A thought to ponder Anyone?

[S.A.M.]

To SamCD key at al:
Forbes today confirmed my guess of a few post back, that India's manufactures are also suffering with the falling value of the dollar (>9% in half a year wrt rupee), but considering a different solution to the "weak dollar" problem:

MUMBAI -
India should consider discouraging some kinds of capital inflows as it struggles with a rapid appreciation of the rupee, due in part to a surge of foreign money into the country, a key government economic adviser said.
“Capital flows far exceed our current account deficit. We have to be very careful about how to moderate capital flows. We should not send out wrong signals, but at the same time some kinds of capital inflows could be discouraged,” C. Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, told reporters at a financial conference here.
The rupee’s appreciation against the dollar has helped to tame inflation, but it also has complicated monetary policy, he said. The rupee has strengthened over 9% against the greenback since the beginning of the year. Inflation, which peaked at 6.7% in January, is now at 5.06%.
In a bid to suck excess liquidity out of the system, the Reserve Bank of India has raised the short-term rate at which it lends to commercial banks five times since last June to 7.75%, and increased banks’ cash reserve ratio three times since December to 6.5%.
The central bank isn’t intervening to control the rise of the rupee, which is hurting Indian exporters (See: “ Rising Rupee Said To Hurt Indian Exports”), because to intervene it would need to buy dollars.* That would push money into the system, conflicting with the banks’ monetary policy of eliminating excess liquidity to control inflation, points out D.K. Joshi, principal economist at the ratings agency CRISIL.
“The objective is to start discriminating between ‘good capital’ and ‘bad capital.’ In sectors like real estate, where there is already evidence of overheating, the government is now trying to regulate the inflows of foreign money,” he said. The central bank’s policy of hardening interest rates has also served as a dampener by making home loans increasingly expensive.

What is your opinion of this strategy? Will it help the rupee if the dollar plummets? How good is it as a buffer?

 

[Billy T]

What is your opinion of this strategy? Will it help the rupee if the dollar plummets? How good is it as a buffer?

I do not like currency flux controls. They are easy to slap on, but hard to remove, and in long run usually do much more harm than good. I tend to think Adam Smith's "invisible hand" is smarter than all the economist put together, which is of course impossible:

I am reminded of what Harry Truman said on this after hearing from several economists, most of which were not even willing to be firm in what they were predicting - I.e. most individually frequent used/ stated: "on the one hand...A... but on the other hand....B..." etc.

When they were done, Harry is reported to have said: "What I need is ONE, good, one-armed economist."

The cost of doing what Brazil is doing is high. Paying 7% more to borrow locally than getting by investing in US Treasuries bonds. Brazil and India can not hold up the dollar (stop its collapse) - That is China and Japan's job, at least for now.

It is obvious, but you say you know little, so I tell that neither India nor Brazil can simply print money to make artificial demand for the dollar as that would collapse the value of the local currency in inflation - much more costly than the 7% extra need to keep or pull the local currency from circulation by borrowing it away from the population.

I still (despite quadraphonics) think my plan of simply refusing to accept dollars from Japan and China in payments for exports to them is better. I suspect this would be harder for India to do as I am guessing much of India's influx is from USA, not much coming from Japan and China as not many exports to them, but I could be all wrong on this as I have not looked into the distribution of dollar flux into India.

Holding up the dollar is their job, until one wants it to fall/collapse. -Probably in about 5 + or - 3 years from now it will be to China's advantage to send US and EU into deep depression to reduce the demand for oil. As Japan depends on the seventh fleet, they will not be the first to dump dollars and probably end up with more than half a trillion dollar write down / loss when the run on the dollar starts.

There is also more than half a trillion in Arab oil earnings invested somewhere, probably mainly in US and England. They do not have either Japan's nor China's reasons for holding up the dollar. I.e. they may get their wealth out of US and EU and stick both China and Japan with bag of near worthless paper. If they do trigger a big depression, they of course will not sell nearly as much oil. But if you are rational, and expect to be around long time, what better investment can you make, than oil in the ground? Certainly, not green pieces of paper, called dollars that are already dropping in value in contrast to the rising value of oil.

 

[S.A.M.]

Thank you Billy; I actually understood all that, its a first for me.

 

[quadraphonics]

That was true, but now it is "pegged" ("banded" would be more accurate)* to a basket of currencies - for about a year I think.

It is true that China has replaced their "hard peg" with a "soft peg," but a cursory examination of exchange rates will show that it is still more or less constant. If there had been significant strengthening of the yuan with respect to the dollar, the US-China trade deficit would have diminished or disappeared, which has not happened.

