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Guest Post: Some Thoughts On Overseas Investing In U.S. Real Estate

Tyler Durden's picture




 

Submitted by Charles Hugh Smith from Of Two Minds

Some Thoughts on Overseas Investing in U.S. Real Estate

Overseas investor buying of U.S. real estate is a consequence of trade deficits that have built up huge surpluses of U.S. dollars that must be recycled into dollar-denominated assets. Perhaps we should welcome the investment as both necessary and positive.

What few media pundits seem to grasp is that when our trade deficits transfer hundreds of billions of dollars to other nations, those dollars have to end up in dollar-denominated assets like bonds, stocks or real estate. Mish of Mish's Global Economic Analysis has tirelessly explained this dynamic many times: when U.S. dollars (USD) end up in another country as a result of our gargantuan trade deficits, the dollars don't just vanish into some other currency. One way or another, they have to flow into one dollar-denominated asset or another.

Many people have missed the difference between dollars used to settle accounts and dollars held as a result of trade deficits. Many of those emotionally wedded to the belief that the U.S. dollar is doomed gleefully grabbed onto the news that China and Japan will swap currencies directly (yen and yuan) rather than intermediate the trade with U.S. dollars. This was mistakenly seen as a nail in the coffin of the USD.

If I am in Japan and I have yuan due to trade with China, and I want to exchange those yuan for yen, I only need USD for about 10 seconds to intermediate the exchange. Cutting out the USD simply cut the exchange costs and lowered the daily trading volume of the USD.

This reduction in the transactions needed to exchange yuan for yen did nothing to change the dollars held by China or Japan as a result of their trade surpluses with the U.S.

This also didn't lower the amount of assets or credit (debt) denominated in USD. In other words, the effect on the value of the dollar is trivial.

No matter how many exchanges the USD sitting in overseas accounts are pushed through, they still end up in dollar-denominated assets somewhere. If China exchanges its surplus USD to Saudi Arabia in exchange for oil, the USD didn't vanish or become yuan: the USD were simply transferred to Saudi Arabia, which can either exchange them with another nation for goods or services, or they use the USD to buy dollar-denominated assets: bonds, stocks, U.S.-based companies, land in the U.S., etc.

Every time overseas holders of dollars start using their monumental stash of USD to buy real estate in the U.S., domestic pundits freak out and declare "X is buying America!" What the xenophobic pundits fail to understand is the overseas holders of USD have to buy something with their surplus dollars, and if they're sick and tired of buying negative-yield bonds (i.e. the bond yield is lower than inflation) then they have little other choice but to buy land, buildings and businesses in the U.S.

The largest overseas owners of U.S. assets have long been the Europeans, chiefly the English. Tremendous sums have been sunk into the relative safety and dynamism of the U.S. economy, going back to the 16th and 17th centuries.

Foreign Investment Surges: U.S. Attracts Billions of Dollars as Investors Seek Relief From Global Turmoil:

"Foreign investment in the U.S. last year totaled $234 billion, a 14% jump over $205.8 billion in 2010, with around two-thirds of the cash coming from Europe."

There is an element of implicit racism at work when the cries of "we're being taken over" swell after the Japanese or Chinese make a signature purchase of U.S. assets: beneath the surface, the message is clear: it's OK for Caucasian Europeans to buy huge swaths of American land and built capital, but not OK for Asians to own the same percentage of assets.

Let me put this bluntly: if you don't want overseas investors to buy American assets, then stop running gigantic trade deficits with them. Once you transfer hundreds of billions of dollars a year, each and every year, to overseas accounts, the owners of those USD will have to buy something denominated in dollars. And since we presumably made those trades of our own free will to our own benefit, then it's hardly cricket to get all hot and bothered when those owners of USD seek the same thing we do: assets that return a higher yield at a lower risk.

That leads many holders of USD to U.S. real estate. As I outlined yesterday in Some Thoughts on Investing in the "Bottom" in Housing, rental properties offer attractive returns in a zero-interest rate world.

Why are the Chinese investing in Toledo?

I have raised hackles by suggesting that the U.S. remains a very attractive "safe haven" for overseas holders of USD. The people who are emotionally attached to the "dollar will be destroyed" ideology are often equally attached to the notion that the U.S. is an internationally unattractive place to live/invest.

Yes, I share the concerns about the erosion of civil liberties and the extreme over-reach of the State and concentrations of private capital in the U.S. These are real and worrisome trends I have covered in depth for years.

