Well, yesterday I said I didn't think the dollar would tank right away, not until the economy sagged more or one of our economic partners got tired of playing along. I figured it'd take four to six months.
Gee, was I wrong. I wonder how many dollars to the Euro in three months.
"We are officially (FUBARED)* if bailout Ben doesn't raise the rates in short order."
*Not a direct quote but this is a family show
Oh don't worry about Ben raising the rates the foreigners who own most of our worthless paper which pays off in a depreciating currency will do it for him as in SELL that crap.
DUDE.....I was so gonna post this link and ask 'did you see THIS!!!!'.
With all the talk about China of late, it has been easy to forget the BIG cash dog of the pack. As all my good buddies from up north used to curse when faced with sudden crisis, jesus, mary and joseph!
Let's not kid around. Those arguing for protection of store of value miss the point. The point is "full employment". MacroEcon 101A.
The FR is an agency charged with one responsiblity; protect and support the banking system. Is it responsible for the store of value? No.
All legal entities have opportunity and responsibility to protect their private stores of value. It's at their peril if they approach reality insularly.
Shaking the Chinese loose from the USD is a public policy goal of the USG. If at the same time there is a windfall to the citizens of the USG, so be it. If the fear of an alternative holds sway, and it's a common psychological mindset, the USD can drop dramatically while the Chinese and the rest of the stakeholders operate on a prior and thus unthoughtfully-vested mindset.
Hope to heck the USD declines rapidly, if you're a US citizen. I sure do, as I want as many petro and asiabucks to be strapped alongside as the buck drops. The outcome will be a US debt bought-back/retired at a significant discount.
Reality here is that the foreign gov'ts must employ their people too and if they get to be Croessus rich, they'll face an uglier problem as they squeeze the goose that laid the golden egg.
For individuals, it's a fun game..."Where do I run to protect my store of value?" For those who are all in, the world's nation-states, that has a well known, hoary consequence.
Or maybe mercantilism isn't dead but just Rip VanWinkle-like, now stirring due to fear as they recognize the production/consumption game players have a bit of indigestion.
On a macro-scale in this universal game, who here has insight and thought as to the near and mid term future
The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation.
Two officials at leading Communist Party bodies have given interviews in recent days warning - for the first time - that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress.
Shifts in Chinese policy are often announced through key think tanks and academies.
Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels. It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900bn in a mix of US bonds.
You guys are cluesless. I am telling you again that there's not going to be any replay of the Great Depression because the key conditions aren't the same. All these news do not change my opinion an iota.
Any guesses on China's next move? I bet its pretty difficult to quietly dispose of umph-teen billion ca-trillion dollars. If they start shifting to euros this could get real interesting. Hope no one is planning on traveling over-seas for say the next two hundred years. At least the politicians will get what they want and the yuan will appreciate against the USD. Give them 9 months and 9% inflation imposed on those that cant afford it they will be begging for the good old days....
The thinking goes that foreign CB's won't buy our debt if the returns are so poor (with low rates on a falling dollar). I assume they wouldn't do this for an economic reason: poor returns on investment.
This assumes two things:
1)They apparently have been happy with the returns up to now dispite the deterioration of the dollar over the last several years (i.e. if their decisions up to now were purely financial, they surely would have bailed on our debt before now, no?).
2) That the economic damage of a U.S. in recession will be less damaging financially than the worsening returns they will get by buying our debt.
It seems overall that foreign CB have found a reason besides simple returns on investment to buy our debt. Worsening returns may not deter them since they haven't been detered before now.
I agree that this is unlikely to lead to anything like the Great Depression. It took some serious neglect and mismanagement by Hoover before things got really bad back then.
You are so right, this is not going to be a repeat of the great depression. It will be worse, since this time the rest of the world is pissed at us, we have massive external debts, americans are much lazier and stupider, peak oil is here, peak food is here, or just around the corner, and most americans couldn't grow food if their lives depended on it, which it will.
Watch those world grain reserve numbers, they keep getting smaller and smaller.
No reason to worry though, we should have plenty of food here in the ol US as long as the natural gas pipelines keep flowing from Canada and Mexico, err, I mean NAU.
Your post on China threatens 'nuclear option' of dollar sales probably ought to have mentioned that it was from back in August. This is not a new article.
Also, to whoever posted with the name Sebastian. You dont sound like the real Sebastian to me.
This is a very sensible move on the part of the Saudis that will allow them to limit the growth their monetary base more effectively. The Chinese should do the same thing.
I would say that unless there is a significant reduction in North American demand, $100 oil may not be far off.
My hope is that other central banks will make this dollar debasement as painful for us as possible. We certainly have it coming.
chinese purchase of bonds has not been financially rational in the sense we think of for years.
its pure social policy and self preservation for the government.
and because of this the great deflation from china shall continue
even with a drop in the dollar.
perhaps they'll open that US Denominated Hard Asset Fund they should open now. when they buy that fancy pants golf course in carmel and rockefeller center, we know the end game is in motion.
I guess Saudi Arabia felt the Fed cut too soon? But if the US does head for recession, it is a good bet Saudi Arabia will not be far behind. They may only have to deal with a rate differential for a year or less.
It's a lot worse for the recyclers...except for the oil exporters. There's probably no better time for them to de-link. That's going to hit the Asian recyclers doubly hard.
I don't pretend to know how this will unwind. My bet is that as we fall, they will fall harder. The oil exporters will make excess profits until global demand falls.
You have the floor. Please state the rationale for why now is different than the 1920's (for the better as you argue). You stated your conclusion, but omitted the observations/facts that led to your conclusion.
Is your assessment of "key conditions" so reliable that you believe things won't get even half as bad as The Great Depression? Would half as bad change life as you know it?
1/4?
I'm setting you up again, but I agree: there will be no repeat of The Great Depression. I cannot foresee Hoovervilles, 2.0; Mexican Pesos preferred to U.S. Dollars, once again, in parts of the Southwest; and Canadian Dollars preferred in parts of New England and Michigan.
I cannot believe that the Communist and Socialist parties will again become so popular (see 1932 vote!) that another "New Deal" will replace the first. I cannot, and do not want to believe that a disillusioned America will glamorize new Dillingers, Bonnie-and-Clydes, and Mothers Barker to the risk of law and order.
Sebastian, I hope you're right. Let us pray for your Divine smugness.
dc1000,
Actually, China has been buying rights to natural resources in places like Africa and Canada. Strange that they're not interested in American baubles like Pebble Beach and the Rockefeller Center. Of course we wouldn't allow them to buy productive assets like Unocal, now would we?
"perhaps they'll open that US Denominated Hard Asset Fund they should open now. when they buy that fancy pants golf course in carmel and rockefeller center, we know the end game is in motion."
Maybe they can buy the REOs and rent them to the foreclosed borrowers.
a candidate for presidency will latch on to all of this and understand that we can debase the currency, save our asses and inflate the economy so long as we get off of oil.
therefore they will announce as a prime part of their candidacy that they will print 100billion in money to begin the drive to alternative fuels to thereby get us off the oil tip. it jives well with our foreign policy needs.
it will bring us back to the isolationism of the GW years. that being George Washington.
we'll grow all we need to eat, manufacture all we need to use, and sell our cheap cheap cheap products to the rest of the world and begin OUR mercantilist era.
and so long as i'm dreaming, they will announce gay marriages, legalized marijuana, and health care for all!
It's not just the Chinese purchasing bonds that's irrational; the entire bond market needs to be dope slapped. Domestic pension funds and insurance companies are all trying to perform duration matching to their liabilities irrespective of yield. This potential shift in psychology about the dollar may be the break that changes the entire debt market.
China may be too smart to buy that fancy pants golf course in Carmel. They seem to be buying natural resources with their money. Expect that to continue.
Helicopter Ben will not allow a great depression, which he's a great student of. More likely he'll bring us close to a Weimar hyperinflation, which he has no clue about.
clyde: not that i want to group myself with sebbie (i'm in a class all to myself) but the main reason is lack of smoot hawley. don't see it coming. do you?
I can't get this idea out of my head, so I will share it with you.
I just think it's weird that the Fed is panic-cutting at the same time France and the U.S are racheting up the rhetoric against Iran and Israel is surprise-boming Syria.
I think a plan to attack Iran has been in the works for a long time, mainly as an accommodation to Israel.
I live on the Hudson River. All summer and fall, there has been way more military aircraft going up and down river to and from West Point than normal. I know, it sounds nuts. But I've live here for 17 years and never seen it before.
I actually think Bush/Cheney need to attack Iran for: 1) promises to Israel and 2) their political legacy.
Yes ASA it is Time to panic,Santa Claus is in a drunken stupor after trying to match GW drink for drink.
Santa should have known that in drinking contests one should always eat lots of cabbage before the drinking begins.
Yeah, the USD is trash, we get it! Good job, Ben.
OT: CR, have you heard whether the first $5 billion in First Data bonds got placed, and at what price? KDP advisors was advising not to pay more than 94% of par. Anyone heard any updates? How much sold? At what price?
PS parts of what i said make some real sense.
dc1000 | 09.19.07 - 7:52 pm | #
I am in agreement. I've felt for the last handfull of years that this may very well be where we are heading. I've been slowly working on some products to coincide, such as advanced, but cheap, control systems for manufacturing.
If our guess is correct, cool. If not, there are other markets for this stuff.
My apologies for reposting, but I posted this in another thread way early this morning and it got buried. Seems relevant here. Would love to hear some informed discussion
OK, I'm WAY over my head here but have been thinking about 2 things this afternoon - China moving out of the dollar and a comment in another thread attributed to Buffet that in order to value a position sell off 5% and see what the value really is.
Then I read this, "Tuesday's US Treasury Department's Treasury International Capital (TIC) report ... showed that foreign (like the Chinese central bank) buying of US government securities actually turned negative in July. " at Object Not Found II20Dj02.html
So my question is why can't/doesn't China hedge it's dollar position with USD puts, Euro calls, Gold calls, oil calls, or some other exotic derivative and then just dump 5% of it's dollar stash on the market to see how much that actually hurts the dollar? Use the proceeds for more hedging and continue to abandon the dollar?
If the Fed made the move they did because they see dark shapes in the water that the rest of us aren't yet privy to, and the economy is headed for serious trouble, then that will hurt the exports of China anyway. Why wouldn't China get out in front of it?
Perhaps a hopelesssly naive question, but I'd love to learn why.
You guys are clueless. I am telling you again that there's not going to be any replay of the Great Depression because the key conditions aren't the same. All these news do not change my opinion an iota.
Sebastian (aka Herbert Hoover)
i can vividly remember asking brad setser back when the blog was back on the NYU servers:
is the bond market wrong?
seems like it has been for years and years.
i'd argue, how can one the deepest most liquid and participated in markets be WRONG
the bottom line (unless finance 101 has been repealed) is that rates are made up of default risk, roll over risk /term risk / duration risk, and inflation risks (on top of risk free ROR for non treasuries)
therefore, inflation expectaions must be low
china knows they are going to send us deflation for a generation
Let's assume Saudi Arabia knows full well that its oil reserve estimates are wildly optimistic at best, a total fabrication at worst, and that real reserves are starting to shrink.
What better way to 1. increase and diversify your income, and 2. create a significant bit of "demand destruction" and keep the oil revenue flowing for another few decades.
Breaking the dollar peg might eventually be good for them and US.
I don't see anything unusual about Saudi Arabia deciding not to follow the Fed. As Brad Setser and Menzie Chinn have been talking about for a long time, the dollar peg has caused inflation inside the Gulf countries. By dropping the dollar peg, they reduce inflation. And it's highly unlikely that there will be a rush of investment. What do the Saudis have to sell, besides oil?
Likewise with China. We have been begging them to allow the yuan to rise. If they sell dollars, that's what will happen.
I think both events are good news for overall global growth.
As for the Federal Reserve, a half point will not change things in the long run substantially. To the extent that it does, it's inflationary and bad for the dollar. Or good, if you happen to be an exporter.
If the dollar is going to decline the best stocks to buy would be foreign stocks denominated in Euro, pounds, Swiss Francs, etc.
Even Canadian $ stocks and Australian $ stocks. And Hong Kong stocks too.
Or just open a plain vanilla bank account in a Euro bank.
Perhaps this is Saudi Arabia's way to pressure USA to attack Iran. Saudis want to be the King in the region.That's why they gave false intelligence reports about Saadam
having nuclear wapons to the US.
"History doesn't repeat; it rhymes, as Twain said.
Is your assessment of "key conditions" so reliable that you believe things won't get even half as bad as The Great Depression? Would half as bad change life as you know it? "
That Mark Twain quote has become the biggest cliche among permabears, who has been shorting the markets since 2004. You cannot go anywhere by comparing apples and oranges.
If you deal with real numbers, you will notice than only 1% of the homes will ever get taken by banks and be marked down in price. The remaining loans will be either renegotiated, or people will continue to pay. Do not confuse blowup of few 100X leveraged hedge funds with blowup of all American households.
This weekend, I am going to the NC coast to look for high-quality foreclosures that I can purchase. People need places to live, and places to retire. This is not like dot-com crisis. You can switch from pet.com to dog.com with just one click, but try switching houses in one click and tell me.
I could be wrong, but I think it's going to be hard to predict the future based on the past, because this time it really is different. Before 150 yrs ago we had less than 1 billion people on earth with a fairly steady population. Then we had the biggest energy and industrial boom ever, I think we are about to see the downside of the boom and population explosion. I don't think the dieoff is going to start next year, but I think times are going to get continually tougher for many years to come.
I hope I don't sound alarmist, because I really am not, just very open minded, and conservative.
I still do not understand the big significance of this US dollar news. US wants its dollar to be devalued (hence pressuring China) and foreigners want the same. We got mutual agreement - a trade.
