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Guest Post: Carry Trade 2 - Extremely Long Dollar Love
Submitted by JM
Revolutions happen when broken parts of existing structures reassemble themselves in novel ways. Today’s Japanese carry trade will become something completely new: currency jettison.
This coming Yen carry trade is going to fundamentally change Japan. Next time, Miho Maejima won’t be hungry for yield. She has no yen for it: the carry trade will be driven by exchange rate volatility hedging. She’ll handcuff the government to the bedpost and go for full-on dollarization. When she does, shorting yen is the best trick on the planet.
Dollarization to control currency volatility happens a lot. It is not even a radically new event in Japan, but it will go viral and mutate into a radically new species of carry trade. The utter abandonment of the yen to de-risk will end any return crash. And the Japanese semi-democracy (that designation applies to all nations, not just Japan) must allow it to happen. Aging pensioners are both creditors and voters: the only possible adjustment they can make to the coming sovereign crisis is by getting entirely out of yen.
Only if the aging samurai in charge let all that is parasitic in the financial system crumble will dollarization be averted. Either way, the Gordian debt-knot will find resolution. Creditors will take it hard.
Sort of. Spurned creditors get their pound of flesh. And this is why in the end the dollarization of Japan will not be a short-term affair. Not only will deposits be dollarized. Liabilities and claims will be dollarized too. Monetary policy itself will be reinitialized to dollars. The idiot-elite in charge will ultimately want to get some turf back, but the handcuffs won’t be coming off for a long time.
I don’t need to tell you that this has import far beyond Japanese shores. Japan won’t be the only country to dollarize, and to possibly abuse a term, the world dynamical system will be coupled with even greater synchronicity.
Japan won’t be the only country to dollarize. Get ready…the dollar love you are going to feast your eyes on will be the next Black Swan in and of itself.
I. Translating Dollarization into Other Idioms
Dollarization is nothing new under the sun: just an extreme from of exchange-rate pegging that strips a state of its monetary authority but leaves unchanged its fiscal authority. It’s like a gold standard only pragmatic. The underlying is based on multi-dimensional faith, not a pricey rock.
At its essence, dollarization is just another riddle of globalization. In one way it centralizes power; in another, it devolves it. To understand this, we need to fire up the way-back machine again.
The way-back machine takes us this time to the land of the scorpion-men and Pazuzu. Its substratum is infused with millennia-old social structures that do their thing independent of late-comer add-ons like government. Its society is intensely conservative and hesitant to discard anything from the hollowed past and as a result, black-swan resistant. Arabic provides a common language, psychology, and overtone shared with its neighbors. Political organization is centralized with a tendency for competing rulers to harness the power of society by controlling the religious, military, economic, and other forces that constitute the state.
The country is Lebanon. Despite its ancient rhythms it is intractably Francais with a long tradition of absent restrictions on cross-border finance. Lebanon is also a contemporary senseless tragedy: once the financial center of the Middle East, sophisticated, elegant, and clever—and utterly destroyed by civil war. Lebanon boasts women of truly luscious face and figure who take pains to be beautiful. Their allure is both pleasing to the eye and touching. Touching because the serious, tender care they take to be breathtaking is not reducible to mere fashion sense. The lipstick and fragrant eye-closing memory-conjuring feminine hair we take for granted is in Lebanon defiance, a statement of the constancy of human spirit amid suffocation. Such antique splendor and recent disaster is mother to the only person our generation can offer as Omar Khayyam’s kindred spirit.
II. Dollarization in Depth
Remember that before the civil war Lebanon was an international financial hub, dealing in petrodollars. Few if any restrictions were placed on capital movements. Its sophisticated banking system offered foreign currency accounts to residents and foreigners alike, which didn’t really take off until a large bank run in the late 1960s wiped out about 20% of total deposits.
Throughout the 1970s, dollars stayed around 20% of total deposits, even when civil war started, and households hoarded cash as basic financial architectures started to break down. This is where serious inflation and currency depreciation started as a result of government failure. By 1979 there was a secular shift out of Lebanese pounds and into dollars. At the time foreign currency was used as a store of value against inflation or exchange rate depreciation.
When Israel intervened in 1982, pretty radical swings in the exchange rate changed the motive for dollarization to volatility hedging. After the Israelis withdrew, the rush out of pounds began. The weakened central government did not inspire confidence in a stable future. This government also co-opted the country’s savings to finance its deficits through oh, let’s call it quantitative easing. Within two years, the dollarization ratio skyrocketed from around 35% to 70% of all deposits.
A credible government was established in 1992ish and the situation normalized 1996ish. This historical prelude is embedded in the USD/LBP exchange rate above.
Want a history lesson, look at the Exchange Rate. Lebanese contemporary history quantified, 1964-2009
Normalization is not just shown in the exchange rate. The nerve cord of even rudimentary market economies is the yield curve. I conjecture that since 36 months is Lebanon’s version of the long bond, the 3 month is a note equivalent to 2yr US govvies. All the way through 2009, yields are in secular decline. This is very good news flow for a country coming out of a 15 year civil war. There is not a well-functioning secondary market for T-bills, and the rate in the primary market acts as the key reference rate for the nominal economy. However, the thorough-going dollarization of the economy ensures that market pressures are absorbed in part by other means.
Sick or healthy? Check Treasury Yields: 1977 to 2009
However, the stability has made little dent in Lebanese dollarization. In fact, dollarization is largely unchanged because creditors contract in dollars now, not Lebanese pounds. The term nature of debt combined with creditor aversion to volatility creates strong reinforcement of dollarization. Deposit dollarization is more sensitive to inflation at times, but the relationship (particularly from 1997 to 2002) demonstrates that dollarization is entrenched in spite of falling inflation rates. Only annual inflation rate data is available for Lebanon, and the monthly data points are interpolated.
From 1994 to 2009 the ratio of liabilities and claims denominated in foreign currencies (mostly dollars) ranged from 90 to 82 percent. Dollarized private sector deposits ranged from 50 to 80 percent. The data suggests that these deposits are sensitive to changes in inflation up to a threshold. These ratios are key adjustment mechanisms within the Lebanese economy.