But we need to see the U.S. through overseas eyes--for example, from a Chinese perspective. Since we have many close friends in China, Japan, Korea and Thailand, and have traveled extensively "on the ground" in these nations over the past 20 years, I have multiple first-hand reports of conditions and perceptions in Asia.

The first thing that is attractive about the U.S. is the wide open spaces--just look how much of the country is sparsely inhabited. Compared to places constantly teeming with people, the U.S. is wide-open. (Recall that the U.S. is Meiguo in Mandarin: Beautiful Country.)

Just another landscape in America, ho-hum....

The northern side of Mt. Rainier (Sunrise):

Also noteworthy is the air is generally amazingly clean in the U.S. Even smog-ridden Los Angeles is relatively clean compared to Chinese urban air quality.

Then there's the rule of law, which despite constant abuse still exists in the U.S. Your assets will not be expropriated at the whim of a senior Party official.

These same conditions also make Australia, New Zealand, Canada, Chile and Europe attractive places to invest surplus currency. The difference between all these places and the U.S. is of course the size of the currency holdings needing a home: the long-standing trade deficits with China have stockpiled hundreds of billions of USD in China. That alone powers a much greater interest in U.S. real estate.

Despite its bloated Plutocracy and numerous structural problems, the U.S. is exceedingly stable compared to other nations and remarkably dynamic compared to less-dynamic safe-havens such as Japan.

Lastly, there are enclaves serving dozens of nationalities in the "98% of us are immigrants" U.S. (92 languages have been identified among students of the Los Angeles Unified School District.) Your religious faith, class origins, caste and all the other social attributes than limit your social and financial mobility in much (if not most) of the world don't matter that much in cosmopolitan parts of America. In general, people here are too busy to care about your personal history: just get the job done and don't rip-off/exploit others, and you are good to go about your business.

Those with assets in China are feeling increasingly insecure. Even if your wealth was earned legitimately, as opposed to being skimmed via corruption or officially sanctioned theft, it doesn't matter: when the blowback to corruption and inequality arises, everyone with assets will be a target.

This is why everyone with significant assets in China is seeking an overseas passport, green card and a safe haven for their wealth. This is a longstanding trend that seems to be picking up momentum: Hedging their bets: Officials, looking for an exit strategy, send family and cash overseas (the Economist).

THE phrase “naked official”, or luo guan, was coined in 2008 by a bureaucrat and blogger in Anhui province, Zhou Peng’an, to describe officials who have moved their family abroad, often taking assets with them. Once there, they are beyond the clutches of the Communist Party in case anything, such as a corruption investigation, should befall the official, who is left back at home alone (hence “naked”). Mr Zhou says the issue has created a crisis of trust within the party, as officials lecture subordinates on patriotism and incorruptibility, but send their own families abroad.

 

You do not have to be corrupt to be “naked”, however. Sending your family abroad is simply a state of maximum readiness. It does not suggest huge confidence in a stable Chinese future. Many wealthy businessmen have also been preparing exit strategies. One of the most common legitimate routes involves immigrant-investor programmes in America, Canada or Hong Kong, typically requiring an investment of up to $1m. Chinese nationals have rushed to apply for these. Three-quarters of applicants for America’s programme last year were Chinese.

 

In 2011 the central bank published an estimate on its website, attributed to the Chinese Academy of Social Sciences, that up to 18,000 officials had fled the country between 1995 and 2008 with stolen assets totalling 800 billion yuan ($130 billion at today’s exchange rate). The bank then claimed the figures were inaccurate, and scrubbed them from its website.

 

Officials who can afford to send their families abroad are usually the most powerful, and the most aware of China’s problems. Says Mr Li of Peking University, “They know better than anyone that the China model is not sustainable and that it’s a risk to everybody.”

In essence, investing a mere $1 million in U.S. business and promising to hire Americans will yield up a highly-valued green card. From an overseas point of view, wages in the U.S. are not that burdensome: Apple store employees, and millions of other workers, earn $11.25 an hour.

We have to put all this overseas investment in perspective. There are roughly $62 trillion in net assets in the U.S., and over $20 trillion in real estate. $200 billion or even $2 trillion isn't going to buy a dominant piece of the U.S. economy.

There are positives to overseas investors buying U.S. properties. Everyone who owns real estate wants their parcel to start rising in value, and the only way that can happen is for demand to exceed supply. The "creative destruction" of capitalism only works if owners who have failed to capitalize on assets move on and turn the assets over to those with capital and a desire to rework the assets into productive uses.

