2009 Economic Forecasts...what will happen, when?

You have it backwards. Inflation is great for those in debt: it reduces the real cost of paying off the creditors. The people that get hurt by inflation are those that rely on savings, as it erodes their value. As inflation occurs in the dollar, it reduces the real value of America's debts, and so the value of China and Japan's reserves. When inflation occurs in the yuan, it's like a retroactive tax on income the Chinese people earned in previous years. Inflation can be thought of as a subsidy given to borrowers at the expense of their creditors: a systematic debt forgiveness, if you will.

While inflation may cause some Chinese to save less in order to avoid such penalties, it is also possible that they will instead save *more* in order to insure sufficient savings down the line. It all depends on what their expectations of future inflation, income and expenses are.

That said, it's not clear to me that inflation in the yuan is going to increase substantially in the first place. The entire reason the CCP is dumping stimulus money into the economy is that it is in recession, unemployment is spiking, and inflationary pressure is negligible. To the extent that there is any substantial boost in inflation, it will be a sign that the CCP has overdone it on the stimulus.

 

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Most Asians I know combat devaluation by buying gold or land. How does that factor in?

 

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Almost exactly like buying another currency. (One they hope will apprecate wrt the one they fear will inflate.) Historically gold has not provided inflation protection as well as the currency of a country with a growing economy.

I am 99% sure that gold will increase from the current level and 99% sure its price in RMBs will also decrease for the current level. - It is only a question of when each happens. Price of gold varries more, especially on the down side, than the currency of growing counties do in purchasing power.

The real risk of buying gold now, is the some of the EU countries with problems (or even the US) may decide to break the mutual restrictions on how much of their hoards they can sell in any one year. There is huge amount already above ground - probably enough to supply the jewlery use for 100 years.

Gold like everything else is supply and demand controlled - Current the available supply (tons of AU bricks in vaults) is limited legally, but those mutually restricition on market sales can change or be violated over night.

 

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The whole issue with gold as always struck me as odd. Humans move tons of earth and expend great effort to locate and recover this metal only to rebury it in a vault somewhere....odd behavior.

You cannot eat gold. If you carry it, you feel someone will steal it. It is just odd behavior in my book. And I want to be clear this is no insult to anyone who owns gold, as I myself own gold. Humans seem to have a universal infatuation with the metal.

 

I have not given this a lot of study, but I would be conerned about the Russians selling. Their economy is not looking all that good either.

 

Even if they aren't, at this point the price of gold is driven by fear and speculation. The moment it appears that the world economy is stabilized (let alone, recovering), demand for gold will take a huge, sudden drop. It would be a great hedge if you had bought it years ago, but people buying it in current conditions stand to get wiped out before too long.

 

“Consumer spending may have hit bottom,
but America’s mountain of debt means the
climb back up will be slow and painful ...”
(Quote is the original cartoon caption)

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From: www.economist.com/finance/displaystory.cfm?story_id=13611284

Joe & Sally American (72% of US GDP is consummer spending) are not able to spend, just now.
They are trying to save or at least reduce their debts. - Why it will be a "slow and painful" climb back out (assuming it is even possible).

“Payrolls fell by 539,000, after a 699,000 loss in March, {but} the … jobless rate still jumped to 8.9 percent, the highest since September 1983, and probably won’t start retreating until an economic recovery is secured. …”

From: http://www.bloomberg.com/apps/news?pid=20601087&sid=aO4SUdppQTZ0&refer=home

I.e. while it is a welcome second derivative change, the unemployment rate is still rapidly climbing.

SUMMARY: We ain’t out of the woods yet and I cannot even see any end to them until payrolls are falling less than 10,000 per calendar day (not / business day). Note the missing and broken rungs on the ladder back out of the hole GWB dug.

 

I agree BillyT. I will be a climb back out of the hole. The US will need to reinvent itself. That is part II. The new economy will be the energy economy...elimination of dependence on oil. Brazil is way ahead of the game. The US is just now starting down that road.

