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shafique · Nov 04, 2010

Over in the US, money is being created and thrown into the economy in a gamble that it can stave off the inevitable consequences of living in a make-believe economic world that is based on 'confidence' rather than reality.
http://www.bbc.co.uk/news/business-11687323

It's a pretty big gamble - and no one is sure what the outcome will be.

One of the consequences of throwing this much money into the economy is that it depresses the currency - a crime that some in US (perhaps, many in that US) accuse China of.

But is this really going to help, or is it just another attempt to stave off the inevitable?

A few people have predicted the death of the dollar - eg this from August this year:

The dollar has already entered its terminal phase. The word "doom" is written across it for anyone with the eyes to see. Sad to say, there is no way to reverse its downward slide. With more than $13 trillion in public debt and some $100 trillion in unfunded mandates, our federal government has assumed far more obligations than it can ever make good on. Worse still, these figures are growing larger every year.

To put it bluntly, our federal government is flat-out bankrupt. Currency disintegration is always the unavoidable result of government bankruptcy. The dollar -- which has been weakening for many decades -- will at some point go into a sudden death spin.

The only question is when. It may happen six months from now or six years from now. The timeframe is impossible to predict, but we can now be certain that happen it will. No one -- not even the federal government -- can escape the numbers. And the numbers are hideous. One hundred trillion-plus is a killer.

http://www.americanthinker.com/2010/08/ ... ollar.html
(Also read the comments to the article - interesting views there)

Will the dollar go the way of property prices in Dubai? :shock:

Cheers,
Shafique

event horizon · Nov 04, 2010

Wuh-Woh.

Is our resident loon quoting from the 'Islamopbobic' site, 'American Thinker'?

LoL.

Pigs do fly.

To be fair, a lot of libertarians and conservatives are gloomy these days and blame the US economy almost entirely on the current administration, even though he's not responsible for monetary policy.

Though the article did correctly say that the dollar (and trade deficit/national debt) has been going on for decades.

From what I remember, the UK and EU don't look any better. We'll see how they manage to come out and I hear China is in for a rude awakening in the next few generations once their work force greys.

shafique · Nov 04, 2010

Hey, when people speak sense, they speak sense.

The UK is bad, Germany is the best of the sick Europeans - but their problems are dwarfed by the US fundamentals.

My question (and I've been asking this for at least 7 years) to those who think that the dollar is 'too big to fail' etc - is 'why'? Fundamentals always apply in the end.

I'm reminded of the mass delusion before the Dubai property bubble burst - the fundamentals all pointed to it being a bubble and unsustainable, and yet there was mass delusion and denial.

What the 2008 financial crisis showed is that the whole current captialistic monetary system relies on 'confidence' - a belief that money that doesn't actually exist has value. The US has just conjured up a few trillion dollars that didn't exist to replace money that disappeared.

However, I do agree that China may indeed face a rude awakening when it has to deal with the fact that the dollars it hasn't been able to divest plummets in value. One thing that China has no shortage of is people who will be willing to work in future and well educated to boot. Demographics of a greying population is not the issue there - the challenge is more likely going to be getting the wealth to the rural areas and people currently poor. It is in China's interest to turn to domestic supply rather than continuing to rely on the crazee situation where they lend to Americans to buy Chinese goods in Dollars which are intrinsically worthless and just rely on 'confidence' that the US debt is going to somehow defy the laws of nature.

The fact that the deficit has balooned and has been going on for decades should actually be a cause for concern - the bigger the bubble the harder the fall. But then again - the optimists can hope for a 'soft landing' etc- but these views also beg the question 'why'?

What can't continue to go up, doesn't.

Cheers,
Shafique

shafique · Nov 04, 2010

This contribution to the Economist website summarises my views and arguments very nicely (its all just common economic sense - and Stiglitz and other economists are pretty much stating the same). The comment is actually better than some articles on The Economist, IMO!:

D. Sherman wrote: Nov 3rd 2010 7:40 GMT

I'm aware that there are lots of learned theoretical arguments about why this is a good and necessary thing to do. There were also lots of learned theoretical arguments a few years ago about why it would never be necessary. Reality has a nasty way of biting theory in the butt.

It doesn't take a PhD in economics to see that creating money out of nothing clearly decreases the value of money that already exist. Reduced to its essence, QE effectively confiscates the savings of prudent people in order to reward debtors. Given that most Americans (individuals and institutions) are debtors, this is good short-term politics.

