Posted on 11/29/2006 5:30:58 PM PST by GodGunsGuts
WILL CHINA LEAD A STAMPEDE OUT OF THE US DOLLAR?
by Gary Dorsch
Editor, Global Money Trends Magazine
November 29, 2006
The $2 trillion per day foreign exchange market never sleeps. Yet for the past six months, the big-3 central banks, the Federal Reserve, the European Central Bank, and the Bank of Japan managed to lull the currency markets into a deep trance. Since last May, the big-3 central banks corralled the US dollar to within a 3% to 5% trading range against the British pound, the Euro and Japanese yen.
The big-3 central banks utilized their three major weapons, (1) relentless jawboning, (2) Japanese threats of intervention, and (3) coordinated rate hikes, telegraphed far in advance to avoid any nasty surprises in the markets. But the big-3’s spell-binding magic act began to wind down on November 25th, when Chinese deputy central banker Wu Xialong jolted the foreign currency markets, warning other Asian central bankers of the future risk of a US dollar devaluation.
Beijing is having second thoughts about the composition of its $1 trillion portfolio of FX reserves, with 70% held in low yielding US fixed income securities. “Firstly, long-term US interest rates are falling. Secondly, the exchange rate of the US dollar, which is the major reserve currency, is going lower, increasing the depreciation risk for east Asian reserve assets,” Wu said.
On October 10th, Fan Gang, another member of People’s Bank of China’s policy committee, made similar comments, “China risks an erosion of its holdings because the US dollar will probably decline.” On August 29th, Gang wrote, “The US dollar is no longer a stable anchor in the global financial system, nor is it likely to become one, therefore it is time to look for alternatives.”...
(Excerpt) Read more at financialsense.com ...
I've always like Larry Kudlow's idea that we should shoot for $400 gold.
With guaranteed noninflation we would have a safer steadier economy to invest in.
I don't think that would "guarantee" non-inflation.
Inflation is always resorted to for the purpose of repudiating a portion of the Debt.
Inflation doesn't repudiate debt, an unexpected jump in inflation repudiates debt.
If inflation is expected to be 2% a year, for the next 100 years, investors require a 2% higher yield on their Treasury purchases. The government doesn't benefit from the inflation.
If we maintain the price of gold by whatever means there is no inflation or deflation by definition. Prices may rise or fall. That happens in markets. But if some prices rise others will fall or products will disappear. Determining a "best" price for gold is simply silly. Wanniski thought , I think, 360. The best price to hold gold at is the price it is when the decision is made to do it. Inflating or deflating to reach a "best" price is just that, inflation or deflation. Determining a best price that is not the price "right now" is purely an aesthetic exercise and compounds whatever distortions already exist. When you decide to nail it, nail it right there.
If your definition consisted of gold alone. Unless you have a source that says, by definition, gold is the only thing that determines inflation?
You know that when we were on a true gold standard, we suffered inflation and deflation? Even though gold, by definition, had a fixed price.
Only when we went to pure paper money for a time during war. After the Civil war it took a few years but the money returned to par witth gold. The price of gold went nominally up during that time. In this century when we were on the "two tier" suystem we were not on a gold standard domestically and exchange rates were mandated and unrealistic. The US participated in exchange scams whereby the government made money with the false exchange rates just like the Soviets did right up until the fall. The inflation of the past is exactly measured by the price of gold discounting the speculative spikes such as the recent run to 725 or so. That happens when folks fear the FED is going to ramp up the rate at which it prints money.I've no more time right now gotta go.
We only had inflation during wartime?
Did we have more wars than I remember? Maybe your memory of gold standard price stability is faulty?
The inflation of the past is exactly measured by the price of gold discounting the speculative spikes
Was inflation exactly measured by the $255 price in 2000? And now it's exactly measured by the $650 price? I didn't realize we had 155% inflation since 2000.
That's one magic loogy.
Instead of trying to keep the dollar steady by pegging it to gold and then struggling to keep the gold steady, America's figured out that it's a lot easier to save a step and just keep the dollar steady and forget gold.
