Absolutely everyone is going ‘ZIRP’. Even Switzerland. The ‘Japanese solution’ is being applied across the board and there is a huge race going on to weaken all trade currencies vis a vis the dollar. The yen, for example, is finally getting sufficiently weak, the Japanese hope to resume expanding their penetration into US markets. The US still imagines, we can ‘innovate’ our way out of this death trap we are in. And we can create new jobs that will revive our economic prospects. But this is plain silly. Japan isn’t looking for new industries! They are looking to protect and preserve existing facilities!
Switzerland used to be the main headquarters of the gnome community. No longer is this true. After deciding that gold wasn’t all that hot, the Swiss also went into all sorts of Ponzi schemes and goofy derivatives deals and is now just as exposed as the US or UK. And is being forced into the same dark hole, Japan, the US and UK are sliding into. The hole of depression.
Swiss consumer prices fell 0.4pc in March (year-on-year). Swiss CPI will be minus 1pc at least by July, nearing the level where spending psychology changes. By the time you have a self-feeding spiral, it is too late.
People won’t buy if they make more money, holding. This favors savers even though banks are not paying anything for holding savings. Which is why so many savers are opting for alternatives including that old warhorse, gold.
Gold has dropped almost $100 from its recent highs due to the dollar getting stronger. It is a tricky business! Since the dollar and all other currencies have total instability and flutter here and there, like startled pigeons, the value of gold could be going up vis a vis the yen but down, vis a vis, the dollar.
Since everything is unstable and there is no steady-point like when gold was kept at a set amount against a major currency, everything is chaos, all the time. There are no ‘safe havens’ but one can only hope, not to make mistakes.
This can lead to a certain cynicism. Or, conversely, becoming passive. A classic way to deal with uncertainty is to have some rules: ‘Sell when it is going up and buy when it is going down,’ is a classic example.
“This is something that we must prevent at all costs. The current situation is extraordinarily serious,” said Philipp Hildebrand, a governor of the Swiss National Bank….
If the inflation merry-go-round stops, the music wheezes to silence and the children wonder what to do next. How boring, this is! Of course, the alternative, to create deliberately, inflation, has very grave dangers, too. Namely, it is too easy to do. Such as in 2008, when the US mailed all of us $600 checks. Instant inflation! Followed by total collapse.
Here lies the danger. If other countries try to export deflation by this means, we will face a second phase of the global crisis. Taiwan is already devaluing. Korea, Singapore, and Sweden all seem tempted to follow. Japan is chomping at the bit.
What? Japan is ‘chomping at the bit’ when it comes to deflation? They are the HOME BASE of ‘deflation exportation’. They created it long ago, in Tokyo, and then used it quite ruthlessly. Who, after all, had the biggest export PROFITS on earth for years? Japan!
“We don’t fully realise in the West what a catastrophic collapse Japan has suffered,” says Albert Edwards, global strategist at Société Générale. “The West has dumped a large part of its economic downturn onto Japan by devaluing against the yen.”
What on earth???? The yen sprang back after being artificially repressed due to the unwinding of the immense Japanese carry trade when other nations had to start dropping interest rates due to the collapse of borrowing when debt levels got too high.
This is about to go into reverse as Tokyo hits the ping-pong ball back across the net. “As the unfolding collapse in the yen gathers pace, the West will see its green shoots incinerated to dust,” he said.
The yen is now 100 to the dollar and the Japanese are absolutely desperate to make it at least 120 to the dollar and will move heaven and earth, to do this, as many cartoons I have done, clearly show.
Japan’s industrial output fell 38pc in February (year-on-year), mostly concentrated into the last four months. No major economy imploded at this speed in the 1930s. The country has been hit by a double shock. As an export power it has taken the brunt of Anglo-Saxon belt-tightening: as the world’s top creditor it is cursed by a “safe-haven” currency that soars in moments of danger – largely because the Japanese bring home their wealth till the storm passes. Normally, Japan can cope. This time, the yen’s rise has pushed the economy over a cliff.
‘THIS time’???? Any time the yen gets strong, Japan collapses. Japan has one rule: the biggest profits are in the business of selling very expensive things like cars, to the US. So they have this total focus on US high-end markets and hammer away at this nonstop. We have a huge trade deficit with Japan which is even worse when we realize, Japanese profits from US factories they own, are also part of the picture and don’t show up in the import/export figures.
The yen must come back down to earth, and soon, or Japanese society will start to disintegrate. If necessary, the Bank of Japan will force it down by intervention, as occurred in 2003-2004….