 

Last Week’s Daily Treasury Yield Curve Rates

Date --- --- --- 1 mo 3 mo --- 6 mo --- 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr --- 30 yr

05/04/09 ---0.14 0.19 --- 0.33 --- 0.52 0.94 1.40 2.03 2.70 3.19 4.11 --- 4.06
05/05/09 --- 0.14 0.19 --- 0.34 --- 0.53 0.98 1.46 2.05 2.70 3.20 4.11 --- 4.06
05/06/09 --- 0.14 0.19 --- 0.32 --- 0.51 0.96 1.43 2.06 2.70 3.18 4.12 --- 4.09
05/07/09 --- 0.15 0.18 --- 0.32 --- 0.54 1.00 1.46 2.15 2.80 3.29 4.26 --- 4.25
05/08/09 --- 0.15 0.19 --- 0.31 --- 0.55 1.00 1.44 2.15 2.78 3.29 4.25 --- 4.28

Treasury Yield Curve Rates. These rates are commonly referred to as "Constant Maturity Treasury" rates, or CMTs. Yields are interpolated by the Treasury from the daily yield curve. This curve, which relates the yield on a security to its time to maturity is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market. These market yields are calculated from composites of quotations obtained by the Federal Reserve Bank of New York. The yield values are read from the yield curve at fixed maturities, currently 1, 3 and 6 months and 1, 2, 3, 5, 7, 10, 20, and 30 years. This method provides a yield for a 10 year maturity, for example, even if no outstanding security has exactly 10 years remaining to maturity.

Data & above text copied from US Treasury at: http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml

Billy T comments:
Note the yield curve continues to steepen (6 month yield down 0.02% & 30 year up 0.22%). Implies not only China is worried about lending long term to the US.

Sorry table is compressed by Sciforum's computer, but I made date, 6 month and 30 year data easy to find with --- inserts.

For comparisons here is the TIP rates of yesterday (8May09) but the maturity dates are 5,7,10 & 20 years: 1.11% -- 1.38% -- 1.77% -- 2.46%

TIPs may not completely protect (or can over protect) you from inflation. (It depends on how your expenses compare to what goes into the CPI.)

For example, 5 years of protection cost you 2.15 - 1.11 = 1.04% in interest rate lost with TIP. 10 year's cost 1.52%; 20 years costs only 1.82%.

In view of what I think will happen to the dollar all but perhaps the first are a bargan as insurance, IMHO. My retirement plan assets from ~30 years of working is mainly (~75%) in TIPs. As you get older and richer, the interest rate becomes of less concern. - You want protection from big losses instead as you do not have time to earn it back again.

I was lucky in that it was all in TIAA/CREF indexed funds, with more than half in non-US dominated funds. At start of 2007, I began to dollar cost average it over into into their "TIP like" fund and was entirely out of the stock sensitive funds by end of June 2008. I.e. I missed the black October slide of stocks down that I had predicted could be the start of the 6 year window for the dollar collapse. I play around with many early stage drug development stocks (more to keep learning in this exciting field). Even with the current rally, I am still with paper losses on them. (Education is always costly.

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From: http://blogs.cfr.org/setser/2009/05/17/we-hate-you-guys-but-there-is-nothing-much-we-can-do/

I am sure T-bills have 1 year or less maturity when issued, I forget if it is 2 or 5 years max a "note" can have at issue and bonds have more, up to 30 years. (For a whille the Treasury did not issue the 30 year bonds but resumed a couple of years ago.) Agency paper is from government agencies like Freddy Mack, Fanny May, etc. -In most practical terms with the "full faith and credit" of the US government but some not that way legally, I think. (I may have some errors here - just trying to be helpful for those know zilch.)

Thing to note in the graph (and in my post 49) is that that there is a sharp rise in the shortest term paper (light gree line) and now that several agencies have failed, no one want that paper (blue line). It is a shame that the notes and bonds are lumped together in the dark green line. If the bonds were separated out their curve would, I think, look quite like the blue curve. But the notes are still selling reasonable well so the green aggregate curve is only turning down, not crashing.

I think, as I have posted several times, that China is not significantly buying the longer term bonds; but they may give some support to their price so the FED does not need to do 100% of the "heavy lifting." I.e. China holds a lot of long term paper still. It is in China's interest to not see its market value collapse as no one but the FED is buying. bnut the yield curve is steepening as interest rates on the longer term issues rise (Point of post 49 and my earlier comments on the steepening of the yield curve.)