Remember what I said about creditors getting their pound of flesh? Well, anybody who lends capital just before massive currency devaluation gets their ass handed to them, period. As a result, form then on they denominate credits in another currency. This is profoundly destabilizing as it could trigger waves of bankruptcy, as wages and revenue would probably yen. It is ironic how “debt jubilee” plans make no difference at all in the end.
Sick or healthy? Check Treasury Yields: 1977 to 2009
Looking deeper, there is a lot of sophisticated behavior going on. The data shows that Lebanese hold somewhere around 50-80% of their liquid capital and Lebanese creditors denominate nearly all of their capital in dollars as risk minimal investments that generate real return unconnected to domestic inflation.
That is not to say they aren’t sensitive to other macroeconomic factors, in particular monetary shocks emanating from the United States or global benchmark interest rates. A bank in Lebanon stated that foreign currency deposit rates are linked to LIBOR less a margin. Lebanese pound deposits are linked to CD rates and ultimately T-bills.
With the other 20-50% of liquid capital, Lebanese seek nominal returns generated from speculative positioning with respect to domestic inflation, and keep a portion of capital (checking deposits) in liquid domestic currency even if it sometimes delivers a negative return.
Humans are cunning and supremely adaptive to changes in environment. The environment of Lebanon required return to be measured in real, not nominal terms.
III. Generalized Empiricism
It is true that Japan has experienced no 15 year civil war, but it stoically endured 15 years of policy hell that has destroyed credit ratings at every level, immiserized nearly everyone and forced destabilizing carry trades on the world. Japanese society is also strongly predisposed toward consensus-building and adherence to hierarchy. In this way it has similarities to Middle Eastern society. And just as Lebanon is Francophile, Japanese society is intractably Americanized: uniquely where the tea ceremony and the Styrofoam cup (page 11) coexist in harmony.
Just as the Lebanese adapted to their environment, so will the Japanese, and it will mean they will look for liquid stores of wealth and a stable medium of exchange. Since dollar assets provide exchange rate volatility hedging and real return, they won’t look back. Creditors because of their economic necessity, and debtors—with what remaining political influence they have—will dollarize the Japanese economy.
- There is a close link between currency depreciation and dollarization. Once bitten, twice shy.
- Under persistent government policy abuse, human beings become clever, and they adapt by ignoring nominal returns and focusing on real return. Dollarization is a consequence of this.
- Human beings develop sophisticated behavior to both maximize and hedge returns.
- Creditors initialize dollarization and make it nearly irreversible, because they anchor their claims independent of government intrusion, and well in advance of any potential inflation increases.
- Currencies may plummet, but if the state doesn’t die, they won’t die. They become ghosts of their former selves, relegated to simple unit of account and marginalized transactions.
- Many countries will dollarize, with tacit sovereign approval or not.
- The world interest rates and asset prices will be even more tightly correlated going forward
- The human race is truly marvelous. Only humans can adapt to the arctic, the Sahara, the Himalayas, the jungle. Only humans can reconstruct complexity on the smoldering ruins of war, pestilence, and famine. We rival rats and cockroaches in the survival game because our collective strategy is to re-shape the world to our preferences.
IV. Post-Endgame
For the last 5,000 years, the central problem of the planet has been civilization. This will continue in the 21st century through globalization. The core of the problem is that governance models are in flux and weakening. Power is devolving down from states toward the individual, even as the state struggles for retrenchment. There is a decisive balance needed between state order and personal freedom. This continuous tension is the defining characteristic of social existence. Lebanon’s short-lived Cedar Revolution was just another manifestation.
The tension is dangerous in that risks and threats are less domesticated. They are ambiguous in kind and imprecise in degree. The associated large scale and persistent economic volatility implies widespread social contract breakdown. Dollarization is an expression of this. People decentralize away from localized nation-state influence, but the increased interconnection of all people and places dramatically reduces the variance of possible behaviors at the global scale. The world looks more like extremistan by the day.
There will be attempts and pretexts to justify state retrenchment, to constrict territorial state’s coils around man’s desire for life without legalized extortion. Trading this or any worldview for that matter will be difficult.
And it is true that government encroachment on living things is not nearly as burdensome as it once was. The course of state diminishment can even continue on unimpeded. It may not be able to get much turf back.
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Excellent post, if the dense and ambiguous prose could still use a little work. It raises a tangential corollary to the subject of a world currency. We may get our world currency, but rather than a new currency, e.g. the SDR's or Amero, it may instead be the Almighty Dollar.
A secret meeting is going on; http://www.news.com.au/business/secret-summit-of-top-bankers/story-e6frf...
I'd make an argument that the SDR would take this role, but it'd take a major death blow in confidence against the USD for the SDR to make the kind of traction it would need to overtake the USD in a scenario such as the one described above.
Of course, we seem to be breedling black swans lately here in the US, so it'll be intesesting to see how everything plays out.
To make a claim that Japan is comparable to Lebanon is just plain silly. Along the lines of claiming substantial similarity between China and Chile based on the fact that in English the first three letters are the same, the letter count is five and the final letter is a vowel. To continue, both border the Pacific Ocean and from either country one can see the Moon and the Sun.
As to the suggestion that elderly Japanese will decide to jettison a lifetime of saving Yen for the creation of Bubbles Bernanke, this is just absurd. Please provide some justification beyond the behavior of Lebanese people living in a state of civil war. Surely not because they are chasing yield. Elderly Americans are driven out of their cash savings because of the lack of yield on their USD savings.
Why not presume that the Japanese will be driven to Swiss Franc or Euro? Not that this is going to happen either.
I do not claim that Japan is like Lebanon, although there are some points of commonality. This is your logical flaw.
I do claim that the Japanese will use methods that many other countries in various contexts have used to avoid the impact of ridiculous government policy.
Lebanon is used for illustrative purposes because their central bank keeps clean data on dollarization.
The critical logical flaw with your argument is that you start by looking backwards.
