Category Archives: Currencies

Re: G20 meeting to push fiscal adjustments

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(email exchange)

Seems none of them have any clue that they are better off doing it unilaterally and hoping the other don’t follow.

That would maximize their real terms of trade/standard of living.

This is our big chance for the us to act first, aggressively, and alone to absorb the entire world’s excess capacity rather than just our own.

We can have a payroll tax holiday and start up our infrastructure projects, etc. while encouraging others to hang tough on fiscal policy and sit back and watch their exports to the US skyrocket as they both build FX reserves (yes, encourage ‘currency manipulation’) and work to balance their budgets.

With economics, unlike most religion, it’s better to receive (real goods and services) than to give, and if others don’t know that it’s not our problem- it’s our opportunity!

>   
>   In purely economic terms you are correct, insofar as it is better to
>   receive a bushel of wheat than to export mounds of coffee. The first is
>   clearly a benefit and the 2nd a cost. But when you’re exporting
>   something further up the value chain, there do seem to be some good
>   multiplier effects which have a positive impact on domestic demand.
>   

Any nation can set aggregate demand at any level it wants independently of external forces.

>   
>   I’d also like to see the Chinese embark on a serious infrastructure
>   build for their interior, and encourage their population to become a
>   nation of rampant consumers.
>   

I’d like to see them continue to send all their stuff to us and accumulate $US financial assets.

But seems they may be too smart for that, as per their new stimulus program.

>   
>   I have no problem with everybody doing fiscal aggressively.
>   

As above.

>   
>   I also want a weaker dollar so that the cost of servicing these dollar
>   denominated debts declines in real terms.
>   

I’d rather see them servicing their USD debt by net exporting to us to get the needed USD.

But seems our leaders are not going to happen either.

They are killing the biggest goose of all time.


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Yen strength

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BOJ Helpless as Yen Rises on Carry, UBS, Barclays Say

by Ron Harui and Stanley White

Nov. 6 (Bloomberg) — The Bank of Japan may be powerless to prevent the yen from rising to a 13-year high, according to the world’s biggest foreign-exchange traders.

Wrong! Japan can sell yen and buy dollars until the cows come home, if they wanted to. What’s stopping them (so far) is the risk of Paulson’s wrath.

As the US-Paulson/Bernanke/Bush- continues its ‘weak dollar’ policy to support US exports. Falling crude prices have (temporarily?) thwarted their efforts and strengthened the dollar. (And the euro has it’s own special issue as previously discussed.)


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Re: Obama’s Yuan Calls- NOT GOOD

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>   
>   On Thu, Nov 6, 2008 at 7:09 AM, Michael wrote:
>   

Obama’s Yuan Calls May Put U.S. on Collision Course With China

by Judy Chen

Nov. 6 (Bloomberg) — Barack Obama’s calls for changes in China’s yuan policy may put the president-elect on a collision course with the U.S.’s second-largest trade partner, which is holding the currency stable to support its export-led economy.

Obama said China must stop manipulating the currency in a letter to the National Council of Textile Organizations released on Oct. 24.

This is counter productive for the US standard of living.

Obama has yet to discover imports are real benefits and exports real costs.

The People’s Bank of China has kept the yuan almost unchanged against the dollar since mid-July as it shifts focus from countering inflation to sustaining growth amid a global credit crisis. The Foreign Ministry said last week the U.S. shouldn’t blame its trade deficit on exchange rates.

“Obama may exert more pressure on China’s foreign-exchange policy to boost U.S. exports and curb unemployment, but China will first consider its own economic fundamentals,” said Ha Jiming, Hong Kong-based chief economist at China International Capital Corp., the nation’s first Sino-foreign investment bank.

Hopefully, Obama will see the light and it will instead be a case of ‘when the facts change I change’.

Policy of Stability
Paulson said on Oct. 21 that he is “pleased” that China’s currency has appreciated more than 20 percent since a peg against the dollar was abandoned in July 2005.