During peacetime, that extra step made life unbearably miserable for the all but the extremely rich. Maybe history's being taught differently these days, but I remember having to learn about William Jennings Bryan famous speech in the 1800's (full text and original audio) that ended: "we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold."
Going to a gold standard now would make life miserable if this were peacetime. This is not peacetime, we're at war, so a gold standard would make national survival absolutely impossible. It's always been that way, which was why "...we went to pure paper money for a time during war.."
Hold gold to a price and everything else straightens out. The economy is predictable. Resources are not wasted as companies try to compensate for government distortion and uncertain directions. Normal market business trends are more predictable for business actors if the money is stable. Their knowledge is better. Foreigners keep their money working in such a stable economy instead of systems that have higher interest rates because stability/predictability is worth a couple of % in rates. Stability is more profitable in the long run because more money comes to it and stays in it.
I'll be the first to agree that the CPI sure has it's limitations-- I personally prefer the ECI (Employment Cost Index) when I talk wages, and for entire-economy-talk I go for the Gross domestic product (GDP) price index.
You've been talking a lot about inflation-- "the deflation of the late 80s-90s..." (237), Reagan ended inflation.."(226), "...Continuing inflation gives power to the FED..." (132). If you're basing your comments on some kind of numbers and measurements I'd be grateful if you could tell us what they are.
So only gold can measure inflation?
To measure inflation by using a group of prices, that group of prices must measure the selling prices of ALL products in their real ratios
So there is no way to sample less than every single item?
or it is inaccurate with no way to know how inaccurate or in what direction.
Yeah, I never said the measurement was perfect.
Inflation is characterized by product substitution as the prices of things go up in nominal dollars.
I thought inflation was a rise in the general price level?
The various cpi amalgamata do not take this into account nor do they take into account that this substitution ameliorates the rise in the aprices that are rising in the "basket."
Are you sure about that? I've heard Freepers complain that the govt uses substitution as an excuse to minimize CPI increases.
The spikiness in both directions of the proffered chart should have been your first visibly obvious clue that it is not an inflation chart.
It's not so spiky since 1983. I suppose you have a chart that shows the real rate on inflation since 1800? Or is your chart just a gold chart?
The cpi is a handy device used by Keynesians and statist monetarists for obfuscating actual inflation. Its message is that inflation is what the official economists say it is and we're doing fine.
Yeah, I get it, evil monetarists. I'll await your real inflation chart.
Also note that the "basket of goods" used to calculate cpi and official inflation is changed, both in content and in ratio, from time to time to produce results more favorable to government policy.
It's not because of substitution? Or the introduction of new products? You'll be satisfied with nothing less than a measure of 100% of all items purchased? Or just one item, gold?
You never commented on our 155% inflation since 2000. Is that your belief?
Thanks for the reminder. I remember inflation slowing, but I don't remember prices dropping as the price of gold dropped. What about you?
Who doesn't want a trillion dollars worth of Euros?
Well, if the CPI doesn't measure inflation, then maybe inflation doesn't have anything to do with prices. I think I'm getting another one of my dizzy spells again...
Wait a second while I look at the market-- NO PROBLEM --I FEEL GREAT!!!
And neither does the ECI. Wages are merely the last price to rise in an inflation and the last to fall in a deflation. In a mild deflation as through the 90s nominal wages do not even fall.The rise in real wages is masked by the deflation. That's why there was labor peace. Workers did not feel they were constantly slipping back because their dollars quarter by quarter bought a little more. Wages are a "lagging indicator" and do not measure the economy- only indicate the existence of inflation.
It doesn't matter whether I am satisfied with anything. You desire a neat little sampler measurement that you can point to and say "See?" there is inflation! Now all we have to do is tweak this quantity over here and twiddle that rate over there and see? we experts know how to adjust everything. The economy really couldn't work at all if our Harvard Hands weren't on the steering wheel. Okay, now I have used the word "gold" without spitting. Why are you still in the discussion? To you I am speaking Tokharian.