I do not know the weight of each in the basket.

Nor does anyone, as this information is kept secret, but experts guess that it is about 70-80% US dollar.

It is thus possible for dollar and Yuan to be moving in opposite directions, and last time I looked this was the case. I.e. dollar dropping and Yuan growing stronger.

Again, the changes haven't been significant. Over the two years since the introduction of the soft peg, the change has been less than 7%. You'd be better off investing dollars in T-bills than in yuan, even with America's relatively low interest rates. The yuan still hasn't regained the exchange rates it had in the mid-90's, when it was devalued drastically (it used to trade at like 4 yuan per dollar until 1995.)

BTW, about a year ago you were of the opinion, contrary to me, that the next move of the FED would be a reduction in interest rates. Back then 90+% of the economists agreed with you, but now a clear majority have come to my POV. Have you also?

I don't recall ever predicting that the Fed would lower interest rates at any particular time. In point of fact, rates haven't changed significantly in over a year. They may edge up somewhat in the short term, but will almost certainly remain at levels that are low compared to most other countries, and to the US historically.

*within the last month they just opened up the band (from 5 to 10% I seem to recall.) but as it has never been more than 3% from the target, this was mainly politics, not economics.

No, they widened the daily trading band from 0.3% to 0.5%, although they have never actually let it hit 0.3%. They have no intention of shutting off their trade deficit, which is what would result if the yuan significantly strengthened with respect to the dollar. Thus, they will not allow this to happen. Any changes will be minor and very gradual.

 

[Billy T]

...Again, the changes haven't been significant. Over the two years since the introduction of the soft peg, the change has been less than 7%. ...

I never said it had dropped "significantly." I was only correcting your erroneous post 259 statement which states:
"Dude, the yuan is effectively pegged to the dollar. It's "dropping in value" exactly as fast as the dollar is."
by pointing out that they were in fact moving in opposite directions. Thanks for providing precisely by how much (7%).

I don't recall ever predicting that the Fed would lower interest rates at any particular time. In point of fact, rates haven't changed significantly in over a year. ...

I will be away for a couple of days, but try to give the post where you did when I get back. It was more than a year ago, as I recall. Several times back then, when you and 90+% of all economists were predicting the next FED move would be to ease credit I offered to bet "bragging rights" and even a 2 to 1 advantage to you. As I recall, the FED rate was 5% and I won if it went up 0.5% and you won if if dropped half as much (to 4.75% as most experts expected.) You wisely did not agree to the bet. Surely you remember some of this.

...They {China} have no intention of shutting off their trade deficit, which is what would result if the Yuan significantly strengthened with respect to the dollar. Thus, they will not allow this to happen. Any changes will be minor and very gradual.

I think that is true for about 5 + or - 3 years more. But there will come a time, especially now, as I predicted several years ago, that China is converting part of its reserves to non-US Treasury investment (Blackstone fund being the first major one, announced) when it will be in China's economic interest to Kill the dollar. For example if they can get 700billion more of the current total reserves 1.4 trillion out of dollars, leaving only about 300 billion in dollar denominated investments (as about 400 billion are already in euros etc.) then they dump the remainder, getting say 100billion (dollar worth 1/3 of current value) the write down loss is only 200 billion. If they collapse the dollar to 1/3 of its current value, the US and EU go almost over night into deep depression. Not only will the price of oil (in the 2/3 weaker dollars be around $300/ barrel, but more importantly the US and EU's demand for it will be about half due to the deeply depressed economies. This will keep the price of oil (again in dollars with only 1/3 their current value) from exceeding $500 / barrel. There will probably actually be a surplus of oil with most of the advanced world (the current big users of oil) in deep depression. So that one time 200 billion loss will soon be recovered by avoiding the high price of oil which would prevail if US and EU were still big consumers, instead of in deep depression.

These numbers (200billion intentional write off with dumping dollars etc.) are not firm predictions. I only give them to illustrate that some not decades away day it will be to China's economic advantage to send US and EU into deep depressions (they could do it tomorrow, but then their right down loss would be about 700 or 800 billion and they would not yet have a rich enough middle class to buy all their factories can produce (with part of the production going to Brazil etc to pay for their food and raw material imports also)

Summary: China is too smart to kill the US and EU economies now as that would drag them down into a truly global deep depression also. They will wait 5+ or - 3 years until the internal demand and exports to suppliers will keep factories "humming" at near 100% of capacity with very little sold to US and EU and then write down what they have not been able to get out of dollars and Euros, for the gain of much lower cost raw materials, mainly oil, caused by greatly reduced demand from depressed US and EU's depression economies. It just makes good economic sense for them to do this when the time comes that it is profitable (worth about 200billion loss in the reserves) to "take out the competition" for oil etc.