THE NEW WORLD DISORDER
Goodbye U.S. dollar, hello global currency says Benn Steil, Director of international economics at the Council on Foreign Relations
"The dollar's privileged status as today's global money is not heaven-bestowed. The dollar is ultimately just another money supported only by faith that others will willingly accept it in the future in return for the same sort of valuable things it bought in the past."
In other words, if the institutions of the U.S. government fail to validate that faith, the dollar, too, merits being abandoned.
"Reckless U.S. fiscal policy is undermining the dollar's position even as the currency's role as a global money is expanding."
Global Exodus from the US Dollar in Motion with full credit due to the policies of Greenspan, Bernanke, Paulson, and most of all Bushco - the absolute worst US admin in history !
All, check out the video at the bottom of the posts: Paul Volcker in Feb, 2005.
"Homeownership has become a vehicle for borrowing and leveraging as much as a source of financial security."
"I come now to the heart of the problem, as a Nation we are consuming and investing, that is spending, about 6% more than we are producing. What holds it all together? - High consumption - high leverage - government deficits - What holds it all together is a really massive and growing flow of capital from abroad. A flow of capital that today runs to more than $2 Billion per day."
I still do not understand the big significance of this US dollar news. US wants its dollar to be devalued (hence pressuring China) and foreigners want the same. We got mutual agreement - a trade.
Sebastian | 09.19.07 - 8:22 pm | #
All imported products will now rise and we have a economy in a recession - Stagflation has now arrived...
The dollar will ralley hard over the next year as credit/dollar destruction plus U.S. Japanese recession craters China's production and banking system.Sentiment is so one sided against the dollar that even taxi drivers are talking about the dollar crash.Interesting that back in the 80"s I saw Jim Rogers at Harvard club in N.Y. telling everyone to get out of dollars .One month later the dollar was higher.He's BACK!
even if the us economic hegemony ends, its gonna be glacial in time scale. how much bigger of an economy are we? how many more bombs do we have than everyone else?
we'll manufacture a world war III just to make a new bretton woods.
where you going to put your money? europa? africa for gods sakes?
just wait til india really gets online with export manufacturing.
we're talking about billions of people out there. billions of people that need to be 'folded' in before there is a better place to sell crap than the good ole usa.
they may not WANT our money, but they frickin need it.
and when they need it they need somewhere to put it.
the biggest force at work here, much like plate tetonics or the big bang or whatever else MASSIVE in scale is the need of china to industrialize and them needing us to buy the crap.
lead poisened crap it is, but we'll buy it.
there will not be import lead inflation (ex energy).
repeat after me: there will not be import lead inflation (ex energy).
that is of course unless buscho decide to F it all up and play chicken with the chinese and piss it all way
that wouldnt surprise me but it would be shocking
(PS Inflation will be domestic in nature: health care, education, services)
The Greenspan conundrum was that long rates didn't rise at the Fed Funds rate
was increased. Bernanke's conundrum may be that long rates don't fall (or maybe
even increase) as he lowers the Fed Funds rate!
It was never a conundrum.
It's just that the context has changed,
and it isn't what we're used to. For example:
If rates are too tight (no misallocation going on, real demand present), lowering them is like taking medicine...you'll end up feeling better tomorrow and long rates will reflect that.
If rates are too loose (misallocation going on, no real demand present), lowering them is like drinking one more beer....you'll end up worse off tomorrow and long rates will reflect that.
That's why the Fed has made a mistake.
It isn't medicine in the Fed's bottle, but the Fed is still going to force feed the economy from that bottle until it's "well".
even if the us economic hegemony ends, its gonna be glacial in time scale. how much bigger of an economy are we?
It may not be as glacial as you think.
The real questions may not be about economic size but rather economic direction and will.
1) Does the rest of the world want to be under our economic thumbs anymore?
2) Do the U.S. people want to be exporting their wealth in so many ways to the rest of the world, or do we just want to be left alone to fend for ourselves?
Maybe...globalization isn't working so well for them or us, and it's time to split.
(BTW Tanta might enjoy this article for the language itself. Sean is a well educated Scott)
The US primary exports are scrap, food, and toxic paper.
1.1 Scrap is used to make stuff. People buying stuff will delcine.
1.2 Peak food/Stupid gov't subsidized "BIO" fuels. Definately going up in dollars. Increasing faster than dollar drop? Yes, currently. Good for exports...eh. Bad for eaters in US? Duuuuuur.
1.3 Toxic paper...isn't selling. Dropping dollar helpful? NO! Increase as an export...If you don't know, go back to top of page and reread.
Where does that leave US? Well dollar sales will increase interest rates...at least at the long end. Mish sees the interest rate pivot between FED pushing down low rates and long rates at 5 year tbills:
I suspect that pivot moves left going forward. Also FCB dollar sales/reduced buying equals inflation.
Physical and Labor capital is badly mal-invested in US. (Huh? The Fed prints capital. Go read at least the first few paragraphs of Sean's article above) Market conditions don't need War Shriek hucksters, more banksters, more mortgage hucksters, more contractors, more real estate officers, etc. ad. nauseum. In fact we need far fewer. We also don't need more residential or commercial real estate...more coming on line...we need less. Similairly we don't need more Home Depots, or the stuff they sell. So we don't need all the people, plants and equipment producing those goods. I could go on, I think the point is made.
Thus, we have dollar sales, rising long end interest rates, lower employment, and rising costs in food, oil, and imported goods, as well as a drop in exports.
Wages won't keep up with inflation as all the unemployed mal-invested (mal-educated, mal-trained, etc.) people will be selling labor services cheaper and cheaper to get a job, in an economy with falling employment. Housing prices must follow this trend.
Does this smell like a really serious Stagflation? Does to me. Is this a a potentially stagflationary-depression? Smells like it to me.
Battery pack hooked up to the tin foil hat ultimo.
Banker bunker stocked and ready.
Cheers,
PS...whoever asked earlier...sorry took a while to type this diatribe...Panic now, get ahead of the rush.
saying globalization aint working well is like saying a union made up of 13 colonies or 50 states or whatever is a bad idea too. localized economies within the us are almost as diverse as it is world wide. compare favelas in brazil to some conditions right here in good ole washington dc.
the us got a single currency, lowered tarrifs across borders and, blammo! global economic dominance.
this union has always had a peaceful and happy arrangement never put off course by economic reasons.
oh wait.
there was that little civil war we had over the means of production (at the time).
but nevermind that, we've shown that disparate groups of cultures, languages, races, and IQ's can peaceful coexist and prosper with free trade and unified monetary policy.
its when you have competing monetary goals is when you got problems.
are we seeing the birth of the Globie? (please someone come up with a better name for the new global currency that is forthcoming0
"This weekend, I am going to the NC coast to look for high-quality foreclosures that I can purchase."
I suggest you take 70 rather than 40. The Yankees are backed up miles trying to get into Wilmington and surrounding beaches. Sales have slowed recently (especially in Brunswick Co) but construction is strong and traffic is awful. Maybe some deals in Salter Path (small fishing village when I was at Broughton).
There is a rising tide of opposition around the world to America's unilateral assertion of its national interests. But few realize that for the United States to become a more responsible country, the world economy needs to move from the current U.S. dollar standard to a global currency.
U.S. dominance rests not only on military superiority and on the size and productivity of its economy, but also on the fact that most international transactions are denominated in U.S. dollars and more than 60 percent of world foreign exchange reserves are held in U.S.-denominated assets, like U.S. Treasury bills.
The problem for the rest of the world is that the U.S. dollar standard encourages the United States to be careless in its monetary and fiscal policies.
Yes indeed BIGTIME careless and reckless for past 6+ yrs. with full credit due to the policies of Greenspan, Bernanke, Paulson, and most of all Bushco - the absolute worst US admin in history !
(Bloomberg) -- The Bank of England abandoned its opposition to emergency three-month money auctions and loosened lending standards, a week after Governor Mervyn King said such steps would encourage ``risky behavior.''
This measure is being taken to alleviate the strains in longer-maturity money markets,'' the central bank said in a statement today. The bank said it will acceptmortgage collateral'' at the auction of 10 billion pounds ($20 billion) in loans next week, which will have a penalty rate of 6.75 percent.
Yep, a race to the bottom it is. (Did someone say gold?)
"but try switching houses in one click and tell me."
I can't there with a click but if I start my truck and drive a few miles I have 2 more besides the one I live in now that I own and could live in. So what's the problem?
Good points about the bond market. It's a huge, deep market and its collective wisdom has to be respected.
Greenspan makes a point in his new book that the disinflation nature of global labor arbitrage with Asia will not last indefinitely. And when it finally ends, interest rates will adjust upward significantly.
I have not agreed with Greenspan on much, but I do think he is right about this.
dc1000,
Hmmm, to further develop your analogy between the US Federal system and the entire globe, would you suggest that our national borders be as permeable as those between our States? Free movement of labor as well as capital across all borders?
not that i advocate that but if it is to work then you must.
i am actually open to free movement of labor and capital across borders. i'm more chicago libertarian than anything. (hell why dont i just say it and not diss my alma matta) I'm actually George Masonian. (yay patriots)
the vote with the feet factor would shed light on global economic dominace in a heartbeat i think
A lurker for for about a year and half. Many thanks to CR and Tanta, for all explanations in excruciating detail. Extremely educating.
Anyway an interesting thesis: Regards Credit bubble in UK Roots of the credit crisis lead right to Bin Laden
As a result, bizarrely, the roots of the Northern Rock crisis and the subsequent falls in the stock prices of all Irish banks can be sourced in the most memorable event of this century.
Where were you when you heard about the Twin Towers? Did you ever think that one of the most unexpected impacts of the September 11 attacks would be the explosion of hire-purchase trampolines in the suburbs, deposit crises and ridiculous house prices in Portlaoise? Strange as it sounds, there is a direct link and here's how it happened.
Every time you fill up at the pump, do you ever think about where the cash goes? Obviously, much of it ends up in the hands of the oil producer after all the others take their cut, particularly the tax man. Since the attack on the Twin Towers, and particularly since the occupation of Afghanistan and Iraq, the price of oil has increased from $23 peaking above $80 a barrel. At the time of writing it is $78. Once more, Arab oil producers benefit from a huge windfall as millions of Western drivers hand over cash to the sheiks. This is Osama's handiwork.
The best way to gauge just how much of your cash has ended up in the Gulf as a result of Osama's oil boom is to look at the foreign reserves of the region. The IMF calculates that the balance of payments of the Gulf went from a $30 billion surplus on the eve of September 11 to $212 billion last year. The crucial oil-trade balance has rocketed from $159 billion to $451 billion. This is your cash, and the cash of every Western punter and company that depends on oil for our daily existence.
But because the Gulf states are small places, they can't absorb all this cash and the money has to go somewhere. It can't all be spent in the Gulf. Also, given that the atmosphere in the US is one of overt suspicion and barely concealed hostility towards Arabs, especially Saudis, the recycled cash is not going back to buy Manhattan penthouses for rich Arab playboys. Not surprisingly, many Arabs have taken the hint and moved themselves and their money back home, with the result being huge price rises and rampant speculation in property in the Gulf, leading to the extraordinary emergence of Dubai out of the desert. This new metropolis is sucking in workers from Bangladesh and Pakistan, hookers from Russia and money from investors reading the property ads at the back of the 'Sunday Independent'.
Because the Gulf states have pretty modest economies (Saudi Arabia is a smaller economy than Denmark), the bulk of the petro-cash, as happened in the 1970s, has gone back out into the world economy, looking for a profitable home.
sebastian If Iwere you, Iwould wait a while before buying on the outer banks.I live here annd the m aket continues to go down.There is a glut of houses on the market.
Welcome, and thanks for the interesting post. It won't take long for the Arabs and Chinese to learn how to spend their profits in their own backyards...
Anyway, The Daily Telegraph is a major British broadsheet newspaper. In the spirit of another comment, intellectuals read the Gruaniad( Guardian which has a propensity for typos ) in their 20s, the ToryGraph in their 40s and the tabloid SUN when sitting on the loo.
I have a hard time believing that this story has any truth to it. It is likely too dramatic. Somebody sent this story to Brad Setser as well. He considerably down plays it's significance. Worthwhile to keep an eye on it, butt I think I'm in his camp on this one. Can't see the peg breaking in my lifetime. The white house will not let them. Just like the Japanese, they do what they're told to help the dollar or else.
For China, more currency flexibility will not restrain growth, nor will it lead to deflation,'' McCormick said.We have already seen the resilience of China's exporters to currency appreciation, with many enjoying higher profit margins than they did two years ago.''
Higher Inflation
Greater currency flexibility will lower the price of imported goods, create incentives for Chinese companies to make goods for the nation's consumers and give policy makers more freedom to use monetary policy ``to maintain price stability and avoid asset bubbles,'' McCormick said.
``This is of particular significance given China's recent acceleration of inflation,'' he said. China's inflation rate in August accelerated to a 10-year high of 6.5 percent.
McCormick's call for faster change in China's economic policies comes as the Bush administration tries to blunt criticism from Congress that China-U.S. trade relations are biased in favor the world's largest developing economy.
No `Magic Bullet'
McCormick disputed the contention by U.S. lawmakers including New York Democratic Senator Charles Schumer that a stronger yuan would help alleviate the record trade gap with China, the U.S.'s second-biggest trading partner. That deficit swelled to $141.3 billion through July this year, a 16 percent jump from the same period of 2006.
``What it will not do is cause a significant reduction in the U.S. trade deficit, nor will it provide a magic bullet for solving the problems of American industries facing overseas competition,'' McCormick said.
McCormick said the deficit can only be reduced through decisive measures to increase both private and public saving,'' adding the U.S.must also continue to strive to avoid the siren song of protectionism.''
Clyde: DC market holding steady in town, to outward appearances. Carnage in the long-commute cheap labor homebuilder glutted suburbs. DC itself has weird statistics because it is very bipolar (?) between white rich northwest and black poor southeast. Better areas will crack eventually, but incomes, therefore rents, are high so price multiples arent insane. Government of course is steady to up even in a recession, unlike CA where real estate predominates.