I have never been in Lebanon, so I will limit my claims about Lebanon to a basic understanding of human nature and the ability to find it on a map. On the otherhand, I have spent time in Japan; more than enough time to know that Japanese savers are not going to flee to the USD, despite whatever dreams Bubbles Bernanke has.
Lebanon is in no way illustrative. Presuming you live in the US, do you make any purchases that are substantially exports of Lebanon? How about Japan?
Japan is a highly productive (export sector) industrial, western democracy with pockets of massive domestic inefficiency (agriculture, government). It is a highly cohesive society that regards outsiders with (polite) suspicion.
There are many options available to savers who are suspicious of government activity. People livng with very predatory governments (whether subjects of Cuba or slaves on US plantations in the 1800s) simply stop being productive. People living with a central bank that is debasing their currency move their assets to find safety (something not delivered by moving assets into another debasing currency). Perhaps the Japanese will decide to purchase property in Australia, Argentina or Switzerland. (Not that I'm predicting that, just that it is a far more logical than your suggestion.)
Intelligent people are able to determine where the US is in the empire lifecycle. While the US was on the ascent, fleeing to USD in times of crisis (ala Lebanon) made sense. While the US is a declining empire, it does not make sense. If you wish to focus on looking backwards, you would do better to consider the behavior of international investors towards Britain in the early 20th century.
Japan will not dollarize. If anything, recent political moves show Japan moving away from the USD.
There is only history (path dependence), expectations (ergodicity), or a mixture of them (emergence). If you can't see from the firsts sentence that this article isn't just backfitting, I'm not going to waste time arguing.
Whether you wish to argue in support of your position is your decision.
Do keep in mind that you give reasons for Japanese savers to abandon the Yen, but you do not give reasons for them to take up the USD. Excepting that you cite an historical example that is not comparable.
I don't need a rationale when I observe that it is already being done. Click the link from the article.
You are correct in that you do not need a rationale.
However, in the interest of being friendly, I'll point out that parts of Japan with perfectly nice beaches have a three week beach season because that's the way it is. Also Americans speculate in other currencies, too. However, put on a short Yen / long USD trade without a rationale if that floats your boat.
Nihon'jin desu ka?
Sumimasen. Nihon'go ga joozu ja arimasen, demo hanashite mitai desu yo.
Sorry, I didn't realize I was debating with Timmy Geithner.
Welcome to fight club dick assman-san.
You should tap out now.
Tap, tap...
Go long the dollar, no sweat off my back.
How exactly are you suggesting that this would happen?. The huge difference between Lebanon and Japan is rather obvious. Lebanon is basically a dependant nation,it has virtually no trade surplus to speak off. In fact most of countries that resort to dollarization basically suffer from a huge account deficit. The same problem happened in Iraq during the 90's when the goverment was printing papers and people resorted to the dollar exchange rate as the mark for their local currency would be. Just like the Weinmar republic or any other current history exaple. But how is that to happen to Japan with their huge trade surplus?could you elaborate further?
Interesting stuff. While many people inside the US look at the dollar as terribly flawed, many outside the US look to it as safe haven. Not sure the USD will become the world currency over the long term but in the short to medium term, a rush to the dollar is very plausible. Go long USDJPY.
This will simply make things that much more unpleasant when the USD goes poof. Other people will be very mad at us. And all US citizens will be mad at "someone."
slightly off topic...but checkout the news out GS in NYTimes.
http://www.nytimes.com/2010/02/07/business/07goldman.html?hp
The associated large scale and persistent economic volatility implies widespread social contract breakdown. Dollarization is an expression of this. People decentralize away from localized nation-state influence, but the increased interconnection of all people and places dramatically reduces the variance of possible behaviors at the global scale. The world looks more like extremistan by the day.
Yes, they call us "goldbugs". We decentralize into a 6,000 year-old, globally recognized world currency. The increased interconnection you speak of yearns for a globally-recognized money / medium of exchange / store of value; humans almost instinctively know we already have one. It is one that is much less easily corrupted by man than any other. Ponder for a second the relative wisdom of people fleeing into an end-of-life fiat money, into debt instruments denominated in one, or into the wisdom of history itself. Why do we need to try to outsmart ourselves yet again?
Free gold to once again be the ultimate extinguisher of debt; welcome to extremistan.
We aren't so opposite on this issue as you may think.
Any resumption of the gold standard will be a "bastard" standard and will come through the dollar... a Bretton Woods II.
What you need is a catalyst to get G-7 / G-20 / G-whatever to formalize the shift.
This is probably further in the future that you expect.
The final, seemingly inevitable step in the gradual degradation of the world monetary system will be a "World currency". Once this current crises comes to a head, the ONLY real politically palatable "solution" will be for the debtor nations to bind together to create a world bank, a world currency, and a some sort of world governance. They will have no choice... In the same way that the fed was created as a result of pressures built up by state banks, in the same way that the gold exchange standard was established following runs on the pound, in the same way bretton woods fell apart leading to our current system of fiat currencies... so a world currency will emerge. There seems no other outlet. And then: the final apocalypse and collapse of modern civilization - hyperinflation of THAT currency... might be 20 years off, might be 40 years off, but it is coming. What emerges out of the ruins of that system is anyone's guess, but the world will look very different than it does now.
A pretty simple, yet entirely accurate, summation of man's predisposition towards all medium of exchange. Fundamentally, faith remains the overriding factor above all others. Faith in government creates faith in fiat currencies, while dismissing the intrinsic value of gold (see 1995 to 2000). Lack of faith in government creates faith in gold, while recognizing the fraudulent nature of all fiat currencies (see 2005 to present).
The perspective that we all have in common (yet fail to immediately recognize) is the inherent flaws of human nature; and therefore, the inherent flaws of government and it's man-made means of exchange (fiat currency). Gold is more than a lack of faith in government. At it's core, gold represents a lack of faith in man himself; specifically, his constant desire to defraud, manipulate, and extort from the very same people of whom he is charged with serving and protecting.
Anybody....please way on this.