I know I am again essentially “standing alone” in suggesting these things, but this is not the first time I have been “standing alone” and I have been correct in the past, without exception. The ability to see what is coming years before others is why a needs-based, full-scholarship student, so poor that he could not pay bus to go home on holidays, is now a multi-millionaire.

 

[DubStyle]

I think that is true for about 5 + or - 3 years more. But there will come a time, especially now, as I predicted several years ago, that China is converting part of its reserves to non-US Treasury investment (Blackstone fund being the first major one, announced) when it will be in China's economic interest to Kill the dollar. For example if they can get 700billion more of the current total reserves 1.4 trillion out of dollars, leaving only about 300 billion in dollar denominated investments (as about 400 billion are already in euros etc.) then they dump the remainder, getting say 100billion (dollar worth 1/3 of current value) the write down loss is only 200 billion. If they collapse the dollar to 1/3 of its current value, the US and EU go almost over night into deep depression. Not only will the price of oil (in the 2/3 weaker dollars be around $300/ barrel, but more importantly the US and EU's demand for it will be about half due to the deeply depressed economies. This will keep the price of oil (again in dollars with only 1/3 their current value) from exceeding $500 / barrel. There will probably actually be a surplus of oil with most of the advanced world (the current big users of oil) in deep depression. So that one time 200 billion loss will soon be recovered by avoiding the high price of oil which would prevail if US and EU were still big consumers, instead of in deep depression.

I follow a couple Fx blogs written by global rebalancing pessimists and I dont think I've seen anyone make such a bold prediction as China reducing their dollar holdings to 300 billion. In fact, most of what I read indicates that within the next year, their dollar reserves will top 2 trillion.

 

[kmguru]

I follow a couple Fx blogs written by global rebalancing pessimists and I dont think I've seen anyone make such a bold prediction as China reducing their dollar holdings to 300 billion. In fact, most of what I read indicates that within the next year, their dollar reserves will top 2 trillion.

Chinese are pragmatic people but not stupid. If they see dollar's decline and their raw materials have to be paid in Euros....they will do what is best for them. While bad days are ahead for U.S. (read this week's BusinessWeek), definitely Chinese would not be stuck with 2 Trillion dollars very soon. My bet is they will wait till 2008 presidential election to see which way the wind blows.

 

[quadraphonics]

I never said it had dropped "significantly." I was only correcting your erroneous post 259 statement which states:
"Dude, the yuan is effectively pegged to the dollar. It's "dropping in value" exactly as fast as the dollar is."
by pointing out that they were in fact moving in opposite directions. Thanks for providing precisely by how much (7%).

Opposite directions relative to what? Not the price of any commodity: the shift in the yuan-dollar exchange rate over the past 1-2 years is tiny compared to the increase in the cost of most commodities (in either denomination).

Several times back then, when you and 90+% of all economists were predicting the next FED move would be to ease credit I offered to bet "bragging rights" and even a 2 to 1 advantage to you. As I recall, the FED rate was 5% and I won if it went up 0.5% and you won if if dropped half as much (to 4.75% as most experts expected.) You wisely did not agree to the bet. Surely you remember some of this.

I remember you trying to get me to make a specific prediction, and I also remember declining to do so, repeatedly. For you to cite this as evidence that I predicted that the Fed would lower rates at a particular time is either disingenuous or delusional.

I think that is true for about 5 + or - 3 years more. But there will come a time, especially now, as I predicted several years ago, that China is converting part of its reserves to non-US Treasury investment (Blackstone fund being the first major one, announced) when it will be in China's economic interest to Kill the dollar.

What you're not getting is that shifting reserves away from T-bills does not imply shifting reserves away from dollar-denominated assets. They're buying US stocks instead of US bonds (and only a small portion of their foreign reserves are being redistributed this way - about $300 Billion). So this does nothing to lessen China's exposure to the dollar. There's no way they can get rid of their dollar denominated assets without "dumping the dollar." The two are synonymous.

For example if they can get 700billion more of the current total reserves 1.4 trillion out of dollars, leaving only about 300 billion in dollar denominated investments (as about 400 billion are already in euros etc.) then they dump the remainder, getting say 100billion (dollar worth 1/3 of current value) the write down loss is only 200 billion.