(quote)
Inflation fears as Kuwait and UAE cut key rates
DUBAI: Kuwait and the UAE cut interest rates yesterday, following a 50 basis point reduction in the United States, raising the prospect that Gulf economic growth and inflation may accelerate.
Saudi Arabia, the world's largest oil exporter, plans to keep its rates unchanged, Saudi Central Bank Governor Hamad Saud Al Sayyari said.
Congrats Ben... You make Greenspan look like an amateur at the bubbles!
From the WSJ:
Emerging Markets And Oil Bubble Up
Will the Fed Rate Cut
Turn Overseas Gambits
Into Tech-Craze Repeat?
By JUSTIN LAHART and JOANNA SLATER
September 20, 2007
Now that the fallout from the downturn of the housing-loan market has prompted the Federal Reserve to cut interest rates, the race is on to find the next bubble.
Emerging markets are a popular answer.
Stock markets around the world rallied in response to the Fed's half-percentage-point cut on Tuesday, with shares in emerging markets -- generally defined as countries that have modest incomes but are growing fast -- posting the biggest gains. Mexico's benchmark IPC index on Tuesday rose 2.8% and Brazil's Bovespa rose 4.3%, trumping the Dow Jones Industrial Average's 2.5% gain.
Yesterday, Asian markets, which had been closed when the Fed announced its rate cut, joined the party, with India's Bombay Sensex climbing 4.2% to cross 16000 for the first time.
The rush into emerging-market stocks is in part because of a belief that the Fed's rate cut, as well as easier policy stances at the European Central Bank and the Bank of England, will end up bolstering fast-growing emerging-market economies more than any others. Proponents of this view say that in 1998, easy money flowed into fast-growing technology stocks following the Asian financial-market crisis and collapse of the hedge fund Long-Term Capital Management. The belief that tech stocks were immune to any downturn helped fuel the dot-com bubble...
The Greenspan conundrum was that long rates didn't rise at the Fed Funds rate was increased. Bernanke's conundrum may be that long rates don't fall (or maybe even increase) as he lowers the Fed Funds rate!
lol
Did you notice the link between dollar peg and short term paper investment ?
This has a instant cycle effect on the dollar when economy decelerate.
Many heavy holders of dollar assets were "shorting" the maturity of their holdings during this cycle.
Maybe only china was heavily buying long term notes, china is selling, brazil his buying and everything is hidden buy the flight to quality.
So the effect on the yields is delayed
but can you imagine what will happen to the dollar when the flight reverse.
Bloody decoupling for sure.
And pushing the yields down already will force dollar holders too anticipate the decline and so on.
fiat money leads to high yield it's always the same music
(quote)
In January 2006, Saudi Arabia's monarch, Abdullah bin Abdul Aziz al-Saud, undertook a tour of Asia that brought him to China, India, Malaysia and Pakistan. It was a strategically significant trip and one that may have some important long-term implications. Some have labeled the Saudi king's Asia visit "a strategic shift in the foreign policy of the country" and have argued that it "heralds a new era."
Saudi Arabia and China Improve Relations
The fact that China was the first destination on the king's list speaks volumes not only about the rising profile of China in global politics, but also about a growing intimacy between the two states. China has been working hard to improve its relations with Saudi Arabia, the world's biggest oil exporter. It was in 2004 that the two countries decided to hold regular political consultations at the same time when China's state oil company, Sinopec, signed a deal to explore gas in Saudi Arabia's vast Empty Quarter. King Abdullah's visit followed Beijing's first formal talks with the Organization of Petroleum Exporting Countries (O.P.E.C.) in December 2005.
It is instructive to note that Saudi Arabia's ties with China have been on an upswing at a time when its relationship with the U.S. has come under severe strain. While China has emerged as the Saudi Kingdom's largest customer, the United States' share in Saudi oil exports has been going down after peaking in 2002 at 1.7 million barrels per day. Saudi Arabia's traditional share of the U.S. oil market has been a function of the country's "strategic relationship" with the U.S., a tie that many think has been weakening for some time now, especially in the aftermath of the September 11 attacks and the Iraq war.
(end quote)
I have a hard time believing that this story has any truth to it. It is likely too dramatic. Somebody sent this story to Brad Setser as well. He considerably down plays it's significance. Worthwhile to keep an eye on it, butt I think I'm in his camp on this one. Can't see the peg breaking in my lifetime. The white house will not let them. Just like the Japanese, they do what they're told to help the dollar or else. not a chance
I don't dispute the story being circulated. Rather, I'm asserting this will not come to be. More politely, I will not be surprised if the Saudi's cut rates "quietly" following some "negotiations" with the US Treasury dept or an impromptu visit by Cheney.
There is one thing we keep coming back to: it wasn't asset quality that impaired those hurt in 1998's liquidity crisis and most suggest it wont be asset quality that kills them today. Or will it? A property securing a loan we recently reviewed was featured in a 1998 article. The loan proceeds today are 3.3 times the amount they were when the loan was made and securitized in 1998. That equates to proceeds of about $125 per square foot (psf) versus $420 psf today. This sets a telling stage to suggest that if commercial property fundamentals falter as a result of the uncertainty of the economy, losses may be compounded.
Most market participants attribute much of todays damage to spillover from the subprime mortgage market, and others will suggest that the eroding quality in CMBS transactions also contributed to the fallout. We would agree. Leverage today has far exceeded levels in the past. The chart below accumulates data gathered from 1998 and 2007 (through Q2 2007) and shows dollars of debt per dollar of property net cash flow (NCF) at origination. Total loan originations for each year were split into quartiles based on the debt-to-net cash flow. In 1998, the worst quartile of loan originations began at $9.05. Earlier this year, in 2007, the best quartile wasnt captured until $10.90. The worst quartile begins at $14.50, suggesting 25% of loans originated earlier this year have greater than $14.50 of debt per $1 of NCF. This is significant. In 1998, 98.9% of the loans originated were originated at debt levels less than the best 25% originated in 2007 ($10.90 of debt per $1 of NCF). Today, the weighted average of $12.92 of loan proceeds for every $1 of NCF is 62% higher than the weighted average in 1998 of $7.96.
The axis of the world is shifting.
The dollar and the West have been the Axis Mundi since 1918. Now we begin to see the end of our hegemony that supports our foreign interests.
I am beginning to have some great sympathy for Lord Keynes, telling his great nation that the Great War had been won, but at the cost of the future. Nonetheless, he successfully helped Great Britain keep the Great Depression from being as badly managed as it was in the United States or in much of the rest of the world.
We now face the same fate as the Soviet Union in late 80s- a crap war, an unhappy populace, and no foundation for the economic system. Dependent on imports for tremendous amounts of economic activity. We are also huge energy importers, and have taken imperial overstretch to ridiculous levels. Humph.
Time to cut the rest of the world loose from our apronstrings. We have a lot of work to make our own country work, and after Wall Street buckles, there are going to be tremendous numbers of unhappy campers looking for someone to blame.
Well, I for one hope the Chinese make it as the world leaders for the next century, as Putin's bunch leaves me with a bit of fear at the bottom of my distaste. Edmonton is looking better and better, aside from that lousy weather. But it is a lot further from Mexico than my current home;-} I am beginning to think that Felipe C might be the last elected el Presidente south of the border.
Parity with the canadian dollar isn't for off now, is it?
When the war ends, this all gets much much worse, so the longer off that day is, the more time you have to prepare. On the other hand, things could miraculously get much better in the middle east, and they could stop trying to get those nuclear devices. Optimism about our position in the world is starting to sound like an extremely foolish position.
Major publicly-traded Chinese companies whose American Depository Shares (ADSs) are traded on the New York Stock Exchange (NYSE) have very poor quality of earnings, inadequate corporate governance standards, and serious accounting related issues, according to a comprehensive study by RateFinancials, Inc.
The ten largest NYSE-listed Chinese companies by market capitalization received Poor, or Very Poor, ratings for their accounting, quality of earnings, and governance. The study also found that all ten companies are ultimately majority controlled by the Peoples Republic of China (PRC), frequently engage in related-party transactions, make strategic decisions that are not adequately disclosed, and pose potential conflicts of interest.
Investing in publicly traded Chinese companies at the end of the day is a crapshoot that requires blind and unfounded faith that the PRC will ultimately put the best interests of shareholders ahead of political and other considerations, said Victor Germack, founder and president of RateFinancials. These companies are government-controlled enterprises masquerading as independent public companies and it is virtually impossible to adequately assess their financial condition given their poor level of disclosures. Given the inherent risks of these companies, its both surprising and disappointing that they are allowed to trade on the NYSE.
Hard to believe the Saudis would bite the hand that's been arming them for the past fifty years (and keeping the corrupt monarchy in power.) Either:
1-- the frayed relationship between the US and Saudi Arabia (thanks, GWB, to your war on Iraq) is now on the verge of a bitter divorce, or...
2-- the Saudis are holding out for concessions (re: the Iraq mess), and will lower their rates after a few desperate phone calls from Dick Cheney.
Of course, risk is spread in a more sophisticated and diffuse way today, says Grantham. But its been accepted in a much sloppier way than any time in history. If its a bad enough loan in the first place and theres enough of it, then spreading it around simply means contaminating a very broad spectrum of the financial world.
Pretty good summary, Rich.
And this Grantham fellow has a way with words - almost like Tanta.
While the group is hoping to renegotiate the price of Sallie Mae, these people said, it may also be willing to walk away and pay the $900 million breakup fee.
If that happened, the deal would become the biggest casualty of the tighter credit market, which persists despite the Federal Reserves decision on Tuesday to cut interest rates.
Wow! Almost $1 Billion in break up fees. That's some pier they must have had to let go...
The Saudi Finance Minister was a friend while he was on the board of the IMF in DC & he will argue strongly, I'm sure, for defending the dollar. I still get Holiday notes from him each Christmas. But he is only one among several players making the decision.
The Oil Minister might have a say. All OPEC crude oil purchases are denominated in dollars and thus this gigantic slice of the world economy is a lever that gives the dollar strength vis-a-vis the Euro & Yen. The Minister Naimi may get tremendous pressure from other OPEC members, including Kuwait which has already decoupled from the dollar, to join them and make a complete decoupling. The head of SAMA is a monetarist, and may also urge for a dollar decouple.
I am no economist, but my years in the oil industry gave me a new appreciation of the dollar. And the effects of US foreign trade if the dollar craters would actually be beneficial, though it would more than offset by diminished spending due to lower housing prices.
It turns out that the housing boom has triggered a housing bust. Driving on I-95 to the University of Miami the other day, I passed dozens of buildings on Brickell & other spots in downtown Miami in mid-construction. Ironically, the cranes and gantrys reminded me of the Saudi building boom decades before.
If the Saudis back out of the dollar, a lot of those buildings will remain vertical skeletons for a long time.
And the sustained post-WWII economic boom, punctuated by occasional hiccups, might end if the US dollar loses its status as the world's de facto reserve currency.
OKAY... looks like Ben's warming up the helicopters. Sigh. You can always count on TPTB to take actions guaranteed to make a bad situation worse.
IMHO we were headed for a depression regardless of what action the Fed took. Lowering (or raising) rates simply accelerates the inevitable.
As long as the Fed held steady, two important fictions were maintained: (1) that they were serious about fighting inflation, and (2) that rate cuts would save the markets and the overall economy. The hope embodied in these fantasies have kept long rates low, floated markets worldwide, and slowed the dollar's decline.
Well, #1 has been definitively dispelled and the run on the dollar will proceed unabated. No more hope for foreign holders of US paper and the domestic long bond crowd.
As expected, #2 spurred the usual knee-jerk euphoria, but it's already running out of steam; we could see a down day as early as tomorrow. Soon there will be no more hope for the market bulls, either.
The world has been wishing and praying that the Fed held an ace up its sleeve. Now that they've shown their cards everyone will soon realize they're "all in" on a losing hand.
Can't see the peg breaking in my lifetime. The white house will not let them. Just like the Japanese, they do what they're told to help the dollar or else. - not a chance
This is precisely the sort of arrogance and hubris that makes America so disliked by other countries, many of whom are quietly building in power and wealth. Best put a little gold star on your calendar on the date 18 Set 07. One day BB may be more famous than AG, the lowly academic Fed Reserve chairman who singlehandedly caused a global game of USD hot potato and brought about the end of petrodollar hegemony with his "shock and awe" rate cut. So what if it takes 20, 50, or 100 years. It will be like the fall of Rome and someday it will matter. Hope your kids are learning to speak Chinese.
Hmmm, to further develop your analogy between the US Federal system and the entire globe, would you suggest that our national borders be as permeable as those between our States? Free movement of labor as well as capital across all borders?
HVH | 09.19.07 - 9:13 pm | #
Labor absolutely must be as free to move as capital is. Whether that's done by liberalizing immigration or restricting international banking is irrelevant.
You are moving way too early to start buying any real estate, even if in foreclosure. The Fed cuts won't help the majority of the mortgages that will be foreclosed over the next 18 months. The new (old) lending standards will guarantee a dearth of buyers at current price levels. Wait for the undershoot of valuations at levels where the investment makes sense on a cash flow basis with no assumption of capital appreciation. Here in Orange County CA that means a 50% haircut or more. It's coming, oh yes it is... Speculators set the price on the way up, and liquidators (REOs) will set the price on the way down... all prices are set at the margin. The negative wealth effect that will be felt by Americans will shut down their spend-free habits.
As to recessions, the rug has already been pulled out, which is what the Fed knows and which is why they acted so strongly. The consumer has overspent his income for the last few years, and that is screeching to a halt NOW... the end of HELOCs and MEWs has arrived... The rate cut may help the auto industry, and shave a little of the carrying cost off the CCs burning holes in the consumers' pockets, but that's about it.
