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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (18684)	12/15/2004 8:01:06 PM
From: RodgerRafter	Respond to of 116555

"Japan's Finance Ministry raised 5 trillion yen ($47.5 billion) at an interest rate of zero" This sounds like a triumph of modern central banking: The Bank of Japan has printed so much money in their effort to keep the Yen weak and inflated the value of assets so much that they've finally reached a point where there is no way to make money off of other investments in Japan. I say that tongue in cheek, but there is some truth underlying it. The Fed has created extreme asset bubbles in the US with massive credit expansion and any country seeking to keep their currencies low (like Japan) has had to print even more money to buy up dollars on the open market (or peg to the dollar like China). While Japan has apparently been rushing to the rescue of the dollar this month to stabilize the Yen vs. the dollar, the yen has been falling to new lows against the Euro: finance.yahoo.com What I'm wondering (as I'm sure others around here are also wondering), is when Japan (and China) will finally decide it is time to abandon the dollar and the US consumer and focus on competing for scarce resources with a stronger Yen (and Yuan). Abandoning the dollar would greatly improve the buying power of their own consumers while they could still keep their currencies weak against Europe. It will be a bold change of direction, but in the long run I think it has to be best for those countries to make the switch. As we all know, the dollar is far too strong based on the underlying fundamentals and the US is gobbling up too much of the world's resources for the well being of the global economy. Meanwhile, the Asian currencies are far too weak because of their link to the dollar. There's nothing to stop Japan from keeping their currency at an optimal level globally by just purchasing Euros like they've done in the past with dollars. Likewise, I believe China can keep their currency as weak as they like globally and let the dollar fall by switching to a peg against a basket of currencies. I did the math a month ago on the Fool to show what the possible effects of a Chinese switch to a basket peg: Originally we had approximately (forgive the month old figures) 1 Euro = 1.25 Dollars 1 Pound = 1.75 Dollars 10 Yen = 0.90 Dollars 1 Dollar = 8 RMB 1 Euro = 10 RMB 1 Pound = 14 RMB 10 Yen = 7.2 RMB under the existing peg, with hypothetical true values of 1 Euro = 2.5 Dollars 1 Pound = 3.5 Dollars 10 Yen = 3 Dollars 1 Euro = 5 RMB 1 Pound = 7 RMB 10 Yen = 6 RMB 1 Dollar = 2 RMB and China choosing a basket peg that still keeps the RMB relatively weak with... 1 Dollar + 1 Euro + 1 Pound + 10 Yen = 40 RMB and currencies eventually find equalibrium around... 1 Euro = 2.5 Dollars 1 Pound = 3.5 Dollars 10 Yen = 3 Dollars 1 Euro = 10 RMB 1 Pound = 14 RMB 10 Yen = 12 RMB 1 Dollar = 4 RMB We also have a barrel of oil going from 50 Dollars 40 Euros 450 RMB to somewhere around 75 Dollars 30 Euros 300 RMB This would allow China to shift sales from the US to Europe and Japan, and also allow China to fill their strategic petroleum reserve at a discount. The American market has been the most important one, but with the middle class squeeze cutting into the American consumer's buying power, competing with the rest of the world becomes more important.