Money As Debt

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<p><em>"Diversifying out and doing a retalitory dump are too different things. Even with a more diversified economy, damaging ours will have wide range affects."</em></p>

<p>Japan and China lead flight from the dollar


By Ambrose Evans-Pritchard,


International Business Editor


Last Updated: 1:09am BST 17/10/2007


"Fears of dollar collapse as Saudis take fright China threatens `nuclear option' of dollar sales Ambrose Evans-Pritchard: This bear is not capitulating"


Japan and China led a record withdrawl of foreign funds from the United States in August, heightening fears of a fresh slide in the dollar and a spike in US bond yields.


Fears of dollar collapse as Saudis take fright China threatens `nuclear option' of dollar sales Ambrose Evans-Pritchard: This bear is not capitulating


The US requires $70bn a month in capital inflows to cover its current account deficit


Data from the US Treasury showed outflows of $163bn (£80bn) from all forms of US investments. "These numbers are absolutely stunning," said Marc Ostwald, an economist at Insinger de Beaufort.


Asian investors dumped $52bn worth of US Treasury bonds alone, led by Japan ($23bn), China ($14.2bn) and Taiwan ($5bn). It is the first time since 1998 that foreigners have, on balance, sold Treasuries.


Mr Ostwald warned that US bond yields could start to rise again unless the outflows reverse quickly. "Woe betide US Treasuries if inflation does not remain benign," he said.


The release comes a day after the IMF warned that the dollar was still overvalued and likely to face "some depreciation in the medium term".


The dollar's short-lived rally over recent days stopped abruptly on the data, increasing pressure on US Treasury Secretary Hank Paulson to shore up Washington's "strong dollar" rhetoric at the G7 summit this week.


The Greenback has already fallen below parity against the Canadian Loonie for the first time since 1976 and has touched record lows against a global basket. It closed at $2.032 against the pound.


David Woo, an analyst at Barclays Capital, said Washington was happy to see the dollar slide. "They don't care so long as the fall is not disorderly. They see it as a way of correcting the deficit. " he said.


Mr Woo said a chunk of the August outflows may have come from foreigners borrowing in the US during the liquidity crunch to meet needs in euros. "We think it may be a one-off," he said.


The US requires $70bn a month in capital inflows to cover its current account deficit, but the key sources of finance are drying up one by one.


BNP Paribas said America has relied on "hot money" from abroad to cover 25pc to 30pc of the US short-term credit and commercial paper market over the last two years.


This flow is now in danger after the seizure in parts of the market over the summer and after the Federal Reserve's half point rate cut, which has shaved the US yield advantage over other countries.


Ian Stannard, a Paribas currency analyst, said the data was "extremely negative" for the dollar. "It exceeds the worst fears. It is not just foreigners who are selling US assets. Americans are turning their back as well," he said.


Central banks in Singapore, Korea, Taiwan, and Vietnam have all begun to cut purchases of US bonds, or signalled an intent to do so. In effect, they are giving up trying to hold down their currencies because the policy is starting to set off inflation.


The Treasury data would have been even worse if it had not been for $60bn of inflows from hedge funds based in Britain and the Caymans, which needed to cover US positions at the height of the credit crunch</p>

<p> </p>
 
<p>Awgee, I'm in agreement and have been in agreeement that the dollar as the currency of choice is about to end.</p>

<p>My point is very blunt and simple, today, or more importantly, a couple weeks ago when China made the threat, their nuclear option was just that, MAD, just like the old cold war nuclear standoff.</p>

<p>They will diversify, they will find others to buy their products, likely, they will find themselves and india to buy. America in the coming years will be buying American again, not because we want to, but because our own products are all we can afford.</p>

<p> </p>
 
i guess the question is how much could you borrow (i.e. how much are willing to stake on this potential arbitrage, and how much could you actually make from it.) for ex, my 30-yr fixed is under 5% and i can earn more than that from all sorts of savings accts discussed in other threads. in a hyperinflation scenario, i guess i could laugh my butt off and feel glad that i stuck it to the evil banker man.





but then again, i'd more likely be wetting myself worrying about the state of world economy, my retirement funds, all my bills which just tripled, perhaps my job, and dammit, those $20 onions at ralphs!
 
"Let me issue and control a nation's money supply, and I care not who makes its laws." (Mayer Amschel Rothschild, Founder of Rothschild Banking Dynasty)
 
"I believe that banking institutions are more dangerous to our liberties than standing armies ... If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs." (Thomas Jefferson, 1743-1826)
 
<a title="Permanent Link to ?You Had Better Be Afraid?" rel="bookmark" href="http://www.socalbubble.com/2007/10/you-had-better-be-afraid.html" linkindex="165" set="yes">“You Had Better Be Afraid”</a>







From Chuck Ponzi's site.
 
