The Dollar: China Syndrome
Here’s a good if convoluted chat about the current macro picture as the various economic powers twist in the breeze and try to protect themselves.
China in late October increased by several orders of magnitude its verbal attacks on the dollar. But in the wake of the G20 meeting it seems to have softened its own currency (by buying dollars) in an attempt to prop up its domestic industrial enterprises (which are suffering for lack of consumers in, to begin, the U.S.).
The dollar has been going up for a month or so, generally speaking. A good deal of this is flight from minor currencies (like Argentina’s, alas) based on fear that the local banks will collapse.
This component of the dollar’s recent surge won’t last. Best guess is that soon enough the dollar will continue its plummet, and that long-term the chinese currency will rise.
The current dollar boost, then, might be imagined as the point in the sinking of the Titantic where the bow suddenly goes under the waves and the stern ascends to bring the ship nearly vertical — until it shaps amidships — upon which the stern falls like a brick into the sea.
And, as the dollar turns and sinks, the cost of oil (denominated in dollars) will go back up.
A debased dollar is good for people who make things with dollars and sell them in other currencies. And for debtors, in general (assuming they can make their payments). Otherwise it’s rather bad.
ed says:
The Citibank monstrosity, $300 billion. And now another $800 billion to support the mortgage biz in various ways …
The total of implemented fixes so far, credits, loans of Treasuries for bad bonds, etc, is about $8.2 trillion.
One of the big Reaganite moves in the 80s — publicized by WSJ editor Jude Wanniski — was to paralyze the Fed government with debt, as a way to attack it, in light of the Congress’s refusal to dismantle the New Deal.
That budgetary disaster was quickly undone by Clinton.
Then it quickly came back under Bush-Cheney. And now …
Under Reagan and Bush pere the national debt went from roughly $1 trillion to $3.
No appreciable gain under Clinton.
Now it’s well over $10 trillion, under Bush-Cheney.
During the 30s the US was a creditor nation, internationally. European states were generally debtors, and before the decade was out had largely failed on their sovereign obligations.
The Fed and Treasury rescue programs require that Japan and China continue to line up and buy Treasuries every auction, and that the US tax base supports the wildly ballooning interest payments on that $10 trillion debt.
Good reason to worry they and it will not. China in particular (see links in main post above) is clearly, just in the past two months, signalling a major change of course. It is going to allow its own currency to float much more freely, and has declared war on the dollar as the planet’s currency.
Dollar has to tumble, huge, from here, mid- and long-term. No other way out of the US debt hole. And the pain of that tumble will encourage Japan and China even more to disinvenst in dollar-denominated things (like Treasuries).
Getcher Weimar wheelbarrow …
November 25th, 2008 at 6:33 pm
ed says:
Here is a slightly belated Times reaction to the astounding moves this week. “The Fed and Treasury signalled they would print as much money as needed to revive the banking system. ”
And here is a quick articulate worry from Minyanville.com about the currency consequences of the government’s sudden willingness to guarantee any bond and … however you wish to characterize the Citibank move.
And below is a reaction by Joltin’ Jumpin’ Jersey Jim Cramer, from RealMoney.com (a subscription magazine under the roof of TheStreet.com):
QUOTE
Who’s Responsible for This Mess?
By Jim Cramer
RealMoney Columnist
11/26/2008
Well, I’ll be. They are finally getting their hands dirty. Two new programs announced Tuesday are the most bold and, frankly, foolproof yet because they can’t not work.
The first, the buying of GSE debt, immediately took mortgage rates below 5%. In one day! That will, at last, trigger a huge wave of refinancing and a definite rush to buy homes for those who have been holding back. I reiterate that housing bottoms next year!
The second, needed to jumpstart the completely moribund asset-backed market, will allow you to buy asset-backed bonds that are guaranteed by the Treasury, meaning that you would be a fool not to borrow because you are buying risk-free bonds with much higher rates than Treasurys. How can that not work? How can you not want to lever up to buy them?
At last we are totally interventionist with all stops being pulled out, no niceties. We are just printing money and giving it at a great rate to anyone who wants it.
One of the most exasperating elements of this financial era is the desire of the feds not to intervene in situations that demand intervention.