Your memory is faulty. Then, again, yall magic formula people have a knack for ignoring minor things like electronics and oil and stuff and whatever you didn't include in your incantation. And cars. The improvement was exponential and the price of the standard minimum sedan remained unchanged for maybe a dozen years and a number of models also electronically sophisticated were sold in quantity at much lower prices.
Prices fell, quarter by quarter? That's funny!
I was the one who said it was impossible to have 0% inflation, remember? LOL!
Why are you still in the discussion?
I'm trying to figure out on what planet your theory would make sense.
I'm not a "magic formula person" and those "minor things" are included in the published inflation numbers.
If anyone is a magic formula person, it's the "gold is the only price that impacts inflation" person. That'd be you!
OK let's suppose the foreign powers decide to coordinate a selloff of US assets - dollars, US stocks, US real estate, US corporate/muni bonds, US treasuries. They could probably coordinate a $10 trillion asset dump which would likely cause a severe market crash of all these assets by 70-80% or more. However, there is one organization that could prevent this from overwhelming the system and that's the Federal Reserve Board. If they were to counteract each selling bubble with a comparable loan-to-buying action to major banks like Citibank, Chase, Bank of America and Wachovia then they'd be able to prevent a severe collapse from happening. If necessary the Federal Reserve could lower the current 525 bp rate down significantly and even make it a negative number like -250 bp. If that extreme were to happen then you'd see American investors simply gobble up American assets for cheaper prices from the foreigners. You'd see mortgages being written with no payments due for 10 years. Only an enemy would try such a bold economic attack on us and the Federal Reserve system under the oversight of Congress and the Presidency could counteract anything the financial powers overseas could try to ruin our economy. The facts are that our housing prices, price of equity assets, cost of living and cost of everyday goods are comparable or less expensive here than in most of the rest of the world. That's why the foreigners buy so much US-based assets with their capital surplus.
The US economy survived the crash of October 1987 and it'll survive anything that foreign enemies might try as long as the following are maintained:
(1) A strong defense system to protect our country from the risk of becoming destroyed and/or occupied.
(2) Judicious use of our natural resources - waterways, agriculture land, mining land, zoned land, forests, deserts, etc.
(3) An educated, skilled, patriotic work force.
The reasons why the USA is on top in the world are:
(1) We have a large, diverse land mass that's livable in most of the year. Sure Russia, Brazil and Canada are very large in land area but so much of their land area is in tundra or jungle.
(2) We have a large, diverse population. If you want to sell widgets in the global marketplace then its best to centralize the brainpower needed to figure out how to adapt the widgets to each target culture. Where in the world can you find an ample supply of people who know the cultures of the Middle East, Africa, Latin America, Europe, Asia, Pacific islands, etc? In the largest metro areas of the USA such as New York, Chicago, LA, Bay Area, Boston, Detroit, Philly and Houston you can find plenty of people with all these cultural backgrounds. Perhaps only London can be comparable at all to the diversity of our largest metro areas here. Companies in almost all industries that seek to succeed and win in the global marketplace will make having a USA presence a major part of their strategy and in many cases the best/brightest startups end up relocating here.
(3) Thinking of entrepeneurs and startups, the tax & labor laws in the USA are much more friendly to the risks and failures that come with the ventures of entrepeneurs and startups. A nation's economic growth depends upon this class of professionals and the best & brightest in the world know that the USA is the place to be if you want the best chance of succeeding and keeping the fruits of your labors.
(4) The checks & balances between layers (federal, state, local) and branches (executive, judicial, legislative) of government with the fundamental understanding that power comes from the lower levels upwards (and not vice-versa) have built a stable system for businesses and individuals to succeed. Everyday the people of thousands of communities are working to fine-tune and improve their local economies under the safety net of our country and states. The people are doing so with freedoms, rights, protections from tyrranical companies/governments and the ability to go find another community if they choose. This in turn creates competition between localities and states for residents, tourists, consumers and businesses who will contribute positively to the local regions. And in turn this makes our country a better place and keeps the engine of our economy and prosperity marching forward.
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