If gold is the ultimate balancing platform of all fiat currencies, then what happens when the insiders and the privileged, accumulate most of it?
Would it not lead to slavery? Or reduced to the going rate of human labor as a medium of exchange?
Imagine a poker game with 1000 players playing for all the gold in the world. Would it not end with few privileged winners (helped by policy makers) if the game keeps going on?
How would a working family or poor country defend against, other than having its own currency and disregard Gold?
BTW: Long on gold and SA agri-land, in the absence of a better protection.
Yes, anyone without a rifle is a slave. If you are personally incapable of preserving your own freedom of travel and trade you are not a citizen.
The Federal Reserve Note is a zombie currency - backed by the US military. We need a system of competing currencies and outlaw the FRN; executing political and financial alchemists as a deterrent.
I can't argue with your premise. I would possibly add, however, that after a long enough period of oppression, those in power would need to be warry of an uprising of the enslaved. They had better either (1) share just enough to squelch the animosity, or (2) maintain one helluva military.
To put a fine point on it, slaves and poor people's desires have never mattered and they never will. I'm sorry, but its true.
To escape slavery and poverty, one must align at least a portion of assets with those higher on the food chain. These assets are ones that offer the most credible promises of protection and return however small.
Oh, and you need luck.
jm, I respectfully disagree with you concerning the future of the dollar and the comparison of Japan to the country just north of Israel - but I will not be surprised if the murderous charade continues. Very thought provoking piece. +1
JM,
Granted. However, as the percentage of population in that category increases revolution chances increase exponentially.
>To put a fine point on it, slaves and poor people's desires have never mattered and they never will. I'm sorry, but its true.<
Be sure to tell Lenin.
While the Soviet Union screwed the little guy (and starved many of them), it was also the end of the line for the Czars.
There are Czar equivalents in many countries. That they will be displaced is simply a matter of history repeating.
Lenin raped the poor bastards worse than the czar did. The desires of slaves and the poor never matter. I'm sorry, but it's true.
I agree. Despite its problems, the dollar is still king of the hill.
Of course, don't tell this to the "Dollar will be worth jack shit in a month and a half crowd."
"The sky is falling! Gold bitchez!"
The very notion that the world looks at our currency for world trade and stability is what makes it worth more than most currencies. And this, is what the goldbugs can never understand.
As our currency appreciates relative to other currencies, they'll understand that they used the weakest dollars that they possibly could to buy gold at its peak.
They could have listened to me, and they can listen to me now. Instead, they'd rather hide out anonymously and cry for the losses in their portfolios, hoping gold rises so they can scream "gold bitchez" from the rooftops again.
As our currency appreciates relative to other currencies, they'll understand that they used the weakest dollars that they possibly could to buy gold at its peak.
I kept this one, MB. You're gonna see it again.
Tell me please, oh wise dollarbug, how the U.S. will resolve its fiscal situation, and how that will translate into a ever-strengthening USD and the end of the gold bull. I keep asking, and no one can tell me.
Edit: Only last year, the Obama budget predicted a $1.1 Trillion deficit for 2010
http://www.washingtonpost.com/wp-dyn/content/graphic/2009/03/21/GR200903...
and now it is $1.6 Trillion?
You can keep my quotes and stalk me all you'd like. You wouldn't be the first person to do so.
I'll explain it like this... if a dollar is printed, but not circulated, does it cause inflation?
Further, deficits have been a problem since the Reagan years, and gold went down in value for most of the time until 2000. If deficits were the overwhelming issue driving gold, why did it decline for 20 years? The dollar's strength (which determines the price of gold) is not determined by deficits alone.
Hey, maybe you should post my quotes from when gold was above 1200 too.
Funny chit. Here is an idiots take so no one assume that I think I know anything.
Is there a chance that the dispute is about the value of the dollar when the scenario JM describes has more to do with the demand of the dollar? It's not like high demand hasn't impacted "true" value before.
After all "real" value is in the market on any given day.
"deficits have been a problem since the Reagan years"
Yes, absolutely.
"We're not broke yet, we still have a credit card!"
I have some sympathy for MB's view on the dollar for one reason. The past 2 years have seen possibly the biggest ever attempt at debasing a currency through the FED printing and attempts to monetize the US's debts yet, with a ZIRP, the DXY is higher than it was in 2008.
Can anyone elaborate on that ?
You and I have been down the long-term view of gold before, SWR, but what is your intermittent view of gold (the next 2 to 5 years)? I agree with your view that the U.S. fiscal policy is becoming the death knell for the dollar, but often times markets don't react as quickly as they possibly should (see- Raghuram Rajan). Thanks hombre.
I wish I could post charts.
The divergence of U.S. sovereign revenues / expenditures is unprecedented and ongoing. My overarching concern is that we are navigating a ridge and might fall or be pushed off at any moment. This causes me to be long and strong in precious metals. Timing is not up to me and is not subject to my predictions. All I see is the certainty of the outcome and some more-than-insignificant possbility for it to come swiftly rather than slowly and predictably. I am not a trader and refuse to take trading positions with capital. I'm 52 and have foregone consumption and saved money my entire life and these fuckers are not going to steal it from me; whatever it takes, capiche? Bank of Gaea is the best friend anyone could ever want. Bank of Gaea has been the little guy's bank of choice for thousands of years.
The markets have great inertia, and, as we can clearly see here at ZH through various posters, paradigms break very slowly. For example, in the face of overt corruption by high-ranking members of both major parties, a near majority here continues to engage in the left-right paradigm. CD has an excellent series of posts elsewhere on what I'll call an epidemic of denial. The paradigm will break. I don't see any way out. MB, for example, continues to make B school statements like this:
if a dollar is printed, but not circulated, does it cause inflation?
Of course it does. If 1,000,000 tonnes of gold were created and was known to have been created, but was kept in central bank vaults, would the buying power (price) of gold fall? Of course it would. Most B schoolers, thoroughly indoctrinated in Keynesianism, would probably counter with: "Except that dollars are being destroyed, so the net number of dollars is constant, so the value of those dollars in constant and there is no net inflation". This, too, is simple to refute, but I will allow one of them to offer that argument before I refute it. Why spoil the fun?
