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To: John McCarthy who wrote (129351)	2/9/2006 10:51:49 PM
From: Win-Lose-Draw	Read Replies (1) \| Respond to of 209892

Is the inference that the YEN becomes the NEW world currency... It is not possible for the Yen to become "the" world currency. Japan has a large trade surplus - especially against other major currencies - and "the" world currency has to belong to an economy that runs a strong trade deficit. IMO people tend to put this backwards: it's not the case that the US dollar will lose Reserve status because of balance of payments deficits, rather, the US dollar is the Reserve currency of choice precisly because the US runs such powerful balance of payments deficit. How can it be otherwise?

To: John McCarthy who wrote (129351)	2/10/2006 1:45:37 AM
From: mishedlo	Read Replies (1) \| Respond to of 209892

Yikes, I am not sure Shack likes this thread but it is after hours. For starters I pretty much agree with the overall idea that Win-Lose-Draw was trying to make (with an important revision). "It is not possible for the Yen to become "the" world currency. Japan has a large trade surplus - especially against other major currencies - and "the" world currency has to belong to an economy that runs a strong trade deficit. IMO people tend to put this backwards: it's not the case that the US dollar will lose Reserve status because of balance of payments deficits, rather, the US dollar is the Reserve currency of choice precisly because the US runs such powerful balance of payments deficit." Actually I would refine that last sentece a bit and take out "balance of payments deficit" and just replace it with something like "global trade engine". The US after all did not always have a balance of trade deficit. The US LEADS in trade and as long as it does it will retain top currency status. Let's see if WLD agrees with my subtle but important change. I do believe there is a carry trade borrowing YEN at interest rates close to zero that replaced the US$ carry trade when Greenspan slashed rates to 1%. Interest rates in Japan are clearly out of wack but.... I do not see an immediate 1% hike like you suggested. China is tied to the US$ yet rates in China are about 2%. Of course they have a "basket". There are a couple of very very significant things happening that are largely unnoticed. Here is one of them: Message 22139720 Rumor has it that China is doing that drain to rein in their property bubble. Perhaps that is part of it. The other parts of it are: Rising commodity prices A slowing US economy In fact it is entirely possible that that last point is the real key, ie that China sees an immanent slowdown in the US and is dramatically putting on the brakes. I guess we see if there is a follow thru to that or not. I suspect as the US slows China will force its economy to slow as well. That is one thing that went unoticed by everyone. I talked about it here if you are interested. howestreet.com in the left hand column look for The US Budget - the Gold price pullback and Chinese maneuvers. Mike 'Mish' Shedlock February 8, and click on listen. Note: some people have problems with that in firefox and have to open up an IE window to hear it. Others don't. Now the second thing that will affect liquidity is the end to ZIRP. I think there was a "warning shot" then everyone realized no it's not going to happen. Add in the fact that we have a FED that is still talking tough and gold got spooked. Gold recovered when Japan denied ending ZIRP. Now, were those really related? One must be careful about cause and effect and I bet WLD would caution me about that. Yet, I think they are related and I think there are lots of waring bells ringing now that people do not see or do not believe. The yield curve is one of them. Now will the end of ZIRP do in gold? Well that is hard to say but I think it gives it one hell of a shock in conjuntion with all the other things I said. I also suspect the ECB may finally hike, but the US will cut - eventually - and Japan will eventually hike. We are a long long ways from the same rate everywhere but the trend IMO will be for interest rate convergence. Right now, the drain in china and the inverted yield curve will continue to pressure commodities. The last question is: will gold act more like a commodity or more like a currency. I think deflation is coming. If gold acts like a commodity it will take a hit. If it acts like a currency (money is hoarded) it will do well. I suspect that those holding it as an "inflation hedge" just might start bailing for the wrong reason. This is all damn complex and I appreciate comments from WLD if he wants to add some, and apologize to Shack for discussing "fundamentals" Mish