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

To: TimbaBear who wrote (49506)	1/11/2006 10:26:19 PM
From: UncleBigs	Read Replies (2) \| Respond to of 110194

When the US economy slows down, there is less incentive to buy US debt (after all would you buy debt of GM right now, no matter how great their past has been?), this slowing down of FCB buying will lead to more Fed monetizing which will make our balance sheet even worse The collapsing dollar/hyperinflation argument has some merit as a possibility but is most anchored in fear. Fear that the FCB's start to indiscriminately dump dollars and fear that the Fed will use the printing press. Let's think through this and connect all the dots. When the US economy slows it is because risk aversion is taking hold and credit growth slows/contracts. When risk aversion takes hold, domestic demand for safe income in the form of U.S. Treasury debt will skyrocket. The FCB's have no incentive to dump US dollar reserves. All currencies are fiat and ultimately a currency's value is it's purchasing power. If asset values are declining, the purchasing power of the dollar is rising. It in the longer run, America is healthier if we reduce our dependence on foreign capital to fund our deficits. It's just one of the many imbalances that need to occur in the next deflationary recession/depression. At some point, the weaker FCBs will start to more rapidly "diversify their holdings" which at some point will reach a critical mass and panic will ensue. This is fear, not fact. The reason the U.S. has large deficits is due to overconsumption financed by debt. A deflationary credit contraction reduces consumption and reduces debt. Our financing needs will go down in this environment at the same time risk aversion is taking hold which causes an increase in domestic demand for safe income (Treasuries and Agencies). We can manage through an environment of a weakening economy and a credit contraction without a panic dumping of dollars by the FCB's. It won't be the question of "but sell off in favor of what?", it will be "Sell off, no matter what!" There is no incentive for the FCB's to ensue in a panic wholesale dumping of US dollar debt. In a deflation the purchasing power of those dollars is rising, not falling. Additionally their own economies are tied to selling into the U.S. market. Why would they want to destroy their own economy? It's in their interests to make an adjustment in dollar reserves over a long period of time, not in a panic. So, to me, the deflationary tendencies will be overwhelmed by higher rates and major US currency problems. Inflation and perhaps hyperinflation being the result. How are deflationary tendencies overwhelmed by higher interest rates? Higher interest rates would accelerate the deflation. The third part of the scenario is that Asia has a brand new manufacturing industry, has jillions of college grads, has learned from our outsourcing much of the service business. Asia is more capable of withstanding a major US economic downturn than anyone gives them credit for. Moreover, they have enough people to make up much of the slack from the US. I'm not saying the adjustment period won't be painful. It's just that it used to be that what is coming at the US would be totally devastating to Asia, now it might just sting for a while. It may very well be that Asia fares the inevitable credit bust better than the U.S. How does that bolster your hyperinflation argument?

To: TimbaBear who wrote (49506)	1/12/2006 11:03:22 AM
From: ild	Read Replies (2) \| Respond to of 110194

<<<It won't be the question of "but sell off in favor of what?", it will be "Sell off, no matter what!" They'll spend USD to buy oil reserves, to buy commodities, to buy gold, to buy anything just to get rid of USD. It is already happening but if one is blind to it, it's invisible.>>> If China buys Russian oil it will result in USDs being pushed over to Russia. Russia in turn will buy French cheese and wine. French will buy Chinese made toys, so the USDs will be back to China. My two points: 1. The only real way to spend USDs is to buy something in the US and return USDs to the US. What can they buy in the US? IMHO there is no tangible/productive assets that can be bought in the US. China couldn't buy Unocal. 2. Only small USD holders will be able to exchange USDs for other assets. Big holders like Japan and China will not be able to exchange their USD holdings as there is no buyers for them. As USD depreciates China will lose capital it holds in USD paper.