Paulson either has it backwards, or he’s being subversive.

“It will be emphasized in the next Strategic Economic Dialogue that it is more important than ever that China should rely more on domestic demand rather than its trade surplus to sustain economic growth,” said Nicholas Lardy, senior fellow at the Peterson Institute for International Economics in Washington.

Same- ignorant or subversive are the only possibilities.

“Currency manipulation has been a quite specific implication in law, and no other president has ever used that term,” said Straszheim. If Obama doesn’t take actions following the charge that China is manipulating the yuan, “he will be regarded as another old type politician who promises one thing during the campaign and does another in office,” he added.


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Aussies buy their own currency

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“Australia’s central bank has intervened to support the tumbling Australian dollar, but failed to prevent its slide to five-year lows against the U.S. currency and its deepest-ever trough against the yen. “

This intervention has two purposes.

One is to keep the decline orderly, the other is anti-inflationary, as the apparent collapse in the currency is immediately passed through to import prices, which play a major role in domestic consumption.

The problem in using intervention to support one’s own currency is that reserves get depleted before the desired level of the currency is achieved.

One core issue is declining real terms of trade due to falling prices of Australia’s exports vs. the prices of their imports.

The other issue is internal distribution.

Australia digs and exports coal, for example, and the boats return full of consumer goods.

A falling currency alters distribution of consumption to those residents in export industries and away from the rest of the population.

The recent US history:

Over one year ago Paulson successfully got foreign CBs to stop buying dollars.

That, along with rising crude prices, sent the dollar to its subsequent lows.

He did this by calling CBs buying dollars currency manipulators and outlaws, insisting they let markets decide currency values.

This was a thinly veiled ploy to get the dollar down to spur exports, as articulated by the Fed chairman in subsequent congressional testimony.

It ‘worked’ as US exports grew at record pace and US GDP muddled through at modestly positive numbers. (A nation net imports exactly to the extent non residents realize their desire to accumulate its net financial assets, as discussed in previous posts)

It also caused a punishing decline in real terms of trade for the US and a decline in the US standard of living, but that was less important to policy makers than ‘pretty trade numbers’ and sustaining domestic demand via sufficiently supportive fiscal policy.

This all caused demand to fall overseas, as governments were (and for the most part remain) in the dark as to sustaining domestic demand, and their economies were directly or indirectly connected to exports to the US.

After Q2 this year rising US exports and falling non-petro imports broke the back of world economies and it has all come crashing down.

Falling crude prices due to ‘the great Mike Masters sell off’ (that I’m still waiting to run its course, and which last week’s OPEC cuts may be signaling), also made dollars a lot tougher to get and created a dollar squeeze on a world that had quietly gotten strung out on dollar borrowings.

Accumulating USD by non-residents to pay off debt in the private sectors is working to strengthen the USD the same way foreign CB accumulation had done.

It is bringing down their currencies and will eventually support foreign exports (at the expense of their real terms of trade, but that’s another story).

The US trade gap will fall substantially for a while as crude prices work their way into the numbers.

But then, should world private sector dollar ‘savings’ get rebuilt via USD debt reduction, make foreign goods cheap enough for US imports to once again start to grow.

A substantial increase in US domestic demand via deficit spending (which should be forthcoming with an Obama presidency and democratic control in both houses of Congress.) can restore domestic output, employment, and US imports, to restore our standard of living to pre-Paulson levels.

If we have a policy that drops energy imports, otherwise we can give it all back in short order.

But that’s all getting ahead of one’s self.

For now, the strong dollar seems to be giving foreign CBs, like the RBA in Australia, an inflation scare even as their economies weaken, housing prices sag, and unemployment rises.

This is typical of emerging market economies- external debt burdens high inflation due to weak currencies (due to debt service from the external debt- they need to sell local currency to meet their external debt payments) high unemployment deteriorating real terms of trade as export prices fail to keep up with import prices.