The irony is that the driver of overseas buying of real estate--trade deficits--could decline as oil prices slip and imports from China decline in recession. Those complaining about overseas buying may withdraw their complaints if the drivers of overseas investment dry up and the buyers vanish, leaving the U.S. real estate market vulnerable to another cascade down in valuations.

At that point, people may wish Chinese investors were still buying in Toledo.

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Wed, 06/27/2012 - 20:12 | 2566902 zorba THE GREEK
zorba THE GREEK's picture

I say we sell Detroit to China. Any offers?

Wed, 06/27/2012 - 20:19 | 2566917 strannick
strannick's picture

its the flow stupid

Wed, 06/27/2012 - 20:21 | 2566926 phyuckyiu
phyuckyiu's picture

I have some property in Stockton, CA. to sell the poster. On sale, super cheap. Should rent really well as long as section 8 vouchers are cool with you.

Wed, 06/27/2012 - 22:10 | 2567134 Doña K
Doña K's picture

Before Hong Kong was returned to China, the rich HK Chinese moved their domiciles to Vancouver and real estate values exploded to the point that the locals could no longer afford them.

When Hawaii became a state, similar story, to the point that the state government had to subsidize housing to native Hawaiians through lottery system. Otherwise the locals could have never afforded houses in the nicer places.

Nice places will always attract foreigners, but forget about the devastated areas. Prices are as low as $1,000 per house and no takers.

One more point: The need to buy dollars to settle accounts artificially boosts the dollar even though it may be a wash if the one receiving the money converts it into another currency. But most keep dollar denominated accounts. 

Thu, 06/28/2012 - 06:28 | 2567604 Harlequin001
Harlequin001's picture

This guy's clueless.

'What the xenophobic pundits fail to understand is the overseas holders of USD have to buy something with their surplus dollars, and if they're sick and tired of buying negative-yield bonds (i.e. the bond yield is lower than inflation) then they have little other choice but to buy land, buildings and businesses in the U.S.'

What utter bollocks. They'll buy gold, and when they do, and all those dollars come back to the US yes they have to go somewhere, rice, wheat and corn i.e. hyperinflationary collapse.

That's the way it ends. You don't need to be a rocket scientist to work that one out, you just need to go re read your history...

Thu, 06/28/2012 - 10:05 | 2567959 easypoints
easypoints's picture

"In the U.S ... Your assets will not be expropriated at the whim of a senior Party official."

John Corzine?

And I don't know about politicians, but bankers in China have recently been excecuted for said behavior, while in the U.S. the penalty is to tax the fraud in the form of a "fine".

Thu, 06/28/2012 - 01:05 | 2567426 Joseph Jones
Joseph Jones's picture

You might have missed the 4k sf Detroit home that sold for $1800 (annual property tax about $2700).

Fri, 06/29/2012 - 13:19 | 2573785 mkkby
mkkby's picture

CH Smith used to write about the death of the USD and buying gold.  Now everything's fine?  WTF...

Despite safe haven flows... for now -- the USD WILL DIE of massive devaluation or hyperinflation.  It may take a long time.  But once Europe goes thru this turmoil it will rise as the safe haven.  Then it's over for the dollar.

Wed, 06/27/2012 - 21:18 | 2567054 blindman
blindman's picture

Stock and flow
From Wikipedia, the free encyclopedia
http://en.wikipedia.org/wiki/Stock_and_flow
From Wikipedia, the free encyclopedia
Stock vs. flow
Dynamic Stock and flow diagram
Economics, business, accounting, and related fields often distinguish between quantities that are stocks and those that are flows. These differ in their units of measurement. A stock variable is measured at one specific time, and represents a quantity existing at that point in time (say, December 31, 2004), which may have accumulated in the past. A flow variable is measured over an interval of time. Therefore a flow would be measured per unit of time (say a year). Flow is roughly analogous to rate or speed in this sense.

.
as in a derivative. a flow is a derivative.
life, itself, is a derivative.
a verbe, in transit like term, not a noun type, object,
in hemispheric terms. a level of spin energetically
accomplished along an axis of orientation opposed to
and alien to its basis or origin, ready to collapse
at any moment depending on underlying energy.
here the basis of essential compassion
and the foundation of ecology. maybe?

Wed, 06/27/2012 - 20:20 | 2566919 veyron
veyron's picture

I'd buy detroit for -1 cents on the dollar.  Anyone dare exceed my bid?

Wed, 06/27/2012 - 20:24 | 2566932 nmewn
nmewn's picture

So, thats like five bucks?