<p>JW, if you take a $1M loan today at 7% and inflation is 12% in the future, your salary should follow inflation, therefore you would make 5%...or in real term, 4.6% (1.12/1.07-1). As you said if you take a loan now, expecting higher inflation in the future, you should be good to go. But as Awgee said, who knows what will happen? In fact, I believe we are about to see lower inflation in future years.</p>

<p>This is the problem with inflation. If you make 8% and inflation is 3%, you don't make 5%, you make the ratio so 4.85% (1.08/1.03-1). Well if you make 12% but the inflation is 7%, you make 4.67%. As inflation increase your real return decrease. As a result foreign investments decrease, which creates a downward spiral (recession) and lowering the inflation to a "normal" level (2%-3%). During that time, the dollar depreciates back to its fundamental value. Then, the dollar looks attractive to foreign investments, inflation is low, real returns are high and you move into inflation again, until the bubble pops. The FED controls inflation to the extend they can to keep it at 3% or so to make sure the inflation period is as long as possible, but it sure looks like it's about to break.</p>

<p>How can the US be 55% of the world economy anyway? I hope that people who have money to invest 401(k) or personnal money invest it in foreign market by at least 45% (based on current economic conditions) or even more if you believe the World will outperform the US market in future years. Emerging markets and EuroPacific funds are the way to go right now. That doesn't mean there are no good investments in the US, individual stocks are fine, but an index will likely perform better outside the US.</p>

<p>One final point, is that the FED can't control everything. There's a big difference between short-run and long-run. The FED can control the short-run demand-supply function by moving interest rates and using other techniques they have. However, they can't control the long-run equilibrium that bring backs the prices to their fundamental values. The more they try to soften the market, the longer it will take to get back to the basics, but it will at some point. So who knows if we are going down hard for 2 years or going down slowly but surely for 7 years?</p>
 
Roo - And there are some of us nutters who think the real rate of price inflation is 7% and the rate of monetary inflation is 13%.
 
I have been contemplating the loss of about a third of the money tied up in residential real estate. Since banks simply create money out of thin air, and since new borrowed money added to the economy is inflationary, when debts are not repaid, and the collateral asset does not recover this money when sold, the money is lost to the system. This is the definition of deflation -- money disappears from whence it came. The amounts of money tied up in residential mortgages is so large and the loan-to-value ratios are so high, that I see no way the FED can stop deflation from occurring. The FED can loan money to banks all day long, but this does nothing to recreate the money that was lost to the market. The only hope we could have is if we devalue our currency enough, perhaps foreigners really will come in and buy up our real estate. Unfortunately, since we are talking about millions of individual homes, this doesn't seem very likely. If we were talking about commercial real estate, this might be a possibility, but with residential, there are too many properties, and the cashflow would still be in US dollars which will not justify the cost, so even a cheap house is a poor investment. Perhaps I just need to read Bernanke's paper again. Maybe he has an answer I am not aware of, or perhaps we are all sitting on the Titanic right after the iceberg hit -- no immediate danger, but we are all still doomed...
 
Very real possibility, but never underestimate the ability of the Fed to inflate. That is what the Fed does, what is has done, and what Bernanke has said it will do. All the Fed has to do is what is has been doing, which is to buy Tbills from the Treasury Dept.. Then the government spends the new currency. Who knows what the Fed and the government can do in the name of national security?<p>

We may be experiencing deflation right now. There has definitely been deflation is Europe, and how did the ECB react? 400-500 billion in Euros created and "given" to the banks. The central banks will inflate. The only question is how far behind the ball will they be?
 
But if commodity prices keep going the way they are, the cost of paper and ink for Bennie's ink jets will exceed the face value of the money he prints. That would be even more deflationary!
 
<p><a href="http://news.yahoo.com/s/ft/20080107/bs_ft/fto010720081324550910;_ylt=Aowq_522SCo0vjzHOs.Lr5b2ULEF">http://news.yahoo.com/s/ft/20080107/bs_ft/fto010720081324550910;_ylt=Aowq_522SCo0vjzHOs.Lr5b2ULEF</a></p>

<p>Not sure if the link has been posted on the forum already, but here is a good article, writen by Chairman of Morgan Stanley Asia...</p>
 
<p>Ah-ha IR, you agree with my prediction in my predictions for 2008 post.</p>

<p>From reading Calculated Risk, the Fed has been supplying liquidity--and then draining it out again, in a way, that I guess they hope is less noticeable. Don't understand the point unless it is all PR, which is all this govt is about anyway.</p>
 
I just wanted to add that The Creature From Jekyll Island is a great book. I read it when I was in high school and it really shaped a lot of my viewpoints about the financial markets.
 
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