Again, sorry for the earlier mix-up. Need to get my eyes checked!


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Re: Yen strength

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Yes! And it’s deep- Hungarian homeowners borrowed yen to buy their homes, for just one example.

And with Japan an importer of all its crude, lower prices make yen that much harder to get, much like USD. And maybe even more so.

>   
>   On Fri, Oct 24, 2008 at 9:17 AM, James wrote:
>   
>   Liquidation of Yen carry trades also in full force…..
>   


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ECB council member foresees ‘tri-polar’ currency system

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>   
>   On Sun, Oct 19, 2008 at 11:06 PM, wrote:
>   
>   Sure he can say that now so long as the Fed is there to
>   backstop everything. These Europeans have no shame.
>   

Right, the Eurozone is surviving on the unlimited Fed USD swap lines.

That’s a complete ideological failure for the Euro members.

It’s their worst nightmare- the ECB borrowing USD reserves to support the Euro Banking System.

ECB council member foresees ‘tri-polar’ currency system

By Jonathan Tirone

VIENNA, Austria — European Central Bank council member Ewald Nowotny said a “tri-polar” global currency system is developing between Asia, Europe, and the United States and that he’s skeptical the U.S. dollar’s centrality can be revived.


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Saudi Production falls slightly as Opec production falls 425,000 bpd

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Production falling some but overall demand probably remains high, as reported inventories remain very low, as the GMIL (Great Master’s Inventory Liquidation) may still be a factor as more pension funds resist adding to passive commodity strategies.

Several months ago a Saudi official said he though $85 was the ‘right’ price, but that doesn’t mean it’s their target.

They are still price setter, until their production is forces down by several million bpd by excess supply.

Meanwhile, lower crude prices both support the $US and help keep a lid on headline inflation.

OPEC September Crude Output Down 425,000 Bbl/Day to 32.19 Million

New York, Oct. 3 (Bloomberg) Crude-oil production from the 13 OPEC members in September declined 425,000 barrels a day from August, the latest Bloomberg survey of producers, oil companies and industry analysts shows. Figures are in the thousands of barrels a day.

Opec Production
September 2008

Opec Country Sept. Est. Aug. Output Monthly Change Nov. 1 Target Est. vs. Target Est. Cap. (@)
Algeria 1,400 1,410 -10 1,357 43 1,450
Angola** 1,800 1,880 -80 1,900 -100 1,930
Ecuador 500 500 0 520 -20 500
Indonesia 865 865 0 865 0 900
Iran 3,950 4,080 -130 3,817 133 4,100
Iraq** 2,135 2,310 -175 — — 2,500
Kuwait# 2,600 2,600 0 2,531 69 2,650r
Libya 1,720 1,630 90 1,712 8 1,750
Nigeria 1,880 1,940r -60 2,163 -283 2,200
Qatar 880 880 0 828 52 900
Saudi Arabia# 9,450 9,500 -50 8,943 507 10,800
U.A.E 2,650 2,660 -10 2,567 83 2,800r
Venezuela 2,360 2,360 0 2,470 -110 2,500
Total OPEC-13 32,190 32,165r -425 — — 34,980r
Total OPEC-12* 30,055 30,305r -250 29,673 382 32,480r

**Iraq has no quota. Quotas effective Nov. 1, except for OPEC’s newest members,
Angola and Ecuador, who were formally assigned output targets Dec. 5, 2007.
OPEC announced a quota target of 28.808 million bbls/day at its Sept. 10
meeting but that figure excludes Indonesia who plans to leave the producer formally at year-end.

Totals rounded.

r = revised @ = Capacity attainable within 30 days and sustainable for 90 days.
# Includes Neutral Zone production shared equally between Saudi Arabia & Kuwait.