Wed, 06/27/2012 - 22:19 | 2567150 El Oregonian
El Oregonian's picture

It's $3.78... It's frigg'in Detriot, no round-ups...

Wed, 06/27/2012 - 21:26 | 2567074 The Gooch
The Gooch's picture

Move over NIRP, 'cuz here comes NIRD, yo. Negative Interest Return (on) Detroit.

 

Wed, 06/27/2012 - 20:33 | 2566951 philipat
philipat's picture

I have several froiends who have looked closely at buying US RE. The problem is that overseas investors are familiar with actually taking possession of a real physical paper title deed. In the US, especilally after the MERS fiasco, it is always unclear WHO actually owns a property and IF the title deed/promissory note will be available for processing? It seems to be a case of, look just pay the money and we promise you. Right.

Wed, 06/27/2012 - 22:03 | 2567124 mjk0259
mjk0259's picture

That's who owns the mortgage. Owning the title is pretty clear especially compared to China where the government owns all the land. You get a 99 year lease subject to whims of local officials.

 

Thu, 06/28/2012 - 04:31 | 2567555 philipat
philipat's picture

My point being, if there is no immediate access to the title deed, who the hell KNOWS if there IS a Mortgage and, if so, who owns it? It's a nightmare. And there are some wonderful scams online carefully designed to draw in foreign dopes. "With just USD 299K you can buy not one, not two, not three, not four but FIVE US properties!!!!!!!!!!!!!" And that is even without CDO's. Probably in beautiful downtown Detroit. The American dream. Shit, go for it!!

Thu, 06/28/2012 - 03:57 | 2567536 bank guy in Brussels
bank guy in Brussels's picture

Whopping falsehood by Charles Hugh Smith in this article here, he says:

« ... Then there's the rule of law, which despite constant abuse still exists in the U.S. Your assets will not be expropriated ... »

Ha! Bullsh*t.

Ask MF global account owners.

Ask the Americans whose cars and homes and bank accounts were confiscated by local authorities for bogus reasons.

Ask the victims of bribed American judges and crooked lawyers in an endless variety of cases.

All 'legal' of course. As Martin Luther King said, everything Adolf Hitler did was 'legal', too.

So-called 'rule of law'. Ha!

Wed, 06/27/2012 - 20:35 | 2566954 Son of Loki
Son of Loki's picture

Some Martians stopped me the other day...asked for directions to where those green shoots are growing.....said they were mighty hungry after their long journey....

Wed, 06/27/2012 - 20:35 | 2566961 Belarusian Bull
Belarusian Bull's picture

I can't vote, but i like the idea.

Wed, 06/27/2012 - 20:42 | 2566969 IndicaTive
IndicaTive's picture

deleted

Wed, 06/27/2012 - 21:21 | 2567063 The Gooch
The Gooch's picture

I'll give you eight miles of Renmibi (sp) and a box of glass, Chinese, crack-pipes disguised as "Roses" or "Pens" for everything East of 94 and South of 9 Mile.

-"Maserati Rick"- http://www.youtube.com/watch?v=RO7BcPWP4yQ

Wed, 06/27/2012 - 21:34 | 2567082 Marginal Call
Marginal Call's picture

Silver coffin?  Know where I'm going post crash. 

Wed, 06/27/2012 - 20:14 | 2566906 Fukushima Sam
Fukushima Sam's picture

The chickens (dollars) coming home to roost?

Wed, 06/27/2012 - 21:03 | 2567012 Ragnar24
Ragnar24's picture

I'm not so sure -- in the near term.  I think the big difference with real estate is debt.

Charles is referring to overseas EQUITY investments in real estate -- the remainder of the asset is financed with DEBT. and even if the foreign investor isn't using debt, the rest of the commercial real estate market is! 

So what happens to real estate prices when the cost to finance an acquisition increases (i.e. higher mortgage rates)? Or how about when credit freezes up again?  We saw the deflation that occured in a debt-fueled housing bubble already... 

And I'm pretty sure interest rates rise when China/Japan no longer transact in USD (although I'm not entirely sure given how manipulated these things are).

Wed, 06/27/2012 - 22:18 | 2567146 kito
kito's picture

no really, the chinese are lining up in suburbia to put a dent in those millions of 4 bedroom 3.5 bath foreclosures...the chinese will save us....and solve our debt problem...hey MAYBE INSTEAD OF GOLD, WE CAN BACK OUR CURRENCY WITH HOUSES!!!!! PROBLEM SOLVED!!!!!