In the long run, it's another long leap in the global race to the bottom. Recent history shows that most low-interest money will be used for non-productive speculative investments (oil and rare earths, anyone?) rather than investments in plants and equipment. Once the money is out there, like a flood from a breached levee, there's no regulating where it will go. Unlike water, however, money flows uphill, so most of the new cheap money will go to very rich, very clever, people who know how to make more money (for themselves) out of it.

If this is the long-term US policy, it can only lead to a third-world status for the United States. We are often told that the US is special, and is largely immune to most global financial storms, because of the US dollar's position as the world's reserve currency. Well, who in their right might will hold US dollars, when the US will simply create more of them whenever it feels like it? It would be like buying gold for $1300/oz while you know that your neighbor has a machine that can make gold out of dirt for $13/oz whenever he feels like it. Value only exists when there's both a demand, and a limited supply of something.

I'm ed that the US has fallen into the same trap that most every failing empire has succumbed to, but that seems to be the clear and deliberate choice. I knew that austerity (raise taxes and cut spending) would never be an option, but I had hoped that the government would still at least keep the US dollar as an honest unit of value. Now that they've made it clear that "dollar" and "honest" will never again be used in the same sentence, I don't see how a hyperinflationary collapse can be averted. It's like jumping off a cliff, but hoping you don't hit the bottom.

We can't even look at Japan's permanent stagnation as a "less worse" case scenario, since Japan at least owes most of its debt to its own citizens. The US is dependent on its good credit with foreigners, and there's nothing that anyone could have done to ruin that good credit faster than today's Fed decision.

Lastly, how is "driving the dollar down" good for any ordinary hard-working (if they still have a job) American? Sure there may be theoretical macroeconomic reasons to do it, and perhaps a tenuous case can be made (at least to the more gullible) to the effect that if we drive the dollar down far enough, Americans rather than Chinese will be making sneakers and iPhones in 10 years (not that we could afford to buy them once we made them), but for the foreseeable future (e.g. the next election cycle) all that driving the dollar down will do for most people is make everything they buy a lot more expensive, while not at all increasing the amount of money they have to buy it with.

If the US is to be a nation of human beings, rather than a nation of data, charts, and ivy-league PhD economics dissertations, we must pursue economic policies that are good for ordinary people. Only in some bizarre hell could policies designed to raise the prices of everything that people need be considered "good".

http://www.economist.com/blogs/freeexch ... y_policy_0

Cheers,
Shafique

blueshift · Nov 04, 2010

I wouldn't write off the dollar just yet as American pesimism has been in fashion since the 1960's.

I think there was a time, in the 1950's where there was great optimism in the USA, but after Sputnik, and the flooding of America with cheap foreign made goods and the military failure in vietnam, pesimism has been highly fashionable.

Excuse me for quoting a fiction source, but I think Gordon Gecko seized on American Pesimism nicely in 1987 with his 'Greed is Good' speach.

'... America, America has become a second-rate power. Its trade deficit and its fiscal deficit are at nightmare proportions. Now, in the days of the free market when our country was a top industrial power, there was accountability to the stockholder. The Carnegies, the Mellons, the men that built this great industrial empire, made sure of it because it was their money at stake. Today, management has no stake in the company! All together, these men sitting up here own less than three percent of the company. And where does Mr. Cromwell put his million-dollar salary? Not in Teldar stock; he owns less than one percent. You own the company. That's right, you, the stockholder. And you are all being royally screwed over by these, these bureaucrats, with their luncheons, their hunting and fishing trips, their corporate jets and golden parachutes.
Cromwell: This is an outrage! You're out of line Gekko!
Gordon Gekko: Teldar Paper, Mr. Cromwell, Teldar Paper has 33 different vice presidents each earning over 200 thousand dollars a year. Now, I have spent the last two months analyzing what all these guys do, and I still can't figure it out. One thing I do know is that our paper company lost 110 million dollars last year, and I'll bet that half of that was spent in all the paperwork going back and forth between all these vice presidents. The new law of evolution in corporate America seems to be survival of the unfittest. Well, in my book you either do it right or you get eliminated. In the last seven deals that I've been involved with, there were 2.5 million stockholders who have made a pretax profit of 12 billion dollars. Thank you. I am not a destroyer of companies. I am a liberator of them! The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA.malfunctioning corporation called the USA'

shafique · Nov 04, 2010

Coincientally, I saw Wall Street 2 just the other day - not as good as the first film, but still watchable.

The rich do get richer in the film and in real life. However, I've still yet to read how 'greed' can mitigate the effects of printing trillions of dollars of money (i.e. manufacturing dollars out of thin air) and can mitigate the debt that needs to be repaid - without the dollar declining in value.

