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Old 11-04-2010, 07:09 PM   #61
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I'm sure it will change at some point, but guessing when has, historically, been an exercise in futility.
Not just an exercise in futility, depending on your portfolio decisions a costly monetary one.

Still, I think the pressures may be finally approaching escape velocity as Bernanke leans ever more and more on the accelerator. But as you point out this has been going on for decades. That having been said, I am certainly not ready to bet against the $/yuan peg yet...
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Old 11-04-2010, 07:09 PM   #62
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That didn't take long. Central Bankers are heard on Bernanke's "beggar-thy-neighbor" policy as they consider responses:

FT.com / Global Economy - Backlash against Fed
If every country wants a weak currency relative to their neighbours and is prepared to aggressively debase their currency in an attempt to acheive that, maybe its time to buy gold

As recently as the 1980s and 1990s countries were defending their currencies against speculators and realities trying to drive them lower. Soros and the GBP, Thao Baht etc etc How the world has changed.
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Old 11-04-2010, 07:12 PM   #63
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Not just an exercise in futility, depending on your portfolio decisions a costly monetary one.

Still, I think the pressures may be finally approaching escape velocity. As you point out they have been building for decades. That having been said, I am certainly not ready to bet against the $/yuan peg yet...
Me neither, but I'm more concerned about the USD - HKD peg than the RMB peg (which is not strictly a straight USD peg these days). That said, I am planing to buy some more RMB bonds to get some more currency diversification.
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Old 11-05-2010, 10:10 AM   #64
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I read it as saying that foreign holders of US Dollar denominated debt would be hurt by a devaluation.
Correct - and thanks.
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Old 11-05-2010, 10:13 AM   #65
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That didn't take long. Central Bankers are heard on Bernanke's "beggar-thy-neighbor" policy as they consider responses:

FT.com / Global Economy - Backlash against Fed
The only specific complaints in the article are from the Central Bank heads of Brazil and Thailand. Their view is not representative of anything other than their own concerns despite the headline.

Brazil’s worry is quite legitimate and representative of many developing countries (sans China). Their economies are fragile and capital markets small, which makes it very hard to deal with large currency movements and major changes in value. Their domestic demand is still quite dependent on external trade so exchange sensitivity is very high and they do not have effective tools to deal with resulting inflation.

Brazil has been here many times now – and each time their economy and currency has collapsed. Every adult in the country knows this and remembers that pain. Same with Mexico, Argentina, and many Asian economies. Clearly, the leadership in these countries is not yet convinced their economies can deal with this.
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Old 11-05-2010, 10:15 AM   #66
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Just wanted to say again this was a really great exchange. I read through it just now and wanted to add one point I didn't see come up. It was mentioned in the Charlie Rose interview with Stiglitz and Berner and it involves those countries that peg their currencies to the USD (in particular China). Under such an policy/ arrangment, a weaker dollar advantage transfers to any economy pegging its currency to the dollar.

It seems a point of particular signficance to an export economy.
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Old 11-05-2010, 10:27 AM   #67
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Yves at Naked Capitalism has a pretty good summary of the discussion of QE II. Worth a read for those that are trying to understand likely impact.

The key summary of Mr. El-Erian's opinion.

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The unfortunate conclusion is that QE2 will be of limited success in sustaining high growth and job creation in the US, and will complicate life for many other countries. With domestic outcomes again falling short of policy expectations, it is just a matter of time until the Fed will be expected to do even more. And this means Wednesdays QE2 announcement is unlikely to be the end of unusual Fed policy activism.
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The Fed would be well advised to prepare for this possibility from now. In doing so, it should insist that any further use of its balance sheet be subject to two overriding conditions.

First, rather than constitute yet another solo effort, the use of the Feds balance sheet should be one component of a more holistic US policy approach that addresses both demand and structural reform issues; and second, that such a policy response be accompanied by correlated, if not co-ordinated, actions in other countries. Without that, the Fed risks finding itself crossing the delicate line that separates a courageous policy approach from a counterproductive one.
Mr. El-Erians points are, as usual, are articulate and legitimate, as are his recommendations. What the US needs is not monetary policy but credible fiscal action and reformed consumer behaviour. Consumers are showing signs of this reform as seen in the improving savings rate and declining consumer debt. Still, BOT is quite negative. There is no real credibility on the fiscal front. Those that complain about Fed actions should redirect their frustration toward the political leadership, where corrective policy is not yet visible.