Wed, 06/27/2012 - 20:16 | 2566909 New_Meat
New_Meat's picture

Japs got royally screwed in the end of the Carter-era, snapping up everything in sight.  Been downhill since.

- Ned

Wed, 06/27/2012 - 22:26 | 2567165 mjk0259
mjk0259's picture

Screwed relative to what? Japanese real estate went down more. Japanese stocks still down 75%. If they bought houses at that time, they are still ahead. It was only commercial real estate they overpaid and they were getting the money by selling bubble stock. A lot of individuals bought houses in Hawaii and that hasn't been hit relative to 1970's.

 

Wed, 06/27/2012 - 20:19 | 2566915 sitenine
sitenine's picture

I'm generally a big fan of Charles Hugh Smith.  I'm pretty sure he understands that when dollars aren't needed elsewhere, they come home (to roost so-to-speak), which will contribute to the inflation problem which comes shortly after the deflation problem.  I'm confused - going to sit down and think about this one for a while..

Wed, 06/27/2012 - 20:31 | 2566945 dick cheneys ghost
dick cheneys ghost's picture

Add me to the 'Im confused camp'..........altho, thats nothing new.........

Wed, 06/27/2012 - 22:21 | 2567155 MachoMan
MachoMan's picture

More like a mild hiccup on the deflationary snowball's path down the mountain...  Look at it from another perspective...  do you really believe that if all the dollars came home to roost, that nominal real estate prices would even get close to rekindling the peak?  pushing on a motherfucking string...

All they'll do is help prop up prices, at best, and ease some of the depreciation in debt laden assets (note, all of J6P's "investments").

The only inflation to be scared about is debasement of trust in the currency... 

Wed, 06/27/2012 - 22:30 | 2567177 fonzannoon
fonzannoon's picture

thats a pretty legitimate concern

Wed, 06/27/2012 - 23:20 | 2567233 BlandJoe24
BlandJoe24's picture

(appreciated your previous post to me - cheers to you too!)

Refreshingly Charles counters the "USD is about to be worthless" meme (look how low his article was rated).  Global trade is in USD.  Global debt, is overwhelmingly in USD.  The loans must be repaid in USD.  Credit is collapsing, so borrowing to get USD is getting very hard.  Profits are decreasing so "making" USD by profiting  is getting harder and harder.  Tax base is decreasing, so fewer USD around.  Printing cannot out-pace ponzi collapse, and in any case the Fed may not actually even be truly interested in extreme printing  (see below).  As the enormous global credit ponzi collapses and deleveraging occurs only debtors who have USD cash and can make payments in USD will survive.  Everybody else goes bankrupt.   

So what becomes more and more valuable in this deflationary scenario (which may go on for months or even a few years)?  USD. 

And from a post of mine a while back:

Global credit collapse/deleveraging = global deflation because of the extreme size of the current global credit bubble and the rapidity with which it can collapse. If the size of a particular credit bubble is small or moderate, and gradual, then its collapse can be matched (neutral) or outpaced (inflation) by CB printing.

But the size of the current global credit bubble is in the hundreds of trillions of USD.  That is many orders of magnitude past anything the The Fed/UST can out-print (even if it wanted to, which it wouldn't - read below).  These days a one or two trillion USD print is a big deal.  The Fed/UST can't get much over that before the power of the bond market (via UST yields) will put the brakes on. 

If the Fed theoretically ignored bond market pressure, then the treasury would be absolutely bankrupt through USD devaluation long before it could print anything close to enough to match a global credit collapse. But that will not be permitted, because the root driver of global financial policy is the profit/power motive of the financial elite. 

As long as it is to the to the advantage of greed and power to keep the USD a reserve currency, it will not be allowed to be devalued significantly by printing.   It's worthwhile to at least contemplate the awful logic that a severe global deflation of a few years might actually appeal to extreme power greediness since a deflation will make a very few people obscenely rich while most everyone else (economically speaking) become serfs (in debt, owning nothing).

 

Wed, 06/27/2012 - 23:49 | 2567289 sitenine
sitenine's picture

So what becomes more and more valuable in this deflationary scenario (which may go on for months or even a few years)?  USD.

That's the rub.  It is until it isn't - and when isn't gets here, it will be epic.

