If China were to allow free floating, then there will be lot of $ departing from China and China will be providing these $s from their reserve holding. Do you think the retreating $ amount is more than the Chinese reserve holding? I dont think so. Also, if these $s were to get into US, what happens to inflation in US? what do they buy with these $s? wont fed be hiking interest rates to keep these money frozen in bonds instead of flooding the market in say, buying more commodities etc.?
There are 2 forces hitting the market: Deflationary credit burst and the reversal of currency hegemony. The reversal of hegemony is where money from China and FCBs come back to US and this would be inflationary. I think the deflationary force is going to wreck the asset (bonds, stocks and real estate) market while the inflationary hegemony reversal is going to inflate the commodity, intermediate goods market. why would the commodity, intermediate goods market suffer inflation? Because, FCBs have to prop up their economy and they have lot of reserves and the FCBs will want to spend this reserves to prop up their economy. If FCBs attempt to prop up their economy by spending their savings (in $ reserves), it is safe to bet that commodities will go up in price. Even if crude consumption falls by 1 million barrel a day in US, China is likely to take up that slack!! Last year China imports of crude increased by 1 million bpd! This I believe is what happened in UK in 1930s where the PPI was soaring and hence the industries where shutting down and laying off people and at the same time assets were deflating!!!
How long can China and FCBs spend into the commodity to prop up their economy? Only as longs as they have their $ reserves. Some of these reserves could be depleted if the FCBs hold GSE bonds and GSE's default on those bonds. Once the massive government spending on reserves is over, FCBs too have to stop spending and that is when commodity market will start to cool!!! I even think it is possible that, US oil companies could suffer for the following reason: Crude prices goes up a lot in USD (might not necessarily go up in Asian currencies when the credit event hits) - however, the gas prices might not necassarily go up in US because demand could fall!! So, oil companies will have higher PPI (in crude prices) and lower CPI (in gas price) [CPI change will be lot less than PPI change]!! Hence, oil companies in US will need to ratchet down their capacity, investment etc... and their stocks could tank even though commodity prices shoot up in USD!! |