Long-term, productivity has to rise and stay extremely high for us to produce enough surplus, and forego enough consumption, to pay our way out of this mess (IMO it's no longer possible, probably hasn't been since at least 2000). Productivity has risen, but not due to increasing production but rather by decreasing labor. Unusued labor costs are shifted to the public sector as an added long-term burden on tax revenues, which continue to fall. This is the reason for the deficit having tripled. The deficit is unsustainable without printing money, so we have come full circle, except that even having printed $1.6 Trillion to buy MBS and Treasuries tax revenues continue to fall, along with real employment. The downward spiral is self-reinforcing. MB's strong dollar will kill the banks, which would be OK with me, but it will not be allowed to happen. Just enough new "money" will continue to be printed to keep the banks zombified; no one (except at ZH) ever talks about off balance-sheet items anymore, no one (except at ZH) ever talks about mark-to-fantasy anymore, we've forgotten about it. And all that new money can count on being defended as harmless by legions of B Schoolers. And none of it will reach main street, all is for Wall Street. One statistic I'd like to see is not employment numbers but payrolls, with finance payrolls excluded, since as we all know finance doesn't make anything, they only skim.
We talk about governments starting a war to boost the economy and distract people from economic calamity; what the hell do you guys think the Iraq war was about? Oil, yes. China, yes. Stimulate the economy, HELL yes. See the first chart here: http://globaleconomicanalysis.blogspot.com/2009/08/military-vs-non-milit...
I guess that means we need an even bigger war. My children will not be participating.
Well, honestly I agree with most of your points. I think that you're very intelligent, and I like that you have well reasoned points aside from "gold bitchez"
Believe me, if the dollar devalues to the point that many of the people on this site are saying it will, it will bring war in and of itself. If we allow the dollar to sink into oblivion, the holders of dollars are going to be pissed. That's why I believe that the holders of dollars will do everything to keep the dollar high for as long as they can. That's why our dollar will beat the Euro, and the Yen, and etc, etc. Because people trade with the dollar and not really Euros and Yen as much.
Will there be another world war? You bet. It's been building for some time.
But frankly, there's war pretty much all the time. There was Iraq, Kosovo, Panama, etc, etc. and all the little small wars in between the major world wars.
I will agree that we are embarking on previously unknown paths, but at the same time, my "B school statements" hold true. We printed an enormous amount of dollars recently, but the dollars are not being circulated, and the inflation isn't occuring. The only inflation we saw was asset inflation, while the other parts of inflation are relatively miniscule. (I'm talking about since the crisis. Since 2000 is a different story.)
As those dollars are sucked back out of the system, we see the deflation of the worth of assets.
So it's not theory, it's fact, when considering the recent examples of monetary policy. The dollars aren't getting to the public. Banks are trading the prices of assets (equities, gold) to abnormal levels. Other than that, inflation is relatively flat. As the QE ends, so does the prices in assets. It's not a coincidence that the markets are tanking as they are. It's the end of QE being imminent.
As far as the military chart, I've already seen it. I'm a frequent reader of Mish.
I just want to say that I agree with you for the most part, but I think that different actions will be taken in the endgame. I agree with all of the reasons that you say for the destruction of the currency, but other currencies are even worse off. Dollars will be kept strong by all of the people that have an interest in holding dollars (which is everybody.)
When the dollar plummets, that's when you'll see the large civil unrest and war across the world.
Once again, I just want to reiterate my respect for your position and for the fact that you didn't sass at me and all that noise like some of the other members (with much weaker arguments) tend to do.
I really gotta get back to my B school homework, ironically enough. Still, I don't really learn economics in B school. I learn a bunch of b.s. that I don't even want to know. Most of my opinions about economics come from reading things like Mish, and pragcap, and zerohedge, along with countless library books. Then, I apply my own critical thinking to the situation.
Frankly, I'm disappointed at the amount of business I've been learning in business school as it is.
Anyway, have a nice day, and nice talking to you.
MB, I like your posts. You're unique, you're bold, and you're thought provoking. I agreed with your thoughts on a dollar rally and a pullback in PMs, and had the extended dialogue with SWR before the holidays to prove it. Having said that, there is much to learn here not only from differing perspectives (like SWR v. your own), but also in the application of tact in regards of how to continue anonymous dialogue such that it remains productive (and not unnecessarily combative).
If I were you (and several months back I was, just a bit older perhaps), try to start by listing the exact sentiments of which you agree upon. Maybe follow that with your most diametrically opposed thoughts, and then simply ask for a frank explanation of why they feel that way (if necessary). While your closings are always kind gestures of well-wishing, they unfortunately go unrecognized because of your staunch disagreement earlier in your post. (Remember, your opinions are in the minority here, so diplomacy is invaluable.)
As I mentioned before, I love your comments. It's always a joy to see someone come with an alternative perspective- it's how we test our own convictions, and learn from those with differing viewpoints. But to get the most out of ZH (and life in general), tact is essential.
You know, tact has always been one of my weakest points in life. I really appreciate both your insights, and the way that you modeled what you talked about by your own post.
Tact and relationships with those that I am uncomfortable are two areas of my life where I am very deficient, and I know this. I really would like to improve those areas of my life.
The style of communication that you bring about is called "indirect" communication, and I learned that it is the more effective way to disagree. Unfortunately, I seem to be hard wired for direct communication.
Still, taking your advice would probably be one of the best things I can do in my personal and professional life.
Thanks a million.
Johnny
Gold, bitchez.
:)
MB, SWR and others: thanks for the informative discussion. I'm a neophyte in the world of finance and markets, but a quick study. I'm an entrepreneur in the process of learning how to protect the (serious amount of) money that I have made, and ZH articles and discussions have been instrumental in making progress.
I think part of the difference in opinion between MB and SWR stems from time frame. It appears that MB is looking at a short time frame - i.e. months, and what he thinks will happen with the dollar. SWR is looking a bit further out, asking the question that I'm also delving into now, which is, what will happen when we cannot repay the U.S. debt?