So, Japan intervened just a few years ago? HAHAHA. I thought, during all the yelling at China, it was only China who was ‘manipulating’ the value of the yuan! Perish the thought, Japan might have done this, too! Considering, both China and Japan have similar FOREX and US debt holding patterns, this should be pretty elementary.
It is remarkable that China’s fall into deflation has attracted so little notice. China’s CPI was minus 1.6pc in February. The country has built too many factories producing goods that the world cannot absorb. The temptation is to shunt this excess capacity abroad. A faction of the politburo is already itching to devalue the yuan.
They were not going to do this unless Japan did this. They are competing with Japan and know this, too. Unlike the US, which forgets that Japan and Europe are dire competitors, not allies, in trade.
Of course, Britain has already played the currency card. That is different. The pound’s fall, though welcome, is a side-effect of the Bank of England efforts to stem the credit crunch. There has been no currency intervention.
Why isn’t it ‘welcome’ when the dollar falls? Heh.
Crucially, Britain has a current account deficit. Many countries toying with devaluation are exporters with surpluses – 15.4pc of GDP for Singapore, 8.4pc for Switzerland, and 6.1pc for China. If these countries refuse to let their imbalances correct, world demand must implode.
Hooray! He mentions the amazing fact that most countries planning to devalue are EXPORTERS. The US is too stupid to devalue the dollar or rather, we are trapped: we must have a strong dollar so we can import huge amounts of foreign energy products.
Mr Hildebrand denies that the SNB is pursuing a “beggar-thy-neighbour’ strategy. Like the yen, the franc suffers from the safe-haven curse: everybody buys it in a storm. This tightens monetary conditions. The SNB cannot easily offset this. It has already cut interest rates to near zero. There are not enough Swiss government bonds in the market to rely on the sort of “QE” asset purchases being carried out by the Bank.
All nations must ‘beggar-thy-neighbor’ and all nations must protect themselves from this, too, at the same time! This way, we get balance. The US is under no obligation to provide trade for Japan, for example. The US has to protect its own bottom line. Only we can’t because we love to consume oil.
Ultimately, I suspect this crisis may mark the moment when the Swiss franc loses its safe-haven role. Credit default swaps (CDS) measuring risk on five-year government debt have reached 127 for Switzerland, higher than Britain at 118. Norway has the world’s lowest CDS at 48, reflecting its status as a petro-democracy.
Switzerland looks at Iceland and shivers with fear.
Switzerland’s banks are over-leveraged. Loans to emerging markets equal 50pc of GDP (half to Eastern Europe). Banking secrecy is dying. Fortunately for the Swiss, they have built up $700bn in net foreign assets for a rainy day. Improvident Britons are less lucky. But that is another story. What we risk now is a game of deflation “pass-the-parcel” worldwide. The economic establishment was caught off guard from 2003 to 2007 because it overlooked the way that Asia’s unbalanced relationship with the West was feeding a credit bubble.
Maybe, Asia has unbalanced trade with the ‘West’ but this same ‘West’ has nearly as much an unbalanced trade surplus with the US. This is the whole problem and why we need a bout of protectionism. To stop the ‘free trade’ freight train which has already utterly destroyed the US.
The U.S. economy is in for a “lasting slowdown” and could face a Japan-style period of relatively low growth coupled with high inflation, billionaire investor George Soros said on Monday.
We can’t have ‘high inflation’ with declining wages. Way back when we did have that queer thing, Stagflation, that is, we had unions and tariffs and barriers of all sorts. Now, we are naked to the storm and everyone will be killed off, nearly instantly, if there is even slight inflation.
Soros, speaking to Reuters Financial Television, also warned that rescuing U.S. banks could turn them into “zombies” that draw the lifeblood of the economy, prolonging the economic slowdown.
“I don’t expect the U.S. economy to recover in the third or fourth quarter so I think we are in for a pretty lasting slowdown,” Soros said, adding that in 2010 there might be “something” in terms of U.S. growth.
Soros’ view contrasts with the majority of economists, who expect the U.S. economy to stop contracting in the third quarter and resume growing in the fourth quarter, according to the latest monthly poll of forecasts conducted by Reuters.
The recovery will look like “an inverted square root sign,” Soros said. “You hit bottom and you automatically rebound some, but then you don’t come out of it in a V-shape recovery or anything like that. You settle down — step down.”
The healing of the banking system and housing markets is crucial to recovery. “The banking system, as a whole, is basically insolvent,” Soros said.
I half agree with Soros and totally disagree with ‘the majority of economists.’ Remember, this same majority of economists were all caught by surprise by obvious economic developments. And can’t see to be able to figure out even elementary riddles. So being at odds with them is pretty easy.
