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

To: GST who wrote (75114)	12/9/2006 1:10:00 PM
From: Crimson Ghost	Read Replies (2) \| Respond to of 110194

Dollar may gain even with US hard landing: Lombard By Steven C. Johnson Reuters Friday, December 8, 2006 today.reuters.co.uk. NEW YORK -- The dollar will rise in 2007 even as the U.S. economy slows sharply, a top U.K. research firm said on Friday, as Asian central banks continue buying greenbacks to keep their currencies down and their exports competitive. A housing slump in the United States will finally cause Americans to cut back on spending, while rising labor costs will prevent the Federal Reserve from cutting interest rates until the second half of the year, said Diana Choyleva, director at Lombard Street, a London-based research firm. But she said Asian states with large surpluses and export-driven economies will still need to recycle savings into U.S. assets and keep their currencies from rising too rapidly against the dollar. And with Americans saving more, "the supply of dollars will shrink at a time when demand for the dollar will be going up," Choyleva said at a conference in New York, and that will put upward pressure on the dollar. The outlook runs counter to a widespread FX market view that the dollar will weaken in 2007 amid slower U.S. growth and an expected decline in U.S. interest rates. Choyleva said markets are pricing in a rate cut too soon. "There's a big chance growth will be high enough in the near-term to exacerbate the inflation outlook than low enough to help with inflation," she said, adding, "The Fed will need to engineer a hard landing to get inflation back on target." U.S. consumer spending will fall, though, as home prices continue to slide. The National Association of Realtors reported last week that existing home prices fell 3.5 percent in October for the third straight month. Rapid gains in home prices had been the main driver in recent years of U.S. consumption, which comprises some two-thirds of U.S. gross domestic product. The result over the next 12 months to 24 months, she said, will be a gradual unraveling of global financial imbalances caused by excessive American spending and excessive saving in Asia. And even if the U.S. spending spree ends, Asian states have assets to spare, said Brian Reading, head of Lombard Street's world service. That's especially true of China, with a stash of foreign exchange reserves that recently topped $1 trillion. Chipping away at imbalances is a top priority of the U.S. Treasury Department, too, though its preferred method is for China's yuan to rise against the dollar, making Chinese imports more costly to U.S. consumers and boosting Chinese demand. The only Asian currency likely to rise against the dollar in 2007 is the yen, Reading added, as Japan is one of the few Asian countries with rising domestic demand. * * *

To: GST who wrote (75114)	12/9/2006 1:30:47 PM
From: mishedlo	Read Replies (1) \| Respond to of 110194

<"A deflationary collapse requires two special factors to be present: 1. A strong or desirable currency that people are content to hold; 2. An inability by monetary authorities to create new money at will.> Precisely correct. Precisely correct? It happened twice already. Once in Japan and once in the US. Thus it is precisely incorrect. The Japanese central bank created money at will and dropped interest rates to 0% to boot. It just did not go anywhere productive. People may not realize it but exactly the same thing happened in the great depression. Monetary policy was actually very loose by the Fed but capital destruction happened at a pace that dwarfed it. During the great depression the Fed injected huge sums of base money. That is a fact. It simply did not matter. That is exactly what happens when asset booms collapse and I might point out we are in the midst of a collapsing asset boom in housing right now. That is a fact. I believe it will spread to the stock market eventually and I also believe that enormous amounts of job losses will result. Those are beliefs but let's review the facts. 1) We are in an asset based bubble 2) The housing bubble has started to collapse 3) Consumers are deep in debt 4) The fact that consumers are so deep in debt, especially in an environment so heavily dependent on housing and consumer spending at a time of global wage arbitrage and outsourcing of labor makes deflation all the more likely. Yes deflation is made far more likely because of that consumer debt. By arguing against point 4) "deflation is made far more likely because of consumer debt." you are arguing against simple economic facts. Period. Furthermore, US consumer debt increases the deflationary pressures relative to Japan at the start of Japan's deflation. Again, that is a simple economic fact. You persist in arguing with simple economic facts. Mish