Thanks for the Don Coxe monthly. Is that available directly on line for everybody here, or need a password?
There's a lot of stuff here, but I wanted to pass on one portion of it that ties into the Train Wreck. Taking about the US-China part of the symbiosis. Some of my thoughts are at bottom, following Coxe. :
"As China's foreign exchange reserves grow, the Bank of China is forced to expand monetary growth beyond levels consistent with strong, but not overheated economic growth. Late last year Chinese money supply had soared to 29%. It pulled back in January but is still far above the rate of GDP growth.
Until recently the BOC was worried about the deflation which had been dogging the economy for three years. It was happy with fast monetary growth, because it understood Milton Friedman's analysis of the relationship between money supplies and prices. Friedman maintained that deflation was a lesser problem for a central bank than inflation, because you could always print enough money to kill deflation, whereas the tightening required to exorcise inflation can be brutally painful. With January's industrial production up a towering 19% over 2003, China's is on the cusp of worrisome inflation. From deflation of 2%, its price index have moved up to positive 3.5%, a big swing.
Later discussion of BOC dollar policy:
China and Japan have both historically focused on their currencies values in terms of exports of manufactured goods and imports of raw materials.
This policy made sense throughout the disinflationary/deflationary 1990's because the Triple Waterfall crash of commodities was in its final, prolonged cycle that drove prices of energy, metals and grains to levels that compared to 1982 prices, would have been inconceivable. Although prices for finished goods were soft during the 1990's, commodity prices fell far faster.
Under Ricardo's theory of comparative advantage in the terms of trade, China and Japan benefited from those price trends because they were net large-scale importers of commodities and net large-scale exporters of finished goods .
However, the terms of trade have turned decisively against them. They can still price their manufactures favorably because of artificially cheap currencies (and in China's case cheap labor)), but the commodity bull market means their input costs are skyrocketing.
That poses a serious problem for nations whose banking systems are in piteous condition. They need their corporate borrowers to earn profits. But even with the stunning growth in exports, profitability can not follow sales for products relying on significant input costs for energy and/or metals, or grains. Because commodities are denominated in dollars, manuafacturers' input cost are soaring.
In other words if the bosses in Beijing think the commodity boom is likely to continue, they should revalue the renminbi upward in order to make their corporate sector more profitable-or to stave off large-scale bankruptcies (my comment: post-haste, like now ). With copper at $1.30 (my comment: already at $1.34 since this was written), and steel scrap $220, many Chinese companies are now in the position of the fabled Brooklyn businessman who figured he could make up nickel per unit losses on volume.
When China became a big buyer of Treasurys, commodity prices were weak and China was a significant exporter of commodities. Now China is the world's most importer of commodities, effectively setting the world price.
A currency policy conceived at a time of commodity oversupply and price weakness makes no sense for China as long as the three economies of The Great Symbiosis keep growing, guaranteeing that the commodity price rises will continue to far outstrip price boosts for finished goods.
My comment: Great points, but to afford these dollar priced input goods, China should have revalued yesterday. I just don't see how 2%, or 5% repegs will help them now though. That's about a week or two's move in some of these items right now. We are hyperinflating (entering the crack-up boom phase), not just inflating. To stay ahead of this curve they will need a shock repeg, and what would that do, just keep them in the high input goods consumption game even longer, and perpetuate the next wave of inflation. In otherwords commodites in the flucht in die sachwerte phase still significantly outpace the purchasing power of all these symbiotic currencies, even those attempting upwardly revaluations against the USD. The way out of the hyperinflation/train wreck I see coming on is to cure on the demand side , and that means the US. The US needs to cool off the consumer AND defend the currency (the USD) that input goods are priced in. The only way to do that is with higher interest rates.
To summarize: to avoid a crack-up boom, this whole symbiotic relationship needs to be deconstructed: 1. shock repegs of the renminbi AND 2. the Steve Roach three percent fed finds formula AND 3. The BOJ needs to quit printing yen at $35 billion a month for currency intervention. Anything short of that threatens to wreck the world with a nasty out of control inflationary (even hyperinflationary) disease. |
