suggests, the Fed simply provides the liquidity and controls the intensity of the flow sluicing into the asset categories. It is, however, most convenient we have a bubble today that confers a fairly broad based wealth effect. A suspicious person could be forgiven for thinking it was engineered.

3) If banks cannot be profitable while simultaneously being prepared for a fat tail event, the business model is inherently flawed and they should either rework the model or be allowed to fail upon the event.]]> http://seekingalpha.com/article/167272-can-the-new-pecora-commission-get-its-job-done?source=feed#comment-720356 720356
Given the widespread opportunities for embarrassment and potential accusations of fraud, I'm inclined to think those in power are anxious to move on as quickly as possible and declare a recovery rather than drilling into the facts and really understanding the underlying causes of the great recession.

The gravest economic crisis since the Great Depression has been covered in the media largely from the top down, told primarily from the perspective of the Obama Administration and large banks, and expressed in the voices and ideas of people in elite institutions more than those of everyday Americans. It's almost as if MSM coverage has been guided by the white house press office.

Those at Washington's blog believe there is a coverup and quote
William K. Black - professor of economics and law, and the senior regulator during the S & L crisis - who "says that that the government's entire strategy now - as during the S&L crisis - is to cover up how bad things are ("the entire strategy is to keep people from getting the facts").

Black also says:

There has been no honest examination of the crisis because it would embarrass C.E.O.s and politicians . . .

Instead, the Treasury and the Fed are urging us not to examine the crisis and to believe that all will soon be well."]]> Mon, 19 Oct 2009 09:34:46 -0400
Given the widespread opportunities for embarrassment and potential accusations of fraud, I'm inclined to think those in power are anxious to move on as quickly as possible and declare a recovery rather than drilling into the facts and really understanding the underlying causes of the great recession.

The gravest economic crisis since the Great Depression has been covered in the media largely from the top down, told primarily from the perspective of the Obama Administration and large banks, and expressed in the voices and ideas of people in elite institutions more than those of everyday Americans. It's almost as if MSM coverage has been guided by the white house press office.

Those at Washington's blog believe there is a coverup and quote
William K. Black - professor of economics and law, and the senior regulator during the S & L crisis - who "says that that the government's entire strategy now - as during the S&L crisis - is to cover up how bad things are ("the entire strategy is to keep people from getting the facts").

Black also says:

There has been no honest examination of the crisis because it would embarrass C.E.O.s and politicians . . .

Instead, the Treasury and the Fed are urging us not to examine the crisis and to believe that all will soon be well."]]> http://seekingalpha.com/article/167207-new-era-of-wall-street-wealth-in-part-courtesy-of-washington-d-c?source=feed#comment-720222 720222
(1) Throwing trillions of dollars at the "too big to fails", instead of admitting that many of them are insolvent

(2) Undermining trust of nations all over the world in the American economy

(3) Failing to restore Glass-Steagall, reign in credit default swaps, or do anything else necessary to stabilize the financial system

(4) Attempting to restart high levels of leverage and securitization

(5) Failing to take real measures to decrease employment and increase manufacturing

(6) Creating an enormous debt overhang and trashing our currency]]> Mon, 19 Oct 2009 08:30:23 -0400
(1) Throwing trillions of dollars at the "too big to fails", instead of admitting that many of them are insolvent

(2) Undermining trust of nations all over the world in the American economy

(3) Failing to restore Glass-Steagall, reign in credit default swaps, or do anything else necessary to stabilize the financial system

(4) Attempting to restart high levels of leverage and securitization

(5) Failing to take real measures to decrease employment and increase manufacturing

(6) Creating an enormous debt overhang and trashing our currency]]> http://seekingalpha.com/article/167124-america-s-multiple-choice-economy?source=feed#comment-719434 719434
It's the unseen structural issues lurking below the radar that concern me; it's the things we can not see that trouble me because when we see them they will appear as surprises, catching us unprepared. For example, more and more US companies are undertaking R&D overseas and I just recently read that many highly educated Chinese and Indians plan to return home rather than pursue careers and/or business interests here in the states. The cost of both could be enormous but the latter could be a sea change and a game changer in terms of innovation and sources of future jobs:

"But a growing body of evidence indicates that skilled foreign immigrants create jobs for Americans and boost our national competitiveness. More than 52% of Silicon Valley’s startups during the recent tech boom were started by foreign-born entrepreneurs. Foreign-national researchers have contributed to more than 25% of our global patents, developed some of our break-through technologies, and they helped make Silicon Valley the world’s leading tech center. Foreign-born workers comprise almost a quarter of all the U.S. science and engineering workforce and 47% of science and engineering workers who have PhDs. It is very possible that some of the smart Indians who sat in the room with me holding their hand up on Columbus Day will start the next Google or Apple. Many of them will build companies which employ thousands. But the jobs will be in Hyderbad or Pune, not Silicon Valley." ]]> Sun, 18 Oct 2009 12:12:05 -0400
It's the unseen structural issues lurking below the radar that concern me; it's the things we can not see that trouble me because when we see them they will appear as surprises, catching us unprepared. For example, more and more US companies are undertaking R&D overseas and I just recently read that many highly educated Chinese and Indians plan to return home rather than pursue careers and/or business interests here in the states. The cost of both could be enormous but the latter could be a sea change and a game changer in terms of innovation and sources of future jobs:

"But a growing body of evidence indicates that skilled foreign immigrants create jobs for Americans and boost our national competitiveness. More than 52% of Silicon Valley’s startups during the recent tech boom were started by foreign-born entrepreneurs. Foreign-national researchers have contributed to more than 25% of our global patents, developed some of our break-through technologies, and they helped make Silicon Valley the world’s leading tech center. Foreign-born workers comprise almost a quarter of all the U.S. science and engineering workforce and 47% of science and engineering workers who have PhDs. It is very possible that some of the smart Indians who sat in the room with me holding their hand up on Columbus Day will start the next Google or Apple. Many of them will build companies which employ thousands. But the jobs will be in Hyderbad or Pune, not Silicon Valley." ]]> http://seekingalpha.com/article/167145-record-deficit-may-dash-obama-s-big-plans?source=feed#comment-719401 719401 Sun, 18 Oct 2009 11:36:33 -0400 http://seekingalpha.com/article/167166-how-washington-s-policymakers-are-damaging-the-u-s-economy?source=feed#comment-719382 719382
In addition to policies that amplify instability which increases the implicit discount rate, thereby stimulating immediate consumption, low interest rate policies discourage savings and encourage consumption. And through the identity that savings must equal investment, investments are reduced when savings are reduced. Taken to together all of these policies encourage consumption and discourage investment and savings; this is exactly the opposite of how long term wealth is created.

I don't think this is terribly well understood but comports with congress and election cycle economics. For them, wealth is winning the next election.]]> Sun, 18 Oct 2009 11:16:53 -0400
In addition to policies that amplify instability which increases the implicit discount rate, thereby stimulating immediate consumption, low interest rate policies discourage savings and encourage consumption. And through the identity that savings must equal investment, investments are reduced when savings are reduced. Taken to together all of these policies encourage consumption and discourage investment and savings; this is exactly the opposite of how long term wealth is created.

I don't think this is terribly well understood but comports with congress and election cycle economics. For them, wealth is winning the next election.]]> http://seekingalpha.com/article/167128-why-we-ll-be-seeing-stimulus-2-0-3-0-4-0-5-0-etc-until-the-great-implosion?source=feed#comment-719321 719321
It's no accident that as (1) government shirks fiscal responsibility and expands its footprint upon the economy (2) perception grows that the US government views the constitution and contract law as an inconvenience and (3) politics becomes increasingly partisan and divisive, the de facto reserve currency of the world....the fiat dollar.... is depreciating. It's all tied to gether.

As I have noted earlier, we are rapidly approaching the point where national debt equals GDP; many prominent economists view this as the practical limit for governement borrowing primarily because of rising debt servicing costs.

We will soon hit a wall and be forced to contain further increases in spending. Global capital markets will step in and impose the financial discipline that should have been imposed by our craven congress.]]> Sun, 18 Oct 2009 10:25:01 -0400
It's no accident that as (1) government shirks fiscal responsibility and expands its footprint upon the economy (2) perception grows that the US government views the constitution and contract law as an inconvenience and (3) politics becomes increasingly partisan and divisive, the de facto reserve currency of the world....the fiat dollar.... is depreciating. It's all tied to gether.

