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

To: mishedlo who wrote (34512)	7/29/2005 1:51:35 PM
From: Chip McVickar	Respond to of 116555

Mish... My Take.... Gradual inflation under present conditions... and for the for-see-able future...!!! However... oil and political tensions could produce a world wide recession in late 2006 - 2007 Interesting piece: Tracking the US dollar as the key international currency By Standard & Poor's 28 July 2005 Why the rating agency expects the US currency to maintain its status and underpin the country's triple A rating. The 'AAA' rating of the US rests on the position of the US dollar as a key international currency. Without this status, the US would not have such ready access to external financing; interest rates would have to rise to attract higher domestic savings; growth would slow well below potential. The US dollar did not attain this position by accident, however, nor is it simply maintained by inertia. It derives from the fundamental strength of the US economy - the causality does not run in the other direction. That strength derives from the size of the economy, the flexibility of labor and product markets, and - relative to other large developed nations - the prospect for high productivity growth and favorable investment returns. As long as inflation is moderate and stable, financial markets sound and unfettered, government spending efficient and sustainable, Standard & Poor's expects the US to continue to enjoy the added benefits a key currency brings and to maintain its 'AAA' rating. The US dollar dominates foreign exchange trading. Most foreign exchange contracts are quoted with one leg as the US dollar. Table 1 shows the survey of foreign exchange market turnover compiled triennially by the Bank for International Settlements (BIS). The US dollar has a commanding position, which peaked in 2001 at 90.3% and only modestly retrenched to 88.7% in 2004. (The figures in the table sum to 200%, as both sides of a trade are recorded.) On the other hand, with the elimination of the predecessor currencies of the euro and thus their trading, the volume of euro trading fell to 37.2% in 2004 versus nearly 60% for the legacy European Monetary System currencies a decade earlier. The third position belongs to the Japanese yen, which has seen its share slip to 20.3% in 2004 from 24.1% - its recorded peak in 1995. The British pound sterling, whose share rose to 16.9% in 2004 from 13.6% in 1992, is in fourth position. No other currency attains a 10% mark (again meaning that no other currency attains a share of one-twentieth of foreign exchange transactions). MORE with CHARTS financeasia.com

To: mishedlo who wrote (34512)	7/29/2005 2:29:32 PM
From: TimbaBear	Respond to of 116555

Can you point to an example in a major economy where we had a big nation-wide housing bust and it was not accompanied by deflation? Can you point to an example where the housing bust was accompanied by a bust in the world's reserve currency in the same nation? I think it supremely ironic that: "May you live in interesting times" is a Chinese curse! I have believed for many years now that we live in truly historic times. Much of what we live in these years will be notable for centuries. As for a US$ crash, I consider it unlikely (near term) although quite possible. Should that happen we might se a very quick spike in rates, plunging the stock market and housing crash. But would that make hyperinflations right if we get a quick spike like that? Not in my mind. In fact, it might not raise any prices at all,... While you may not give a US$ crash much probability, I am not quite so quick to dismiss it. I happen to think that businesses will have no choice but to pass on the price increases, just as they are currently doing in oil, building materials, medical industry and elsewhere. Again, I am not arguing that the US consumer won't have to drastically slow down. I am not arguing that that won't serve as a depressing factor on demand and thus prices. What I am allowing for though is that, since virtually everything we consume comes from imports and since in at least the USD collapse scenario everything will rise, I believe we have at least the possibility of rising prices at a time of high unemployment and falling consumption. If that does unfold, how fast the prices rise will also become a function of the change in USD confidence levels. As for a slow decline in the US$ we must once again ask what? Don't know that I can answer that any more clearly than "some sort of amalgam of Asian origin". In my mind, just because I can see no alternative doesn't mean it doesn't exist. Nor does it mean that the world will continue to subject itself to the stench of rotten fiscal policies and rotten savings. That's like saying a battered woman has to stay with her spouse because she doesn't know what else to do. Sometimes they do, sometimes they find a way out of the pain. For the record I see the US$ falling once Greenspan stops hiking. That may be true, but I think the USD is more likely to start falling once he leaves office, because I think that will happen first. Thus I find it very easy to poke holes in every hyperinflation theory I see, and no one has answered my questions in a manner that I could not easily respond to. There are many gifted debaters in the world and I'm sure at least half of them would be able to easily poke holes in the deflationist theories and the other half in the inflationist ones. I'm not so sure this line of reasoning does anything but reinforce to the reader how confident you are in your own opinion. To me, I think its nice that you are, but your arguments haven't budged me off of my neutral stance on the issue. I really don't see them as really any stronger than the inflationists arguments. To me, any argument that doesn't address the underlying really rotten fundamentals if the USD in a way that clearly describes the outcome of the correction that must take place is one that is incomplete. Just because the problem of what takes the place of the USD is a thorny one, doesn't make it go away. Your arguments are more than sufficient if the currency value of a country undergoing housing deflation, jobs deflation, consumption demand deflation remains somewhat stable. However, I am not convinced that that is how things will unfold for the US. Again I state that I am in neither camp. Neither your confidence in your arguments nor the inflationists confidence in theirs does much more for me than to hope that confidence continues to manifest itself in well-thought out and well presented arguments. Also it is of some interest perhaps that Roach, Faber et al can appear to support one side or the other. I have read most of their commentary and it is part and parcel of the bank of opinions that I hope ultimately help me gain enough clarity to have some certainty as to which way this will resolve itself. I appreciate your efforts to assist that endeavor. Timba