Writing about economics or finance means flogging the same article over and over again. One either goes broke or not. There is only so much that can be said about the subject of going broke!
Here is Steve’s First Law of Economics: the costs of managing any surplus increase along with the surplus to the point where costs ultimately exceed the value of the thing itself.
More stuff makes you broke!
This is pretty much self- explanatory. The more ‘stuff’ you have the more you have to spend to keep it together. At some point costs explode and it’s impossible to predict what form the costs are going to take! It’s here today, gone tomorrow or you hope: (Click on any chart for a bigger, better image!)
China’s Forex Cache: Too Much of a Good ThingThe nation’s central bank is exploring new ways to manage and invest US$ 3 trillion in foreign reserves.
The People’s Bank of China is mulling a new strategy for managing – through diversified investment – its enormous cache of foreign currency and bonds, whose total value exceeded an all-time record US$ 3 trillion in late March.
The amount of U.S. Treasury bonds, dollars, euros and other currency held by the Chinese government is “really too much,” said the bank’s governor, Zhou Xiaochuan, at an April 18 financial forum at Tsinghua University.
Zhou’s comments at least in part reflected international market pressure on the U.S. dollar, which analysts say may comprise 70 percent of the China’s foreign holdings. Euros, pounds and yen are also mixed into the reserves, details of which have never been publicized by Beijing.
The same day Zhou spoke, the ratings agency Standard & Poor’s frowned on the U.S. government’s debt position, raising the possibility of a lower debt rating in the future. China this year has maintained its position as the world’s largest holder of U.S. government bonds, with US$ 1.15 trillion in U.S. Treasuries as of February.
And for months, international prices for dollar-based commodities including gold have steadily risen. Global crude oil prices recently neared three-year highs.
Zhou suggested the central bank might react to these tumultuous conditions by changing its approach to strategic investments that rely on foreign currency held in reserves.
Basically, the Chinese surplus of cash is worth less than what it costs China to manage it. The costs include inflation and an excess of capital investment. F/X cash generates inflation in China because the establishment insists that it be spent on something that represents ‘value’. There might be more value gained from gambling junkets to Las Vegas. China and her businesses swap dollars and euros for commodities, store the commodities at further cost and bid the commodity prices up to the stratosphere @ the same time.
The excess investment appears as ghost cities, excess manufacturing capacity and a massive property bubble getting ready to explode!
What passes for US inflation is the result of China spending its dollars on fuel. What does China have to show for its waste of dollars on fuel?
Nothing …
It goes from there, the Chinese have so much cash that anything they do with it bounces back to kick the Chinese economy in the balls. They have so much cash that doing enough with it to make a difference in the size of the hoard would spoil the value of what remains. The cash hoard is bankrupting China and this is the first acknowledgement by the establishment the surplus is a problem.
It’s also a huge problem for the US and the dollar. What does the US have to show for shipping a large part of its output to China?
Nothing …
Geez … the president of the United States of America, spreadeagled on the hood of a squad car by the World’s biggest phony. What a country, what leadership! No wonder the dollar is getting hammered!
Why did it take two years for the Prez to release the certificate? It must have taken that long for the hot shots @ the CIA to forge one and for these same hot shots to be killed.
So they can’t be outed on Wikileaks …
Obama should have just ordered a new certificate from the Pyongyang outfit that makes all the $100 bills …
One problem for the dollar is the endlessly expanding US Defense Department budget. There is less and less bang for the military’s dollar. A solution would be to eliminate the Pentagon, fire all the generals and soldiers, ground all the US’ aircraft and mothball the entire US Navy.
Hire the Taliban.
The defense budget would shrink to about $50 plus all the Red Bull jihadi recruits can guzzle. They don’t need anything in the way of supplies or support, not even razor blades. Get that Koran- burning bigot in Florida to toss in a few spares for ‘motivational purposes’.
They are kicking our ass, why not turn them around to kick others’ ass for a change?
One of the Twitter remarks during Fed Chairman Bernanke’s (non)news conference yesterday was from ZeroHedge: “Every word out of his mouth is ten cents added to the price of gold.”
Every word is a nail in the coffin of the dollar which is on its ‘death ride’:
Not really, but people have a right to be concerned. The dollar’s value priced in other currencies is the little arrow on the right. It’s so stinky that even professional dollar traders are giving it a wide berth. Thanks to reader Josh for this chart.
The current data does not support deflation arguments. Priced in crude oil, the dollar has lost about 40% of its value over the past nine months. Within the all- important crude/dollar relationship there is almost 100% annual inflation, no wonder people are howling!
They will howl until something starts breaking, likely the weakest link: will it be the dollar?
Probably not … a big reason is what would folks use to buy fuel in place of dollar? This presumes that all else remains the same, which is a completely false presumption! If the dollar falls in value oil prices rise ‘too high’ and the economy crashes because people stop buying ‘other stuff’.
There are really no alternatives to the dollar ‘out there’. All the other major currencies are emitted from countries with the same problems the US has or worse.