But hey, as long as people 'believe' the dollar should have value - then it's all ok...

Cheers,
Shafique

blueshift · Nov 04, 2010

Well, the point is not that greed is good, but that pessimism has been in fashion before and it connects with peoples emotions in a way that avoids the need for proof.

Printing money in itself isn't necessarily good or bad and doesn't change the fundamental wealth of a nation which includes physical assets and human capital.

I also disagree with the BBC article's suggestion that Japan has been in depression because of it's low interest rate policy. There are fundamentals which strangle innovation namely that the corporations of Japan own each other - in a Japanese corporation, 90% of a corporation is owned by other corporations. The boards are like a modern day aristocracy who don't answer to investors, but only to each other.

shafique · Nov 04, 2010

I think it is a bit more than some people talking down the dollar or the US economy!

Isn't the issue that the 'fundamental' wealth of the USA is currently a massive deficit with no immediate prospect of a surplus to reduce the deficit (i.e. the amount of debt is increasing, and won't decrease until it spends less than it earns)?

As for printing money - it doesn't affect the wealth of the nation in absolute terms in 'reality' but the capitalist system we're in relies on people believing that somehow doubling the amount of dollars overnight won't result in the purchasing power of the dollar halving (i.e. the wealth is the same, but just spread over twice as many dollar bills).

And the issue is that debts are denominated in dollars and therefore printing more dollars out of nothing - reduces the value of every dollar held by savers and creditors. Just look at what happened in Zimbabwe recently and tell me that printing money isn't necessarily bad.

But hey - we're just all spectators in this game - so let's see what unfolds and which Economists get it mostly right.

Cheers,
Shafique

Tom Jones · Nov 05, 2010

Yes, you're right, Shaf!! It's a big gamble by the Fed.

Bernkae is experimenting with something that has never been done before, in an economic environment such as the present one. I think QE has been done only once during the severely exceptional conditions of the recent financial crisis. I guess that’s why they call this one QE2

It is indeed a very dangerous move. It might wake up the sleeping inflation giant who may start running all over the place,.. out of control.

I think the Fed is too preoccupied with deflation, fearing a repeat of what happened in Japan in the 90’s, but they forgot that inflation is already starting to creep up. Metal and other commodity prices, including oil, have been rising recently.

As to the death of the $, I tend to agree with Blueshift. If the $ goes down the tube, then the American economy will sink and drown, basically by means of a massive wave of runaway inflation.. Meaning, also, the GCC economies will almost instantaneously collapse, followed by the economies of China, Japan, S. Korea, and later the EU, and eventually the rest of the world.

It will be like a domino effect, resulting in a TOTAL global meltdown. If that happens, it will surely spur anarchy and wars throughout the world. It may even mean the end of today’s civilization, as we know it. The end of civilization will be very destructive to all mankind, including the powerful elite, who, some claim, want this meltdown to happen in order, for them, to establish a New World Order!!

But I believe that there are now enough safeguards in place, already agreed upon between the world biggest economies, not to let something like this to happen!!!

shafique · Nov 05, 2010

TJ - I agree completely with your analysis - both about the gamble that is QE2 and indeed what the consequences of a collapse in the dollar.

The previous empire to go from strong economic power to debtor nation was the British Empire - WWII bankrupted the UK and it had to be bailed out by the USA (and got a debt which was only repaid in 2007 and had to hand over state secrets etc) - but 'civilization' did not collapse. The pound as a reserve currency did - but the UK had to adjust from ruling 2/3's of the world population to being a small island nation with a proud history.

The handing of the baton from the US to China and India will similarly not lead to a collapse in civilisation - but the size of the bubble and the inter-connections are so extensive that it will certainly feel like a collapse in civilisation. It will be like Iceland and Ireland (and indeed Greece) - but maybe 10 to 100 times worse (on the basis that the fundamentals are worse in the US).

I do believe that it will lead to wars - safeguards tend to go out of the window in the face of crises. However, I hope and pray that I'm wrong and that the 'safeguards' hold. Bear in mind, it was fear of a total meltdown that spurred QE - and that didn't work. If QE2 doesn't work - there's not much more they can do by printing more money. And by definition if QE2 doesn't work - aren't we at the point where the dollar finds it's economic intrinsic value (i.e. collapses)?

But as I said, we're all speculating (even Bernake) - and are just observers.

Cheers,
Shafique

Tom Jones · Nov 05, 2010

Yes.. I think the news of the $ dying soon is overly exaggerated.