Epic, because when rich become poor, they do stupid-ass shit.  Don't even get me started on how stupid people have become in the first place.  When corporations become insolvent, they stop providing us with services that we depend on to live.  What happens if Walmart closes its doors, for instance?  Has anyone ever considered that a possibility?  No, because society has turned into a bunch of stupid arrogant slobs - but I chose to digress again.  All I really mean to say is, nothing lasts forever.  Have something physical that you can depend on.  This deflationary situation is a blessing.  Use it to your advantage to prepare in whatever way you see fit - but DO prepare.

Thu, 06/28/2012 - 00:29 | 2567357 BlandJoe24
BlandJoe24's picture

(update to sitenine: you added more to your post, so my response below is almost totally irrelevant to what you said :-) So editing it to be a generalized comment.  But first, did you look at the link i previously recommended (it's a very short read and really connects with what you wrote and i'm curious to find out what you think in response):  http://theautomaticearth.com/Lifeboat/40-ways-to-lose-your-future.html ... after reading that look at this:  http://theautomaticearth.com/Lifeboat/how-to-build-a-lifeboat.html )

I'm tired, so only come up with this silly analogy to anyone who says, "yes we're in deflation, but i'm worried about HI down the road"

You look in your powerful space telescope and see a hostile alien army (HI) somewhat past the edges of the solar system, heading to earth, to arrive months or perhaps a few years from now.  This is a big threat and something to get prepared for.  At the very moment you are looking in your telescope, giant spaceships from a different alien planet are landing on earth and hostile and very dangerous aliens (deflation) of ever-increasing numbers are marching towards your town (and most every other town in the "developed" world) hungry for blood...  You keep thinking about what you are going to do about those other aliens still in space... 

Both HI and a deflationary depression can be devastating.  Zimbabwe was horrible.  The Great Depression was horrible.  They have a lot in common, but they have some significant differences.  And somewhat different advantageous ways of being prepared.  We may get both, but the first is looking to be the deflationary depression.  And that can be an enormous, prolonged difficulty. 

Yes, be aware and prepared for what may be coming down the road a ways (HI), but not at the expense of being prepared for what's here and likely to be much worse for quite a while (deflation).

 

 

Thu, 06/28/2012 - 00:37 | 2567383 sitenine
sitenine's picture

To wrap it up, can I say, "We know it will come, but we don't know when, so don't put all your eggs in one basket."?  I really get the feeling we're agreeing here, but we have very different ways of expressing ourselves.  It's been a pleasure to read your comments.  Sorry about the editing thing - afterthoughts are a bitch sometimes ;)

Thu, 06/28/2012 - 02:16 | 2567475 BlandJoe24
BlandJoe24's picture

Cheers!

...and still curious to hear your responses to those links, if you're willing. :-)

Thu, 06/28/2012 - 13:41 | 2569654 sitenine
sitenine's picture

Hmm. You've got me thinking pretty hard. I don't know how I feel about the possibility of a deflationary apocalypse scenario. I vehemently oppose selling all your commodities though. In a scenario where your money suddenly buys you everything, the system collapses very quickly because resources are still finite (unless you're Krugman ), but trade can still occur if people are willing to step outside of the status quo (at which time, who will have a choice anyway?). In a fiat society, we have forgotten what's worth something and what's not. When paper is substituted for gold, there is no longer a desire to have resources because the paper becomes worth something in and of itself. It's not though. It's paper, and no amount of coercion can change that fact. That's were trust/faith comes in. Deflation can go on for only a very short time because you obviously can't buy unlimited anything. The dynamics change very quickly when resources are no longer available due to increasingly unlimited purchasing power, and that inflection point is whatever society is willing to let it be. I'm leaving out consumption though. Will an individual consume more simply because they can 'afford' more? To a certain extent I suppose, but just as resources are limited, there are also limits to consumption. So, it gets philosophical. What do you believe about limits of dynamic supply and demand coupled with uncontrollable fiat appreciation? What do you believe are the consequences, and how rapidly does it play out? These are the questions we all come here to ask.

P.S. I'm not in the habit of recommending MW articles, but this one speaks directly to our topic of conversation: http://www.marketwatch.com/story/sell-everything-2012-06-28

Thu, 06/28/2012 - 00:37 | 2567382 Uchtdorf
Uchtdorf's picture

Wait a sec there, Joe. Are you telling me that the British handlers of all the US banksters are going broke before the USD does? That seems far-fetched to me. The City rules. I'm not saying I like it, but thems the facts, ma'am.