Again, to "get 700 billion of the current total reserves [...] out of dollars" is exactly the same thing as "dumping the dollar." And, anyway, they're still buying about as many new T-bills *every year* than they have shifted into the investment account. China's exposure to the dollar is continuing to increase, with no signs of abating.

Moreover, $300 Billion isn't nearly enough dollars to set off a runaway worldwide dollar ditching. That's only 3% of the American debt held by foreigners, and so it could be offset by a comparable rise in interest rates (which works out to about 0.163 points; much less than the 0.25 increments the Fed uses). The myriad other holders of dollar-denominated debt know this and so, instead of selling, would simply hold their dollar denominated assets to reap the (slightly) higher rates. China would erase their trade deficit, scare away FDI and so end up in a prolonged recession (if not full-blown depression), probably leading to the overthrow of the CCP. The rest of the world, meanwhile, would be more of less fine, the only change being a worldwide aversion to trade with China. To set off a collapse of the dollar would require selling a sufficient amount of dollars to force American interest rates up to untenable levels. It would take at least $2 Trillion, and maybe considerably more, depending on exactly how skittish the various other holders of dollar debt are feeling.

If they collapse the dollar to 1/3 of its current value, the US and EU go almost over night into deep depression.

So would China. You're talking about cutting demand for Chinese products by almost half overnight. The only scenario where that might be in their interest would be if the US and EU were staging a military invasion of China (in which case, exports probably would have already stopped anyway).

(they could do it tomorrow, but then their right down loss would be about 700 or 800 billion and they would not yet have a rich enough middle class to buy all their factories can produce

What does that even mean? China's middle class could certainly buy all of China's output today; they just wouldn't be able to pay as much as the various foreign importers do. The situation you're assuming implies a negligible trade deficit, which in turn requires appreciation of the yuan. I.e., it's circular: you're arguing that China can get away with dumping the dollar by assuming that they've already dumped the dollar without any ill effects.

It just makes good economic sense for them to do this when the time comes that it is profitable (worth about 200billion loss in the reserves) to "take out the competition" for oil etc.

Dude, if China tries to "take out" the American and EU economies, for whatever reason, Beijing and Shanghai will be turned into parking lots the next day. It may well be your fantasy for China to undertake some ill-advised scheme to destroy the world economy (wherein somehow China and Brazil miraculously come out okay), but they're way too realistic and common-sensical to do something that stupid. Why would they want to make mortal enemies of most of rest of the world (and in particular a power with the ability to wipe out Chinese civilization at the press of a button)? As you've aknowledged before, America has the capability to impose a naval blockade on China, so they won't even get the cheap gas out of the deal.

Another fact you're neglecting is American oil production. America is the third-largest producer of oil in the world (behind only Russia and Saudi Arabia, and then only by 10-20%), so the ability of outsiders to push America out of the oil game is quite limited. Moreover, sky-high oil prices equate to a massive source of income (over $1 Trillion per year if oil hits $300/gallon - that's almost half of China's economy).

 

[15ofthe19]

Dude, if China tries to "take out" the American and EU economies, for whatever reason, Beijing and Shanghai will be turned into parking lots the next day. It may well be your fantasy for China to undertake some ill-advised scheme to destroy the world economy (wherein somehow China and Brazil miraculously come out okay), but they're way too realistic and common-sensical to do something that stupid.

I don't know about turning Beijing and Shanghai into parking lots, but otherwise I agree with you. You've nailed something that I don't think BillyT is getting. He keeps trying to explain a scenario where China collapses the world economy, but is somehow not negatively affected. That simply can't happen. And even if it could, China wouldn't want it to happen. What part of that is so hard to understand?

What would China stand to gain by seeing the U.S. and the EU in a depression? BillyT, in your eco-polypse fantasy, who steps in to buy up all the surplus goods China produces, now that the U.S. and EU aren't buying as much?

 

[Billy T]

I will reply to you first and get to Quadraphonics later (Just returned from 2 days working on my house.)

...{BillyT} keeps trying to explain a scenario where China collapses the world economy, but is somehow not negatively affected. That simply can't happen. And even if it could, China wouldn't want it to happen. ...What would China stand to gain by seeing the U.S. and the EU in a depression? BillyT, in your eco-polypse fantasy, who steps in to buy up all the surplus goods China produces, now that the U.S. and EU aren't buying as much?

It is perfectly possible that (as is true today) a set of countries is prosperous while others are very depressed; thus I think you are wrong to say "That simply can't happen." After next paragraphs, at ***, is what "can't happen."(US continuing to borrow as does today.)