MB - he asked this question specifically and you didn't respond to it. I would like to see your answer (not being caustic here - actually would like to hear what you have to say). It is clear that we have unpayable debt (include the unfunded liabilities like Social Security and Medicare), so what's going to happen? Default or inflate it away?
Also for MB - don't fret too much about Business School not teaching you a lot about business. Academia is not where you learn business - it's in the real world and, as I often say, the School of Hard Knocks. Finish school, then get out there and do it and you'll learn plenty.
Also for MB - don't fret too much about Business School not teaching you a lot about business. Academia is not where you learn business - it's in the real world
Amen, brother. Proximity to business activity reveals business opportunities when you know what to look for. I have spent time "employed", and am now self-employed. Completely different worlds.
Johnny,
Through my experiences, I've learned that before you jam it in someone, it's best to lube it up first. Not only is it less painful for you, but your partner will likely be more receptive to it, as well.
Relating that to dialogue, it may sound a bit counterintuitive at first, but the best way to disagree is to be agreeable. If you can't pull that one off, then attempt to placate to their ego a bit before sliding in your two cents.
Like most skills in life, this isn't something that is usually mastered quickly. But try it out; play with it; learn your own style and perfect your own voice.
If there is one skill in life that is ABSOLUTELY NECESSARY to success, it is the ability to be graceful in social situations. Business, ultimately, is always done with (and through) interacting with other people. Master your ability to communicate in all forms, and you'll become the master of your domain.
What you contribute here @ZH is great. We need more people like you (alternative viewpoints, and the stones to continually present them regardless of backlash). Keep it up, feel free to junk my comments if you need to vent, and I'll keep looking for more from ya.
If there is one skill in life that is ABSOLUTELY NECESSARY to success, it is the ability to be graceful in social situations. Business, ultimately, is always done with (and through) interacting with other people. Master your ability to communicate in all forms, and you'll become the master of your domain.
Amen to that as well.
reserve currency does as is. IF the world designs a NEW reserve currency, then your cynical view will prove right.
Until then, USD can do no wrong. NO ESCAPE for now...even gold is paid for with USD.....fiat WILL NOT DIE.
40muleteam borax
OT -
Not usually an Alex Jones Fan, but hey, give this one a shot forward thinkers...
Boycott proxy penis gladiatorial diversions.
http://www.youtube.com/watch?v=x_47eLGkA_I
When there is less of anything it gets far more valuable. The amount of "air" within the USD ala mark to myth is a quite an event potential on the horizon if that were to come to balance -- as there will then instantly be far fewer dollars in existence there after. Secondly, the simple idea of one authority over monetary policy under one reserve has great traction against the various patch works out there and simply put the irony is this: That which has the greatest amount of debt due will in the end be the strongest currency. At the time those debts come due and units of exchange rush to service that debt there will be ever fewer of them in circulation. That which is less available goes up in value.
Yen strength is currently such as it has not seen since 1995. (!) Reversion to mean is certainly a viable additive to the equation.
Zero Hedge should be required reading for any graduate economics course...
I'm still in the gold long term camp, but interesting piece!
WHERE IS ZH (AND EVERYONE ELSE) ON THE REPORTED SECRET MEETING OF CENTRAL BANKERS IN AUSTRALIA THIS WEEKEND!
ANYONE KNOW WHAT'S GOING ON THERE?
* See the General Forums page for more information... thanks in advance for any information posted on this!
mg
But what is "long term" anyway? Will you be beating the gains you could have made in other assets?
Yeah, the price of chewing gum will be higher in ten years too. That doesn't mean that chewing gum's appreciation will beat inflation.
Long term is 3 - 6 months... and my exposure to gold is in (non US) precious metal stocks... I only wish it was "chewing gum," much less stress!
BTW, that wasn't my flag.
If this is true, doesnt it throw quite the monkey wrench into the new 'export' oriented American plan? How is the United states suppose to double its exports to the rest of the world as its currency continues to appreciate?
@ cursive
Did you get past the math problem?
SS
Damn, that dollar chart looks like an inverse head and shoulders that is only now breaking its neckline to me.
Looks like the goldbugs have some pain coming up. Better get out the KY, cause the dollar has just begun its ascendancy.
I want somebody to keep this quote and bring it up in a couple of months too!
It's not about months, it's never been about months. Is your "dollar ascendancy" to last mere months?
Well, I have a different time perspective than you do. When I look at assets, I look in weeks and months because that is the time that I look at assets. I look at how to turn a profit NOW.
Then, I'll turn those profits into long term assets by playing with the house's money instead of my own. Make money trading, accumulate wealth and diversify the stores of wealth. Still, trading is my first perspective.
So really, we're both right. The dollar is about to roar, and already has been. Long term, it and every other fiat will fall.
I still think that gold and most other assets like equities and other commodities are overvalued because of the recent flight to them.
It may take years to get to gold 1200 again. Or, it may work out to be a happy ending sooner than that.
One thing is certain, it's not going to 3000 or whatever tomorrow like some of these nuts would have you believe.
Well, MB and SWR, allow me in here to straighten all this up.
I have been reading fofoa.blogspot.com as my current favorite education on gold (although I have been a gold fan since the '80s). fofoa offers dense analysis of gold's new position, basically that it will become THE wealth preserver as time goes by.
Though a gold-bug, I also hold lots of FRNs for various reasons (including that gold may NOT be a good investment, yo, could be wrong!). The US$ going up for me is JUST FINE, will make Italy cheaper in the spring when my wife and I go there again.
fofoa writes that FIAT currencies will always be with us, going up, going down. But that gold will jump an order of magnitude in price as fiats will NEVER be able to be "backed by gold", etc. Whenever almost every issuer of fiats has said that, they just go out and fractionally-reserve the gold away (lend it out).
That gold may go to or over $20,000 non-hyperinflated 2009 dollars is an interesting thesis. Reading fofoa (and really radical views on any subject you are really interested in) is vital in trying to understand how you can save your financial butt in perilous times.