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Eurozone on the Brink

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Hi Joseph,

Agreed, and this attitude continues this morning, with comments like ‘Europe needs this slowdown to bring down inflation’ as their opinion leaders argue against a rate cut (not that a rate cut would actually help demand as they think it would, but that’s another story).

It seems they are actually welcoming this weakness, probably out of fear unemployment was getting far too low to ‘discipline’ the unions, as wage demands were anecdotally featured in the Eurozone news.

France’s proposal for a 300 billion euro wide fund to calm bank depositors was immediately shot down by Germany (not that it would have or could have been sufficient to stop a run on the banking system, but that too is another story).

It is also becoming more clear that effectively major euro lending institutions have found themselves massively ‘long’ euros and ‘short’ dollars. The Fed’s swap lines have grown to over $600 billion, mainly with the ECB. This means the ECB is borrowing USD from the Fed to lend to its banks. This represents the same kind of external debt that has brought down currencies since time began. Running up external debt to sustain your currency is highly unlikely to succeed.

Ultimately, their only exit is to sell euros and buy the USD needed to cover their net USD needs. The resulting fall in the currency can spiral into a serious run on the banking system. Unlike Americans who run to high quality securities in their local currency when they get scared, Europeans and their institutions tend to flee the currency itself.

While the national governments will attempt to contain any such run, they don’t have the capability, as they are all limited fiscally by both law and market forces, with the latter the far stronger force. Only the ECB can write the check of the size needed, no matter how large, but they are currently prohibited by treaty from making such a fiscal transfer.

I have serious doubts the Eurozone can get through this week without entering into a system wide banking crisis that will end with the payments system being closed down until it reopens with bank deposit insurance at the ‘federal level’- in this case from the ECB itself.

The Eurozone would have been ‘saved’ if the US has responded with a fiscal response in the range of 5% of GDP, and continued to increase imports and keep the world export industries alive.

But that didn’t happen, and, by design, that channel was cut off when Paulson, supported by Bernanke and Bush, managed to convince foreign central banks to stop accumulating USD reserves.

This both killed the goose laying the golden eggs for the US (imports are a real benefit and exports a real cost), as US exports have boomed and real terms of trade fell, and also triggered the looming collapse of the Eurozone as exports fell off and domestic demand remained weak.

Good morning!


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Wednesday beginning on the weak side

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Could be a very tough three days coming.

Yesterday probably used up all the Paulson plan rally exuberance. Yesterday could have been the first leg of a classic buy the rumor/sell the news event.

The package has been sold by threats of ‘grave risks’. Now the risk is the package doesn’t do anything for those ‘grave risks’ which it won’t, particularly in Europe. And they know cutting rates in the US did little or nothing, reducing expectations of what a rate cut could do in Europe.

Crude back up over $102 right now. This tends to weaken the USD as it increases the US import bill, but for now the desire to exit the Euro could overwhelm that.


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Can the euro payments system last the week?

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Euro equities and banks are now under attack, and the ECB is effectively borrowing hundreds of billions USD from the Fed via swap lines. The eurozone deposit insurance is by the national governments, not the ECN, which are credit constrained.

National government euro bonds have been supported by various CB/monetary authority allocations that are slowing with slowing net exports.

A major bank failure becomes infinitely more problematic in the eurozone than in the US, Japan, or UK, all who have deposit insurance at the ‘federal’ level.

The risk in the eurozone is the payments system completely shuts down, and re opens only when the ECB is allowed to conduct what amounts to fiscal transfers.

In a crunch, USD borrowings will need to be serviced from selling euros to buy USD and result in a sharply falling euro.

Yields on the national government bonds will move sharply higher due to credit concerns, as will credit default premiums in general.

For 10 years the euro ‘system’ has functioned reasonably well on the way up.

The systemic risk is only on the way down. And once in motion, it will unwind very quickly.

Protect yourself by not having any euro deposits, buying out of the money puts on the national government bonds and out of the money puts on the euro.

And then hope you lose those bets!


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