The dollar in this chart is priced against a ‘basket’ of ‘Various Brand X’ currencies. Who swaps dollars for a basket? People don’t use other currencies in America. Dollars can already purchase the goods of any country in the world. There is no demand on the street for other currencies in this country and the dollar has not lost enough value for people to call for alternatives. For better or worse, America is a dollar desert.
Some of the proposed alternatives to dollars such as IMF ‘SDRs’ or gold and silver are not currencies. Realistically, no one is going to trade gold or silver for a tank of gasoline so they can ‘drive around’. Hard currencies and currency black markets are incompatible with advertising- based consumer economies which rely on electronic money and credit.
The country can and probably will get to that point but would require a severe bout of deflation first. This is because a black- market currency trade is a requirement for hyperinflation. Such a trade cannot be caused by the current round of price increases which involve all the major currencies swapped for crude. This is what is meant by ‘Share the same problems’: oil prices are high in all the currencies. If you want fuel in Indonesia you have to fork over the rupiahs. It’s not just ‘Scapegoat Bennie’s fault but that of lazy gas users all over the world!
Right now, the only dollars swappers able to take large enough positions to change the relative values of one currency vis-a-vis any other(s) are are traders on F/X markets. These include the big banks like JP Morgan- Chase or Goldman- Sachs.
Hmmmm …
Look carefully @ the chart and you can see the long or short positions are concurrent with trend changes. The big traders don’t telegraph or lead the market but their actions signify the trend.
Will traders buy the dollar any time soon? I don’t know. They will eventually, there is too much easy money out there right now to ignore the long- dollar trade. Add a short- squeeze and buying dollars might be the trade of the decade. Just sayin’ …
People are panicking about the dollar right now, generally when panic is taking place that is the time to buy: when there is “Blood on the streets!” You can look @ some of the dollar action in commodities like silver and the response of some of the analysts as a signal for a trend change.
Meanwhile, high oil prices damage the world’s economies but where will the damage manifest itself? The weakest links are Ireland, Portugal and Greece. Spain and Italy aren’t much stronger. All are ‘too big to bail’ yet failure is pretty much unavoidable at this point.
Look @ Greek debt and the unwillingness of anyone to lend to her even at the offer of twenty cents annual return on every dollar lent! Greece represents the endgame of austerity whereby borrowing costs increase while the ability to meet those costs is diminished.
Nobody in charge figured this out when Greece & Co. got into trouble a year and a half ago …
Almost all of Europe is on the same road to insolvency as Greece. The Europeans are energy debtors. Only Norway, Switzerland and Iceland have energy surpluses that aren’t existentially threatening. France is another nuclear time bomb like Japan. Both Greece and Germany burn lignite as a thermal fuel. For all the yakking about ‘efficiency’ and ‘alternatives’ the Eurozone is where car manufacturing is king and there are no speed limits on the various autobahnen.
Hard earned European foreign exchange flows outward toward Middle East oil producers, what returns is burned up for nothing. What can possibly be wrong with this program?
Once Greece or Ireland default the world’s interconnected banks will begin hemorrhaging again. Like the sovereigns, the EU banks are insolvent. The interesting question is whether the EU central bank itself is solvent or is willing to risk its own solvency by expanding its balance sheet.
The IMF does not have enough cash to bail out the entire Eurozone. When it totters the euro will be on the gallows. Who will guarantee the ECB if there is a significant run out of euro- denominated assets? Can Bernanke?
The issue with monetary policy easing is that it also follows Steve’s First Law. There are diminishing returns/increased costs associated with the surplus of easy credit. Adding to the surplus pushes costs even as added funds cannot substitute for value.
Value is something which cannot be printed or ginned up on a laptop. Fed Chair Bernanke touched on this during his epochal press conference Tuesday. I watched hoping the Fed chief’s pants would fall down. Instead, Bernanke admitted the Fed cannot print more oil. What the world needs in its hours of despair is some value.
We have a problem because we have burned up so much of our value with nothing to show for it besides a fake birth certificate that sez the President was born in Honolululu, Kenya.
Good grief!
Japan is a country with debt and spending characteristics similar to the US and is also experiencing deflation. This is not to say that inflation is impossible in Japan but 20 years of deflation in the face of massive establishment efforts to generates some inflation leads one to believe that crafting even the smallest amount of inflation is much more difficult than is commonly believed.
Japan’s industrial production slumps record 15.3% in MarchTOKYO, April 28 (Xinhua) — Japan’s industrial production plummeted a record 15.3 percent from the previous month in March on a seasonally adjusted basis, the Economy, Trade and Industry Ministry said in a preliminary report on Thursday.
The record decline in the recording period was due to the March 11 twin disasters that destroyed infrastructures, damaged production facilities and severely disrupted key supply chains, the government said.
March’s figure far exceeded median economists’ expectations for an 11.4 percent drop and the index stood at 82.9 against the base of 100 for 2005.
Industrial shipments plummeted 14.3 percent to 85.3 and industrial inventories dropped 4.3 percent to 97.6, the government data showed.
Japan’s middleman economy arbitrages the difference between what it pays for energy and what it receives for that energy in the form of finished industrial goods. With the costs of Fukushima added to increasing crude costs, the ability of Japan to continue with the arbitrage is falling into doubt.