As to what the Chinese may or may not do... well, after the real estate liquidations to come (the deflationary component going forward), the Chinese can just come here and buy up properties on the cheap in 3-5 years, trading devalued dollars for devalued property.
But we are all in this together with our fiat currencies... the competitive currency devaluations that took place (Japan leading the way, and China close behind) enabled the US to run huge deficits. They knew what they were doing.
I look for a currency war to flare up between China and Japan, and the US will just be collateral damage.
He also begs the Feds to raise the jumbo loan cutoff to $850K. I'm sure Barney Frank and Chuckie Schumer have already been bribed. What a fine system we have.
If this bill ever passes and Bush signs it, I will never vote Republican again.
Hope no one is planning on traveling over-seas for say the next two hundred years.
michaelcampion
I'm going out on tour with a rock band of Europe & the UK in November and am gonna make a killing. All rooms & transport are provided by the venues, all our product will be manufactured in the states and sold at a massive profit(while providing customers VFM) because of the currency differential.
CDs: $1 cost, sell @ 10 pound or 10 euro
T-shirts:$7, sell @ 10 pound or $20 euro
Will clear north of $20k USD in 3 weeks, almost 50% more than last time.
They are so arrogant. Do they really think that the ROW won't just end up shunning Agency debt because of a new policy like this. I think it has the real potential to make housing actually worse. That would fit well with history, where well-intentioned government policies exacerbate the crisis.
Paulson to signal shift in GSE stance, according to source - DJ
DJ reports U.S. Treasury Secretary Henry Paulson is expected to signal a shift in the Bush administration's policy regarding Fannie Mae (FNM) and Freddie Mac (FRE) by suggesting that permitting the cos to securitize more expensive mortgage loans could help the strained housing mkts, someone familiar with the matter said Wednesday. "There is little question that allowing the GSEs to securitize jumbo mortgages would give a short-term lift" to the housing mkt, Paulson is expected to tell the House Financial Services Committee Thursday, the person familiar with the matter said. But Paulson said such a change must be connected with broader reform of the regulatory structure for Fannie Mae and Freddie Mac. "It would be unreasonable and irresponsible to expand the GSEs' businesses without addressing the fundamental problems of their regulatory structure," Paulson is expected to say, according to the person familiar with the situation.
Saying that the dollar is making all-time lows "isn't a big deal", could quite possibly be one of the dumbest things I've ever seen written. Congratulations.
"If the Saudis back out of the dollar, a lot of those buildings will remain vertical skeletons for a long time.
And the sustained post-WWII economic boom, punctuated by occasional hiccups, might end if the US dollar loses its status as the world's de facto reserve currency."
The sad truth is, it is inevitable. The US has been spending other peoples money to finance its lifestyle and masquerading as if it was wealthy. I could charge to the hilt my credit cards too and for a while, I also would be fooled into feeling like I was opulently wealthy. The difference, I realize I have to eventually pay those bills and return to live within my means. Debt is not equity. Debt is NOT wealth. Events over the past month in the financial markets are just making more salient that same realization for stakeholders in the US economy. Its currency is starting to reflecting that.
Long bond prices continue to fall, driving up the rate for the 10 year to around 4.6 and the 30-year to about 4.9%.
If this were a global game of chess, one could say that the situation up until Tuesday was a long near-stalemate. Both players wait for their opponent to make a mistake before committing to any serious startegy. I'd say the Saudi move today has exposed Bernanke's move on Tuesday as a serious blunder. Don't be surprised when mortgage rates rise, counter-intuitively.
Let's just hope the Chinese don't see the opening and checkmate Heliben and his impotent cronies.
Is it possible that the smart people are actually selling gold and euro's now ? "sell on news" . Iam skeptical about betting on "obvious" financial moves, that everyone is talking about. Is it possible that all weakness in dollar is priced in over the last few years ?
Folks, i have a serious question. can someone pls answer.
so, all these people buying Gold. What is their version of end game ? When there is hyperinflation, all the world governments are going to say .. "okay, we lost. fiat currencies don't work. Now, whoever happen to have Gold have the new money in the world" ? It just doesn't make sense. All i can think of is, we may learn a lesson, create absolutely stringent measures on creating credit fiat money, and we move on. So, why should the new currency be only Gold. It could be just about any other resource. Frankly, it just seems to be another "greater fool" situation, without any real fundamental basis.
Bhayya, I'm buying because the US government is insolvent if it did it's accounting properly. It has $65 Trillion in unfunded liabilities. As more and more baby boomers retire, this balance become payable and need financing. David Walker, US comptroller general, a rather bright fellow, laid out the repercussions quite clearly. US = bankruptcy, ergo the currency goes to hell. That will threaten all fiat currencies. Perhaps not in amplitude, but certainly in terms of cause and effect, check out what happened in the Weimar republic. My time frame is what we're experiencing now is like small waves, ripples perhaps. Tidal wave hits around 2012, so I'm accumulating now as I consider it extremely cheap.
Just as an update on the dollar and the market activity today, the Dollar Index (which tracks the dollar's performance against six major currencies -- the euro, yen, pound, Canadian dollar, Swedish krona, and Swiss franc) is falling off a cliff. It is now down -- in percentage
UPDATE: Right now, the DXY's daily decline in percentage terms is about 0.94%. That is the single-worst daily decline since 11/24/2006. In the days around that Thanksgiving week, the euro surged from around 1.28 to around 1.34 in just a matter of days. Before that, you have to go all the way back to April 17, 2006 to find a worse performance (-1.06%). So a 0.94% move is a fairly large one for currencies, even if it doesn't seem like it.
Well that post sure got garbled. Sorry. Here's what I meant to say:
Just as an update on the dollar and the market activity today, the Dollar Index (which tracks the dollar's performance against six major currencies -- the euro, yen, pound, Canadian dollar, Swedish krona, and Swiss franc) is falling off a cliff. It is now down -- in percentage terms -- by about 0.94%. That is the single-worst daily decline since 11/24/2006. In the days around that Thanksgiving week, the euro surged from around 1.28 to around 1.34 in just a matter of days. Before that, you have to go all the way back to April 17, 2006 to find a worse performance (-1.06%). So a 0.94% move is a fairly large one for currencies, even if it doesn't seem like it.
Stuart, the dollar may be in trouble. But, what is the fundamental logic that Gold will be chosen as the alternative ? Why would the society accept something that is distributed very unevenly across the society, as the new currency ?
Gold may not be accepted as a currency but it sure is worth more than a pallet of paper.
If gold is not officially accepted as a currency, i would argue that it is no better than paper. It's just a piece of metal. If we are talking about times of economic collapse, how is it more valuable than car scrap metal that will lie around when economies collapse ?
Be reasonable. Gold is just a piece of metal that makes nice non-corroding jewelery. Gold is easier to trade than a scrapped car. We all know taht there is no paper currency that holds its value longer than the government that produces it. As our paper currency gets devalued foreigners may be more willing to give me their currency at a higher exchange for the gold than the dollars.
Bhayya, I would also add that as oil gets more expensive and energy intensive extraction of gold gets more expensive, physical gold would be that much more valuable.
Bhayya, gold has the advantage of fungibility. I can take that ounce of gold to the souk in Bahrain to the gold dealer and get local currency in about two minutes. No questions asked, no muss, no fuss.
Are you an Indian? Then I would understand your jewelry centric view. In the West, as currencies falter folks tend to grab their gold and silver very quickly.
This is due to literally centuries of experience with Gresham's Law in practice. As governments print and devalue, people with spare cash want to preserve their value, and gold and silver provide that insurance.
If you check the values of old currency, they tend to track the value of the metals outside of any rarity collector value. The melting pot stands every ready to recycle old into new. Go and read some of Isaac Newton's writings from his time as Master of the Mint and you will see the elementary understanding of this process was well know in his time. What we do today is make is more convoluted, and hide the fact of inflation of the money supply through subterfuge, but the end results are inescapable.
When money is printed faster than the population grows, there is inflation. You can delay it by importing huge amounts of finished goods from other countries that have cheaper labor. You can deny it. If H.P. has the termity to call it a strong dollar policy, I am going to start calling it the dollire.
The Dollire!!!
Forget that Amero fantasy- we now have the Dollire!!!
Pronounce it the almost like delirious;-}
Fiat value resides in confidence. Confidence in America is receding, hence my tagline:
i'm simply astonished at how many of you think that china has their sh#t so together. have you ever lived there? or did you ever travel off the 8-day tourist path? so let me get this straight ... you honestly think that they have overcome rampant corruption, destruction of key non-renewable resources, tremendous waste and duplication of investment, and still totally neglect the basic needs of 2/3rds of their population ... and have got it all wired right? hahahahahaha ...
and saudi? they are in a secure position ... just look up north a bit. so if they f#ck us up, they are just screwing up their own legacy. again, you are just showing your enormous ignorance of how things work. good luck y'all
$100 oil is bullish for the markets!
alea jacta est
This left me breathless!
I'm sorry for swearing here:
We are officially FUCKED if bailout ben doesn't raise the rates in short order.
Fool me once, shame on you. Fool me twice . . .
Why the housing market won't rebound due to the lack of foreign investment in mortgage backed bonds. | Blown Mortgage
so is now the time to panic?
Ruh-Roh!
What do you mean? Cramer said everything was fine now..
Could there be more shoes dropping?
How could Helicopter not see this? Next is China. Noone will hold dollars will Helicopter dropping them all over the world like toilet paper.
Well, yesterday I said I didn't think the dollar would tank right away, not until the economy sagged more or one of our economic partners got tired of playing along. I figured it'd take four to six months.
Gee, was I wrong. I wonder how many dollars to the Euro in three months.
"We are officially (FUBARED)* if bailout Ben doesn't raise the rates in short order."
*Not a direct quote but this is a family show
Oh don't worry about Ben raising the rates the foreigners who own most of our worthless paper which pays off in a depreciating currency will do it for him as in SELL that crap.
Again I ask, is this the time to panic?
DUDE.....I was so gonna post this link and ask 'did you see THIS!!!!'.
With all the talk about China of late, it has been easy to forget the BIG cash dog of the pack. As all my good buddies from up north used to curse when faced with sudden crisis, jesus, mary and joseph!
Yes ASA it is Time to panic,Santa Claus is in a drunken stupor after trying to match GW drink for drink.
What freddyinp'town said.
The game is to drop the dollar's relative value.
Let's not kid around. Those arguing for protection of store of value miss the point. The point is "full employment". MacroEcon 101A.
The FR is an agency charged with one responsiblity; protect and support the banking system. Is it responsible for the store of value? No.
All legal entities have opportunity and responsibility to protect their private stores of value. It's at their peril if they approach reality insularly.
Shaking the Chinese loose from the USD is a public policy goal of the USG. If at the same time there is a windfall to the citizens of the USG, so be it. If the fear of an alternative holds sway, and it's a common psychological mindset, the USD can drop dramatically while the Chinese and the rest of the stakeholders operate on a prior and thus unthoughtfully-vested mindset.
Hope to heck the USD declines rapidly, if you're a US citizen. I sure do, as I want as many petro and asiabucks to be strapped alongside as the buck drops. The outcome will be a US debt bought-back/retired at a significant discount.
Reality here is that the foreign gov'ts must employ their people too and if they get to be Croessus rich, they'll face an uglier problem as they squeeze the goose that laid the golden egg.
For individuals, it's a fun game..."Where do I run to protect my store of value?" For those who are all in, the world's nation-states, that has a well known, hoary consequence.
Or maybe mercantilism isn't dead but just Rip VanWinkle-like, now stirring due to fear as they recognize the production/consumption game players have a bit of indigestion.
On a macro-scale in this universal game, who here has insight and thought as to the near and mid term future
From the Telegraph through Bakersfield Bubble:
China threatens 'nuclear option' of dollar sales
The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation.
Two officials at leading Communist Party bodies have given interviews in recent days warning - for the first time - that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress.
Shifts in Chinese policy are often announced through key think tanks and academies.
Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels. It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900bn in a mix of US bonds.
You guys are cluesless. I am telling you again that there's not going to be any replay of the Great Depression because the key conditions aren't the same. All these news do not change my opinion an iota.
Any guesses on China's next move? I bet its pretty difficult to quietly dispose of umph-teen billion ca-trillion dollars. If they start shifting to euros this could get real interesting. Hope no one is planning on traveling over-seas for say the next two hundred years. At least the politicians will get what they want and the yuan will appreciate against the USD. Give them 9 months and 9% inflation imposed on those that cant afford it they will be begging for the good old days....
OK,
The thinking goes that foreign CB's won't buy our debt if the returns are so poor (with low rates on a falling dollar). I assume they wouldn't do this for an economic reason: poor returns on investment.
This assumes two things:
1)They apparently have been happy with the returns up to now dispite the deterioration of the dollar over the last several years (i.e. if their decisions up to now were purely financial, they surely would have bailed on our debt before now, no?).
2) That the economic damage of a U.S. in recession will be less damaging financially than the worsening returns they will get by buying our debt.
It seems overall that foreign CB have found a reason besides simple returns on investment to buy our debt. Worsening returns may not deter them since they haven't been detered before now.
China threatens 'nuclear option' of dollar sales
But at least social security and this f*#@'ing war would be paid for!
I'm getting the passport if I see oil quoted in euros....
I agree that this is unlikely to lead to anything like the Great Depression. It took some serious neglect and mismanagement by Hoover before things got really bad back then.
A fairly severe recession seems likely, though.
GaudiaRay, is English your second language? For someone who is so long-winded, you write poorly. Read "The Elements of Style," please.
Sebastian-
You are so right, this is not going to be a repeat of the great depression. It will be worse, since this time the rest of the world is pissed at us, we have massive external debts, americans are much lazier and stupider, peak oil is here, peak food is here, or just around the corner, and most americans couldn't grow food if their lives depended on it, which it will.
Watch those world grain reserve numbers, they keep getting smaller and smaller.