SUMMARY: China holds a lot of US paper, and is rapidly reducing its exposure, at least to the longer term paper as does not want to be stuck holding the bag when the dollar collapses.
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*That would look bad and could trigger the run on the dollar - China is not yet wanting that as is still making the transition to not selling to US and EU but employing its factories and workers for domestic needs, and the rapidly growing long-term foreign investments for needed supplies of energy,** raw materials and food stocks.

**Probably*** the ink is just now drying on the 10 Billion loan to Brazil by China which is repaid in oil at 200,000 barrels/ day. I.e. China is buying real assets like crazy (crazy as a fox that is) instead of US treasury promisse to repay later in dollars which may have little value.

***I think Brazil's president, Lula, is in the air now going from China to Turkey for talks and will wait to return to Brazil before making the signed deal public. But the really important "deal" would be the MOU to drop the dollar for Brazil/China trade settlements.
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---------- Here is some text from the blog article of the graph:
"The shift in China’s portfolio during the crisis – described in more detail in an updated paper* that I have done with Arpana Pandey of the Council on Foreign Relations — mirror the global data almost perfectly. China wasn’t the only foreign investor that shifted out of Agencies and into Treasuries – or, for that matter, the only investor who stopped buying US equities and corporate bonds.

Russia sold its Agencies to buy short-term Treasury bills. Its holdings of non-Treasury short-term securities have gone from $97 billion at the end of 1997 to $1 billion at the end of March 09 while its holdings of Treasury bills rose from next to nothing to $73 billion. A host of smaller central banks did something similar. And private investors abroad – including, I suspect, European banks – wanted more bills too. ..." {Remember bills mature in less than a year.}

This whole blog is very informative on the subject of US debt financing by foreigners, etc.
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*Here is the down load link for the pdf file of the 2.7Mbit 22 page paper, updated a few days ago. (I have not yet read it but will I think.):
http://www.cfr.org/content/publications/attachments/CGS_WorkingPaper_6_China_update0509.pdf

Both authors are widely respected experts.

PS note that five year Treasury paper, which was at 2.03% interest 15 days ago (see post 49) has climbed thru the 3% psychological barrier - Investor are scared US dollar may collapse. My window for that, predicted years ago, ends on Haloween 2014.

 

Billy T,

A treasury note can have maturities of 2, 3, 5, 7, and 10 years. Bonds are 20 or 30 years.

China no longer has the dollars to buy as much US debt. The collapse of China's export market caused a severe hit to their foreign reserves. China's foreign reserves grew by $153.9 billion during the first quarter of 2008, but only by $7.7 billion during the first quarter of 2009. China buys US debt with new dollars in its foreign reserves, so of course their purchases declined. Duh!

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No, China is still increasing its holdings of US debt monthly, just not at as fast of a pace as they used to because their foreign reserves are increasing at a much slower pace. In contrast to most all countries, Brazil has reduced its holdings of US Treasuries in the past year.
You constantly hype about a "dollar collapse" and a "run on the dollar". At times, you define this as a run on the banks, banks shutting down, a worthless dollar, and riots in the streets. At times, you define this as "hyper-inflation" with hyper-inflation defined as "double-digit" dollar inflation (10% or more annual decline) without stating for how long this double-digit inflation will last. Other times you define your speculation of US hyper-inflation as a 10% or more monthly decline in value.

I have stated before that I predict a 30% to 40% decline in the value of the dollar relative to an international basket of curriencies. I predict that decline won't materialize until after the global economy (including the US) recovers significantly. I do not consider this decline a "dollar collapse" or a "run on the dollar", but a necessary "correction" in the global economy.

Now Billy T, state EXACTLY how you define "dollar collapse" and "run on the dollar", without all the ambiguities.

 

Thaks - I knew I could count on you when my memory was failing me.

Actually the cost of their imports fell even more, both because of less volume and the lower price of the commodities they mainly buy. Thus I think the drop in reserves is much more do to getting out of dollars and buying real assets with reserves.