What China stand would gain by seeing the U.S. and the EU in a depression is greatly reduced global demand for raw materials/energy. I.e. much lower cost to keep its factories "humming" if those in US and EU were only "limping along" or closed.

China can not damage US with military power, and knows that. (US also knows it can not attack "man-in-space" CHINA armed with nuclear ICBMs, WITHOUT BEING DESTROYED also.) China is arming an "economic gun" instead, with US supplying the "bullets." Surely, you must understand that the world, especially China, will not forever finance the excessive consumption of US. I.e. forever send things of value to US for green pieces of paper and IOUs. This will end. The question is how? I suggest one way. (China and her suppliers of raw material become the "prosperous set of nations" and US and EU become part of the set of "very depressed" nations.)

***There is a way for US to remain in the "prosperous set". I.e. US must reduce it demand for oil (starting by paying at least what is charged in EU for gasoline). Increase it savings rate (currently negative, and getter more negative every year as the demographic bulge of people in their peak earning/saving years retires and becomes "negative savers" also). Increase taxes significantly so that at least US does not need to borrow externally just to pay the interest on the old debt. (US debt is growing in part because the US is deep in debt already.) Reverse the "suburban infrastructure" (lots of capital require for public transport, restoration of the city slums, etc.) I think the capital required for these items simply is not available, even if the political will could be found to more than double the taxes on gasoline, mandate 3% of salaries be saved (currently 104% of salaries is spent.) Nothing can be done about the Baby Boomers retiring and ceasing to save, starting to spend. The stock of SUV and big cars can not be totally replaced in less than a decade. The current drive to make Alcohol from corn is stupid beyond words. Very little, if any, reduction in oil demand will result and food prices already up more that 50% for several items. The effect on food prices is spreading to more items (as well as making the balance of payments worse with reduced agricultural exports).

If you want to say something "can not be done" I think correction of the US economy is the correct item to speak of, not that China and it suppliers "can not" be come prosperous while the US population lose real wages (already occurring for 3 years now and getting worse rapidly as "MacJobs" replace those outsourced and more factories close.) and US population must pay higher prices for food as corn makes alcohol.

Finally, I have already stated "who steps in to buy up all the surplus goods China produces, now that the U.S. and EU aren't buying as much"
Quick answer:
The rapidly growing Chinese middle class and the suppliers of raw materials China increasingly needs to import. (To name just one example of this rapid growth of China's non-US exports: Already the world's largest exporter of enriched iron ore, Brazil, had a 50% increase in shipments last year, and the rate is still increasing to China. China pays with it productivity - lower % of which is already going to US.)

In less than 5 years the middle class of China will be larger than the entire US population and essentially "Debt Free." Only 3% of them currently even know what a credit card is! Western banks were allowed last year for the first time to buy into China's banks and are modernizing them now. Soon the credit cards will be issued and the long suffering Chinese population will go on a buying spree. The Chinese government will have real problems controlling inflation because of the exploding domestic demand, but they must as the government has been going all over the world signing long term contracts (typically 30 years) for raw materials (energy included). These imports will be paid for buy the products of Chinese factories. Even if China wanted to there simply will not be capacity to honor these contracts, met the exploding domestic demand and ship products to US for green pieces of paper. - You guess which China will not do.

Summary: Get you head out of the sand. Look around at what is already happening. It is not carved in stone by God that US must be in the set of "prosperous nations."

 

[Billy T]

…I remember you trying to get me to make a specific prediction, and I also remember declining to do so, repeatedly. For you to cite this as evidence that I predicted that the Fed would lower rates at a particular time is either disingenuous or delusional.

That is not why I cited it. I did so only to help you remember, as I did not want to go to the trouble of digging up your old post, but now that you give me only the choice of being "disingenuous or delusional" I have taken the 15 minutes to find and quote your own words back to you:

In post 95 (8March07) I said:
“I predict {interest rates} will continue to increase rapidly.”
And you replied:
“What are you talking about? The rate has been 5.25% since the middle of last year, and nobody expects it to increase.”

In post 32 (22Feb07) I said:
“In no more than a decade US will need to pay 10% real interest to finance the debt*
“And you replied:
“…There's plenty of room to raise rates without strangling the economy, not that it will be necessary. (I made last your words bold)

I have 9.5 years more to go on my prediction of 10% rates. The “economic experts” have already changed from “nobody expects rates to rise” to almost everyone now expects the next move will be a rate increase. - I.e. I am about on schedule with my predictions.
You clearly indicated that you did not expect rates to rise and that an increase “would not be necessary,” Few “economic experts" still agree with you.