There’s a quartet of fellows at fault: New York Fed president and soon to be Treasury secretary, Timothy Geithner; Chris Cox of the Securities and Exchange Commission; Ben Bernanke of the Federal Reserve ; and Hank Paulson of Treasury.
Right now we are supposed to believe that everything good is from Geithner and he has made no wrong moves. But Bernanke’s also blessed with no critics whatsoever. Cox, we all know, is over his head but somehow we have exonerated him because the New York Fed has primary responsibility for the banks. But again, Geithner’s done nothing wrong, so that means Paulson must be at fault.
Paulson’s a big target and he has screwed up mightily.
But all of the fancy, elegant solutions to set up lots of borrowing facilities have failed miserably and those are done by the Fed. The press and the “sources” led us to believe that these solutions from the Fed are all as if by magic because Bernanke’s against them and they have been wrong so they can’t be Geithner’s fault.
Still, now, with the direct buying of mortgages, something if, had it been done in the spring, probably would have saved Fannie Mae and Freddie Mac or at least saved the preferreds, we are getting the kind of bolder action that should have been done months ago.
You see, we have still yet to attack the root cause, the home price depreciation, with any gusto, and the Fed, which encouraged toxic mortgages, claims to have clean hands on this but does nothing to undo them.
That’s all been left to the one actor on the scene who has actually called for rigorous bold action, Sheila Bair at the Federal Deposit Insurance Corp.
I can tell you for a fact that the Federal Reserve simply didn’t believe we were in trouble of systemic risk. The whole way it didn’t. All it saw was a need to cut rates and do no more except supply a lot of interesting credit facilities that did nothing.
Treasury came up with a great plan to buy bad assets but it was overrun by systemic risk.
Because no one is ever held accountable for any of the failures we have had, and because it is all ad hoc, it probably hasn’t sunk in but what the government is doing now is making everything a Treasury and making every guarantee a federal guarantee. They have gone from being laissez faire and “judicious” in their use of guarantees to simply panicking and letting everyone win, the common stock holders included, as we saw from Citigroup. They have now created a situation where Wells Fargo and JPMorgan and Goldman Sachs and Morgan Stanley and Bank of America would be nuts not to go to the government and ask for the same help as Citigroup. Especially Goldman, which has no dividend to speak of.
What’s wrong with all of this? I will tell you what is wrong. They simply refuse to say it out loud: “Things are falling apart and we will not stop until they are fixed and we will guarantee and buy whatever is necessary and we will not wipe out the common stock or the preferred or whatever provided you have done the following” and then give us the darned instructions and guidelines.
The uncertainty just makes every move up a squeeze from shorts not sure what the next move is from longs who want in to stay in.
I am appalled that no one takes any responsibility in this government and everyone is exonerated. I am appalled because I know for a fact that everything that has been done in the last few weeks was proposed to these guys in one form or another for more than a year. In each case the Fed dismissed it, whether it be Bernanke or Geithner, although it can’t be Geithner, because he has done nothing wrong, right?
So now what’s happening? The pessimist in me says it is not too little too late, it is too lot too late. The issue going forward has permeated to well beyond housing and banking and is now unemployment and this administration doesn’t even know it yet.
At least Obama knows it. And I am not worried about the new Treasury secretary’s role because, alas, he never does anything wrong!
Random musings: Were housing stocks so wrong to rally? I don’t think so if rates stay down. The most solvent ones — Toll — win!
Also, Chinese rate cuts are huge but we need the European Central Bank. China still has many points to take down.
END QUOTE
November 26th, 2008 at 6:23 am
Drew says:
Good stuff here — the follow-up comments as bang-up as ed.’s article. Two things: is there some way to add an accent to pere, as in “Bush pere” and we’ll have to think a bit about this “Weimar wheelbarrow”!
November 26th, 2008 at 7:16 pm
ed says:
Here’s a guy who thinks to the contary that the dollar is going to strengthen mid term.
December 5th, 2008 at 1:42 pm
ed says:
Here’s a piece entitled “Don’t Count on Asia to Bail Out the West.”
December 11th, 2008 at 1:26 am
ed says:
And again in the Times: China Losing Its Taste for US Debt.
January 8th, 2009 at 3:16 pm