weekend commentary - US loses control of foreign exchange dollar recycling
(snip)"Tin Cups and Ponzi Boyz
Saturday, April 26th, 2008 at 7:52 AM
New Lee Adler, Aaron Krowne, and Russ Winter podcast is available, including free preview portion. [worth listening to BTW - sic] - Here is a key related note and item.
On the question of foreign central banks, I spotted this item showing that of late it has been Russia who has been engaging USD buying interventions to stem the appreciation of the Rouble, (another defacto pegged currency). This operation in effect buys more overpriced USD securities and puts even more Roubles into the Russian economy to do so.
MOSCOW, April 25 (Reuters) - Russia’s central bank has bought about $20 billion on the forex market this month to prevent the rouble from appreciating against the dual currency basket, First Deputy Chairman Alexei Ulyukayev said on Friday. Dealers said Friday’s trade volumes at Moscow’s MICEX exchange reached $10.3 billion, with the central bank purchasing about $6 billion.
Next we see the familiar pattern of these countries trying to control their Mad Max inflations with monetary rather than currency policy. These countries tighten, the US eases, and the cheapened USDs come rushing in for exchange. Note however the discussion about allowing the Rouble to appreciate. By how much is the question. Increasing bank capital set asides is a rouble sterilization operation.
On Thursday, Ulyukayev said the central bank was ready to tighten monetary policy because foreign capital inflows have picked up again and inflation accelerated to 14 percent in April. Ulyukayev, who chairs the Bank of Russia’s monetary policy committee, said the bank may soon raise interest rates but did not rule out the use of rouble appreciation or an increase in the amount of capital banks have to set aside.
In thinking of the larger issue and environment discussed in the backside of the podcast of “will FCB lend the huge support necessary to deal with enormous recessionary and the US Treasury backstop of cronies finance requirements going forward”??? I think it is important to consider something critical. These Dollar recycling and intervention operations are entirely a function of the needs and timing of the enabling country (Russia in this instance) and not the US. If Russia decides, say on a Friday, to engage in this conduct, it has little if anything to do with US Treasury or GSEs finance needs of the moment. It is entirely a function of the internal policy decisions of the FCB. I think that is why the indirect participations at the auctions have been so erratic.
So if the the US Treasury or Fannie Mae were to show up next week with a big tin cup, it may be tough shit Ponzi Boyz. Or if Ponzi Boyz were lucky, it may be that the FCBs generically had the “need” that day. However, with the kind of “storm the palace” inflations these countries are now experiencing, their real and proper need is currency appreciation, and halting USD recycling and by extension local currency printing. That way, some of the inflation can be transmitted off on the US, and other USD holders. It’s hard to see why Russia in particular would even care about those consequences for Americans. Buying USD securities at puny interest rates then becomes a hot potato right as US financings are gathering steam. The fact that FCB demand for US securities is so artificial and self directed will make these financings extremely difficult to conduct.
Also discussed in the backside of the podcast was the prospect for the Fed to start aggressively monetizing the Treasury’s finance onslaught. I have little doubt that some of this will be attempted, especially when the Ponzi Boyz can’t time these new debt offerings with foreigner’s needs. Also the broker-dealer network is too strained to hold the bag on tens of billions of routed marked down US Treasury notes. But the effect of monetizations will be limited and in my thinking very overrated. The amounts required are just too large. It is like going into battle against tanks and artillery with a 22 caliber. There are big problems with it as well, and one are traders (Berserkers). Once these Berserkers spot a few serious coupon passes, watch the swift and immediate reaction. And you thought $120 oil, and $5 milk was bad? The other problem is that FCBs hold $2.254 trillion (just custodial holdings) in US securities already. They will have to be kept sedated. Rattle even a few of those holders at the margin and rates could get hiked a couple percent over night.
The Ponzi Boyz do have a few tried and true short term Godfather protection racket tricks that could also be employed, especially with “incidents” in the Middle East. The idea is to get the USD holders there into a tizzy and panic them into “the safety” of US Treasuries and agencies. A version of this was produced last week, but had little effect. Perhaps something much bigger is in store? Don’t be too surprised if we get a “whodathunk” in that score. [emphasis added - sic]"(snip)
Indeed it is possible that 'something much bigger' is just around the corner ! For the sake of the American dollar and middle class Americans, it NEEDS to be ! Otherwise, Foreign Central Banks are now at the point where they are prepared to stop 'propping up' the US dollar in order to attempt to control their own countries' inflation rates, meaning that US inflation rates will accelerate even more. Stand by for a $2 Euro, $5 gasoline, $1 tomatoes etc. if 'something much bigger' in the way of an international crisis doesn't materialize quickly.