As I have noted earlier, we are rapidly approaching the point where national debt equals GDP; many prominent economists view this as the practical limit for governement borrowing primarily because of rising debt servicing costs.

We will soon hit a wall and be forced to contain further increases in spending. Global capital markets will step in and impose the financial discipline that should have been imposed by our craven congress.]]> http://seekingalpha.com/article/166000-a-weak-dollar-benefits-chinese-exports?source=feed#comment-719239 719239 Sun, 18 Oct 2009 09:25:54 -0400 http://seekingalpha.com/article/167117-the-underlying-size-of-u-s-economy?source=feed#comment-719212 719212
Robert Barro of Harvard, however, argues that long-term peactime multipliers are closer to zero and during war they may be around .6. The reason they are not 1 is that increases in government spending are accompanied by frictional losses and crowding out of private investment.

A more recent sudy determined that in the US the short-term impact of fiscal spending was .6 and the longer-term impact was 1.2. The differences have to do with debt levels, exchange rate mechanism, degree of economic openess and type of government spending and other structural factors; since the 1980's spending multipliers have been contracting.

The irony is that we will fund these brilliantly designed spending programs with taxes increases; taxes have a mutiplier of 2 or 3, meaning if you increase taxes 1% it will be accompanied by economic contraction two or three times the size of the tax increase. Reducing taxes would have the opposite effect.

Not surprisingly we have the worst mix of fiscal policies because we are more interested in transfering wealth than creating wealth.]]> Sun, 18 Oct 2009 08:48:28 -0400
Robert Barro of Harvard, however, argues that long-term peactime multipliers are closer to zero and during war they may be around .6. The reason they are not 1 is that increases in government spending are accompanied by frictional losses and crowding out of private investment.

A more recent sudy determined that in the US the short-term impact of fiscal spending was .6 and the longer-term impact was 1.2. The differences have to do with debt levels, exchange rate mechanism, degree of economic openess and type of government spending and other structural factors; since the 1980's spending multipliers have been contracting.

The irony is that we will fund these brilliantly designed spending programs with taxes increases; taxes have a mutiplier of 2 or 3, meaning if you increase taxes 1% it will be accompanied by economic contraction two or three times the size of the tax increase. Reducing taxes would have the opposite effect.

Not surprisingly we have the worst mix of fiscal policies because we are more interested in transfering wealth than creating wealth.]]> http://seekingalpha.com/article/167004-eps-beat-rate-at-85?source=feed#comment-718488 718488 Sat, 17 Oct 2009 10:33:00 -0400 http://seekingalpha.com/article/167013-nominal-vs-real-gains?source=feed#comment-717915 717915 ______________________...
Perhaps it was planned and who better to do it than the denizens of Wall Street who populate Treasury, the Fed and other regulators. When speaking of nominal versus real gains, it has now taken on a multitude of possible meanings: real bank earnings versus reported earnings, Wall Street earnings versus Main street earnings, inflation adjusted earnings versus real earnings and nominal earnings versus currency adjusted earnings. It's, as I have said before, a fun house mirror room full of distortions and illusions, allowing the anointed elite to see and report as they see fit.]]> Fri, 16 Oct 2009 15:26:10 -0400 ______________________...
Perhaps it was planned and who better to do it than the denizens of Wall Street who populate Treasury, the Fed and other regulators. When speaking of nominal versus real gains, it has now taken on a multitude of possible meanings: real bank earnings versus reported earnings, Wall Street earnings versus Main street earnings, inflation adjusted earnings versus real earnings and nominal earnings versus currency adjusted earnings. It's, as I have said before, a fun house mirror room full of distortions and illusions, allowing the anointed elite to see and report as they see fit.]]> http://seekingalpha.com/article/167010-volcker-fed-needs-to-start-draining-liquidity?source=feed#comment-717798 717798 Fri, 16 Oct 2009 13:59:45 -0400 http://seekingalpha.com/article/166985-bofa-and-stating-the-obvious-about-bank-profits?source=feed#comment-717568 717568 ______________________...