No reason to worry though, we should have plenty of food here in the ol US as long as the natural gas pipelines keep flowing from Canada and Mexico, err, I mean NAU.
Max,
Your post on China threatens 'nuclear option' of dollar sales probably ought to have mentioned that it was from back in August. This is not a new article.
Also, to whoever posted with the name Sebastian. You dont sound like the real Sebastian to me.
Given their aggresive action yesterday, it's hard for me to think they won't just monetize long bonds to keep the rates down.
This would drive the dollar into the gutter, of course.
I think oil is the main problem here - we don't need to worry about other exports as much.
I hate to say it, but it would very much please me to see easy money policy backfire.
Still,
If there was to occur a recession many in the US would buy treasuries. Could that somehow compensate FCB "fleeing" from US Bonds?
Has anyone figured out the impact of this variance and the other, recent variances?
http://www.federalreserve.gov/boarddocs/legalint/BHC_ChangeInControl/2007/20070917.pdf
Let me see if I understand this.
The bears say we should take the worst of the 1970s and combine it with the worst of the Great Depression.
The bulls argue that we should take the best of the 1970s and combine it with the best of the Great Depression.
You guys are all nuts! I am on the fence taking an average amount of 1970s and mixing it with an average amount of Great Depression!
Okay, maybe I'm not being completely fair to the bull case. Sorry about that! Attempted humor is job one though (emphasis on "attempted").
This is a very sensible move on the part of the Saudis that will allow them to limit the growth their monetary base more effectively. The Chinese should do the same thing.
I would say that unless there is a significant reduction in North American demand, $100 oil may not be far off.
My hope is that other central banks will make this dollar debasement as painful for us as possible. We certainly have it coming.
chinese purchase of bonds has not been financially rational in the sense we think of for years.
its pure social policy and self preservation for the government.
and because of this the great deflation from china shall continue
even with a drop in the dollar.
perhaps they'll open that US Denominated Hard Asset Fund they should open now. when they buy that fancy pants golf course in carmel and rockefeller center, we know the end game is in motion.
I guess Saudi Arabia felt the Fed cut too soon? But if the US does head for recession, it is a good bet Saudi Arabia will not be far behind. They may only have to deal with a rate differential for a year or less.
It's a lot worse for the recyclers...except for the oil exporters. There's probably no better time for them to de-link. That's going to hit the Asian recyclers doubly hard.
I don't pretend to know how this will unwind. My bet is that as we fall, they will fall harder. The oil exporters will make excess profits until global demand falls.
The massive trade imbalances can't go on forever.
Few Asian Nations Will Celebrate `Bernanke Put': Andy Mukherjee - Bloomberg.com
Sebastian,
You have the floor. Please state the rationale for why now is different than the 1920's (for the better as you argue). You stated your conclusion, but omitted the observations/facts that led to your conclusion.
Sebastian:
History doesn't repeat; it rhymes, as Twain said.
Is your assessment of "key conditions" so reliable that you believe things won't get even half as bad as The Great Depression? Would half as bad change life as you know it?
1/4?
I'm setting you up again, but I agree: there will be no repeat of The Great Depression. I cannot foresee Hoovervilles, 2.0; Mexican Pesos preferred to U.S. Dollars, once again, in parts of the Southwest; and Canadian Dollars preferred in parts of New England and Michigan.
I cannot believe that the Communist and Socialist parties will again become so popular (see 1932 vote!) that another "New Deal" will replace the first. I cannot, and do not want to believe that a disillusioned America will glamorize new Dillingers, Bonnie-and-Clydes, and Mothers Barker to the risk of law and order.
Sebastian, I hope you're right. Let us pray for your Divine smugness.
dc1000,
Actually, China has been buying rights to natural resources in places like Africa and Canada. Strange that they're not interested in American baubles like Pebble Beach and the Rockefeller Center. Of course we wouldn't allow them to buy productive assets like Unocal, now would we?
"perhaps they'll open that US Denominated Hard Asset Fund they should open now. when they buy that fancy pants golf course in carmel and rockefeller center, we know the end game is in motion."
Maybe they can buy the REOs and rent them to the foreclosed borrowers.
Industry groups that benefit from
lower dollar and steeper yield curve are: (caveat: if inflation does not get out of hand)
Homebuilding(the most)
Gold
Diversified Metals
OIL services
IT consulting
Banking(yes)
Fertilizer
Diversified Chemicals
specialized finance
communications Equipment
Source: Howard Simmons at REALMONEY, economist from Johns Hopkins.
a candidate for presidency will latch on to all of this and understand that we can debase the currency, save our asses and inflate the economy so long as we get off of oil.
therefore they will announce as a prime part of their candidacy that they will print 100billion in money to begin the drive to alternative fuels to thereby get us off the oil tip. it jives well with our foreign policy needs.
it will bring us back to the isolationism of the GW years. that being George Washington.
we'll grow all we need to eat, manufacture all we need to use, and sell our cheap cheap cheap products to the rest of the world and begin OUR mercantilist era.
and so long as i'm dreaming, they will announce gay marriages, legalized marijuana, and health care for all!
PS parts of what i said make some real sense.
dc1000
It's not just the Chinese purchasing bonds that's irrational; the entire bond market needs to be dope slapped. Domestic pension funds and insurance companies are all trying to perform duration matching to their liabilities irrespective of yield. This potential shift in psychology about the dollar may be the break that changes the entire debt market.
Savers have been screwed for way too long.
Clyde:
(present company exempted from my historical references)
China may be too smart to buy that fancy pants golf course in Carmel. They seem to be buying natural resources with their money. Expect that to continue.
Helicopter Ben will not allow a great depression, which he's a great student of. More likely he'll bring us close to a Weimar hyperinflation, which he has no clue about.
clyde: not that i want to group myself with sebbie (i'm in a class all to myself) but the main reason is lack of smoot hawley. don't see it coming. do you?
I can't get this idea out of my head, so I will share it with you.
I just think it's weird that the Fed is panic-cutting at the same time France and the U.S are racheting up the rhetoric against Iran and Israel is surprise-boming Syria.
I think a plan to attack Iran has been in the works for a long time, mainly as an accommodation to Israel.
I live on the Hudson River. All summer and fall, there has been way more military aircraft going up and down river to and from West Point than normal. I know, it sounds nuts. But I've live here for 17 years and never seen it before.
I actually think Bush/Cheney need to attack Iran for: 1) promises to Israel and 2) their political legacy.
Yes ASA it is Time to panic,Santa Claus is in a drunken stupor after trying to match GW drink for drink.
Santa should have known that in drinking contests one should always eat lots of cabbage before the drinking begins.
Yeah, the USD is trash, we get it! Good job, Ben.
OT: CR, have you heard whether the first $5 billion in First Data bonds got placed, and at what price? KDP advisors was advising not to pay more than 94% of par. Anyone heard any updates? How much sold? At what price?
PS parts of what i said make some real sense.
dc1000 | 09.19.07 - 7:52 pm | #
I am in agreement. I've felt for the last handfull of years that this may very well be where we are heading. I've been slowly working on some products to coincide, such as advanced, but cheap, control systems for manufacturing.
If our guess is correct, cool. If not, there are other markets for this stuff.
My apologies for reposting, but I posted this in another thread way early this morning and it got buried. Seems relevant here. Would love to hear some informed discussion
OK, I'm WAY over my head here but have been thinking about 2 things this afternoon - China moving out of the dollar and a comment in another thread attributed to Buffet that in order to value a position sell off 5% and see what the value really is.
Then I read this, "Tuesday's US Treasury Department's Treasury International Capital (TIC) report ... showed that foreign (like the Chinese central bank) buying of US government securities actually turned negative in July. " at Object Not Found II20Dj02.html
So my question is why can't/doesn't China hedge it's dollar position with USD puts, Euro calls, Gold calls, oil calls, or some other exotic derivative and then just dump 5% of it's dollar stash on the market to see how much that actually hurts the dollar? Use the proceeds for more hedging and continue to abandon the dollar?
If the Fed made the move they did because they see dark shapes in the water that the rest of us aren't yet privy to, and the economy is headed for serious trouble, then that will hurt the exports of China anyway. Why wouldn't China get out in front of it?
Perhaps a hopelesssly naive question, but I'd love to learn why.
Matt:
"Peak food."
Thanks a lot, buddy, for introducing me to a terrifying term.
You guys are clueless. I am telling you again that there's not going to be any replay of the Great Depression because the key conditions aren't the same. All these news do not change my opinion an iota.
Sebastian (aka Herbert Hoover)
Hilarious!
peconic:
i can vividly remember asking brad setser back when the blog was back on the NYU servers:
is the bond market wrong?
seems like it has been for years and years.
i'd argue, how can one the deepest most liquid and participated in markets be WRONG
the bottom line (unless finance 101 has been repealed) is that rates are made up of default risk, roll over risk /term risk / duration risk, and inflation risks (on top of risk free ROR for non treasuries)
therefore, inflation expectaions must be low
china knows they are going to send us deflation for a generation
Guys, as I said up above, I don't think that post by Sebastian was by the "real" Sebastian. I really don't.
It sounded to me like somebody trying to yank your chains. That would explain why you haven't heard a response too.
A bit of Peak Oil conspiracy theory here.
Let's assume Saudi Arabia knows full well that its oil reserve estimates are wildly optimistic at best, a total fabrication at worst, and that real reserves are starting to shrink.
What better way to 1. increase and diversify your income, and 2. create a significant bit of "demand destruction" and keep the oil revenue flowing for another few decades.
Breaking the dollar peg might eventually be good for them and US.
I don't see anything unusual about Saudi Arabia deciding not to follow the Fed. As Brad Setser and Menzie Chinn have been talking about for a long time, the dollar peg has caused inflation inside the Gulf countries. By dropping the dollar peg, they reduce inflation. And it's highly unlikely that there will be a rush of investment. What do the Saudis have to sell, besides oil?
Likewise with China. We have been begging them to allow the yuan to rise. If they sell dollars, that's what will happen.
I think both events are good news for overall global growth.
As for the Federal Reserve, a half point will not change things in the long run substantially. To the extent that it does, it's inflationary and bad for the dollar. Or good, if you happen to be an exporter.
dc1000,
I suppose the 30 year bond buyer is assuming that as well...whether they realize it or not.
of course the buyer of the 30 yr is thinking that. who buys those? instutitions and FCB. aint no retail guy doing it.
under 5 yield for 30 years?!?
If the dollar is going to decline the best stocks to buy would be foreign stocks denominated in Euro, pounds, Swiss Francs, etc.
Even Canadian $ stocks and Australian $ stocks. And Hong Kong stocks too.
Or just open a plain vanilla bank account in a Euro bank.
Perhaps this is Saudi Arabia's way to pressure USA to attack Iran. Saudis want to be the King in the region.That's why they gave false intelligence reports about Saadam
having nuclear wapons to the US.
the Great Depression
highly over-rated
there was'nt even a civil war, for cryin out loud...
so there were soup kitchens....
big deal..
there's one on 55th and 9th
there will be a new term for what occurs in the future...
we just don't know what it is...
and it won't be positive
"History doesn't repeat; it rhymes, as Twain said.
Is your assessment of "key conditions" so reliable that you believe things won't get even half as bad as The Great Depression? Would half as bad change life as you know it? "
That Mark Twain quote has become the biggest cliche among permabears, who has been shorting the markets since 2004. You cannot go anywhere by comparing apples and oranges.
If you deal with real numbers, you will notice than only 1% of the homes will ever get taken by banks and be marked down in price. The remaining loans will be either renegotiated, or people will continue to pay. Do not confuse blowup of few 100X leveraged hedge funds with blowup of all American households.
This weekend, I am going to the NC coast to look for high-quality foreclosures that I can purchase. People need places to live, and places to retire. This is not like dot-com crisis. You can switch from pet.com to dog.com with just one click, but try switching houses in one click and tell me.
Sebastia
I get a feeling not many people here have actually studied some key areas that may have a big impact on our future.
In no particular order.
I think everyone should watch the Century of Self series. Internet Archive: Free Download: Century of the Self
I could be wrong, but I think it's going to be hard to predict the future based on the past, because this time it really is different. Before 150 yrs ago we had less than 1 billion people on earth with a fairly steady population. Then we had the biggest energy and industrial boom ever, I think we are about to see the downside of the boom and population explosion. I don't think the dieoff is going to start next year, but I think times are going to get continually tougher for many years to come.
I hope I don't sound alarmist, because I really am not, just very open minded, and conservative.
I still do not understand the big significance of this US dollar news. US wants its dollar to be devalued (hence pressuring China) and foreigners want the same. We got mutual agreement - a trade.
THE NEW WORLD DISORDER
Goodbye U.S. dollar, hello global currency says Benn Steil, Director of international economics at the Council on Foreign Relations
"The dollar's privileged status as today's global money is not heaven-bestowed. The dollar is ultimately just another money supported only by faith that others will willingly accept it in the future in return for the same sort of valuable things it bought in the past."
In other words, if the institutions of the U.S. government fail to validate that faith, the dollar, too, merits being abandoned.
"Reckless U.S. fiscal policy is undermining the dollar's position even as the currency's role as a global money is expanding."
Goodbye U.S. dollar, hello global currency
I live on the Hudson River.
Ever think that fleet week just passed?
oops. this was a mistake on First Data. CR
Edited By Siteowner
Global Exodus from the US Dollar in Motion with full credit due to the policies of Greenspan, Bernanke, Paulson, and most of all Bushco - the absolute worst US admin in history !
All, check out the video at the bottom of the posts: Paul Volcker in Feb, 2005.
"Homeownership has become a vehicle for borrowing and leveraging as much as a source of financial security."
"I come now to the heart of the problem, as a Nation we are consuming and investing, that is spending, about 6% more than we are producing. What holds it all together? - High consumption - high leverage - government deficits - What holds it all together is a really massive and growing flow of capital from abroad. A flow of capital that today runs to more than $2 Billion per day."