Despite its massive debt and other problems, the US has enormous assets and resources (including gold reserves) to pull itself back from any crisis. Let alone, the amazing human resources (innovations, knowledge and superior talent in all fields) which can only be found in America!!!

shafique · Nov 05, 2010

Note, my point is that we're witnessing the death of the dollar - the patient is being given mouth-to-mouth, adrenaline and being jump started. But for it to become healthy again, it has to be backed up by real assets of value.

I've yet to see a credible path that takes the US from a debtor nation where the debt increases each day to a point where it is producing more than it is spending and therefore has money to reduce the debt.

I've read/heard a lot of 'beliefs' that the US 'should' recover. I just ask the questions 'why' and 'how'. The why tends to be answered - we'll start generating wealth again, because the Americans are a nation of fighters and traders etc. Great words - but I imagine Romans, Persians, Brits, Greeks, Egyptians, Aztecs and heck - even Dubai property speculators - having the same 'faith' before their bubbles burst and reality encroached on the dreams of eternal growth and prosperity. (I exaggerate for effect, of course)

I used to concede (a few years ago) that the US at least had the edge in high tech, entertainment and the motor industry - but also great agriculture business and potential. Then China came out with Hero, Crouching Tiger.. and I thought - well, they've caught up in terms of creativity and film production - technology, the Chinese and Taiwanese are fast going into primary research (and indeed I expect them to have a faster development path than Japan - who went from a joke copy-cat manufacturing state to the second largest economy) etc.

It certainly has the strongest military - and I'd argue this is a major factor in the slowness of the death. But I can't see it maintaining it's superiority if there are no wars - China will just naturally become the most powerful very soon.

I'm struggling to understand what human resources are unique to America - it can't be the entrepreneurs or scientists or techies in Silicon valley or in academia - many of them are Indian!

Historically, the talent goes where the money is. The number of ambitious parents who are having their kids learn Mandarin is a sign of things to come (although there was a fad of learning Japanese in the 80s and 90s - but the difference is that we don't expect the Chinese bubble to burst).

Indeed, which of the 'positives' don't apply to China? In terms of talent growth - why shouldn't they develop their primary research and manufacturing and leap-frog Europe and America like Japan did? They've got more resources, more focus and indeed have the will. They have a space programme, working on a replacement GPS system and their military is fast becoming a force to be reconned with.

Indeed, Forbes magazine says that the most powerful man in the world is the Chinese premier, and Obama second.

Anyway - perhaps I'm just a natural cynic. I was regularly criticised for not believing the Dubai dream explanations for why it wasn't a property bubble ('this time it's different' etc) - but was ultimately proved right there.

But I'm prepared to be agnostic on this one - show me something more than 'beliefs' and I'll happily revise my opinion.

Perhaps if the assets of the US could be used to pay off debts, then indeed there would be an argument that fundamentally the US and dollar could bounce back (but you'd still need to show where the revenue would come from - and who would buy).

Wiki estimates the total US debt to be around $13 trillion, and the total amount of Gold ever mined to be around $6 trillion (with the US having an estimated 8000 tonnes of Gold in reserves) - so the Gold reserve is probably around $2 trillion (just a guess).

Dillon · Nov 05, 2010

Tom Jones wrote:Let alone, the amazing human resources (innovations, knowledge and superior talent in all fields) which can only be found in America!!!

What? And on which planet is the America that you’re speaking of? Because it most certainly isn’t this one! :lol:

The only real benefit one could hope for by QE and ultimately further devaluing the dollar will be for the export trade and the gamble there is that the benefit of the additional exports will outweigh the detrimental effects of further inflation attributable directly to the QE.

Another hope is that the additional cash will find it’s way through the banks and into the private sector stimulating growth but if the banks continue to perform as they have done in recent Years, they will simply sit on the additional cash and hold it in reserve for future defaults that are still on the increase.

Shafique is right, you can’t print money you don’t have, it’s been tried before and failed on every occasion

Tom Jones · Nov 05, 2010

Dillon wrote:
Tom Jones wrote:Let alone, the amazing human resources (innovations, knowledge and superior talent in all fields) which can only be found in America!!!

What? And on which planet is the America that you’re speaking of? Because it most certainly isn’t this one!

Like or not, America currently leads the world in just about everthing, science, techology, medicine, space, weaponary, GDP, military might, reserach....etc. You just name it, and you'll find America is the top leader!!

I'm surprised you haven't noticed that!!!

shafique · Nov 05, 2010

^One word springs to mind. Hubris.