We are in a race between economic recovery and economic nationalism. At last week’s Group of 20 summit, leading nations agreed to roughly $1 trillion of additional lending, mostly through the International Monetary Fund, to help end the worldwide slump. But beneath the veil of consensus, countries are maneuvering to protect their economies and blame someone else for the crisis. Will the world economic order overcome these stresses or give way to a global free-for-all, characterized by rampant protectionism and nationalistic subsidies and preferences?
What always puzzles me is how the US media hires people who are anti-American. Why do they do this? HAHAHA. Of course, other nations are maneuvering to protect their own economies! This is what sane people do who are patriotic and don’t want to be on the scrap heap of history! Of course, nationalism will rise. Why not? Obviously, this is prime time for such things to occur.
What Samuelson wants, of course, is for the old status quo where we pretend we are rich and powerful while going deeper and deeper into the red. This might be brief fun but it is also traitorous.
Emblematic of the tension is a recent proposal by Zhou Xiaochuan, governor of the People’s Bank of China (PBOC), to replace the dollar as the world’s major international currency. In a paper, Zhou argued that today’s crisis reflects “the inherent vulnerabilities and systemic risks” of the dollar-based global economy. The PBOC is China’s Federal Reserve; Zhou is no obscure bureaucrat. It may surprise Americans that, up to a point, his analysis is correct. The dollarized world economy developed huge instabilities — vast trade imbalances (American deficits, Asian surpluses) and massive, offsetting international money flows. But Zhou’s omissions are equally revealing. To wit: China is heavily implicated in the dollar system’s failings. By keeping its currency artificially depressed — as an aid to exports — China abetted the imbalances it now criticizes.
He goes on, here, to rage about how dare the mean Chinese force us to run in the red. Of course, he doesn’t examine statistics or he would notice, the US was running in the red, budget as well as trade, starting under Nixon. And Nixon went off to China, looking for new markets and political cover. The Chinese did NOT come here, first.
The US, not China, believed in ‘free trade’ and wrote lots of ‘free trade treaties’ and the US, not China, founded the World Trade Organization, just for one immense example. I could go on and on, of course. The point is, blaming the last of the trade giants for the mess created by the very first trade giant is infantile, infuriating and above all, plain stupid.
The Bank of Japan may refrain from introducing new policy steps today for the first time in seven months amid signs the economy’s deterioration is moderating.
The yen is weak! Long die the yen!
Governor Masaaki Shirakawa and his colleagues will keep the overnight lending rate at 0.1 percent, according to 25 of 26 economists surveyed by Bloomberg News. The decision is expected by early afternoon in Tokyo.
Oh, the interest rate has bounced between 0% to 0.5% for the last 15 years! Oh, the instability is just so scary!
Japan’s major manufacturers expect to become less pessimistic in three months, the first improvement since 2006, after sentiment plunged to a record low in March, the central bank’s Tankan survey showed last week. The policy board will examine Prime Minister Taro Aso’s stimulus package due this month before deciding whether to add to its program of buying government and corporate debt, analysts said.
The manufacturers are, to a man, export giants. And they demand a weak yen and are happy to finally get their weak yen back, damn it! And they will make certain, the dollar is strong, come hell or high FOREX reserves! Japan’s reserves, which were only $600 billion just 6 years ago, are now over a trillion dollars. Not only that, their securities are now nearly a trillion, too! That was much, much lower just three years ago!
In January, 2008, Japan held only $585 billion US Treasuries. Today, it is now $635 billion and climbing. China has bought even more: $492 billion in 2008 and over $740 billion, today. In stark contrast, Germany, whose economy is as big as China and Japan’s economies, holds only $56 billion in Treasuries, up only $2 billion from last year. China’s grew by almost $250 billion and Japan’s grew by $50 billion.
More bad news for the US: last year, all our trade rivals or people we owe money to, held $1.7 trillion US Treasuries. But this year, these same rivals now hold over $2.265 trillion! This is an increase of over half a trillion dollars more, in just one year!
Now, the Chinese had a list of industries they needed to move out of the US and into China. Fasteners, ball bearings, gasket making, gears, etc were on this list. So were tires.
China offers incredible opportunity for makers of tires, autos and other products, but only for the smartest and most intrepid enterpreneurs, according to a speaker at the Clemson University Tire Industry Conference.
“You have to be very, very careful if you want to do business in China,” said Dennis Byrne, professor emeritus of economics at the University of Akron. The sheer size of the Chinese market is unfathomable, he said at the March 9-11 meeting, but the unwary Western company may find itself tossed out of China after having given away its most precious proprietary information.