This contrast in our positions is why I offer to bet you (even requiring twice the rise / change for me to “win bragging rights” as for you to “win” by a drop in rates.) Again I did not use this bet to prove anything, only your own wards in post 32 and 95 do that. Are you still of the opinion that there is no need for rates to rise? Or like the experts, you have also switched to the position I stated back in March, when I agree I was all alone in predicting a rise?

Also,please note that I did not say you "predicted a decrease". What I said and what is true, is that you were expecting the next move by the FED to be down, not up, as I was expecting. - there is a slight logical difference in that the FED could conceptually never change rates again. I offered to bet on the direction, placing a 2 to 1 handicap on myself, to make the offer more attractive to you.

To keep this post from being too long, I will respond to some of your other points later.

 

[Billy T]

…What you're not getting is that shifting reserves away from T-bills does not imply shifting reserves away from dollar-denominated assets. They're buying US stocks instead of US bonds (and only a small portion of their foreign reserves are being redistributed this way - about $300 Billion). So this does nothing to lessen China's exposure to the dollar. There's no way they can get rid of their dollar denominated assets without "dumping the dollar." The two are synonymous.

I disagree.
“Dumping the dollar” would be to sell their treasury bonds, REGARDLESS OF PRICE.
Getting rid of “dollar denominated assets” would be easy and is in already in progress.

Purchase of Blackstone group's new IPO at 5% discount as they are taking so large a share. They tried to buy SoCal (name is not quite right) oil about a year ago - that also would be "getting value out of dollars" and into oil without "dumping".* (SoCal has an unusually large fraction of its total worth in oil in the ground in contrast to "down stream" assets, like gas stations etc...

It is true that many of the REAL TANGABLE ASSETS they buy are quoted in dollars, but as the value of the dollar falls, these assets will tend to hold their real value - I.e. appreciate in dollars. IMHO, that is the main reason why stock market is frequently hitting all time highs (in dollars but not in reasonable basket of other currencies.) Also the reason why for more than a year, I have been predicting that the DOW will hit 1500 by end of 2007 or early 2008.
I.e. if one “owned the DOW” and it dose hit 1500, then the amount of material (including oil) that you could buy will be less than if you bought those materials today with the money required to “buy the DOW.” This prediction depends upon my other prediction -I.e. that China needs US to buy significant fraction of it goods for about 5 years still. Once China concludes it is economically attractive to dump its remaining treasury bonds in hope that others will follow - make a run to get out of dollars - to destroy the economies of US and EU, I don’t know what the DOW will do, and few will care. If US and EU do crash, then China will pay much less for the materials and oil it needs to keep factories "humming" - see post 270 for who will be buying their factory products.
---------------------------
*China is also buying real goods all over the world, and paying with dollars. It is really hurting the manufactures in Brazil as the influx of dollars that few want, or need, has made the Brazilian Real much too strong. Causing Brazil's central bank to buy more than 10 billion surplus dollars every month. The Brazilian reserves have more than doubled. Brazil can pay off ALL of its external debts tomorrow and still have reserves! How long has it been since US could say that - I bet at least 75 years.

 

[DubStyle]

Billy,

Ever come across this blog?

http://www.rgemonitor.com/blog/setser

You should check it out and post some of your theories there.

 

[quadraphonics]

I'm not going to waste time debating what I meant in threads that you haven't even bothered to link to. Suffice it to say that your "rapid increase" in rates has yet to appear (it's still constant at 5.25%), and that my statements applied only to the 6-month term of your "bet." Note that I was absolutely correct: rates have not gone up.

It's also absurd that you assign positions to "most econ experts" without even the slightest justification. People expect the Fed Funds rate to remain constant. Nobody agrees with your prediction of "rapidly rising rates."

 

[Billy T]

...my statements applied only to the 6-month term of your "bet."... Nobody agrees with your prediction of "rapidly rising rates."

Like you, my statement has a time period. I.e. rapidly rasing during the next 10 years. I.e. being constant, but expections having completely reversed (in only 5% of the period) as to the direction of the next change is completely consistent with my prediction for next 10 years. Obviously before rates will beging to rise the nearly unamanous view that next move would be down had to first change, as it has. We will just need to wait and see if my prediction is correct or not.

 

[Billy T]

Billy, Ever come across this blog?
http://www.rgemonitor.com/blog/setser
You should check it out and post some of your theories there.