We have socialized banking system losses through Fed purchases and there is now discussion of extending this program of purchases of MBS which will invariably leave the Fed with losses. ( no wonder they oppose an audit ) It's incredible the lengths we have gone to satisfy the demands of the banking oligarchy: TARP, accounting changes, payment of interest on reserves, a fraudulent bank examination disguised as a stress test, delays in financial reform, preservation of the too-big-to fail doctrine and allowing banks to recapitalize by renting Treasury's balance sheet under FDIC guarantees.]]> Fri, 16 Oct 2009 10:52:56 -0400 ______________________...

We have socialized banking system losses through Fed purchases and there is now discussion of extending this program of purchases of MBS which will invariably leave the Fed with losses. ( no wonder they oppose an audit ) It's incredible the lengths we have gone to satisfy the demands of the banking oligarchy: TARP, accounting changes, payment of interest on reserves, a fraudulent bank examination disguised as a stress test, delays in financial reform, preservation of the too-big-to fail doctrine and allowing banks to recapitalize by renting Treasury's balance sheet under FDIC guarantees.]]> http://seekingalpha.com/article/166939-china-s-huge-property-bubble?source=feed#comment-717521 717521

"Arthur Kroeber, an economist at Dragonomics, a research firm in Beijing, argues that the high level of prices relative to income is partly explained by hidden subsidies. A high proportion of households live in apartments purchased at a fraction of their value from the government a decade ago (when the housing market was privatised) or have upgraded to apartments financed by the sale of such properties.

The leap in property sales follows a deep slump last year after the government deliberately cooled the market. The level of transactions in August was less than half its level in 2005 or 2006. More important, China’s housing market is much less dependent on credit than those in places like America, so its economy would be less vulnerable to any sharp fall in prices. Andy Rothman, an economist at CLSA, a broker, estimates that only one-quarter of middle-class homeowners have a mortgage and their average loan is only 46% of the property’s value, compared with 76% in America. Homeowners have to put down a minimum deposit of 20%. Speculators buying property as an investment have to put down 40%.

Rising home prices are not an accidental consequence of government easing but one of its goals. The government needs a lively housing market to support the economy when its fiscal stimulus fades. It creates a lot of jobs, spurs private-sector investment in construction and encourages new homebuyers to spend more on furniture and electrical goods. Until recently China’s recovery was driven largely by state spending but thanks to a rebound in construction, private-sector investment rose by 30% in the year to August, double its growth rate in December. "]]> Fri, 16 Oct 2009 10:27:27 -0400

"Arthur Kroeber, an economist at Dragonomics, a research firm in Beijing, argues that the high level of prices relative to income is partly explained by hidden subsidies. A high proportion of households live in apartments purchased at a fraction of their value from the government a decade ago (when the housing market was privatised) or have upgraded to apartments financed by the sale of such properties.

The leap in property sales follows a deep slump last year after the government deliberately cooled the market. The level of transactions in August was less than half its level in 2005 or 2006. More important, China’s housing market is much less dependent on credit than those in places like America, so its economy would be less vulnerable to any sharp fall in prices. Andy Rothman, an economist at CLSA, a broker, estimates that only one-quarter of middle-class homeowners have a mortgage and their average loan is only 46% of the property’s value, compared with 76% in America. Homeowners have to put down a minimum deposit of 20%. Speculators buying property as an investment have to put down 40%.

Rising home prices are not an accidental consequence of government easing but one of its goals. The government needs a lively housing market to support the economy when its fiscal stimulus fades. It creates a lot of jobs, spurs private-sector investment in construction and encourages new homebuyers to spend more on furniture and electrical goods. Until recently China’s recovery was driven largely by state spending but thanks to a rebound in construction, private-sector investment rose by 30% in the year to August, double its growth rate in December. "]]> http://seekingalpha.com/article/166966-china-september-data-long-term-overcapacity-problem-is-intensifying?source=feed#comment-717482 717482
We should look for consolidation in six industries including cement, glass, steel and coal and other sectors will excess capacity and various inefficiencies; my takeaway if that excessive savings still plague the Chinese economy and the imbalances are so severe there could be rather dire consequences as excess capacity is unwound and brought into alignment with required levels.

