AHHAHA
Thanks for the comments:
Asia. Agreed. The current Asian deflation investment theme may be a mirage with inflation more clearly visible on horizon. Japan is taking fiscal expansionary steps. China is relaxing credit, increasing money supply and employing fiscal steps to stimulate its economy with reforms of state owned banks and enterprises on hold until economy recovers. Taiwan, Malaysia, South Korea and Thailand are lowering interest rates and bank reserve requirements while increasing fiscal spending to offset collapsing domestic demand. FDI is reportedly starting to ease the credit crunch and facilitate export growth that the devaluation encourages. Once exports begin to flow, commodities will be in demand to service the exports. Also it is reported that commodity inventory liquidation is about over with stocks and demand in normal relationship - only the price is lower relative to the relationship waiting to be caught up.
Dollar: Agreed. Collapse in the stock market, which has now fallen through support, should induce an outflow of capital which in turn should induce a fall in the dollar. A falling dollar will become less attractive relative to gold as a safe-haven by foreigners. It will also induce higher interest rates due to less foreign investment. And as you have indicated, it will add to inflationary pressure in the US rising from the ECI which has previously been held in check by the current account. Also, I wonder how much the past productivity has been due to slash and burn and restructuring which is behind us. GM strike signals further labor wage pressures. Reduction in health cost benefits due to HMOs and the like are over and are rising. Service wages are increasing sharply. And consumption is still on a tear notwithstanding the GM strike.
The FED. I also believe the FED may have a difficult time raising rates to off-set the inflationary trend not only in view of Asian concerns and domestic political pressure in face of a collapsing stock market, but also because clearly, consumption has been the driving force in the US economy and recent disclosures reveal that this consumption has been driven by the wealth affect. Personal savings rate has been 1.2% during the 1st Qtr., and remarkably estimated at 0.6% during the 2nd which is the lowest since the 32-34 depression. This of course means that the consumer has little savings to use for consumption to offset any market downturn. A rise in interest rates would only exacerbate it. I intend to watch the yield curve. If it rises, it will put further pressure on the stock market and dollar which will cause a further outflow of capital that will further pressure the market and dollar. However the Fed responds will exacerbate the problem. If it raises rates it will further slow the economy and add to a market crash, or if it does nothing or lowers rates, the same should occur for fear of inflation. If the Fed does raise rates and the yield curve still rises, then the Fed has waited too long and is behind both the Phillips and yield curve. This may be most serious times.
Currencies: We appear to be on the same ground. Although in a ST, a number of subjective as well as objective factors may affect a currency, in the LT the strength of a currency is dependent on its purchasing power parity relative to other currencies. And that is dependent on the relative rate of inflation between the respective countries, which as you stated is determined in large by the efficiency of manufacture or service output of one country vs another But is that not a responsibility of the national banking authorities as well as the respective governments. Thus if inflation were perceived to be increasing faster in the US than in Germany, or in the ECU, than as you have indicated, the mark should benefit. I appreciate the comment on the stock market being the first to react.
Trade Deficit: I cannot accept your views, although I respect them. Currencies DO adjudicate trade as is that not what all the fuss between China, Japan and other Asian countries is about. It seems to me axiomatic that devaluation of one currency relative to
another provides a trade advantage to the devaluating country. It would also seem incontrovertible that a trade deficit due to devaluation of foreign currency is disadvantageous to domestic manufacturers as it affects the price on which they can sell their products. And if the trade deficit continues long enough, the domestic manufacturer will go out of business as it cannot compete. As I know you are aware of this concept in theory, I wonder why you and other experts claim the trade deficit is nothing to be concerned about.
Gov. Debt. I also cannot accept your position on the national debt. Although advantageously, foreign debt has financed our economy, it continues to pump more dollars to the global supply which ipso facto induces a weakening of a currency. Also, in addition to those reasons explained earlier, the only way debt can be reduced under a system of fractional currency is by devaluation or default. Paying off a bond with dollars is merely replacing one debt with another. And adding debt to the money pyramid increases the potential of adverse consequences in the event of debt contraction. Although, the budget presently is in surplus, it is measured on a cash rather than an accrual basis which means it does not account for the trillions of debt accruing for entitlements to come due. On an accrual basis the deficit is reportedly over 1.5 trillion/yr. With the current existing debt, how are these entitlements going to be funded without additional taxes which is not politically expedient- or by monetization of the debt.
Gold: Inflation in the US should be beneficial for gold, particularly if the Fed gets behind the curve as you suggested. It should also benefit as a safe haven currency of last resort if the dollar falls for the above reasons. Although I do not look to gold price as a commodity for above-ground supply of 40 years of production, aside from CB reserves, is more than ample to furnish any jewelry need, a fall in the dollar with an increase in bond rates should adversely affect the yen and gold carry trade and increase demand in Asian countries. I am also not concerned of CB selling as I do not believe it will be a deciding factor, and in any event, even (LBMA) chairman Peter Fava expects gold to reach $320 end of year due to central banks becoming net buyers of gold. As GNI put it, the first half of year saw ECB sales, a huge gold collection in Korea, liquidation from Far East investors, deflation in Japan, currency collapses in Australia and South Africa leading to producer hedging, a strong dollar and massive fund sales. The second half could see a huge Japanese stimulus package, no ECB sales, North American gold mine closures, a stable dollar, an end to Far Eastern liquidation and fund short covering (or even buying). My concern is that my readings indicate that gold usually foreshadows price increases as a leading indicator, and does not lag as you suggest. Thus it should be moving up and confirming an increase in general price if such were to occur in the intermediate term. Does this mean that a severe recession is more likely to occur offsetting any inflation? In addition, the lows currently being introduced by NEM are not indicative of favorable LT expectations. Perhaps it is the notorious August lows that we are in before a turn-a-round toward year's end. But it is concerning.
Vieserre
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