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

To: bond_bubble who wrote (37943)	8/6/2005 1:21:02 AM
From: bond_bubble	Read Replies (1) \| Respond to of 110194

There is another way to look at why interest rates go up: During recessions, lower order goods are preferred by everyone and only such goods can be exported by most of the countries. In 1930s, US was not trying to export lathes, machines etc. Instead it was attempting to export food grains. Because, that is the only thing people are desperate for and if it can come at lower price, they will buy it!! The excess capacity does not allow them to prefer lathes etc. even if it comes at lower price. During the recessions, every country will be having tough time selling lower order goods to other nations. And this hard earned currency will not be given for lower interest rate!! Under gold standard, gold was this hard currency and it had creditworthiness. Currently, China, India etc are all selling lot of goods to US. Hence, they are willing to loan the dollars so that they can sell more goods which are more profitable and generated lot of employment in those countries. When the times are good, dollar's creditworthiness is high. Hence, these countries are willing to supply the dollar loan. i.e China/India subsidize US by giving dollar loan at lower interest rate. During recession, US will not need lot of the goods - i.e trade deficit is going to shrink. However, US is not self reliant (as most of it is outsourced because of the credit bubbble) and hence will need to buy some from foreigners. For example, If US wants to buy oil by printing dollars there will be no takers of this dollar during the depression. Why? During the credit bubble, China/India bought lot of dollars. US converts their hard work into oil (For example US needs toys - and to make toy you need oil - china works its ass off and buys this oil for US and gives the toy at a low price!! Opec also buys toys from China and gives oil to china i.e US buys oil at low price in USD). And during the recession - India/China cannot easily spend the dollar because dollar can be ultimately used only in US and everyone around the world are trying to sell of dollar and buy their basic needs (not the higher order goods that they buy today). Unfortunately, US does not make the basic needs of the foreigners at low price. Suppose China/India launch major public works during recession - and they need coal/oil/ore (the raw materials will fall in price in deflation) - but US does not produce any of these for exports. US can not sell software, computer chips etc to these countries because there will be in excess capacity at that time - and hence capital investment will be tiny. i.e India/China will not be able to spend the dollars during recession and they are trying to dump it on opec and opec will find it hard to purchase anything out of it. And on top of it, US will be paying interest on the US Bonds these countries hold i.e these countries will be getting more and more dollars!!! When US can not sell goods to foreigners, how can it pay the foreigners the interest? It will pay by printing the dollars!!! This is the exact limitation when foreigners will stop buying US Bonds. i.e they will not buy US bonds that is paid back as their interest!! INDIA/CHINA WILL BUY BONDS ONLY AS LONG AS THEY SELL GOODS MADE IN THEIR COUNTRY TO THE US WHOSE WORTH IS EQUAL TO THE BOND PURCHASE!! When the US trade deficit shrinks i.e US doesnt buy much stuff from India/China (because of depression) they will not be willing to buy US BOnds. But US will be paying them interest in USD by printing money - And they will refuse to take this money unless it has CREDIT WORTHINESS in the world market i.e they can buy substance with it. In other words, interest rate goes up. This time (during depression), US will be subsidizing the rest of the world!!! This is the law of balance. You got subsidized earlier - now you subsidize. Interest rate in a currency is based on (1) money supply (2) Risk/Credit Worthiness (3)Value/Inflation of that currency. So, (2) will be dominant and hence the rates will be high. Why is the risk in holding dollar? Because, US monetizes even the interest!!! It does not have goods that these poor countries can need/buy at low price. So it pays printed money as interest!!! Only a deflationary recession will lower the cost of US products so that these poor countries can buy from US. It can not be inflationary recession. So, Why did Japan's interest rate fall (or why did it fall in 1929?): Because, Japan was a net exporter (so was US in 1929) and they can buy lower order goods that they need by selling the higher order goods like car, tv. When Japan was in recession, there were buyers for their higher order goods. Moreover, Japan had lot of savings and they ploughed these savings into govt debt (i.e govt debt which was zero % of gdp before recession has consumed all the savings and become 150% of GDP). i.e The yen's CREDIT WORTHINESS was proved by the fact that all the govt spending was based on internal saving - they did not spend foreigner's money!!! CREDIT WORTHINESS comes into picture ONLY when you have to go to free market - not when govt forcibly pushes its people's saving into Japan govt bonds!! The CREDIT WORTHINESS of US in 1929 was proved by the US following gold standard for the foreigners!!! If a recession were to come full blown in US, Japan will be thrown into depression similar to US. Why? It will not be able to sell anymore higher order goods to China and US. And Japan also does not make too much of lower order goods for the poor countries - that they need/can afford!!! And they have spend all their savings so far!!!! They have no more savings like US!! Japan can not buy oil by selling Japanese bonds within Japan!! It will not be able to sell much goods to foreigners!! So, interest rates in Japan will also increase and they will also have a depression. As Jim Grant says - it is going to be higher interest rates everywhere in the world - and I believe it is all because of CREDIT WORTHINESS of every fiat currency nation will be questioned!! Remember, in early 1930s, UK got out of gold standard. Immediately, its currency started falling and UK was a debtor and net importer (had huge trade deficits). Because its CREDIT WORTHINESS was questioned (this must have cost them so much) that Norman Montague immediately pushed UK into the gold standard again!!! This time - there is no gold standard. The only thing that will prove CREDIT WORTHINESS is higher interest rates!!!