China is still not taking bold steps to become a consumption driven economy and poor investments that aggravate surplus capacity reflect this situation. Its ability to drop wages of migrant workers further confirms this fact.

If we focus upon steel industry and look at steel capacity, steel production and the imports of iron ore each exists independently of the others when all three should be unified. Steel capacity is determined by the state with an eye towards expanding production; steel production is determined by the state with an eye towards expanding/maintaining employment; and imports of ore is a combination of stockpiling and speculation. Over the long run, these three spheres of activity should be brought into balance.


An interesting consequence of China expanding its market share of international trade through capitalizing on a devalued currency linked to the falling dollar, is that China's reserves are expanding as a function of its market share and we are becoming every more dependent upon China as a creditor.]]> Fri, 16 Oct 2009 09:57:30 -0400
We should look for consolidation in six industries including cement, glass, steel and coal and other sectors will excess capacity and various inefficiencies; my takeaway if that excessive savings still plague the Chinese economy and the imbalances are so severe there could be rather dire consequences as excess capacity is unwound and brought into alignment with required levels.

China is still not taking bold steps to become a consumption driven economy and poor investments that aggravate surplus capacity reflect this situation. Its ability to drop wages of migrant workers further confirms this fact.

If we focus upon steel industry and look at steel capacity, steel production and the imports of iron ore each exists independently of the others when all three should be unified. Steel capacity is determined by the state with an eye towards expanding production; steel production is determined by the state with an eye towards expanding/maintaining employment; and imports of ore is a combination of stockpiling and speculation. Over the long run, these three spheres of activity should be brought into balance.


An interesting consequence of China expanding its market share of international trade through capitalizing on a devalued currency linked to the falling dollar, is that China's reserves are expanding as a function of its market share and we are becoming every more dependent upon China as a creditor.]]> http://seekingalpha.com/article/166695-the-gold-dollar-inverse-relationship?source=feed#comment-716560 716560

On Oct 15 12:33 PM morph366 wrote:

> Re CautiousInvestor
>
>
> There is at least one currency where gold has appreciated more than
> it has against the dollar over the last five years - UK sterling.]]> Thu, 15 Oct 2009 13:48:52 -0400

On Oct 15 12:33 PM morph366 wrote:

> Re CautiousInvestor
>
>
> There is at least one currency where gold has appreciated more than
> it has against the dollar over the last five years - UK sterling.]]> http://seekingalpha.com/article/166756-why-stocks-go-up-as-jobs-go-away?source=feed#comment-716525 716525
Obviously cost cutting has been responsible for companies beating continuously revised (reduced) estimates. And based upon various surveys, most executives intend to keep payrolls lean for the next six months or so; companies hunkered down are not positioned for growth.

What happens in the second quarter of 2010? Companies have slashed payroll to the bones and I think that will be the first quarter in which we will have an opportunity to observe the financial performance of companies operating under the new normal and the limits of improvements through cost cutting.

Other than exporters who are benefiting from the weaker dollar, I'm inclined to think most companies will report rather flat year-over-year results in Q210 unless they would cut costs further which would signal a further deterioration in the economy. Measured in operating earnings, companies earned around $14 in Q209 and the street is looking at $18 in Q210; if they come in flat we could see the market throw a temper tantrum.

Next year the debate between those who see a new normal and those who see a return to normal will be resolved with huge consequences for the market]]> Thu, 15 Oct 2009 13:17:31 -0400
Obviously cost cutting has been responsible for companies beating continuously revised (reduced) estimates. And based upon various surveys, most executives intend to keep payrolls lean for the next six months or so; companies hunkered down are not positioned for growth.

What happens in the second quarter of 2010? Companies have slashed payroll to the bones and I think that will be the first quarter in which we will have an opportunity to observe the financial performance of companies operating under the new normal and the limits of improvements through cost cutting.

Other than exporters who are benefiting from the weaker dollar, I'm inclined to think most companies will report rather flat year-over-year results in Q210 unless they would cut costs further which would signal a further deterioration in the economy. Measured in operating earnings, companies earned around $14 in Q209 and the street is looking at $18 in Q210; if they come in flat we could see the market throw a temper tantrum.