Thu, 06/28/2012 - 00:57 | 2567406 sitenine
sitenine's picture

Fuck London - It's hypothicated 100 times over. You think a margin call is bad?  What do you think a collateral call would look like?  There's no redemption in The City, and there will be no mercy.  Sounds far fetched?

http://www.zerohedge.com/news/watch-corzines-mf-global-testimony-live

Thu, 06/28/2012 - 02:23 | 2567474 BlandJoe24
BlandJoe24's picture

I wasn't talking one city-nation-state over another, just the strength and staying power of the USD.  The USD is the world's reserve currency, the lubrication of most of the world's financial and broad economic transactions.  It is also  the store of the trans-national super-wealthy's wealth, and the very muscle through which they wield their power.  So therefore,  it is the currency they are most likely to try and keep strong while most fall...(until it eventually falls too). 

To be clear: i'm mostly parroting the wisdom of others and in truth have no absolute knowledge of what will happen

 

Thu, 06/28/2012 - 01:33 | 2567447 Cursive
Cursive's picture

@sitenine

What's so confusing?  When a country runs a current account deficit it, by definition, has an equal and opposite capital account surplus.  Two of our biggest trading partners, China and Japan, are always looking for ways to spend those dollars.  The yield on Treasuries suck, so maybe they try real estate.  This is usually the sign that the shit is about to hit the fan just as when a Japanese company bought 30 Rock.  They sold it a couple of years later for a huge loss.

Thu, 06/28/2012 - 02:05 | 2567469 sitenine
sitenine's picture

I think what's confusing me is the lack of flow analysis.  I don't buy into the 'fact' that China and Japan not buying dollars for a few minutes to complete an exchange doesn't affect the broader system.  Of course it does, doesn't it?  Aren't these dollars traded on the Forex, and if they weren't, well, then, they wouldn't be, so that affects the system.  I feel like I'm grasping at straws though for some reason.

Thu, 06/28/2012 - 06:49 | 2567628 Withdrawn Sanction
Withdrawn Sanction's picture

2 other factors ignored by CHS are:

(1) the fiscal deficit also plays in here.  To the extent domestic savings are insufficient to support it, those savings must come from somewhere.  So while WalMart shoppers share some of the blame, so too do the spenders of SNAP benefits, defense contractors, and Iowa corn farmers.

(2) a fourth option (besides stocks, bonds, and RE) is the foreign holder of USDs can simply request conversion through his/her domestic banking system into another currency of choice.  Then, through the network of CB FX reserves, these USDs will eventually end up back from where they came.

His argument really seems to be that worldwide demand for dollars is inelastic.  There may indeed a degree of price insensitivity as far as dollars are concerned b/c of its unique reserve status, but its not hardly as steep (or rosy) as his analysis implies.  And every tick in favor of the dollar has a sharp counterpoint as the other authors have suggested above.  Indeed, the claim about security of property and rule of law really actually made me chuckle.  Tell that one to Kelo.

Thu, 06/28/2012 - 08:33 | 2567862 ozman
ozman's picture

Articles like this is meant to obfuscate and confuse people after all if you read the authors articles, this article (influenced by the mainstream -- the economist who quotes US backed/funded Chinese dissident blogs) is contradictory to his thesis in previous articles such as the evil US oligarchs are depriving US middle class and siphoning the wealth of the country while moving the wealth offshore.

The problem with articles like this is that it does alot of contradiction, for example author advocates rule of law in the US to prosecute bankers, politicians and other oligarchs while at the same time says there is rule of law in the US.  You cant have it both ways, either you have it or you dont.  In this article he scoffed at China for prosecuting or trying to prosecute the corrupt politicians and the crooked business.  So if you see it clearly, if China does not pursue trying to catch these corrupt people who funnel their money to the US does that not say there is no rule of law?

Let us understand the situation and connect the dots.

First lets ask where did all the money come from.  To understand this game is to follow the money.  The paid dissidents of China which have never worked a day on their life and earn $170K a year funded by the US state department has a job to do which is to incite insurrection in the country.  None of them ask where did the money come from.  For the uneducated people in China they would instantly think all these wealth were accumulated from tax money which are in RMB.  No they are not, those corrupted RMBs are barred from capital flight by the government and most of those went into real estate speculation and funding the lifestyles of mistresses in the country.  As the author says those are US dollar denominated currency that is being laundered.  So where are these massive US dollars in China coming from? 