Yes, but my point was not that they were not still buying but that they were mainly buying T-bills Almost all of the 122billion they bought in first quarter of 2009 was T-bills (one year maturities) See page 19 of the link I gave already.

That would depend on the time scale, but you did not specify.

OK. "dollar collapse" is averaged annualized drop in purchasing power of 30% per year for at least for a year* or 50% drop in less than two years. "Run on the dollar" is dollar purchasing power dropping 25% in less than a month. Just made these up and may not remember, so when I forget you remind me.
---
*E.g. 31% (or more) down in 370 days

 

Actually the huge buildup of China's foreign reserves during the last few years were in large part due to foreign FDI flowing into the Chinese economy. That FDI deminished, even went negative, since the global economic crisis.

Your link estimated that China's total holdings of T-bills at the end of the first quarter was $122 billion. That is still a small percentage of the over $750 billion of Treasuries that China currently holds. China realized that they were over-exposed to the dollar after the recession hit and the US began pumping stimulus money (new money) into the economy to prevent a depression and deflation. As I have stated, I believe that new money will eventually cause inflation and devaluation of the dollar in the long term, as does almost everyone else including China. BTW, most of those new purchases of short-term T-bills were funded from the sale of US agency debt, such as Fanny May and Freddie Mac, not from new foreign reserves nor from the sale of already owned long term US bonds. Of course, no one wants to purchase long term Treasury bonds when inflation is likely to return in about three years or less.

Attempting to predict currency valuations with any precision is a fools game, but I will give my "best guess" based on my own biases and my reading of global market forces.

As many economists predict, I agree the dollar will devalue by 5% to 10% in the near term (over the northern hemisphere's summer) from its recent highs. The dollar will then be relatively stable at those values for about three years, then begin to devalue further (an additional 20% to 30%) due to inflation caused by huge US debt and the new money that has been added to the economy. That period of inflation will begin at the real recovery of the US and western economies. It will not only be the dollar that devalues compared with a world "basket" of currencies, but also the euro, the pound, and the Japanese yen. In other words, the 'emerging market' currencies will gain value compared to the currencies of the 'developed' nations. Don't forget Billy T, the euro zone, Great Britian and Japan are also flooding "new money" into their economies. That is the real reason the dollar hasn't fallen at the present time, all the major economies are pumping out new money by "running the printing presses". Countries like China and Brazil have large foreign reserves to back their stimulus packages, but most all "developed" economies don't. The devaluation of developed countries' currencies with respect to the rest of the world will serve to balance trade, eliminating much of the export advantages emerging markets currently enjoy due to their weak curriencies. China and Brazil have reaped the rewards of FDI and export growth in recent years, but will have to depend more on internal growth in the next few years. The period of double-digit growth will soon be, or already is, over for emerging markets. Yes, their economies will continue to grow, but just at a slower pace. Specific enough?

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Yes the infatuation is almost entirely qualitative.

Like the human appreciation of beauty...it cannot be defined quantitatively.

 

If the Chinese government wanted Chinese workers to earn more and become primary consumers of their own products, they would have arranged for that long ago.

The Chinese government currently functions as a feudal lord extracting all it can from a serfdom willing to work for food.

 

To Quad:
We agree, I think, that for more than five years prior to the start of the crisis in late 2008, FDI into China was the main driver of their growing reserves (as it was in Brazil also, but not "so much so" as commodity prices were soaring also), not their trade surpluses. I have in fact use this to taunt Republicans about the fact GWB’s “reward the rich” with tax breaks (“trickle down” economics) did not build jobs in the US but modern factories in China and closed the then non-competitive US factories because investors ALWAYS seek the highest risk adjusted rate of return (and with ~4 times the US GDP growth rate, that was China.)

BTW the FDI is returning to Brazil now. Yesterday (or day before?) Brazil’s central bank was buying dollars all day to the tune of almost 1 billion dollars and still failed to keep the dollar value from falling against the Real! It is now at R$2.02 = 1$ down from more than R$2.5 to the dollar just a couple of months ago! (Exporters are screaming.) Thus Brazil’s reserves are growing again, despite being used for modest stimulation. But now to where we disagree:

From post 51:

As you did not either mention the FDI or the imports, both of which were more important changes than the exports you did mention, I said:

From post 52:

Now I did not directly mention / name FDI either, but when China buys Australian mineral companies and foreign energy supplies, etc. that IS negative FDI.