Next year the debate between those who see a new normal and those who see a return to normal will be resolved with huge consequences for the market]]> http://seekingalpha.com/article/166742-today-s-stimulus-comes-with-a-depression-of-potential-expansion-in-the-future?source=feed#comment-716458 716458
Rather than allowing the economy to unwind, redress imbalances, institue meaningful financial reform, wipe out malinvestments, correct other distortions, expand savings and increase investment in new wealth generating industries, we immediately attempt to reflate a horribly defective economy through aggressive fiscal and monetary policies.

To use a trope, we keep kicking the can down the road but each time we do this the ultimate day of reckoning becomes larger because the imbalances accumulate and it takes ever more financial energy to reflate an increasingly malignant economy. If this one does not do us in the next one will.]]> Thu, 15 Oct 2009 12:25:36 -0400
Rather than allowing the economy to unwind, redress imbalances, institue meaningful financial reform, wipe out malinvestments, correct other distortions, expand savings and increase investment in new wealth generating industries, we immediately attempt to reflate a horribly defective economy through aggressive fiscal and monetary policies.

To use a trope, we keep kicking the can down the road but each time we do this the ultimate day of reckoning becomes larger because the imbalances accumulate and it takes ever more financial energy to reflate an increasingly malignant economy. If this one does not do us in the next one will.]]> http://seekingalpha.com/article/166695-the-gold-dollar-inverse-relationship?source=feed#comment-716421 716421 Thu, 15 Oct 2009 11:59:20 -0400 http://seekingalpha.com/article/166740-jobless-claims-down-to-514-000-two-things-to-look-for-now?source=feed#comment-716407 716407 Thu, 15 Oct 2009 11:49:10 -0400 http://seekingalpha.com/article/166652-spare-a-dollar-why-we-need-a-new-monetary-system-now?source=feed#comment-716254 716254 Thu, 15 Oct 2009 10:12:32 -0400 http://seekingalpha.com/article/166652-spare-a-dollar-why-we-need-a-new-monetary-system-now?source=feed#comment-716242 716242
That and SDR's may be rebalanced to reduce the current weight given to the dollar but none of this does a currency make. One other interesting point: China and others who pegged their currencies to the dollar have been gaining export market share because their currencies have been falling vis-a-vis the euro and yen. The recent improvements in China's export performance was due to it gaining market share through a depreciated currency, not an expansion of international trade. China is now the world's largest exporter and the largest exporter to the US. Ironically, the weaker dollar while improving US exports is making us more reliant upon China as surplus country as their market share expands.]]> Thu, 15 Oct 2009 10:02:26 -0400
That and SDR's may be rebalanced to reduce the current weight given to the dollar but none of this does a currency make. One other interesting point: China and others who pegged their currencies to the dollar have been gaining export market share because their currencies have been falling vis-a-vis the euro and yen. The recent improvements in China's export performance was due to it gaining market share through a depreciated currency, not an expansion of international trade. China is now the world's largest exporter and the largest exporter to the US. Ironically, the weaker dollar while improving US exports is making us more reliant upon China as surplus country as their market share expands.]]> http://seekingalpha.com/article/166527-fomc-minutes-a-rift-develops?source=feed#comment-715343 715343 Wed, 14 Oct 2009 15:34:37 -0400 http://seekingalpha.com/article/166517-central-banks-shift-reserves-away-from-u-s-dollar?source=feed#comment-715306 715306
To place recent turmoil in perspective, Mauldin draws upon the work of an academic and his owns thoughts as to what constitutes the maximum amount of debt the US can issue in relationship to GDP. In his most recent book, Monetary Regimes and Inflation: History, Economic and Political Relationships, Peter Bernholz analyzes the 12 largest episodes of hyperinflations - all of which were caused by financing huge public budget deficits through money creation. His conclusion: the tipping point for hyperinflation occurs when the government's deficit exceed 40% of its expenditures. By the accounts of the OMB, we will be there this FY and next FY.

Mauldin also observed there is every likelihood our debt will exceed 100% of GDP by 2015 or sooner. This is a critical threshold at which interest payments and ongoing borrowing needs becomes so burdensome that the process become unsustainable unless taking place within a country with a high savings rate. Clearly, this does not apply to the US.