In China, US dollar arrives in these ways:
1.  Trade Deficits which majority of the business people exchange the dollars with the government for RMBs to create capital investment needed to run their business.  The US dollars now in government hands are sliced 10% by the politicians and the rest went to sovereign wealth funds.
2.  Economic Hitman and the carry trade- If you read John Perkin's book it details how US dollars are funneled into countries corrupting politicians.  The Bo Xilai scandal clears this up, monies coming from hedge funds like Quantum (George Soros) and Berkshire funded by the offshore accounts of US/Western oligarchs all aimed to assist US corporations get contracts and launder the monies to seek higher yields goes into the pockets of these politicians and businessmen in China. 

So why the capital flight?  Because Guanxi which is the root of corruption but also the way business is conducted in present China is now being prosecuted and wealthy people who most of them like anywhere else in the world are all earned through fraudulent means are now  trying to protect these wealth.  In the US control fraud and corruption are protected as long as the victims are not the rich (got that Madoff?).  If you now see it most of the money come from number 2 cause none of those has to be contributed to the government sovereign wealth fund.

So lets see what are the assets bought with these money.
1.  farmland, mines, malls and infrastructure -  all coming from soveriegn wealth funds linked somewhat to the talf program
2.  homes and other luxuries including children's foreign education - money laundered from economic hitmen which originated from the US/Western oligarchs in the first place.

So is this all bad for China. Not really, the pro to this for China is that it turns America into a penal colony for China indirectly.  All these monies come to America and with it shady businesses connected to the triads also arriving to the country.  The death of these capital is beneficial for small entrepreneurs in China as none of them can be used to do business and hence small start ups have alot of chance to succeed which makes assist China in booming.

If you connect the dots and you'd see a spade is a spade.  The Chinese corruption and the American corruption is one in the same, instead of swiss bank accounts the Chinese use America just like the Saudis and most other nations from Columbia, Kenya to the Philippines.  The Americans offshore their wealth to offshore to the Caymans and Swiss where in turn are rolled back into hedge funds who launder the money through economic hitmen back to those nations who laundered them to the US.  It is a shell game, all in all it is just paper transfer.

Unlike the US however at least China is doing something about this.  They are now cracking down on economic hitmen, reforming the banking system and the central bank and the biggest of all they are cracking down on corruption.  So where is the country that does not have the rule of law?  In the US, the rule of law is spelled Just-Us. 

If you look at it I have more hope for China because the country at least is changing and one thing for sure the future is not like the present. 

Fri, 06/29/2012 - 13:28 | 2573820 mkkby
mkkby's picture

Nothing has changed.  The huge trade imbalance always had to go somewere.  Most here predicted it would be hyperinflationary and said "get gold".  The US has always been a safe haven in bad economic times.  As soon as Europe crashes and heals, it will become the safe haven. 

It may take many years, but we weill get the dollar crash as soon as there is a viable alternative.

Wed, 06/27/2012 - 20:21 | 2566918 Maos Dog
Maos Dog's picture

I gave him a one when I read this line here:

There is an element of implicit racism at work when the cries of "we're being taken over" swell after the Japanese or Chinese make a signature purchase of U.S. assets: beneath the surface, the message is clear: it's OK for Caucasian Europeans to buy huge swaths of American land and built capital, but not OK for Asians to own the same percentage of assets.

Cry racism = lose

It's a lazy argument and a sign of a weak mind, when, instead of attacking the other sides economic argument, you just shout "RACISM"

I used to like this guy 

Wed, 06/27/2012 - 20:49 | 2566988 nmewn
nmewn's picture

"I used to like this guy"

Me too.

Waiting with breathless antiipation where Caucasian Europeans buying "huge swaths" of "land and built capital" in any foreign country ceases to be called "investment" (in his self loathing parlance) and instead be called racism.

Turning blue over here ;-)

Thu, 06/28/2012 - 12:46 | 2569610 Diogenes
Diogenes's picture

Right. First it is called "Imperialism" then "Colonialism" only then do they get to "racism".

Wed, 06/27/2012 - 21:14 | 2567045 Marginal Call
Marginal Call's picture

He's right to a degree.  But I'll come out and say it.  Fuck the chinese.  Out here on the west coast we've seen enough of them, and it doesn't take much to get even the most die hard politically correct Obama supporter to go off on the Chinos.

 

I grew up on an island in Puget Sound with a large number of Japanese, and they were polite, reserved, generous, and went to great lengths to integrate and be respectable.  Now, I go to the south Seattle Costco and it's swarming with Chinese people in full on combat shopping.  80 year old ladies mowing people down with shopping carts, because they are used to living in a fucking ant hill and that's how they roll. 

 

I can't buy my pallet of Charmin in peace and it's Nixon's fault.  Fuck Nixon, and fuck China. 

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