Hi Snowshoe, On this …
Message 17802046
<<Jay, I'll get back to you later on that. In the meantime have a look at this piece on currencies...
Message 17801878
morganstanley.com.
His main point: if the US has a deflationary double-dip accident, the dollar may actually be stronger than in a more mild scenario. Reasons: (a) forced repatriation of foreign investments by US institutions in crisis, and (b) the resulting bull market in US Treasuries, caused by LT interest rates dropping, will suck in investments from the rest of world, particularly Asians hedging the collapse in their exports>>
I saw this before and believe it to be a piece of wishful thinking on the part of Morgan Stanley. Here is why …
(a) <<stronger than in a more mild scenario>> is small comfort. The USD needs USD 1.x billion per day of bidding in order to maintain its current price level. The US will go into double dip, as in deflation of business activities, but as the currency starts to weaken, will go into inflationary (now of services, and later, of goods) stagnation, enhanced by subsidized export of food stuff, feeding more domestic inflation of same;
(b) Inflation of goods and services, together with deflation of business and asset, and thus asset backing debt, will trigger rise in cost of money (interest rate) demanded by international credit suppliers;
(c) Interest rate rise will set off more asset implosion and debt explosion, along with still more equity deluge and cost-cutting induced unemployment, depressing consumption, and thus consumption supported returns on investment;
(d) Making the US a bad wager, especially given that the WAT-WOT-whatnot and baby-boomer retirement account deficit will necessitate more paper money creation, higher taxation, lower productivity, and less dependable domestic politics.
(e) Sure, the USD may tank 15% instead of 25%, but at the margin that can snap one’s backbone, small comfort and bad wager.
The US repatriation of capital from overseas to meet domestic redemption may take place, but is more than easily balanced off by international refusal to buy more US asset, international redemption from US asset, and US capital flight into international market.
Morgan Stanley is whistling through the graveyard, ignoring the line up of coffins.
<<will suck in investments from the rest of world, particularly Asians hedging the collapse in their exports >>
This last bit is shear and absolute nonsense. The Asian hedge against collapsing export is to invest where the growth is, and was always going to be, namely in Asia, where stocks are cheap, getting cheaper, and no perpetual war requires financing. Besides, the accounting system on this side of the Pacific pond seems more than adequate, given that the investors are aware of all the tricks and recognize all the cronies.
Chugs, Jay |