One phrase: 'pride comes before a fall' - or the more precise Biblical proverb :"Pride goeth before destruction, and a haughty spirit before a fall."

and one analogy: 'Dubai is not a bubble'
(Ok, couldn't resist another one 'Japanese cars - what a joke, Detroit will remain no1 in car manufacturing')

But seriously - Dillon said it far more eloquently than I did - printing money one doesn't have doesn't work. It's just a stealthy way of devaluing the currency (which is the same as increasing prices - i.e. inflation).

Cheers,
Shafique

Dillon · Nov 05, 2010

Tom Jones wrote:Like or not, America currently leads the world in just about everthing, science, techology, medicine, space, weaponary, GDP, military might, reserach....etc. You just name it, and you'll find America is the top leader!!

I'm surprised you haven't noticed that!!!

You missed Bull$hit from your list! :lol:

Misery Called Life · Nov 06, 2010

Tom Jones wrote:Like or not, America currently leads the world in just about everthing, science, techology, medicine, space, weaponary, GDP, military might, reserach....etc. You just name it, and you'll find America is the top leader!!

I'm surprised you haven't noticed that!!!

Hmm TJ time for a reality check?
Take a look around ur apt..and name me 10 no let's make that 5.... name 5 products manufactured in America.

Tom Jones · Nov 06, 2010

Misery Called Life wrote:
Tom Jones wrote:Like or not, America currently leads the world in just about everthing, science, techology, medicine, space, weaponary, GDP, military might, reserach....etc. You just name it, and you'll find America is the top leader!!

I'm surprised you haven't noticed that!!!

Hmm TJ time for a reality check?
Take a look around ur apt..and name me 10 no let's make that 5.... name 5 products manufactured in America.

You asked me to look around my home?

I did, and all I saw was furniture, curtains, a TV, a fridge, a stove, a coffee maker,… etc.

As you know, all the above could be classified as light manufacturing.

Sorry to say the following to you MCL, because I know you’re much smarter than that:

It’s pretty naïve to think that the greatness of a nation is only measured by the its light industry!!.

If that’s the case, then Taiwan would easily become the greatest nation on earth.

I’m not going to list all the things that make a nation great, because, I’m sure, you can find all that out on your own.

But, in brief, I’ll just mention one small measure that clearly reflects the greatness of America. America has probably produced more Noble Prize winners than the entire nations of the world put together!!!!

Dillon · Nov 06, 2010

Tom Jones wrote:
But, in brief, I’ll just mention one small measure that clearly reflects the greatness of America. America has probably produced more Noble Prize winners than the entire nations of the world put together!!!!

And the ‘Carlsberg, probably the best beer in the world’ ad probably works with the easily led as well, that is of course until they taste it! :lol:

Nobel prize winners, all categories, since 1901;

USA, 231
The rest of the World, 572
Source: nobelprize.org

TJ, your faith in your great Nation is truly admirable but as MCL has also stated ‘Hmm TJ time for a reality check?’

Misery Called Life · Nov 06, 2010

Tom Jones wrote:You asked me to look around my home?

I did, and all I saw was furniture, curtains, a TV, a fridge, a stove, a coffee maker,… etc.

As you know, all the above could be classified as light manufacturing.

Sorry to say the following to you MCL, because I know you’re much smarter than that:

It’s pretty naïve to think that the greatness of a nation is only measured by the its light industry!!.

If that’s the case, then Taiwan would easily become the greatest nation on earth.

I’m not going to list all the things that make a nation great, because, I’m sure, you can find all that out on your own.

But, in brief, I’ll just mention one small measure that clearly reflects the greatness of America. America has probably produced more Noble Prize winners than the entire nations of the world put together!!!!

Whoaa let's not get melodramatic.

My logic is quite simple actually, A value of currency needs to be backed against a specific asset. And I think the Fed is overreaching the US economy. All this financial mumbo jumbo is what Fed has been doing all along. At the end of the day this quantitative easing is a joke. Borrowers in the US are already borrowing at a bloody low rate. But no one's spending. The Fed is the problem who at times seems to operate more like a private company. I wonder why does the gov have to borrow money from the Fed when the gov can create it's own? Apparently this dates back to some law passed in 1913.

There was an interesting article in the Times with the heading Will the Federal Reserve Cause a Civil War? High in shock-value no doubt, but definitely an interesting read.
http://curiouscapitalist.blogs.time.com ... civil-war/

Anyways TJ, I hope ur right but only time will tell.

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