U.S. Secretary of Treasury Timothy Geithner
Recently in China, Secretary Geithner had the gall to inform the students of Peking University that he "believe[s] in a strong dollar," and that "Chinese [dollar-denominated] financial assets are very safe." Apparently the Secretary hasn't been informed that the term "strong dollar" is now a punch-line. Additionally, reviewing the excellent graphs of John William's Shadow Stats, we notice several disturbing things.
First is the value of the U.S. Dollar: it appears to be taking another little dip. We would like to draw your attention to the last high in the power of the Dollar, as it was in 2002 or so. The recent 'strength' of the U.S. Dollar only reached the purchasing power of 2006 Dollars... nothing to write home about.
Secondly, and this is the more damning graph, is the money supply; more precisely the M1 money supply (i.e. coin, paper money, and the deposits in chequeing accounts). As a general rule of thumb, increases in M1 usually correlate with inflation. So, if M1 is increasing at 16% or so, and the trend continues, one can reasonably expect inflation to be cooking along at a respectable 16% or so. We do hope the Chinese will do more than just laugh at the Treasury Secretary's bold-faced lie... perhaps they might use all their dollars to buy industrial and precious metals?
Congratulations, Mr. Secretary. Your trophy will be on your desk by Friday.
***
Runner-up in for the Award this week was Vice-President Joseph Biden, for stating the painfully obvious. "We know some of this money is going to be wasted," he said recently, referring to the Federal Government's bailout plan. Thank you, Mr. Vice-President, we already figured that one out.
As runner-up, Mr. Biden will receive a red origami crane.
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7 comments:
I have been following your blog and do hear your point, especially regarding the effect of federal deficit spending.
But I am a little more convinced by the deflation argument than the inflation one and in this vein have been trying to figure things out.
How much of what we are seeing could be the result of a very large dollar carry trade since as I go through it, a large carry trade would explain most of what we are seeing and lead to a tremendous reversal in the dollar with a collapse of long bond rate IF the loaned money comes home.
I certainly wouldn't deny the present deflationary trends. For example, I just enjoyed boneless ham for $0.99 a pound, and cotto salami for $0.50 a pound. These prices haven't been seen in decades, and whatever the causes (deflation or industry liquidation, or both) of these great price drops are, they spell one thing: Depression.
I really don't feel I can comment on a dollar carry trade. I can certainly see how such a trade can arise - especially with interest rates so low - but I don't see how a trade could influence the market that much. Would you care to elaborate further?
Personally, I posit that deflationary trends will continue to exist... until they stop. Gasoline and diesel, for example, have already climbed significantly from their recent bottoms - local stations have nearly $3 per gallon where I live.
As the Federal Reserve is by its very nature a reactive organisation, it's actions will be vastly out of proportion to the problem it is attempting to solve. At some point it will go too far... or the American citizenry will decide the dollar isn't attractive anymore... or any number of things... but at that point deflation will come to a screeching halt and inflation will resume in earnest.
The question is when. As Japan shows, deflationary doldrums can drag on for a very long time indeed.
Accrued Interest has a very good posting on the inflation-deflation debate and comes down strongly on the side of deflation.
The thing we have to remember about currency markets is that they are absolutely massive.
It is estimated that world currency markets trade an average daily trade volumes of around $4 trillion/day- 85% of this involves trades with the US dollar as part of the transaction.
On the other hand, the TOTAL market cap of all the world's equity markets is about $35 trillion with daily trading values far far smaller than currency trades.
FOREX has therefore been estimated at something like 50 times larger than all the world's equity/asset markets combined.
This means movements of even 1-2% in world currency markets involving the US dollar can have massive effects on every other market/asset class in the world.
And the most frustrating thing about about carry trades is that there is no single place where it all occurs. It is very hard to get a feel for the size of the actual carry trades as they occur, you can only guess their existence from the ripples they cause.
But go back and look at the history of carry trades, and where investors confused carry trades with votes of "no confidence" on a country's currency, you will inflationary collapse bears had their heads handed to them on a silver platter when the carry trades unwound.
The yen appreciated over 30% in a matter of hours in 1998 during the Long Term Capital Management debacle.
To get a feel for what this means were the same to occur in the US, it would be the equivalent amount of money being lost as the US stock market collapsing to 0 and then repeating itself and doing it another 10 times... The sheer size of the currency markets is that large.
A dollar carry trade can very much looks like a dollar collapse to the untrained eye. Yet the reality is that it is very very different and if and when the carry trade were to unwind, it would destroy gold bugs, etc...
But a carry trade does have some signatures that are different.
Money is borrowed in dollars (so interest rates climb), but the dollar is sold (so the dollar falls, even though interest rates are rising, which is usually the opposite of what one would expect).
The money then purchases foreign currencies (lowering the value of their currencies) and purchases foreign assets (raising their price) or is lent to foreigners (lowering their interest rates).
A carry trade in a deflationary doldrum might look to an investor like a currency collapse in the setting where a central bank is engaged in mild quantitative easing.
I had ponder your idea for awhile, that's why I didn't get back to you right away! I understand what you mean, and I can definitely see how a carry-trade could be in operation.
The one major problem I see with the carry-trade is this: carry-trading is a very high-risk operation, and I seriously doubt there is sufficient appetite world-wide for such risky, potentially disastrous investing. The world-wide faith in Treasury bills, for instance, is not the greatest at present, and T-bills are regarded as default-proof!
So that is my observation on the matter... however, it will be difficult to see what is exactly going on right now, until it has stopped working altogether. A carry-trade could indeed be operating with USD, but again, I feel this has too much inherent risk for much money to be flowing in that direction.
But think about it, if you thought the dollar was going to collapse and you borrowed in dollars, it would be a total home run.
Your risk is actually that the dollar would strengthen, this is what would kill you.
Plus, from a currency traders' perspective, they might not have very large positions (say 10% of currency positions) yet the same massive currency market vs. small asset class market issue would never the less cause major disruptions.
If extreme bearish sentiment is at all a good contrarian indicator (and personally I think it is) everyone is anti dollar, anti treasuries right now.
Everyone can't be right in a zero sum market.
I do indeed believe that the U.S. dollar is going to collapse... I just don't know when. It's the Heisenberg Uncertainty Principle, applied to socioeconomic analysis: one can know what will happen, but not when; and can know something will happen when, but not what; however, one can never know both.
I really don't see 'everyone' being anti-dollar right now. In fact, I must say that it's utterly the opposite: virtually everyone is pro-dollar. Simple proof: the yields on Treasury debt is practically zero. That is the sign that investors are super-bullish on U.S. debt, and have not a care in the world about inflation.
If investors were anti-dollar, the yields on debt would have to be fat enough to convince risk-happy investors to loan money to a tin-pot dictatorship (if you will).
If there is a carry-trade going on - which I could certainly see - I really feel it cannot be anti-dollar. The bond yields just do not permit an anti-dollar trade; any trade would have to be pro-dollar, considering how investors are cheerfully accepting effectively zero-yields on T-bills.
I really don't know one way or the other.
But I do think that if you borrowed in dollars and the dollar collapses, then you would pay back in something that was worthless which would be easy to purchased back on the cheap.
The people that got killed in yen carry trades were the people that had to pay back in a yen that had strengthened considerably.
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