No, but thanks. It seems to be 100% Brad Setsel's blog. I am not into blogs. Even wiki is not reliable at times.

I prefer to read major economic articles (Bloomberg, Economist, WSJ, when I can see in Brazil, etc.) and then think for myself what the "facts" imply longer term. I am not a "trader." - Many of my positions, via ADRs, in Brazil and India are 5 or more years old - one of my positions in a mainly European fund is nearly 30 years old. If you can look far ahead, this can work well and it saves trading cost and defers taxes for many years.

BTW journal "Foreign Affairs," only a quartely I think, often has some very perceptive long term views in many areas, not just economics, but many things do come down to economics in the end analysis - Why I think there will come a day that (to take out the competition for oil and raw materials) China will fire the big "economic gun" the US (and to some extent, EU) have been loading for it to wreck the existing domination of the dollar.

 

[DubStyle]

Its mostly his blog, but if you check the comments to each post there is quite a bit of discussion from a regular group of posters.

 

[Billy T]

Its mostly his blog, but if you check the comments to each post there is quite a bit of discussion from a regular group of posters.

Thanks again.

While here I will add some information supporting my POV that capital is fleeing the dollar:

Yesterday my two largest ADR holdings (They are now worth about half a million dollars, which is more than 8 times what I paid for them only 5 years ago. Ticker is IBN for India´s ICICI bank & SBS for Sao Paulo's water/sewer company. - Check their shair price curves, if do not believe a bank and water company can grow so fast. Both went up yesterday. (SBS locally in Brazil by 7.15% in one day!, leading the Brazilian stock exchange to its 22d record high close this year, and this with the Brazilian Real about 20% more valuable wrt dollar than at start of the year! - Contrast this with the DOW's highs, which are mainly caused by the drop in dollar value this year.) Announcement of huge expansion of service area etc is what moved SBS up. (Most of Sao Paulo state is still without public sewers.)

Here is what modestly moved IBN up (quoting from C. Schwab's PR):

"India's largest private sector bank, ICICI Bank (IBN), said it will sell up to $4.9 billion of shares next week so it can fund the companies that will drive India's rise as an economic force.... almost one-quarter of its {current} market value. The proceeds of India's biggest share sale would fund lending to the retail, corporate and infrastructure sectors in the Asia's third-largest economy, ICICI chief executive K.V. Kamath told reporters. "There's opportunity probably that's not seen, ... the huge gap between the market valuation of banks in China* and India ...The market capitalization of all the banks in India is less than half of the second-biggest bank in China," Kamath said. ICICI expects Indian companies to spend about $500 billion in the next few years building infrastructure, such as roads and ports, and expanding capacity." - Schwab is much more clear than the prospectus I recieved a few days ago.
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*I do not own anything in either Russia or China. Never have. Both will probably confiscate someday. To a large extent Russia already is via "environmental requirements" applied only to energy companies not already controlled by Putin's government. - I would rather pick someone at radomn from a Sao Paulo street give them 10R$ and a note telling which of my bank accouts to put 8R$ in than invest money in China or Russia, despite fact that, if lucky, that is high profit opportunity. I buy for the long term and generally hold unless froced to take profits by a take over of company I own. Then, I may clean out some losses, if I have any, to avoid taxes.

 

[Billy T]

In interest of some balance: (A POV of why China’s reserves are NOT now a threat to US and EU) see:

http://www.forbes.com/2007/06/19/cr..._rl_0620croesus.html?partner=daily_newsletter

Although I predict that it will someday be in China’s interest to remove the competition for oil and other raw materials by crushing the dollar sending much of the world into deep depression, I do not for see this for many years, so I also agree with this link, FOR NOW, and have repeatedly said so.

Some quotes from above link:

“The latest figures show the Chinese accumulating $20 billion of dollar-based reserves every month. Treasury figures further show the Chinese owning $420 billion in Treasuries in March 2007--up from $321 billion in April 2006.”

“Michael Cembalest, the wise chief investment officer of the $250 billion JPMorgan Private Bank, wrote, "A Big Bang dollar collapse is unlikely in 2007, as we see China as having an overriding self-interest in a cheap currency."”
– I stongly agree as it will be at least 5 years more before China’s rapidly growing domestic market and exports to suppliers of energy ad raw materials (payents for them) will absorb all of the production capacity of Chna’s factories etc.