Seems fitting for today's news.
Best to all.
I still do not understand the big significance of this US dollar news. US wants its dollar to be devalued (hence pressuring China) and foreigners want the same. We got mutual agreement - a trade.
Sebastian | 09.19.07 - 8:22 pm | #
All imported products will now rise and we have a economy in a recession - Stagflation has now arrived...
The dollar will ralley hard over the next year as credit/dollar destruction plus U.S. Japanese recession craters China's production and banking system.Sentiment is so one sided against the dollar that even taxi drivers are talking about the dollar crash.Interesting that back in the 80"s I saw Jim Rogers at Harvard club in N.Y. telling everyone to get out of dollars .One month later the dollar was higher.He's BACK!
even if the us economic hegemony ends, its gonna be glacial in time scale. how much bigger of an economy are we? how many more bombs do we have than everyone else?
we'll manufacture a world war III just to make a new bretton woods.
where you going to put your money? europa? africa for gods sakes?
just wait til india really gets online with export manufacturing.
we're talking about billions of people out there. billions of people that need to be 'folded' in before there is a better place to sell crap than the good ole usa.
they may not WANT our money, but they frickin need it.
and when they need it they need somewhere to put it.
the biggest force at work here, much like plate tetonics or the big bang or whatever else MASSIVE in scale is the need of china to industrialize and them needing us to buy the crap.
lead poisened crap it is, but we'll buy it.
there will not be import lead inflation (ex energy).
repeat after me: there will not be import lead inflation (ex energy).
that is of course unless buscho decide to F it all up and play chicken with the chinese and piss it all way
that wouldnt surprise me but it would be shocking
(PS Inflation will be domestic in nature: health care, education, services)
Sebastian,
You're right. The 100X leveraged hedge funds have a lot more money to blow. OPM.
It was never a conundrum.
It's just that the context has changed,
and it isn't what we're used to. For example:
If rates are too tight (no misallocation going on, real demand present), lowering them is like taking medicine...you'll end up feeling better tomorrow and long rates will reflect that.
If rates are too loose (misallocation going on, no real demand present), lowering them is like drinking one more beer....you'll end up worse off tomorrow and long rates will reflect that.
That's why the Fed has made a mistake.
It isn't medicine in the Fed's bottle, but the Fed is still going to force feed the economy from that bottle until it's "well".
It may not be as glacial as you think.
The real questions may not be about economic size but rather economic direction and will.
1) Does the rest of the world want to be under our economic thumbs anymore?
2) Do the U.S. people want to be exporting their wealth in so many ways to the rest of the world, or do we just want to be left alone to fend for ourselves?
Maybe...globalization isn't working so well for them or us, and it's time to split.
Let's look at things like Sean Corrigan recently did:
Twilight of the Gods - Sean Corrigan - Mises Institute
(BTW Tanta might enjoy this article for the language itself. Sean is a well educated Scott)
1.1 Scrap is used to make stuff. People buying stuff will delcine.
1.2 Peak food/Stupid gov't subsidized "BIO" fuels. Definately going up in dollars. Increasing faster than dollar drop? Yes, currently. Good for exports...eh. Bad for eaters in US? Duuuuuur.
1.3 Toxic paper...isn't selling. Dropping dollar helpful? NO! Increase as an export...If you don't know, go back to top of page and reread.
Mish's Global Economic Trend Analysis: Where's the Value?
I suspect that pivot moves left going forward. Also FCB dollar sales/reduced buying equals inflation.
Does this smell like a really serious Stagflation? Does to me. Is this a a potentially stagflationary-depression? Smells like it to me.
Battery pack hooked up to the tin foil hat ultimo.
Banker bunker stocked and ready.
Cheers,
PS...whoever asked earlier...sorry took a while to type this diatribe...Panic now, get ahead of the rush.
saying globalization aint working well is like saying a union made up of 13 colonies or 50 states or whatever is a bad idea too. localized economies within the us are almost as diverse as it is world wide. compare favelas in brazil to some conditions right here in good ole washington dc.
the us got a single currency, lowered tarrifs across borders and, blammo! global economic dominance.
this union has always had a peaceful and happy arrangement never put off course by economic reasons.
oh wait.
there was that little civil war we had over the means of production (at the time).
but nevermind that, we've shown that disparate groups of cultures, languages, races, and IQ's can peaceful coexist and prosper with free trade and unified monetary policy.
its when you have competing monetary goals is when you got problems.
are we seeing the birth of the Globie? (please someone come up with a better name for the new global currency that is forthcoming0
Sebastian,
"This weekend, I am going to the NC coast to look for high-quality foreclosures that I can purchase."
I suggest you take 70 rather than 40. The Yankees are backed up miles trying to get into Wilmington and surrounding beaches. Sales have slowed recently (especially in Brunswick Co) but construction is strong and traffic is awful. Maybe some deals in Salter Path (small fishing village when I was at Broughton).
The case for a global currency
Robert H. Wade
The case for a global currency - Editorials & Commentary - International Herald Tribune - The New York Times
There is a rising tide of opposition around the world to America's unilateral assertion of its national interests. But few realize that for the United States to become a more responsible country, the world economy needs to move from the current U.S. dollar standard to a global currency.
U.S. dominance rests not only on military superiority and on the size and productivity of its economy, but also on the fact that most international transactions are denominated in U.S. dollars and more than 60 percent of world foreign exchange reserves are held in U.S.-denominated assets, like U.S. Treasury bills.
The problem for the rest of the world is that the U.S. dollar standard encourages the United States to be careless in its monetary and fiscal policies.
Yes indeed BIGTIME careless and reckless for past 6+ yrs. with full credit due to the policies of Greenspan, Bernanke, Paulson, and most of all Bushco - the absolute worst US admin in history !
And why should the ME hold dollars? Is anyone aware of how the US is regarded in the ME?
There are political factors as well as economic factors at play here.
You cannot shit repeatedly in your bankers house and expect him to continue to loan you money. The same holds true for the Chinese.
The ME is full of Phd's that are looking to diversify beyond dollars and the US. So is China.
Get used to it.
BOE Reverses Policy, Lends Three-Month Emergency Cash
(Bloomberg) -- The Bank of England abandoned its opposition to emergency three-month money auctions and loosened lending standards, a week after Governor Mervyn King said such steps would encourage ``risky behavior.''
This measure is being taken to alleviate the strains in longer-maturity money markets,'' the central bank said in a statement today. The bank said it will acceptmortgage collateral'' at the auction of 10 billion pounds ($20 billion) in loans next week, which will have a penalty rate of 6.75 percent.
Yep, a race to the bottom it is. (Did someone say gold?)
Ain't capitalism grand?
"but try switching houses in one click and tell me."
I can't there with a click but if I start my truck and drive a few miles I have 2 more besides the one I live in now that I own and could live in. So what's the problem?
are we seeing the birth of the Globie? (please someone come up with a better name for the new global currency that is forthcoming0
dc1000 |
Yeah...gold. We essentially had no competing currencies until the world went essentially fiat after 1913.
Yeah I know, gov' still meddled and set gold/silver ratio which created some arbitrage opportunities, but really nothing like today.
Cheers,
dc1000
Good points about the bond market. It's a huge, deep market and its collective wisdom has to be respected.
Greenspan makes a point in his new book that the disinflation nature of global labor arbitrage with Asia will not last indefinitely. And when it finally ends, interest rates will adjust upward significantly.
I have not agreed with Greenspan on much, but I do think he is right about this.
dc1000,
Hmmm, to further develop your analogy between the US Federal system and the entire globe, would you suggest that our national borders be as permeable as those between our States? Free movement of labor as well as capital across all borders?
" Peconic Bay
Greenspan makes a point in his new book that the disinflation nature of global labor arbitrage with Asia will not last indefinitely."
And your calm? Oh yeah that arbitrage will stop when US wages drop to their levels. Several billion vs a few hundred billion...Ol' Mr. Magoo...
Need some new batteries.
Cheers,
"Several billion vs a few hundred billion...Ol' Mr. Magoo..."
Should be few hundred million...
Doh!
Cheers,
Globollar
HVH
not that i advocate that but if it is to work then you must.
i am actually open to free movement of labor and capital across borders. i'm more chicago libertarian than anything. (hell why dont i just say it and not diss my alma matta) I'm actually George Masonian. (yay patriots)
the vote with the feet factor would shed light on global economic dominace in a heartbeat i think
Globak currency?
Renminbi.
"but try switching houses in one click and tell me."
I agree. Foreclosures take at least 6-9 months...
Looks like if monetary policy doesn't allow it, fiscal policy will make up for the rest when the decline is in full-swing:
Fannie Mae, Freddie Mac Regulator Eases Asset Limits (Update5) - Bloomberg.com
"All these news do not change my opinion an iota."
Don't worry, Sebastian, we won't confuse you with facts.
I am all for equal movements across borders, but it has to be equal.
If our kids are buying Chinese toys, then dammit those Chinese kids had better start buying our toys.
If you are surprised by this you haven't been paying attention. Yesterday, Ben sealed the dollars fate as the world's reserve currency.
Put yourself in the shoes of a foreign central banker, would you want to hold US dollars or Euros?
A lurker for for about a year and half. Many thanks to CR and Tanta, for all explanations in excruciating detail. Extremely educating.
Anyway an interesting thesis: Regards Credit bubble in UK
Roots of the credit crisis lead right to Bin Laden
As a result, bizarrely, the roots of the Northern Rock crisis and the subsequent falls in the stock prices of all Irish banks can be sourced in the most memorable event of this century.
Where were you when you heard about the Twin Towers? Did you ever think that one of the most unexpected impacts of the September 11 attacks would be the explosion of hire-purchase trampolines in the suburbs, deposit crises and ridiculous house prices in Portlaoise? Strange as it sounds, there is a direct link and here's how it happened.
Every time you fill up at the pump, do you ever think about where the cash goes? Obviously, much of it ends up in the hands of the oil producer after all the others take their cut, particularly the tax man. Since the attack on the Twin Towers, and particularly since the occupation of Afghanistan and Iraq, the price of oil has increased from $23 peaking above $80 a barrel. At the time of writing it is $78. Once more, Arab oil producers benefit from a huge windfall as millions of Western drivers hand over cash to the sheiks. This is Osama's handiwork.
The best way to gauge just how much of your cash has ended up in the Gulf as a result of Osama's oil boom is to look at the foreign reserves of the region. The IMF calculates that the balance of payments of the Gulf went from a $30 billion surplus on the eve of September 11 to $212 billion last year. The crucial oil-trade balance has rocketed from $159 billion to $451 billion. This is your cash, and the cash of every Western punter and company that depends on oil for our daily existence.
But because the Gulf states are small places, they can't absorb all this cash and the money has to go somewhere. It can't all be spent in the Gulf. Also, given that the atmosphere in the US is one of overt suspicion and barely concealed hostility towards Arabs, especially Saudis, the recycled cash is not going back to buy Manhattan penthouses for rich Arab playboys. Not surprisingly, many Arabs have taken the hint and moved themselves and their money back home, with the result being huge price rises and rampant speculation in property in the Gulf, leading to the extraordinary emergence of Dubai out of the desert. This new metropolis is sucking in workers from Bangladesh and Pakistan, hookers from Russia and money from investors reading the property ads at the back of the 'Sunday Independent'.
Because the Gulf states have pretty modest economies (Saudi Arabia is a smaller economy than Denmark), the bulk of the petro-cash, as happened in the 1970s, has gone back out into the world economy, looking for a profitable home.
By the way, in all of the excitement yesterday, did you notice the extremely low "net foreign purchases" number yesterday?
Global tolerance for US shenanigans might really be ending.
http://photos1.blogger.com/img/243/2888/320/VolckerA.jpg
Volcker even stands at a podium like he is just waiting to kick inflations ass.
Global currency name: bancor
courtesy Keynes.
Bancor - Wikipedia, the free encyclopedia
sebastian If Iwere you, Iwould wait a while before buying on the outer banks.I live here annd the m aket continues to go down.There is a glut of houses on the market.
dc1000,
The continued dollar drop is only going to take the export-share of our GDP higher. I think it is 8.5% now, give or take.
So I presume that the pressure for a Smoot-Hawley sequel is going to diminish.
How about that DC market? I hear that many areas inside the beltway are still going up, is that true?
That's a new Sebastian...the poor grammar etc. is a dead give away.
Cheers,
How come this news is nowhere to be found on major financial news outlets??
Checked WSJ, Bloomberg, FT etc. and then wrote an e-mail to them asking why have they not published this news.
Thanks for bring the best here.
nishi
sbarrkum,
Welcome, and thanks for the interesting post. It won't take long for the Arabs and Chinese to learn how to spend their profits in their own backyards...
re:
How come this news is nowhere to be found on major financial news outlets??
So the Daily ToryGraph is no longer a major financial news outlet ? Poor Bill Deedes ( Bill Deedes - Wikipedia, the free encyclopedia ) must be rolling over in his so recently dug grave - though Peter Simple ( Michael Wharton - Wikipedia, the free encyclopedia ) would be saying - 'serves them right'.
Anyway, The Daily Telegraph is a major British broadsheet newspaper. In the spirit of another comment, intellectuals read the Gruaniad( Guardian which has a propensity for typos ) in their 20s, the ToryGraph in their 40s and the tabloid SUN when sitting on the loo.
-K
I have a hard time believing that this story has any truth to it. It is likely too dramatic. Somebody sent this story to Brad Setser as well. He considerably down plays it's significance. Worthwhile to keep an eye on it, butt I think I'm in his camp on this one. Can't see the peg breaking in my lifetime. The white house will not let them. Just like the Japanese, they do what they're told to help the dollar or else.
For China, more currency flexibility will not restrain growth, nor will it lead to deflation,'' McCormick said.We have already seen the resilience of China's exporters to currency appreciation, with many enjoying higher profit margins than they did two years ago.''
