Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Pastimes : The Naked Truth - Big Kahuna a Myth -- Ignore unavailable to you. Want to Upgrade?

To: Mike M2 who wrote (80196)	12/17/1999 2:12:00 PM
From: Peter Singleton	Respond to of 86076

hey, Mike, I've been around, but real busy with my day job <g> ... still following stuff with awe. this really could be the big one. here's another post, also yesterday, from the same fellow ... usagold.com ORO (12/16/99; 20:37:32MDT - Msg ID:21176) TownCrier - Commodities imf.org As you say so much more efficiently then I; Any commodity with a futures market in New York or in London, or that is internationally traded in volume will be priced in dollars through arbitrage with the dollar markets. Debt is not as straight forward as it seems. Each country, particularly those who are dollar creditors, can contribute to interest rates. Short term rates are controlled by the local central banks and can be used to support the dollar and the exporting businesses by lowering the interest rate to well below dollar interest rates. Of course, it may cause price inflation in the country if demographics are right for a high demand surge, particularly if there is a strong retail credit market. If the demographics are right for savings, it will cause a pooring of the local banks and force them to lend abroad to obtain high rates of return, otherwise, they would not be able to offer sufficient interest rates to their account holders to prevent them from moving to mattress savings. The latter action is characteristic of Japan and Europe and is responsible for holding long term US interest rates as low as they have been. Add to that the Fed's ready hand in supplying liquidity to make all deals possible, and you don't have anything to stop New Parabubble from forming in the benign interest rate environment of the US. If short term interest rates are set high in order to prevent price inflation and to import liquidity when the banking system is straining, the currency appreciates and the country becomes indebted. Our own experience shows that to be the case here. Erodollar interest rates are nearly always higher than US rates for the same maturities. The key there is that only the US can monetize dollar debt. All other borrowers can only borrow more in order to pay off loans. The spread between US and foreign dollar borrowing will tend to be from 0.3% (e.g. Australia) for the best sovereign debtors to a 2-2.5% spread for good debtors with ample $ reserves, and 5% for higher risk debtor countries with weak reserves or other problems. For commodities, the result is that the products of each country are discounted in the LOCAL futures markets according to the dollar interest rate there. The higher the local rate on the dollar, the more attractive is shorting of the locally produced commodity in that country. In this way, climbing out of debt is near impossible, as one developing market borrows to build new production, the resulting export product is shorted by the buyers who signed supply contracts, at times even before new production comes on line, and by manufacturers eager to start returning dollar debt while the inevitable startup delays prevent their selling actual product. The Interest rate spread on the domestic and foreign dollar debt is a major subsidy for US interest rates. In countries with high poppulation density, most food and products have a direct or indirect imported component. Korea imports 74% of its food and resources, and funds it through exports, which are up to 80% of GDP (For those who don't know, GDP is calculated as Final Sales less Imports add Exports). They pay 2% to 4% spreads over US rates on $ debt, which they need to obtain the commodities they need. The US commercial buyer funds purchases with the base rate and the spread, that must be covered through export is supplied by lowering product prices sufficiently to increase dollar volume by the spread rate relative to any US competitor (add shipping costs, insurance- also a dollar expense- and you have the picture for how much lower costs are outside the US). Most products do not increase sales in linear proportion to price, thus a 5% lower price may increase sales by only 2%. This is particularly the case for agricultural products. When one asks why would anyone dump product below the cost of production, this is the only thing one needs know. The dollar trap has no escape. The country that allows itself to become a dollar debtor will pay the dollar spread on the prices realized for its production. The dollar creditor nation will need to raise its local prices for imports by a sufficient margin over the price of the same product in the US to avoid excess importation and the resulting debt trap. Thus the choices stand for the poppulation between consuming (and even producing) and going into debt - and paying the spread, or suffering the increased prices that prevent imports from dollar indebted nations seeking to make up the interest rate spread by increasing dollar volume. The results may be seen in the Purchasing Power Parity (PPP) statistics. The dollar debtors sell their wares at prices 40 to 60% below those in the US, while the dollar creditors tax their imports to the point that they are 15% to 25% above US prices. Obviously, being a dollar creditor has a lower price, but requires a period of sacrifice to reach a critical mass and forces the country to build its industries according to US consumer purchasing patterns, thus locking in some dependence on the US. The Japanese have done so to a completely absurd extent. The URL above is a CSV tab delimited spreadsheet of the data on PPP effects on the global economy. The main point here is that the dollar introduces a 30% distortion in the world pricing mechanism, and puts dollar global GDP at a 30% discount to its value. Thus the US is not 28% of global GDP, but 20%, and by volume production of goods and services, the US is only 12% of the world economy. Even in high tech, where the US has enjoyed a great lead in timing technology development, being first to market, the tech companies must be subsidized through the ESOP money pump - despite the 3% or so advantage in capital costs. Is it not obvious where ranking 27th (just behind Malaysia) in science and math in high school brought us?