We agree that China’s FDI is much lower now, after the crisis than before, but there are two parts to this story, both direct effects of the crisis:
(1) As you note, foreigners are hurting for cash and “risk adverse” so making less direct investments in China. &
(2) With the prices of most commodities significantly depressed and many companies needing money (more willing to sell off a piece of themselves) China is on a “crazy like a fox” buying spree. – Probably will make about 100billion of “negative FDI” in 2009 FROM THEIR RESERVES at the current rate their reserves leaving China to buy up long term supplies.

Thus I am not surprised (and agree) when in post 53 you say:

But you are “flat out wrong” in post 53 to say:

Here is proof:
In the fourth line under the graph on page 19 of my link it states:
“In the fourth quarter China bought 122 billion of treasuries –almost all short term bills …” (I changed “almost all short term bills” to: “almost all in T-bills” as only maturities of one year or less are called “bills” but perhaps there are some treasury issue “bills” that are not T-bills.)

Also on page 11, the 8th line from the top the link states:
“Since June 2008, an unusually large share of Chinese purchases have been showing up in the monthly TIC as China has been buying little other than treasury bills.” and again elsewhere the same, hard to believe, fact.
Was it so hard to believe that you just assumed it was the total holdings of T-bill, instead of the near exclusive BUYING of them in one quarter (AND FOR THE LAST 9 MONTHS OR SO)? I do not know what "TIC data" is - perhaps you will tell me. (My link may have, but I skimmed some pages of factual details.)

I noticed before my Foreign Affairs sponsored link was even published (and posted here) that the yield curve was getting steep quickly. From that alone, I came to the same conclusion as my link. Namely that few other than the Fed were buying bonds instead of T-Bills and notes. BTW the 10 year note has broken above the psychological barrier of 3% interest, which many have called a “line in the sand” since the Fed is trying to hold interest rates down to stimulate. (Even the FED’s massive buying cannot counter act the wide spread fear that 10 years hence the dollar will be much lower.) Even you, in the rest of your post 53 seem to agree! The end of my predicted “dollar collapse” window is Halloween 2014 so of course I agree as that is only 5.5 years away.

 

Billy T,

Foreign Direct Investment is foreign money flowing into China (or any country referenced). When that foreign source of money decreases, the FDI decreases. If that foreign money is removed from China's economy by means of the outside investors pulling their investments out of China, that is negative FDI. Foreign Reserves are a result of foreign money accumilating in China, either from export proceeds or FDI. Investing those reserves, either by buying US Treasuries or mineral companies, does not reduce the foreign reserves. China is not 'setting on' $2 trillion cash dollars in their own banks, but the money is invested abroad.

Read more cosely Billy. We were specifically discussing the first quarter of 2009, not the last quarter of 2008. China stopped buying all US Treasuries during Jan. and Feb. of 2009, and didn't resume until late in March. It was 1Q of 2009 when China's foreign reserves grew by only $7.7 billion. China's short-term T-bills were still close to $122 billion at the end of 1Q 2009, although their total treasuries held was over $750 billion. I thought I had read in one report or another that China's T-bill holdings were 120-something billion, but I may be mistaken. As I stated, China reduced their agency holdings (mostly mortgages) late in 2008 and reinvested in T-bills with those sale proceeds. From your own link, page 10:

This article was originally written in early 2009. It has since been updated in parts, but not in others. Most of the figures posted in the article are estimates by the author, China keeps its international holdings secret.

 

I agree that strictly speaking Foreign Direct Investment, FDI must be the transfer of funds to (+) or from (-) China by foreigners but when it comes to the change in Chinese reserves, who takes the money out of China is not important, because foreigner's usually (but not always) come with their own currency (or want to leave with it when FDI is negative) and get their need currency from mainly the Chinese central bank. (Other countries, with less control usually have a healthy non-governmental exchange market - a legal "Cambio" - or various shades of "grey market" but I think in China the buying and selling of RMB is mainly by the government.)