So fiats look like they will always be with us, in whatever form. The dollar may very well go UP nicely for awhile, maybe gold will go down hard for awhile. So what! In the longer term what counts is HOW MANY OUNCES of gold you have. Another plus for accumulating gold is that you can give it away, quietly, once you get old and want to pass it along...
As the US$ goes up, I will enjoy Europe more and buy more gold.
Hope that helps!
I am also sitting on a crapload of raw FRNs; I mean, most of my "wealth" is either in FRNs (MM funds, bank accounts, outright cash) or precious metals (I love me some Bank of Gaea). The purpose of the FRNs is literally to get me through the deflationary collapse without the need to liquidate my precious metals. As others here have pointed out, a pronounced (and perhaps prolonged) deflation will (probably?) be the midwife of the currency collapse = hyperinflation. The worst possible scenario: a prolonged deflation to take away your job and your home, forcing you to sell everything you own in order to stay alive (and at depressed prices because everyone else is doing the exact same thing), followed by a hyperinflation to make everything you need cost more than you can afford. Net result: destitution, willing to surrender hope and rights in order to just be able to live. If I keep enough cash to get through the deflation, I can emerge on the other side of the hyperinflation with some wealth still intact.
That's the plan, at least. Timing? No idea, I'm not on Ben or Timmys' speed dial. It's a waiting game.
Just saw an ad on the TV for a new group that is buying rare watches....just send it to us in our free padded box, and we'll send you a check! Picking of bones, phase 2.
It is actually a cup with handle. H&S is an inverse cup with handle or vice versa. NOOBY
Sorry I am NOOBY not you.
Good chart. Something bigger than lehmnan is going to die. Wonder what it is.
http://www.youtube.com/watch?v=rNf0jkgwZ90&feature=related
Fascinating!
Globalization ---Dollar hegemony---Subversion of National/State Sovereignty---One world Government---One world currency. The Dollar?????
Tyler could you do a piece on the current state of the Australian Financial System?
Australian Financial System,
By: TD
The Aussie financial system is like America in 2006 without the large scope of derivatives and CDS, and junk like that.
A crash is coming there, but probably not to the scope it is here.
Also, the Aussie economy largely depends on commodities exports to China, which also will not last forever.
When first housing, and then China exports slow, goodnight Oz.
Love,
MB
*flagged as junk*
Now that is just funny as hell. Keep doing your thing, MB.
Can't argue with that, a pretty good description actually.
Remove constant demand at high prices for commodities, especially iron ore (which you'd think China had stockpiled enough of by now) and you'll bring the Aussie housing market to its knees, with decapitation to ensure rapidly thereafter.
Household debt levels (mortgages) are at all-time record highs downunder, and we all know how that ends. Another problem is the high-pay associated with low-education/low-skill jobs in Australia. Should these jobs disappear, you will have ex-$100k/year illiterates looking to somehow pay their $600k mortgage. Look out below WHEN (yes, I said WHEN) this happens. As we all know, nothing lasts forever, so, get your cash NOW Aussies.
Thanks MB. In other words, there is no place on Earth to run from Babylon. Sounds about right...
Babylon iz Burn.
I see a potential happy ending for Japan: hyperdevaluation of yen --> cash in UST hoard --> pay off national debt w/ proceeds
If you're looking for a happy ending, check out names of the films Miho Maejima has starred in. @jm- I had no idea who she was, but that was one funny-ass reference.
Also, jm, I would love you hear you expound upon your statement that, "For the last 5,000 years, the central problem of the planet has been civilization."
Great posts, please keep them coming (pun not intended).
Unscarred, tis 'left brain, right brain' and the utter & complete misunderstanding of such alongside the entirely endogenous causality of social mood.
Who is that fine Lebanese lady?
great post, JM. just awesome work. thanks for the highlight, TD, sir !
dollar has firmly bottomed and is about to take the F off ... up, up and away !!
in all (petulant) seriousness ... please do let us know if / when anyone else on the planet would like to try n claim that they called gold's top & uncle bucks' bottom (with actual technical 'reason') 'better' than we did (wanna see publicly verifiable chat room logs ? how many different ones ya want ?).
we were kinda late in publicly declaring THE DX / DXY bottom at 74.34 (and are still waiting to hear back from all of our ZH haters who wanted to "come back in a week and see where [our] little red dots are then."
Gold vs Silver, the US Dollar vs Gold and the US Dollar Index
Submitted by Fibozachi on 11/18/2009 18:00 -0500
Will a "Cold / Frost" Full Moon cool off Fiery Hot Gold Futures ???
Submitted by Fibozachi on 12/02/2009 04:42 -0500
Yes fantastic - excellent. Will have to print.
(the article I mean)
yeah here are another couple reasons to be extremely bullish a piece of paper--(I guess people are really that stupid)
U.S. economy to lose 20 MILLION jobs this year
http://www.bullionbullscanada.com/index.php?option=com_content&view=article&id=416:us-economy-to-lose-20-million-jobs-this-year&catid=53:featured&Itemid=102
and:
Next in Line for a Bailout: Social Security
Social Security 25 Billion Short This year
http://finance.yahoo.com/focus-retirement/article/108747/next-in-line-for-a-bailout-social-security?mod=fidelity-readytoretire
also let me refer you to Jesse--
Fortune Editor Suggests That the US Treasury Will Have to Start Defaulting On Its Bondshttp://jessescrossroadscafe.blogspot.com/2010/02/social-security-is-broke-beware-of.html
Jesse is right. All hell is breaking loose. Not just here, everywhere. Because of this, the Federales are going to firewall off obligations they can't support.
In short, social security, Medicare, handouts of all stripe will be ineffectual shadows of their former selves, pissed off voters or no.
The US will not formally default on its bonds. They don't have enough outstanding index-linked yet to even entertain the idea.
The US will not formally default on its bonds.
Of course not. As we've discussed, default takes many forms. How will the feds render SS etc "ineffectual shadows of the former selves"? By actually cutting benefits, or through inflation?