The commentary that Naked Capitalism added around this sounds more like political debate so I wont comment.
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Old 11-05-2010, 10:31 AM   #68
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It follows that if one expects the USD to continue to devaule, one should not invest in USD debt. Absent continued manipulation, a reduced demand for USD debt should logically lead to higher interest rates which reduces the market value of debt instruments (especially longer maturities) so investors will get hit twice.
If the Fed is successful, yes. If the US economy stays weak and falls into chronic deflation, though, a more likely outcome is like Japan, with an ever increasing supply of money driving yields lower still.
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Old 11-05-2010, 10:36 AM   #69
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Just wanted to say again this was a really great exchange. I read through it just now and wanted to add one point I didn't see come up. It was mentioned in the Charlie Rose interview with Stiglitz and Berner and it involves those countries that peg their currencies to the USD (in particular China). Under such an policy/ arrangment, a weaker dollar advantage transfers to any economy pegging its currency to the dollar.

It seems a point of particular signficance to an export economy.
This is an excellent point. Countries like Brazil complain bitterly about the US$ rate but the deval of the Real vs Yuanl rate hurts them badly, and they are reluctant to complain against China for fear of reprisal.
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Old 11-05-2010, 12:29 PM   #70
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The only specific complaints in the article are from the Central Bank heads of Brazil and Thailand. Their view is not representative of anything other than their own concerns despite the headline.

Brazil’s worry is quite legitimate and representative of many developing countries (sans China). Their economies are fragile and capital markets small, which makes it very hard to deal with large currency movements and major changes in value. Their domestic demand is still quite dependent on external trade so exchange sensitivity is very high and they do not have effective tools to deal with resulting inflation.

Brazil has been here many times now – and each time their economy and currency has collapsed. Every adult in the country knows this and remembers that pain. Same with Mexico, Argentina, and many Asian economies. Clearly, the leadership in these countries is not yet convinced their economies can deal with this.

Yet another country (South Korea) heard from and not pleased with the "beggar-thy-neighbor" wrong-headed approach of Bernanke et al.

News Headlines
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Old 11-05-2010, 02:29 PM   #71
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We're in counterintuitive times. Zero rates and, even Quantitative Easing, don't by themselves make for "easy money". In fact, Taylor Rule calculations indicate a negative Fed Fund's rate is called for so, by that measure at least, the Fed's zero rate is restrictive.

Here's some data from Citigroup economists comparing various measures of money growth and its transmission to inflation before and after the Fed's "extraordinary easing." Show me in the data below, where is the evidence of money growth or inflation. And then consider where we'd be if the Fed stood pat like so many seem to be suggesting.
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Old 11-05-2010, 06:12 PM   #72
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If the Fed is successful, yes. If the US economy stays weak and falls into chronic deflation, though, a more likely outcome is like Japan, with an ever increasing supply of money driving yields lower still.
Very true, although there are a number of (IMHO) very significant differences between Japan and the US inculding the enterprise/compeititive culture, the much greater speed with which the US deals with economic failures, the general openness of the US economy, the net population growth/immigration etc etc. I'd like to believe that the US will do a much better job of dealing with a deflationary problem than Japan but who knows?
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Old 11-05-2010, 07:30 PM   #73
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Very true, although there are a number of (IMHO) very significant differences between Japan and the US inculding the enterprise/compeititive culture, the much greater speed with which the US deals with economic failures, the general openness of the US economy, the net population growth/immigration etc etc. I'd like to believe that the US will do a much better job of dealing with a deflationary problem than Japan but who knows?
Japan is a cautionary tale. And there are parallels with the USA - real estate bubble, financial crisis, bad debt.

People will disagree about the future depending upon where they think they think we are in the USA crisis.

