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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Carlos Blanco who wrote (21063)	10/30/2004 8:31:20 PM
From: Square_Dealings	Read Replies (1) \| Respond to of 110194

Thats a good point you bring up about a closed system Most Americans are so used to being top dogs of the business and financial world that they still think they are in control. But alas foreigners now control the fate of the dollar, interest rates, and demand for many goods and services So while we sit here and wonder how in the world demand for copper for example could be so strong when things are slowing down here, is all we need to do is look a little further than the end of our noses. I think COMEX re:gold will go by the wayside just as OPEC has re: oil. And the G-7 will be reduced to a tea-party. There's little to no world cooperation with the US. M

To: Carlos Blanco who wrote (21063)	10/30/2004 10:08:45 PM
From: Kailash	Read Replies (1) \| Respond to of 110194

That's a great point. The moment the system opens, one way or another -- smart money or dumb -- the current measures of optimism and pessimism become unreliable. In the case of the dollar, you might say we have extreme pessimism, since private investors stopped net purchases several months ago. But how do we predict the actions of central banks? Their calculations don't hinge on a simple capital return analysis; they're trying to guide a whole economy. What it would make sense for Japan and other dollar holders to do is to buy raw materials hand over foot with their dollars. This is clearly what China is already doing. But what is Japan doing? Let's imagine for a moment what might make sense to do if you're in their shoes. Let the yen rise and you make your exports to the US uncompetitive, slowly choking off the economy. As long as the US runs something in the neighborhood of a balanced budget, as we did under Clinton, this doesn't expose your savings to great danger -- it effectively exports Japanese deflation to the US. Now chapter two: the US notices that "deficits don't matter" (Reagan, then Cheney) because they get soaked up by Asia. Policy changes in response to the Japanese intervention. From Japan's point of view, it looks like the weak-yen strategy is still working, as the yen-dollar ratio doesn't change much. But what's happening is that both currencies are being devalued -- most importantly, relative to commodities, Sachwerte, but also to the euro. The real value of Japan's US investments is now dropping, with no end in sight. Chapter three: what does Japan do? It may be a little easier to see now. The simple answer is that Japan has to stop manipulating other currencies downwards -- stop relying on countries that export their inflation to the Japanese and ultimately leave them suckers. For a stable, long-term solution, Japan has to do in Asia what the Europeans are doing: create trade pacts that prevent governments from printing limitless amounts of money. Such trade pacts may in fact be a more intelligent way than a gold standard of solving the problem any paper-based democracy inevitably faces: the temptation of any administration to print money to pay off their supporters and buy votes -- short-term tactics that stimulate the economy, until of course it falls off a cliff. Making this change is extremely tough for Japan and there is no reason to expect a sudden turnaround -- as in abruptly terminating the purchase of US debt. Instead, we should expect Japan to shift its investments increasingly toward its neighbors, try to open new markets there, and slowly scale down the support for the dollar. What makes this more complicated is that Korea, Taiwan, and China all have traumatized relations to Japan and would rather buy US/European goods. There are constraints that limit the Japanese government's ability to sustain the burden of providing the US with the capital it needs -- between 2-3 billion dollars a day. The main one is that Japan's public debt is already around USD 6.6 trillion -- iht.com What we have, then, is a classic race to the bottom in the dollar zone, and it's very hard to see how to stop it. What can Japan do? Suggestions? In the absence of political solutions -- and they are not impossible -- we should get a trainwreck, characterized by low interest rates (there's too much debt to raise it) and soaring commodity prices (the value of money declines). And Japan should be hit just like the US. Cheers, K