Higher Inflation
Greater currency flexibility will lower the price of imported goods, create incentives for Chinese companies to make goods for the nation's consumers and give policy makers more freedom to use monetary policy ``to maintain price stability and avoid asset bubbles,'' McCormick said.
``This is of particular significance given China's recent acceleration of inflation,'' he said. China's inflation rate in August accelerated to a 10-year high of 6.5 percent.
McCormick's call for faster change in China's economic policies comes as the Bush administration tries to blunt criticism from Congress that China-U.S. trade relations are biased in favor the world's largest developing economy.
No `Magic Bullet'
McCormick disputed the contention by U.S. lawmakers including New York Democratic Senator Charles Schumer that a stronger yuan would help alleviate the record trade gap with China, the U.S.'s second-biggest trading partner. That deficit swelled to $141.3 billion through July this year, a 16 percent jump from the same period of 2006.
``What it will not do is cause a significant reduction in the U.S. trade deficit, nor will it provide a magic bullet for solving the problems of American industries facing overseas competition,'' McCormick said.
McCormick said the deficit can only be reduced through decisive measures to increase both private and public saving,'' adding the U.S.must also continue to strive to avoid the siren song of protectionism.''
McCormick Urges China to Increase Yuan `Flexibility' (Update2) - Bloomberg.com
Now start saving damn it!
It would be hard to summarize the arguments advanced here over the past few months in a few words. But this article comes close. Check it out.
Wall Street Crash - Views - Portfolio.com
Clyde: DC market holding steady in town, to outward appearances. Carnage in the long-commute cheap labor homebuilder glutted suburbs. DC itself has weird statistics because it is very bipolar (?) between white rich northwest and black poor southeast. Better areas will crack eventually, but incomes, therefore rents, are high so price multiples arent insane. Government of course is steady to up even in a recession, unlike CA where real estate predominates.
Hoovervilles are now referred to as "FEMA trailers".
Ask the good folks of NOLA.
Volcker's a 2-meter man. That lectern is probably down around his knees.
Gulf Daily News, Bahrain, tonight:
(quote)
Inflation fears as Kuwait and UAE cut key rates
DUBAI: Kuwait and the UAE cut interest rates yesterday, following a 50 basis point reduction in the United States, raising the prospect that Gulf economic growth and inflation may accelerate.
Saudi Arabia, the world's largest oil exporter, plans to keep its rates unchanged, Saudi Central Bank Governor Hamad Saud Al Sayyari said.
(end quote)
how come this news is nowhere to be found on major financial news outlets??
Search google news for Saudi arabia rate cut
Apparently UAE etc have cut rate. Saudis have held the rates.
Congrats Ben... You make Greenspan look like an amateur at the bubbles!
From the WSJ:
Emerging Markets And Oil Bubble Up
Will the Fed Rate Cut
Turn Overseas Gambits
Into Tech-Craze Repeat?
By JUSTIN LAHART and JOANNA SLATER
September 20, 2007
Now that the fallout from the downturn of the housing-loan market has prompted the Federal Reserve to cut interest rates, the race is on to find the next bubble.
Emerging markets are a popular answer.
Stock markets around the world rallied in response to the Fed's half-percentage-point cut on Tuesday, with shares in emerging markets -- generally defined as countries that have modest incomes but are growing fast -- posting the biggest gains. Mexico's benchmark IPC index on Tuesday rose 2.8% and Brazil's Bovespa rose 4.3%, trumping the Dow Jones Industrial Average's 2.5% gain.
Yesterday, Asian markets, which had been closed when the Fed announced its rate cut, joined the party, with India's Bombay Sensex climbing 4.2% to cross 16000 for the first time.
The rush into emerging-market stocks is in part because of a belief that the Fed's rate cut, as well as easier policy stances at the European Central Bank and the Bank of England, will end up bolstering fast-growing emerging-market economies more than any others. Proponents of this view say that in 1998, easy money flowed into fast-growing technology stocks following the Asian financial-market crisis and collapse of the hedge fund Long-Term Capital Management. The belief that tech stocks were immune to any downturn helped fuel the dot-com bubble...
Emerging Markets And Oil Bubble Up
The Greenspan conundrum was that long rates didn't rise at the Fed Funds rate was increased. Bernanke's conundrum may be that long rates don't fall (or maybe even increase) as he lowers the Fed Funds rate!
lol
Did you notice the link between dollar peg and short term paper investment ?
This has a instant cycle effect on the dollar when economy decelerate.
Many heavy holders of dollar assets were "shorting" the maturity of their holdings during this cycle.
Maybe only china was heavily buying long term notes, china is selling, brazil his buying and everything is hidden buy the flight to quality.
So the effect on the yields is delayed
but can you imagine what will happen to the dollar when the flight reverse.
Bloody decoupling for sure.
And pushing the yields down already will force dollar holders too anticipate the decline and so on.
fiat money leads to high yield it's always the same music
From pinr.com
(quote)
In January 2006, Saudi Arabia's monarch, Abdullah bin Abdul Aziz al-Saud, undertook a tour of Asia that brought him to China, India, Malaysia and Pakistan. It was a strategically significant trip and one that may have some important long-term implications. Some have labeled the Saudi king's Asia visit "a strategic shift in the foreign policy of the country" and have argued that it "heralds a new era."
Saudi Arabia and China Improve Relations
The fact that China was the first destination on the king's list speaks volumes not only about the rising profile of China in global politics, but also about a growing intimacy between the two states. China has been working hard to improve its relations with Saudi Arabia, the world's biggest oil exporter. It was in 2004 that the two countries decided to hold regular political consultations at the same time when China's state oil company, Sinopec, signed a deal to explore gas in Saudi Arabia's vast Empty Quarter. King Abdullah's visit followed Beijing's first formal talks with the Organization of Petroleum Exporting Countries (O.P.E.C.) in December 2005.
It is instructive to note that Saudi Arabia's ties with China have been on an upswing at a time when its relationship with the U.S. has come under severe strain. While China has emerged as the Saudi Kingdom's largest customer, the United States' share in Saudi oil exports has been going down after peaking in 2002 at 1.7 million barrels per day. Saudi Arabia's traditional share of the U.S. oil market has been a function of the country's "strategic relationship" with the U.S., a tie that many think has been weakening for some time now, especially in the aftermath of the September 11 attacks and the Iraq war.
(end quote)
I have a hard time believing that this story has any truth to it. It is likely too dramatic. Somebody sent this story to Brad Setser as well. He considerably down plays it's significance. Worthwhile to keep an eye on it, butt I think I'm in his camp on this one. Can't see the peg breaking in my lifetime. The white house will not let them. Just like the Japanese, they do what they're told to help the dollar or else.
not a chance
It's real: gulfnews : Saudi Arabia holds back from matching US rate cut
I don't dispute the story being circulated. Rather, I'm asserting this will not come to be. More politely, I will not be surprised if the Saudi's cut rates "quietly" following some "negotiations" with the US Treasury dept or an impromptu visit by Cheney.
Thanks for the post CR. Fund manager John Hussman has a good rundown of the implications of this type of problem at his blog Hussman Funds - The Fed: Magical Fairies and Pixie Dust - September 17, 2007
Also Naked Capitalism has been posting several links to Martin Wolf (chief economics editor of FT) about the significance of foreign flows of capital propping-up the dollar. Scary Words From Martin Wolf: End of Global Imbalances « naked capitalism
This is not good.
Cheers
This is not the end of the world.
CR,
here is an interesting piece on CMBS leverage now vs back in 1998 from the latest DRBS newsletter - might make a good post if they gave you the OK.
Global CMBS Newletter - DBRS
[snip]
There is one thing we keep coming back to: it wasn't asset quality that impaired those hurt in 1998's liquidity crisis and most suggest it wont be asset quality that kills them today. Or will it? A property securing a loan we recently reviewed was featured in a 1998 article. The loan proceeds today are 3.3 times the amount they were when the loan was made and securitized in 1998. That equates to proceeds of about $125 per square foot (psf) versus $420 psf today. This sets a telling stage to suggest that if commercial property fundamentals falter as a result of the uncertainty of the economy, losses may be compounded.
Most market participants attribute much of todays damage to spillover from the subprime mortgage market, and others will suggest that the eroding quality in CMBS transactions also contributed to the fallout. We would agree. Leverage today has far exceeded levels in the past. The chart below accumulates data gathered from 1998 and 2007 (through Q2 2007) and shows dollars of debt per dollar of property net cash flow (NCF) at origination. Total loan originations for each year were split into quartiles based on the debt-to-net cash flow. In 1998, the worst quartile of loan originations began at $9.05. Earlier this year, in 2007, the best quartile wasnt captured until $10.90. The worst quartile begins at $14.50, suggesting 25% of loans originated earlier this year have greater than $14.50 of debt per $1 of NCF. This is significant. In 1998, 98.9% of the loans originated were originated at debt levels less than the best 25% originated in 2007 ($10.90 of debt per $1 of NCF). Today, the weighted average of $12.92 of loan proceeds for every $1 of NCF is 62% higher than the weighted average in 1998 of $7.96.
[snip]
DH:
link?
"All these news do not change my opinion an iota."
Sebastian
I really don't care about your opinion or your iota.
Not to get personal, but you are a child in a man's world.
The axis of the world is shifting.
The dollar and the West have been the Axis Mundi since 1918. Now we begin to see the end of our hegemony that supports our foreign interests.
I am beginning to have some great sympathy for Lord Keynes, telling his great nation that the Great War had been won, but at the cost of the future. Nonetheless, he successfully helped Great Britain keep the Great Depression from being as badly managed as it was in the United States or in much of the rest of the world.
We now face the same fate as the Soviet Union in late 80s- a crap war, an unhappy populace, and no foundation for the economic system. Dependent on imports for tremendous amounts of economic activity. We are also huge energy importers, and have taken imperial overstretch to ridiculous levels. Humph.
Time to cut the rest of the world loose from our apronstrings. We have a lot of work to make our own country work, and after Wall Street buckles, there are going to be tremendous numbers of unhappy campers looking for someone to blame.
Well, I for one hope the Chinese make it as the world leaders for the next century, as Putin's bunch leaves me with a bit of fear at the bottom of my distaste. Edmonton is looking better and better, aside from that lousy weather. But it is a lot further from Mexico than my current home;-} I am beginning to think that Felipe C might be the last elected el Presidente south of the border.
Parity with the canadian dollar isn't for off now, is it?
When the war ends, this all gets much much worse, so the longer off that day is, the more time you have to prepare. On the other hand, things could miraculously get much better in the middle east, and they could stop trying to get those nuclear devices. Optimism about our position in the world is starting to sound like an extremely foolish position.
Someday this war's gonna end...
Major publicly-traded Chinese companies whose American Depository Shares (ADSs) are traded on the New York Stock Exchange (NYSE) have very poor quality of earnings, inadequate corporate governance standards, and serious accounting related issues, according to a comprehensive study by RateFinancials, Inc.
The ten largest NYSE-listed Chinese companies by market capitalization received Poor, or Very Poor, ratings for their accounting, quality of earnings, and governance. The study also found that all ten companies are ultimately majority controlled by the Peoples Republic of China (PRC), frequently engage in related-party transactions, make strategic decisions that are not adequately disclosed, and pose potential conflicts of interest.
Investing in publicly traded Chinese companies at the end of the day is a crapshoot that requires blind and unfounded faith that the PRC will ultimately put the best interests of shareholders ahead of political and other considerations, said Victor Germack, founder and president of RateFinancials. These companies are government-controlled enterprises masquerading as independent public companies and it is virtually impossible to adequately assess their financial condition given their poor level of disclosures. Given the inherent risks of these companies, its both surprising and disappointing that they are allowed to trade on the NYSE.
The page cannot be found
We screw them and they screw us, hope you ain't holding any of this crap.
Hard to believe the Saudis would bite the hand that's been arming them for the past fifty years (and keeping the corrupt monarchy in power.) Either:
1-- the frayed relationship between the US and Saudi Arabia (thanks, GWB, to your war on Iraq) is now on the verge of a bitter divorce, or...
2-- the Saudis are holding out for concessions (re: the Iraq mess), and will lower their rates after a few desperate phone calls from Dick Cheney.
Your guess is as good as mine which.
"All these news do not change my opinion an iota."
The sad part is you don't know what will change your opinion. If you can't measure it, you can't manage it.
Of course, risk is spread in a more sophisticated and diffuse way today, says Grantham. But its been accepted in a much sloppier way than any time in history. If its a bad enough loan in the first place and theres enough of it, then spreading it around simply means contaminating a very broad spectrum of the financial world.
Pretty good summary, Rich.
And this Grantham fellow has a way with words - almost like Tanta.
OT: Deal to Buy Sallie Mae in Jeopardy
Deal to Buy Sallie Mae In Jeopardy - NY Times
While the group is hoping to renegotiate the price of Sallie Mae, these people said, it may also be willing to walk away and pay the $900 million breakup fee.
If that happened, the deal would become the biggest casualty of the tighter credit market, which persists despite the Federal Reserves decision on Tuesday to cut interest rates.
Wow! Almost $1 Billion in break up fees. That's some pier they must have had to let go...
The Saudi Finance Minister was a friend while he was on the board of the IMF in DC & he will argue strongly, I'm sure, for defending the dollar. I still get Holiday notes from him each Christmas. But he is only one among several players making the decision.
The Oil Minister might have a say. All OPEC crude oil purchases are denominated in dollars and thus this gigantic slice of the world economy is a lever that gives the dollar strength vis-a-vis the Euro & Yen. The Minister Naimi may get tremendous pressure from other OPEC members, including Kuwait which has already decoupled from the dollar, to join them and make a complete decoupling. The head of SAMA is a monetarist, and may also urge for a dollar decouple.
I am no economist, but my years in the oil industry gave me a new appreciation of the dollar. And the effects of US foreign trade if the dollar craters would actually be beneficial, though it would more than offset by diminished spending due to lower housing prices.