“Brad Setser, a former Treasury official, … says the U.S. needs $800 billion of the $1 trillion a year in dollars being accumulated by all foreign central banks. He sees inflows from Brazil, India and Russia picking up. But he worries about what might happen if central bank dollar reserves stop growing at such a fast pace. "We need $850 billion each year to finance the U.S.," he says.”
– Brazil is buying about 10 billion US treasury issue each month, but does not want to or think they are a good investment. Brazil is losing two ways: (1)Value of dollar dropping and (2)paying about 7% more than Treasury yield to borrow the Brazilian Real to buy unwanted dollars that then buy the Treasury issue. There is such a flood of dollars coming to Brazil than no one else wants that the central bank must buy them to moderate the rise in the value of the Real wrt the dollar. – Even with this effort the Real is so strong many manufactures can not export and Brazil is being “de-industralized” – all as I predicted – on it way to becoming an “economic colony” of China.

“Of course there are heavyweight worriers like … “The effect on the reversal of U.S. interest rates and credit spreads could be devastating."
_ Hey, what gives, you for to mention Billy T !

 

[Billy T]

Article from USA Today about how central banks are getting out of US Treasuries issues. (For another similar approach, yesterday it was announced that China owns 70% of the just sold IPO of the Blackstone Group (I.e. 3 billion US dollars that were in US treasuries is now in a private investment fund, buying assets all over the world. China got its part with almost 5% discount from the price paid by other 30% of owners.):

"The rise of a secretive breed of government-owned investment funds could spark big changes in global markets and trigger "financial protectionism," a top U.S. Treasury official warned Thursday. Clay Lowery, acting undersecretary for international affairs, called for the International Monetary Fund and World Bank to develop guidelines for the "sovereign wealth funds." Such investment funds increasingly are being used by cash-flush Asian exporting countries and global oil-producing nations to earn higher returns than traditional holdings.

Several countries — including Norway, Singapore and Dubai — already operate such funds, which hold up to $2.5 trillion, according to Morgan Stanley. The New York-based investment bank expects fund assets to double before 2010 and hit $10 trillion before 2014 as others such as Japan and Russia join in.

"They're an important factor today. Going forward, they'll be even more important," says Stephen Jen, Morgan Stanley's chief currency economist.

The new funds are expected to help global stock markets but hurt demand for Treasury bonds. For Americans, the result is likely to be higher interest rates ... {As Billy T has been predicting for more than year in running disagreement with quadraphonics in this thread. For example, in post 268 Quad said to me: "What you're not getting is that shifting reserves away from T-bills does not imply shifting reserves away from dollar-denominated assets." but I and USA today think that is at best only partially true as these funds invest in assets ALL OVER THE WORLD.}

Countries are setting up such funds, which usually provide scant details of their holdings, amid unprecedented growth in global foreign exchange reserves. After rising at an annual rate of 6% from 1997 to 2001, reserves grew 20% every year since. {In Brazil, by more than 100% in less than one year as flood of dollars come to Brazil.}

Central banks typically hold their reserves in ultrasafe securities, such as U.S. Treasuries and euro-denominated government bonds. Asian countries have stockpiled enormous reserves as insurance against a repeat of the region's 1997 financial crisis. Countries such as South Korea and Thailand now have more than adequate protection against future shocks.{Brazil certainly does - can pay off ALL foreign debts from the current reserves!}

Since the end of 2005, China has added almost $400 billion to its reserves, which exceed $1.2 trillion. In March, China set plans to create a $200 {300 I think is correct, and it was just the "initial funding"} billion investment fund. "Countries like China just don't need to hold any more T-bills. There's just no point," says Kenneth Rogoff, former IMF chief economist. {and in less than a decade, there will be no need to sell any products to US -I.e. China will tell US: "Go to hell - we do not want your worthless paper anymore."}

Last year, foreigners spent $380 billion on Treasuries and government agency securities. But as countries chase higher returns, they will buy stocks, entire companies, corporate bonds or real estate instead of those risk-free investments.

A shopping spree by foreign governments could inflame protectionist sentiments. This week, Sen. James Webb, D-Va., called for the Securities and Exchange Commission to review China's planned $3.2 billion stake in the Blackstone private-equity group, because Blackstone's holdings include companies that produce military software.

Officials in China and Russia this week assured visiting Deputy Treasury Secretary Robert Kimmitt that their new investment funds would focus for now on stocks and corporate bonds. Any future acquisitions of companies would be limited to "non-sensitive sectors," Lowery said. {Words to get the camel's nose under the tent with as little disturbance as possible as US "sells the farm" to continue spending more than it earns.}

From: http://www.usatoday.com/money/economy/2007-06-21-cash-usat_N.htm