Now that China is a net energy importer, China’s energy arbitrage trade is also looking dicey. They can build an enormous F/X surplus by swapping cheap coal for cash but what happens when they have to buy expensive coal … or their cheaply- made nuke plants start to blow up?
China shares a lot of Japan’s mercantile and manufacturing characteristics. China’s inflation appears to be rampaging out of control with both rising prices AND rising wages. Why does China experience inflation and Japan deflation? There are no easy answers. It’s possible that next year China’s property bubble will collapse like Japan’s did in 1990 with China falling into a severe deflation or even depression. At the same time, Japan might convince its remaining savers that there is nothing for them to gain by their holding on to their money. Once all of Japan’s cash is turned out onto the markets there would be inflation.
The earthquake and tsunami would appear be a reason for Japan to call out all of its spare change. The public has so- far not responded: inflation in Japan appears to be unlikely, at least for the present.
The bottom line of this analysis is what the public does on its own in the various countries which determines whether there is inflation or deflation. All the motorists in the world buying fuel pushes up fuel costs. This is not inflation but supply and demand falling out of balance. The same motorists swapping one particular currency for others is inflation! That is not happening, the context for such a swap does not exist and neither do the required pre- conditions such as a non- dollar currency black market in the US.
Currency traders are swapping out of dollars. They do so for short- term market- related purposes, which is their jobs. These same markets (which aren’t really markets), politicians and economists cannot control currency outcomes because these agents cannot take large enough market positions to have any long term effect. Only the public(s) can do this.
The establishment cannot control, only cajole by way of spamming.
For the Fed to take a large enough currency position (short) to effect the value of the dollar its loss of (asset) value on the trade would render the Fed insolvent. (Maybe it is already!) This is the problem with central bank balance sheet expansions. As with the natural world there are limits to what even powerful agencies can do.
The currency and interest rate derivatives markets have as much influence on the value of the dollar as does the Fed and other central banks, the F/X traders or all of them together. The currency/rate swaps markets have their own dynamic(s), everyone goes along for the ride. Can the derivatives markets ‘kill’ the dollar? Yes and no: the public is more powerful than even these derivatives markets.
The public holding dollars or other currencies (such as the Japanese yen) gives the currency value. This is how the value process works … not the other way around. If the people choose to hold dollars (saving them) the outcome is the bankruptcy of the establishment, regardless of what the establishment does. This is the lesson of the Great Depression. This is also of a piece with Max Keiser’s silver buying siege of JP Morgan- Chase. The concept is holding a good to add value: it is Keynes’ famous ‘Paradox of thrift’.
The situation is a bit different in the US. The establishment thinks it can separate cash from savers’ hands but the joke is on the establishment. There are few savers in the US, most Americans are broke with zero liquid net worth. This is because Americans have been living with inflation their entire lives! Loading up on debt is the rational strategy in an inflationary environment!
The great bulk of Americans’ wealth lies in their houses and other real property. Removing more of the citizens’ net worth would be accomplished not by cost- push inflation aimed at non- existent savers but by settling the robo- signing debacle and ramping up foreclosures.
Even that won’t work! The primary reason for fewer foreclosures is the loss- recognition that would accompany any foreclosure increase. This in turn would render the banks who hold the trillion$ in bad loans … insolvent. Homeowners are broke and so are the banks that lent to them.
Underwater homeowners, the unemployed, the destitute or those on government life support cannot push prices. This is the obvious flaw in any inflation argument. High prices caused by supply- demand imbalances (such as Peak Oil) are not — by themselves — inflationary.
The governments and banking establishments are impotent. Bernanke is a dude w/ a witch doctor mask who jumps around and waves his arms until his pants fall down. Bernanke cannot create value only the markers for value that does not exist in the real world. If there was value in the real world Bernanke would not have to expand the Fed’s balance sheet!
Meanwhile, another argument concerning inflation regards the ‘persistence of money’ that is, once currency is created it doesn’t die even as the output it represents vanishes. There is an increasing imbalance as there is more money relative to goods and services leading mechanistically to more inflation.
Money is indeed persistent (which is what Modern Monetary Theory or ‘MMT’ is all about). Persistent money finds itself on different places on various balance sheets over time. The question unanswered is what happens when the balance sheets themselves are destroyed?
Depending where a bookkeeping entry (YOUR cash) is to be found on a particular balance sheet, its destruction will also destroy YOUR cash. It will be marked as an asset against some liability and the loan explicit in YOUR cash’s creation will be ‘paid off’. This destruction OF balance sheets rather than BY them happens all the time, particularly in deflationary periods. It’s called ‘bankruptcy’.
Keep in mind, one of the things that the USA Waste- based economy does best is destroy capital. It (de)values capital to near zero and burns it up with a big shit- eating grin on its face. If your asset is assigned as ‘capital’ onto some business entity’s balance sheet you can kiss your cash goodbye.
Meanwhile, there is another tricky supposition that manifests itself as inflation which involves the amount or quantity of credit embedded in the price of a good. This will be in Part Two.