Looking at the statistics, Byrne said China:
* has a labor force of 778.1 million workers;
* has a current annual growth rate of 9.1 percent. “At that rate, their economy will double in eight years,” he said, although doubting that growth rate will continue, since China´s economy is in danger of overheating. Even in recession, China´s growth rate will exceed that of most other countries, Bryne said. “It´s almost certain that within a few generations China will have the largest economy in the world.”
* is rapidly expanding its infrastructure. While the most recent figures show China has only 314,000 miles of paved roads, compared with more than 4.1 million in the U.S., “the highway figures are probably changing as I´m standing here talking about it,” he said.
* now is the fifth-largest national auto market in the world. Chinese auto production, by conservative estimate, will reach 5.2 million units in 2005, and annual sales in the Chinese market could conceivably reach 40 million to 50 million in the not-too-distant future, he said.
* has about 330 tire plants. While most of these are small and somewhat backward in their technology, producing fewer than 10,000 tires annually, he said, Chinese tire output amounted to about $4 billion in 2003, approximately 5 percent of the world´s total.
China could well become the world´s largest tire-making country within a decade, Byrne said.
China plans to be the world’s largest tire-making country on earth. This is their plan, of course. Eventually, they will have the top of the line factories and the US will be left out in the cold, selling mostly our debt to China so we can buy their goods. A very bad thing.
Well, hope they figure it out right, to replenish bank balance sheets. So, what has all this taught us about risk and what can we take from that in the future?
It comes in many forms. I guess the lesson is, when an industry gives you lemons, sometimes it’s just lemons. It doesn’t turn into lemonade. How we got here is, margins collapsed to such a level that banks felt entitled to make all these sorts of profits. So, you’ve got a cruddy business.
So, how do you make, lever it, right? Take a bad business and lever it. And, you know, great things come. How about finding good businesses? So many great things about financial services were product innovation, and really good product innovation. Because I think that there were so many great things that came out of the securitization industry in terms of distribution of low-cost funding and low-cost borrowing for more Americans. Globally, distribution of lower-cost borrowing for more citizens of the world, that’s great financial innovation. But leverage is not great financial innovation. It’s one of the oldest–
It’s like an up market. It makes you look like a genius.
That’s exactly right. So, I think, we had really dumb risk this time. It wasn’t clever risk. It wasn’t calculated risk. It was just dumb risk. And that’s probably what’s so frustrating about it.
Painting the pig?
[25:20] No Recovery
So, what is the one still big, misplaced assumption out in the marketplace today when you look at it, despite what’s happened in the last year and a half?
Well, it’s sort of nice that people have hope that a lot of these government plans will work. A misplaced assumption could be that something can change and you’ll have a V-shaped recovery inside of 2009. I don’t see that happening. I don’t see an L-shaped recovery, either.
I think that we’re just better than that. I think that we’ll be innovative. This is notwithstanding the government making this a socialist state, which I’m hoping that they won’t. It will be somewhere in the middle. So, it’s not all bad, and it’s sure as heck not all good from my vantage point. But it’s not all bad. Resourcefulness can make you a lot of money in this market.
So, your bold prediction for the future is? How do you see this all shaping out? Is it going to be two years of a slog, three years and then suddenly we pull out? Or it’ll be a gradual buildup and people say, “Hey, things are starting to get better?”
It all depends. It’ll be really curious to see which industries lead us out of this cycle, and what areas of innovation this country then becomes famous for. Because no doubt in my mind, the single greatest export over the last 40 years from the United States was the financial services industry.
Not technology. It’s the financial services industry. So, we’ve got to find a new export. And that’ll be curious. I don’t know what that is. A bold prediction is, our entire economy has got to reshape, redefine and restructure itself. And that of course can’t take a year. It can’t take two years.
Whitney is being touted as some sort of genius because she saw what seemed totally obvious to me. Well, hooray for her! But her analytical skills are a tad weak. How, in heaven’s name, are we going to ‘innovate’ our way out of bankruptcy? Eh? And why? WHY ON EARTH??? Is Japan looking for new industries? Is China hoping to find something new? Or are both working like fiends to corner the tire-manufacturing markets? Eh? Think of it. We have to fight our trade rivals, not wish upon a star and hope something falls into our laps. Look at the computer industry: it was so ‘Tomorrowland’ and we were going to have the top fabrication factories and the top programmers and…what the hell. We lost the entire industry, lock, stock and barrel.
What’s next? No one wants our ‘finance’ industry and its ‘innovations’. Indeed, the Chinese will shoot anyone who tries to export THAT to China!
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