That said and agreed to, it is not only the trade balance and FDI changes that change reserves. In China case billions come out of reserves to fund various Chinese agencies and state controlled companies, which may then export the currency, and that has the same effect on reserves as if it were strictly defined FDI. For example as I recall when China set up it sovern fund a couple of years ago, 100 billion came out of reserves and a big chunk of it was invested in the US based Black Stone Group (much to their later regret as about 2/3 was lost with the market collapse.) When I called the buying of Australian mineral companies etc. by Chinese companies, "negative FDI" I was technically wrong, but as the money came for reserves, as was the case with Black Stone buy, it has identical effect as truly "negative FDI." - So I think you are sort of quibbling here as I (and you I think) are concerned with the size and nature of Chinese reserves, not the details of how reserves were decrease by funds leaving China. And as imports fell more than the exports did, the main reason for the very small 7.7 billion1Q09 growth of reserves was the "negative fdi." (I did not put FDI in the usual caps here as I do want to include export of funds by the Chinese foreign purchases as well as by foreigners cashing in some chips, since the effect on reserves is identical (without any more quibbling). Lula just brought 10 billion of Chinese reserves to Petrobras yesterday. etc. Probably we will see at least 100 billion decrease of reserves in 2009 in this "negative fdi" way as China now wants to holds more real assets and less US Treasury promisses, which may even lose their AAA rating by end of 2009!)

I think China has much more in short term (T-bills or the like) than only the 122 billion they bought in 4Q08. You did not quote the page 11 statement from the link I gave you. I.e. starting since June 2008 almost all of Chinese buying of Treasury paper was "short term." In June?, July, August and September (not part of 4Q09) the influx of FDI and the trade balance were much larger than in 4Q08 so I would expect that in 3Q08 that added several times 122 billion of short term paper. If I were to guess, and assume they held none before June 2008 (not very likely, but some of the older is maturing now) then they would still hold about half a trillion in short term paper (or about 25% of their total US Treasury holdings) at the end of 2008. Thus your statement that they only held 122 billion at the end of 2008 is not reasonable. -PROOF: It can only be true if at 31Aug08 they held none, but we know that is not the case as most of 3Q08 was short term buying and in 3Q08 they had more fresh funds to buy with than in 4Q08 when the crisis hit.

 

It is not only China that ain't buying 10 year or longer term Treasury paper:

"...“We are testing key levels on the long end of the market,” said Hicham Hajhamou, a trader in New York at BNP Paribas, one of the 16 primary dealers that trade with the Federal Reserve. “There’s a lack of confidence in dollar assets and the bond market is repricing itself.” The yield on the 10-year note rose nine basis points, or 0.09 percentage point, to 3.45 percent at 2:15 p.m. in New York, {Today 22 May09} according to BGCantor Market Data. ..."

"... The Treasury announced this week it will auction $40 billion in two-year notes on May 26, $35 billion in five-year notes on May 27 and $26 billion in seven-year notes on May 28. The Treasury also sell $61 billion in three-month and six-month bills weekly auction on May 26. ..."

Billy T comment: I.e. NOT EVEN TRYING TO SELL 10 YEAR PAPER TO THE PUBLIC ! (62.3% of May public offering is two year or less paper. 0% is 10 year bonds.)

Quoted text from:http://www.bloomberg.com/apps/news?pid=20601087&sid=a6vR4nWTQHBk&refer=home

SUMMARY: The yield curve is getting so steep, no one but the FED will climb that hill and go long term without high interest rate to compensate for possible dollar collapse. I.e. they FED cannot force rates down to stimulate economy at the long end of the market.

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Source closes with look at the FED:
“The Fed may have to announce a change in quantitative easing to help support the market,” said Thomas Tucci, head of U.S. government bond trading in New York at RBC Capital Markets, the investment-banking arm of Canada’s biggest lender. “The Fed will have to have an alternative or expansion to the current quantitative easing policy to help support the market.”

The central bank has bought $122.984 billion in government securities through the program. The Fed’s next purchase is scheduled for May 26, when it will buy Treasury Inflation Protected Securities* maturing between January 2010 and April 2032, followed by a purchase of debt maturing between May 2012 and August 2013 on May 27.
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*Should be good for me - as I hold more than $400,000 in TIPS.