It turns out that the housing boom has triggered a housing bust. Driving on I-95 to the University of Miami the other day, I passed dozens of buildings on Brickell & other spots in downtown Miami in mid-construction. Ironically, the cranes and gantrys reminded me of the Saudi building boom decades before.
If the Saudis back out of the dollar, a lot of those buildings will remain vertical skeletons for a long time.
And the sustained post-WWII economic boom, punctuated by occasional hiccups, might end if the US dollar loses its status as the world's de facto reserve currency.
OKAY... looks like Ben's warming up the helicopters. Sigh. You can always count on TPTB to take actions guaranteed to make a bad situation worse.
IMHO we were headed for a depression regardless of what action the Fed took. Lowering (or raising) rates simply accelerates the inevitable.
As long as the Fed held steady, two important fictions were maintained: (1) that they were serious about fighting inflation, and (2) that rate cuts would save the markets and the overall economy. The hope embodied in these fantasies have kept long rates low, floated markets worldwide, and slowed the dollar's decline.
Well, #1 has been definitively dispelled and the run on the dollar will proceed unabated. No more hope for foreign holders of US paper and the domestic long bond crowd.
As expected, #2 spurred the usual knee-jerk euphoria, but it's already running out of steam; we could see a down day as early as tomorrow. Soon there will be no more hope for the market bulls, either.
The world has been wishing and praying that the Fed held an ace up its sleeve. Now that they've shown their cards everyone will soon realize they're "all in" on a losing hand.
This is precisely the sort of arrogance and hubris that makes America so disliked by other countries, many of whom are quietly building in power and wealth. Best put a little gold star on your calendar on the date 18 Set 07. One day BB may be more famous than AG, the lowly academic Fed Reserve chairman who singlehandedly caused a global game of USD hot potato and brought about the end of petrodollar hegemony with his "shock and awe" rate cut. So what if it takes 20, 50, or 100 years. It will be like the fall of Rome and someday it will matter. Hope your kids are learning to speak Chinese.
Kevin, re Chinese companies. Buffett owns a big chunk of PetroChina. You think he doesn't know what he invests in?
Hmmm, to further develop your analogy between the US Federal system and the entire globe, would you suggest that our national borders be as permeable as those between our States? Free movement of labor as well as capital across all borders?
HVH | 09.19.07 - 9:13 pm | #
Labor absolutely must be as free to move as capital is. Whether that's done by liberalizing immigration or restricting international banking is irrelevant.
Sebastian,
You are moving way too early to start buying any real estate, even if in foreclosure. The Fed cuts won't help the majority of the mortgages that will be foreclosed over the next 18 months. The new (old) lending standards will guarantee a dearth of buyers at current price levels. Wait for the undershoot of valuations at levels where the investment makes sense on a cash flow basis with no assumption of capital appreciation. Here in Orange County CA that means a 50% haircut or more. It's coming, oh yes it is... Speculators set the price on the way up, and liquidators (REOs) will set the price on the way down... all prices are set at the margin. The negative wealth effect that will be felt by Americans will shut down their spend-free habits.
As to recessions, the rug has already been pulled out, which is what the Fed knows and which is why they acted so strongly. The consumer has overspent his income for the last few years, and that is screeching to a halt NOW... the end of HELOCs and MEWs has arrived... The rate cut may help the auto industry, and shave a little of the carrying cost off the CCs burning holes in the consumers' pockets, but that's about it.
As to what the Chinese may or may not do... well, after the real estate liquidations to come (the deflationary component going forward), the Chinese can just come here and buy up properties on the cheap in 3-5 years, trading devalued dollars for devalued property.
But we are all in this together with our fiat currencies... the competitive currency devaluations that took place (Japan leading the way, and China close behind) enabled the US to run huge deficits. They knew what they were doing.
I look for a currency war to flare up between China and Japan, and the US will just be collateral damage.
I posted yesterday, China has a big Sucker, tattooed on their forehead. I told you so.
"I am all for equal movements across borders, but it has to be equal.
If our kids are buying Chinese toys, then dammit those Chinese kids had better start buying our toys."
Chinese kids will lay down their pretend toys and hold Chinese toys, and US kids will lay down their Chinese toys and hold pretend toys.
The world's poles have flipped in the past. Ask China. Ask a geologist. Can we not be alive to witness and experience such a flip?
Mozilo wants to double the number of Countrywide branches:
hubris
He also begs the Feds to raise the jumbo loan cutoff to $850K. I'm sure Barney Frank and Chuckie Schumer have already been bribed. What a fine system we have.
If this bill ever passes and Bush signs it, I will never vote Republican again.
Hope no one is planning on traveling over-seas for say the next two hundred years.
michaelcampion
I'm going out on tour with a rock band of Europe & the UK in November and am gonna make a killing. All rooms & transport are provided by the venues, all our product will be manufactured in the states and sold at a massive profit(while providing customers VFM) because of the currency differential.
CDs: $1 cost, sell @ 10 pound or 10 euro
T-shirts:$7, sell @ 10 pound or $20 euro
Will clear north of $20k USD in 3 weeks, almost 50% more than last time.
They are so arrogant. Do they really think that the ROW won't just end up shunning Agency debt because of a new policy like this. I think it has the real potential to make housing actually worse. That would fit well with history, where well-intentioned government policies exacerbate the crisis.
Paulson to signal shift in GSE stance, according to source - DJ
DJ reports U.S. Treasury Secretary Henry Paulson is expected to signal a shift in the Bush administration's policy regarding Fannie Mae (FNM) and Freddie Mac (FRE) by suggesting that permitting the cos to securitize more expensive mortgage loans could help the strained housing mkts, someone familiar with the matter said Wednesday. "There is little question that allowing the GSEs to securitize jumbo mortgages would give a short-term lift" to the housing mkt, Paulson is expected to tell the House Financial Services Committee Thursday, the person familiar with the matter said. But Paulson said such a change must be connected with broader reform of the regulatory structure for Fannie Mae and Freddie Mac. "It would be unreasonable and irresponsible to expand the GSEs' businesses without addressing the fundamental problems of their regulatory structure," Paulson is expected to say, according to the person familiar with the situation.
Realalistically Long-
Saying that the dollar is making all-time lows "isn't a big deal", could quite possibly be one of the dumbest things I've ever seen written. Congratulations.
"If the Saudis back out of the dollar, a lot of those buildings will remain vertical skeletons for a long time.
And the sustained post-WWII economic boom, punctuated by occasional hiccups, might end if the US dollar loses its status as the world's de facto reserve currency."
The sad truth is, it is inevitable. The US has been spending other peoples money to finance its lifestyle and masquerading as if it was wealthy. I could charge to the hilt my credit cards too and for a while, I also would be fooled into feeling like I was opulently wealthy. The difference, I realize I have to eventually pay those bills and return to live within my means. Debt is not equity. Debt is NOT wealth. Events over the past month in the financial markets are just making more salient that same realization for stakeholders in the US economy. Its currency is starting to reflecting that.
a guess there has never been such an absolute contrarian call than to go long the dollar huh
Soon it will be time to buy dollars.
Long bond prices continue to fall, driving up the rate for the 10 year to around 4.6 and the 30-year to about 4.9%.
If this were a global game of chess, one could say that the situation up until Tuesday was a long near-stalemate. Both players wait for their opponent to make a mistake before committing to any serious startegy. I'd say the Saudi move today has exposed Bernanke's move on Tuesday as a serious blunder. Don't be surprised when mortgage rates rise, counter-intuitively.
Let's just hope the Chinese don't see the opening and checkmate Heliben and his impotent cronies.
"Let's just hope the Chinese don't see the opening and checkmate Heliben and his impotent cronies."
Do you really think they're not going to see it?
Is it possible that the smart people are actually selling gold and euro's now ? "sell on news" . Iam skeptical about betting on "obvious" financial moves, that everyone is talking about. Is it possible that all weakness in dollar is priced in over the last few years ?
Thanks
Folks, i have a serious question. can someone pls answer.
so, all these people buying Gold. What is their version of end game ? When there is hyperinflation, all the world governments are going to say .. "okay, we lost. fiat currencies don't work. Now, whoever happen to have Gold have the new money in the world" ? It just doesn't make sense. All i can think of is, we may learn a lesson, create absolutely stringent measures on creating credit fiat money, and we move on. So, why should the new currency be only Gold. It could be just about any other resource. Frankly, it just seems to be another "greater fool" situation, without any real fundamental basis.
Thanks in advance.
Dennis Gartman stated it well the other night. As far as gold and oil, weakness is to be bought, not strength to be sold.
Bhayya, I'm buying because the US government is insolvent if it did it's accounting properly. It has $65 Trillion in unfunded liabilities. As more and more baby boomers retire, this balance become payable and need financing. David Walker, US comptroller general, a rather bright fellow, laid out the repercussions quite clearly. US = bankruptcy, ergo the currency goes to hell. That will threaten all fiat currencies. Perhaps not in amplitude, but certainly in terms of cause and effect, check out what happened in the Weimar republic. My time frame is what we're experiencing now is like small waves, ripples perhaps. Tidal wave hits around 2012, so I'm accumulating now as I consider it extremely cheap.
Just as an update on the dollar and the market activity today, the Dollar Index (which tracks the dollar's performance against six major currencies -- the euro, yen, pound, Canadian dollar, Swedish krona, and Swiss franc) is falling off a cliff. It is now down -- in percentage
UPDATE: Right now, the DXY's daily decline in percentage terms is about 0.94%. That is the single-worst daily decline since 11/24/2006. In the days around that Thanksgiving week, the euro surged from around 1.28 to around 1.34 in just a matter of days. Before that, you have to go all the way back to April 17, 2006 to find a worse performance (-1.06%). So a 0.94% move is a fairly large one for currencies, even if it doesn't seem like it.
Well that post sure got garbled. Sorry. Here's what I meant to say:
Just as an update on the dollar and the market activity today, the Dollar Index (which tracks the dollar's performance against six major currencies -- the euro, yen, pound, Canadian dollar, Swedish krona, and Swiss franc) is falling off a cliff. It is now down -- in percentage terms -- by about 0.94%. That is the single-worst daily decline since 11/24/2006. In the days around that Thanksgiving week, the euro surged from around 1.28 to around 1.34 in just a matter of days. Before that, you have to go all the way back to April 17, 2006 to find a worse performance (-1.06%). So a 0.94% move is a fairly large one for currencies, even if it doesn't seem like it.
Stuart, the dollar may be in trouble. But, what is the fundamental logic that Gold will be chosen as the alternative ? Why would the society accept something that is distributed very unevenly across the society, as the new currency ?
Gold may not be accepted as a currency but it sure is worth more than a pallet of paper.
If gold is not officially accepted as a currency, i would argue that it is no better than paper. It's just a piece of metal. If we are talking about times of economic collapse, how is it more valuable than car scrap metal that will lie around when economies collapse ?
Bhayya,
The IMF has sanctioned holding only 3 currencies as a reserve currency.
The US dollar
The Euro
GOLD.
That's as close as official acceptance as you're going to get.
An update: Canadian dollar just hit parity against USD for the first time in 30 years.
Bhayya,
Be reasonable. Gold is just a piece of metal that makes nice non-corroding jewelery. Gold is easier to trade than a scrapped car. We all know taht there is no paper currency that holds its value longer than the government that produces it. As our paper currency gets devalued foreigners may be more willing to give me their currency at a higher exchange for the gold than the dollars.
Maybe those Canadians could use vacation homes in Florida?
Bhayya, I would also add that as oil gets more expensive and energy intensive extraction of gold gets more expensive, physical gold would be that much more valuable.
Sanctioned by IMF ... that's quite interesting.
w, thanks. Iam still not convinced, but there are no easy answers i guess. There is some faith involved, it looks like.
on a different note, if higher gold prices reduce the ornamental demand.. i wonder how that would affect gold markets going forward.
But gold is not going up in Euros, CN$, Au$, BRIC etc. Only US$ and Yen.
C'mon guys, Kuwait depegged in May, and guess how much KWD appreciated against the dollar since then?
2.5%
Bhayya, gold has the advantage of fungibility. I can take that ounce of gold to the souk in Bahrain to the gold dealer and get local currency in about two minutes. No questions asked, no muss, no fuss.
Are you an Indian? Then I would understand your jewelry centric view. In the West, as currencies falter folks tend to grab their gold and silver very quickly.
This is due to literally centuries of experience with Gresham's Law in practice. As governments print and devalue, people with spare cash want to preserve their value, and gold and silver provide that insurance.
If you check the values of old currency, they tend to track the value of the metals outside of any rarity collector value. The melting pot stands every ready to recycle old into new. Go and read some of Isaac Newton's writings from his time as Master of the Mint and you will see the elementary understanding of this process was well know in his time. What we do today is make is more convoluted, and hide the fact of inflation of the money supply through subterfuge, but the end results are inescapable.
When money is printed faster than the population grows, there is inflation. You can delay it by importing huge amounts of finished goods from other countries that have cheaper labor. You can deny it. If H.P. has the termity to call it a strong dollar policy, I am going to start calling it the dollire.
The Dollire!!!
Forget that Amero fantasy- we now have the Dollire!!!
Pronounce it the almost like delirious;-}
Fiat value resides in confidence. Confidence in America is receding, hence my tagline:
Someday this war's gonna end...
i'm simply astonished at how many of you think that china has their sh#t so together. have you ever lived there? or did you ever travel off the 8-day tourist path? so let me get this straight ... you honestly think that they have overcome rampant corruption, destruction of key non-renewable resources, tremendous waste and duplication of investment, and still totally neglect the basic needs of 2/3rds of their population ... and have got it all wired right? hahahahahaha ...
and saudi? they are in a secure position ... just look up north a bit. so if they f#ck us up, they are just screwing up their own legacy. again, you are just showing your enormous ignorance of how things work. good luck y'all