The greatest entitlement obligation of the US government is Medicare which is a promise to render future services rather than make transfer payments. The government can't inflate away its promise to render services. Consequently a reduction in benefits must occur.
My family is Lebanese. This characterization of "Lebanese Women" is sentimentalist bullshit. Lebanese women are as varied and individual as any woman on the planet.
You pointed to a cultural obsession with image. I will give you that. It is there, but as a part of a consumerist drive, just like it is most places.
Sorry I think that there are hot Lebanese women out there that dress to the nines and are fun to be with. No offense. Sheesh.
Shall we let the readers decide?
A Protest Babe...
http://www.willisms.com/archives/cedarrevolution7.gif
Whoa...
http://www.arasale.com/secure/miss/oldmiss/16miss/leen03.jpg
What's in that hooka?
http://www.berro.com/funny_pictures_from_lebanon_photos/lebanese_women_bikini_san_george_hookah_argillah_destroyed_hotel.jpg
If Japan truly did go the dollarization route I think the best play would be to buy Yen since the gov't would no longer be printing them hand over fist. Happened with the invasion of Iraq after the gov't fell and the printing presses fell silent.
The short yen. If the voting savers (the older generation) get out of yen, BOJ will finally be able to print away the debt. Big time devaluation.
As long as older voters are vested in the yen, BOJ can only be reactive to deflation, because they can't put an end to the root cause.
If they try to be proactive, you get dollarization or some other currency substitution like complex indexing of everything (this is how Brazil deals).
If they are content to only react to the symptoms, then the yen is going to keep yo-yoing.
Iraq was a carry trade unwind, right?
The EUR/JPY fell over the cliff last Friday.
Look for the pair to follow the S and P down to 1040 and rebound with the market to ~1100. After that move, the floor is the limit.
It seems that the central banks have somehow colluded to rotate their currencies through relative devaluation. Don't ask me the inner workings of that, but the evidence sure points to it. Last six months, it was USD, now it is EUR, then comes the JPY. If the precursor USD weakness is any indication, then the EUR correction should last from now until the middle of summer.
July may see the beginning of yen weakness and the currencies rotation begins again. July may also see the bottoming (in this round...) of the S and P and a market rally into year-end. The charts of the EUR/JPY and S and P have been the synchronised. In July, get long the EUR/JPY for at least a fifty percent retracement from the top.
Make you rich.
It is also my assertion and assumption that the GBP has been excluded from these rounds, basically because the currency is a basket case.
JM....nice piece of thinking...less effort toward cute prose would be an improvement IMO, but that's just me..the problem with the analsis is this:
"......and it will mean they will look for liquid stores of wealth and a stable medium of exchange. Since dollar assets provide exchange rate volatility hedging and real return, they won’t look back."
a nation such as the US launching, as it is, upon the same road as Japan but with vastly inferior fundamentals but at the same time being an equal if not much bigger fuck up on the world economic stage, means the USD is not, as you suggest, a true "store of wealth" or a "stable medium of exchange"...
Permit me some fun on these weekend posts. Pazuzu made me do it...
Down to it. Japan has much greater debt burden, but its external debt profile is much better than the US.
Japan isn't a land of savers much anymore. The whole population, especially the young have been thoroughly fleeced by twenty years of "policy hell", as they call it. And they have nothing really to show for it.
Voting out the ruling party in Japan is much much bigger than voting out the bums stateside. It is a statement that the establishment is "out of harmony"- a core value in Japan.
Their leaders regardless of stripe are out of answers. The Japanese are ready for something out of the normal and extraordinary.
Ok, have your weekend fun....the Japanese may be "ready for something out of the normal and extraordinary" but they are not going to be ready to jump from their frying pan into our, hot but getting increasingly hot, fire....we are in the early stages of stomping all over our lunch boxes..their govt has been doing it for 20 or so years...they have seen this movie.....and want no part of a replay....
Certainly possible, and it has some precedent.
But isn't it a bit retro? White man's burden and all that.
Dopey Asian muck it all up, and run to the Americans
to solve their problems at whatever price?
Does not seem probable really, unless Japan wishes to sign
on full time as US client state after becoming insolvent.
And it does beg the question, what will the big dogs do?
Roll over and opt for world government chaired by the Fed?
Sounds like Robert Rubin's wet dream.
Sure don't want to give Robert Rubin any fun.
If a country of any stripe is a twenty year veteran of debt deflation, and they finally capitulate to end it by any means necessary, it implies crazy-ass monetary policy.
I'm not sure there is any alternative to the dollar, as crappy as it is.
I don't mean to have any imperialist overtones here. I think it will be a choice on the part of the little guys, and the govt. won't be able to do anything about it short of exchange controls 'n such. That puts them right back in the debt-deflation spiral.
Perhaps this is another way of saying the same thing (given the peg), but Japan seems more likely to try to move toward China and a regional Asian currency. The new Japanese administration, destined to last until at least the next hurriedly called Sunday vote, has made a lot of noise about China that must be pleasing to the ears of the mandarins. Though long wary and resentful of Japan, the Chinese are now in a position to dictate terms and use Japan as it sees fit. They'll pass Japan as the Second Largest Economy this year (already?), they are the object of infinitely greater world focus, and they need friends to help them stand up against US trade and currency pressure. Indeed, Japan seems poised to move away from its security relationship with the US, and China's arms would be open so long as there is at least an attempt at contrition by the Japanese for past crimes wrought.
In Asia generally and in China in particular, folks view the economic crisis as purely a US-sourced phenomenon (ignoring the reality that everyone had a part to play as an overconsumer, overproducer or someone in dire need of the other). This view, although simplistic, will drive Asia---Japan included---towards a regional trade and currency regime. The only thing standing in the way of it are the old animosities surfacing again (which given the pride---false or otherwise---exhibited by the parties involved is a distinct possibility).
infinitely
The human race is marvelous all right. I marvel at how stupid, corrupt, fat, lazy, and annoying they are. The human race is on their last leg.
Dollar rally has a long way to go ........
http://www.zerohedge.com/forum/market-outlook-0