Hi KJC, <<Hefty foreign reserves ... Japan's world-leading $407 billion ... China, reserves of $231 billion (expected to approach $300 billion next year) ... Taiwan ... $133 billion ... South Korea ... $108 billion>>
Ooh, Stop talking sexy!
(1) What would we do if we were the Asian central bank?
(2) What should we do if we were the US FED?
(3) What then must we investors do?
What would we do if we were the Asia ex-Japan central bank?
(a) Our job is to keep the economy going and keep inflation in check for as long as possible; and
(b) We effortlessly release liquidity with impunity because the USD is weakening, even as the liquidity is not absorbed by the economy (no borrowers, no buyers). We try to keep our currency at relatively the same value to the USD, and keep the export machine going for as long as possible. Petroleum, imported raw material and machinery remain affordable because USD’s weakening market value is keeping pace with our induced currency weakness. We hope that the Euro and Yen will stay relatively high, and thus they buy more and more of our stuff, even as J6P in US bankrupts himself.
What would we do if we were the Japanese central bank?
(a) Easy job. We continue to flood the system with liquidity to gradually whittle down our banking problems, keep export going, and try to talk the Chinese to revalue their currency upward to give us a fighting chance;
(b) The USD wants to fall due to market forces, even as our own currency should fall due to decrepit nature of our financial health. Thankfully, it is always easy for central bank to keep currency weak, if and only if we do not care about inflation. Guess what, in Japan, we do not care about inflation.
What should we do if we were the US FED?
(a) Keep the currency strong, if we could, even if the pain of adjustment could be worse later on, because we are hoping that time will work to our debt-ed favor … keep currency strong, interest rate low, pray for economic recovery, before currency collapses, bankruptcies become uncontrollable, and inflation takes off;
(b) Talk the currency up without raising rates, so that the recovery does not get shut down. The problem is that we know there is no impetus for recovery, because consumers never really slowed down, housing has been strengthening all along, job prospects are poor, and no one in their rational mind would undertake capital spending gamble.
What must we investors then do?
(a) Believe in market forces. The US economy will slow, currency drop, and asset values decline;
(b) Causing echo collapse in Asia;
(c) Also believe in the power, however ephemeral, of the central bank interventions, as the currencies competitively grind against each other, down, down and down again;
(d) Put faith in the logic that more and more paper liquidity will flood the system as an intervention cure for problems, even though the problems were first caused by deluge of similar liquidity. The intervention cure will fail, because paper is not wealth, productivity is not profit, and debt is not healthy. Trust that much bigger though less familiar problems will arise as a result of the intervention; and so
(e) We opt out of the fiat paper system however we can, at any prices we have been offered so far.
I think, perhaps and maybe.
Chugs, Jay |