Despite these precarious imbalances, the dollar could be saved: the Fed could start mopping up liquidity and raise interest rates; and congress and Treasury could redefine themselves and begin acting responsibly by imposing a measure of discipline in our fiscal policies, namely spending and borrowing less. We all know this is too much to ask of elected officials who buy votes through the budgeting process; and we also know that the Fed, who is desperately trying to reflate the economy and grind out a modicum of growth, is unlikely to change policies until the middle of next year, at the earliest. Knowing this and that the Fed could easily expand some of its debt monetization policies and extend them through the first quarter of next year, the international community has been punishing the dollar and, as the author suggests, central banks have been diversifying out of the dollar and expanding its holdings of other currencies.

From Bloomberg:

"Policy makers boosted foreign currency holdings by $413 billion last quarter, the most since at least 2003, to $7.3 trillion, according to data compiled by Bloomberg. Nations reporting currency breakdowns put 63 percent of the new cash into euros and yen in April, May and June, the latest Barclays Capital data show. That’s the highest percentage in any quarter with more than an $80 billion increase.

The dollar’s 37 percent share of new reserves fell from about a 63 percent average since 1999. Englander concluded in a report that the trend “accelerated” in the third quarter. He said in an interview that “for the next couple of months, the forces are still in place” for continued diversification.

That helped reduce the dollar’s weight at central banks that report currency holdings to 62.8 percent as of June 30, the lowest on record, the latest International Monetary Fund data show. The quarter’s 2.2 percentage point decline was the biggest since falling 2.5 percentage points to 69.1 percent in the period ended June 30, 2002. "]]> Wed, 14 Oct 2009 15:04:18 -0400
To place recent turmoil in perspective, Mauldin draws upon the work of an academic and his owns thoughts as to what constitutes the maximum amount of debt the US can issue in relationship to GDP. In his most recent book, Monetary Regimes and Inflation: History, Economic and Political Relationships, Peter Bernholz analyzes the 12 largest episodes of hyperinflations - all of which were caused by financing huge public budget deficits through money creation. His conclusion: the tipping point for hyperinflation occurs when the government's deficit exceed 40% of its expenditures. By the accounts of the OMB, we will be there this FY and next FY.

Mauldin also observed there is every likelihood our debt will exceed 100% of GDP by 2015 or sooner. This is a critical threshold at which interest payments and ongoing borrowing needs becomes so burdensome that the process become unsustainable unless taking place within a country with a high savings rate. Clearly, this does not apply to the US.

Despite these precarious imbalances, the dollar could be saved: the Fed could start mopping up liquidity and raise interest rates; and congress and Treasury could redefine themselves and begin acting responsibly by imposing a measure of discipline in our fiscal policies, namely spending and borrowing less. We all know this is too much to ask of elected officials who buy votes through the budgeting process; and we also know that the Fed, who is desperately trying to reflate the economy and grind out a modicum of growth, is unlikely to change policies until the middle of next year, at the earliest. Knowing this and that the Fed could easily expand some of its debt monetization policies and extend them through the first quarter of next year, the international community has been punishing the dollar and, as the author suggests, central banks have been diversifying out of the dollar and expanding its holdings of other currencies.

From Bloomberg:

"Policy makers boosted foreign currency holdings by $413 billion last quarter, the most since at least 2003, to $7.3 trillion, according to data compiled by Bloomberg. Nations reporting currency breakdowns put 63 percent of the new cash into euros and yen in April, May and June, the latest Barclays Capital data show. That’s the highest percentage in any quarter with more than an $80 billion increase.

The dollar’s 37 percent share of new reserves fell from about a 63 percent average since 1999. Englander concluded in a report that the trend “accelerated” in the third quarter. He said in an interview that “for the next couple of months, the forces are still in place” for continued diversification.

That helped reduce the dollar’s weight at central banks that report currency holdings to 62.8 percent as of June 30, the lowest on record, the latest International Monetary Fund data show. The quarter’s 2.2 percentage point decline was the biggest since falling 2.5 percentage points to 69.1 percent in the period ended June 30, 2002. "]]>