I don't think we have hit bottom yet and that will influence the deflation question. We have had a bounce - economies don't go straight up or down - so many think we will have a slow period and then get back to normal.

I think the next downturn - I don't know the cause or what it will look like - will begin to change people's minds, because it will increase people's uncertainties and fears. All of which will increase the deflationary pressures as people get conservative.

This too shall pass and the economy will improve but the USA would have changed; they will be more cautious so it will not be a robust recovery like the 80s.

So the sequence might go something like: deflation, stagflation, recovery (2020s?) with higher unemployment and lower relative wages than in the past.

Also, the issues people discuss now - wealth distribution, social programs for the needy - will be worse and the large federal deficit will hand tie the gov't ability to address them. Add higher taxes and VAT in the future and you can see why the recovery will be muted and deflation/slow growth could be with us for awhile.
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Old 11-05-2010, 07:56 PM   #74
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Old 11-05-2010, 08:44 PM   #75
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I think the next downturn - I don't know the cause or what it will look like - will begin to change people's minds, because it will increase people's uncertainties and fears. All of which will increase the deflationary pressures as people get conservative.

.....

Also, the issues people discuss now - wealth distribution, social programs for the needy - will be worse and the large federal deficit will hand tie the gov't ability to address them. Add higher taxes and VAT in the future and you can see why the recovery will be muted and deflation/slow growth could be with us for awhile.
Most generations carry memories of their economic experiences with them through their lives. Those who lived through the great depression tended to be very conservative financially. My parents' generation still think and act based on concerns about a revisit of the high inflation experienced in 1970s. My own early life experiences are certainly an influence on my own financial behavior. So yes, I would expect people to be more conservative following a period of economic adversity.

As to the latter, sadly I agree with you.
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Old 11-06-2010, 08:15 AM   #76
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Most generations carry memories of their economic experiences with them through their lives. Those who lived through the great depression tended to be very conservative financially. My parents' generation still think and act based on concerns about a revisit of the high inflation experienced in 1970s. My own early life experiences are certainly an influence on my own financial behavior. So yes, I would expect people to be more conservative following a period of economic adversity.

As to the latter, sadly I agree with you.

The generation that faced the depression resolved to pass legislation to regulate an over leveraged financial system, to set federal standards on wages and child labor and to establish old age insurance, established a system of community colleges....The result was an unprecedented period of shared prosperity in America.

The generation that faced 1970s stagflation resolved to reduce our dependence on imported oil and to tightened the money supply. When progress was underway on both we had morning in America.
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Old 11-06-2010, 08:33 AM   #77
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Most generations carry memories of their economic experiences with them through their lives. Those who lived through the great depression tended to be very conservative financially. My parents' generation still think and act based on concerns about a revisit of the high inflation experienced in 1970s. My own early life experiences are certainly an influence on my own financial behavior. So yes, I would expect people to be more conservative following a period of economic adversity.

As to the latter, sadly I agree with you.
In analyzing why I behaved the way I did in Sept 2009, I'd have to say that the recent large downturn played a large role in my decision making process. I had anchored myself to a certain target value and decided to jump off the merry go round once I got there. I should have been looking at the bigger picture in terms of my time horizon.
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Old 11-06-2010, 05:34 PM   #78
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The generation that faced the depression resolved to pass legislation to regulate an over leveraged financial system, to set federal standards on wages and child labor and to establish old age insurance, established a system of community colleges....The result was an unprecedented period of shared prosperity in America.
With respect, while these were good things, it was other factors which drove America's economic prosperity post WWII - not least that fact that following WWII Americal had no serious rival as a substantial free market economy.
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Old 11-06-2010, 06:03 PM   #79
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Buy an RV an plan to travel in the USA. Foreign travel will be expensive.
Gas will also be expensive.
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Old 11-06-2010, 06:08 PM   #80
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With respect, while these were good things, it was other factors which drove America's economic prosperity post WWII - not least that fact that following WWII Americal had no serious rival as a substantial free market economy.
Right. Like the Marshall plan and the transportation infrastructure that soon followed - and a high savings rate.

The current bitter dialog among citizens about gov't spending is all the more striking given the prominent enabling role it has played in the past.
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