Re: weekend commentary - US loses control of foreign exchange dollar recycling
Quote:
Originally Posted by
Melonie
Stand by for a $2 Euro, $5 gasoline, $1 tomatoes etc. if 'something much bigger' in the way of an international crisis doesn't materialize quickly.
I'm still waiting for the price of American Stratocasters to go down in $AU ;)
Quote:
The US and China bicker like an unhappily married couple, but Brad Setser warns us that the squabbling is getting nastier. And worse, both parties seem to fail to recognize how deeply enmeshed they are, and how divorce is not a realistic option.
"The negative results of the US dollar's decline are evident: the rising prices of all primary products, the intensified pressure on inflation globally, the confusion in the settlement of international transactions, etc. Worst of all, this is the US' disguised way of avoiding paying off its debts to foreign countries."
http://www.nakedcapitalism.com/2008/...r-worsens.html
(Offline at time of posting... here's the Google cache: http://209.85.173.104/search?q=cache...lnk&cd=1&gl=au)
So China's saying something like "Hey, no fair - you're letting the money you owe us become worthless. But if we stop lending you money, you can't afford to buy all our stuff anymore. Ohshit".
The sneaky bastard part of me now has the idea that, if you could get away with it, here's the ultimate market manipulation- Rack up debts in USD while acquiring assets not in USD (gold or Euros or something)
- Let the USD tank
- Now your debt is in a cheap currency, so pay it back easily
In possibly related news,
http://globaleconomicanalysis.blogsp...ck-market.html
And in definitely related news, despite the global food shortage, it's now unprofitable for China to export rice
Quote:
Rice Prices Going Through Roof Worldwide
Cost Nearly Doubles Since February; Industry Experts: Part Of Problem Is China Ceasing Exports Due To Weak Dollar
http://wcbstv.com/topstories/rice.pr....2.707121.html
(Is the Fed Causing a Global Food Crisis? http://bigpicture.typepad.com/comments/2008/04/is-the-fed-caus.html)
Other news/editorials over the weekend...
More free money:
Quote:
The Federal Reserve is at it again, pumping another $50 billion in short-term loans in to the financial system to prevent a freeze up. That brings the total to a cool $360 billion since the auctions started in December. 83 bidders were represented looking for a slice of the loans which were granted at 2.87% interest.
http://blownmortgage.com/2008/04/23/...r-your-effort/
But it's doomed to fail
Quote:
Interestingly enough, analysis posted on the Fed's own website shows why the program is doomed to fail. The conclusion of a Fed sponsored study was that banks and broker dealers will not make short term unsecured loans to each other when instead they can swap increasingly lousy paper with the Fed.
http://globaleconomicanalysis.blogsp...-futility.html
And in commodities,
Quote:
Ship hired by U.S. military fires warning shots in Gulf
The news helped push oil prices up more than $3 to $119.50 a barrel
http://www.reuters.com/article/topNe...rpc=22&sp=true
("Iran denies confrontation with U.S. ship in Gulf" http://news.xinhuanet.com/english/20...nt_8052480.htm but "U.S. Weighing Readiness for Military Action Against Iran" http://www.washingtonpost.com/wp-dyn...501480_pf.html)
Re: weekend commentary - US loses control of foreign exchange dollar recycling
Quote:
The sneaky bastard part of me now has the idea that, if you could get away with it, here's the ultimate market manipulation
Rack up debts in USD while acquiring assets not in USD (gold or Euros or something)
Let the USD tank
Now your debt is in a cheap currency, so pay it back easily
this is the functional definition of the 'carry trade' ... which has been going on with the Japanese Yen for years ! The concept is exactly what you described ... borrow a shitload of money at very low interest rates denominated in a currency that is stable or weakening ... invest that borrowed money in anything that is denominated in a currency that is strengthening ... sell off your profitable investment ... pocket the exchange rate gains from the strengthening currency versus your own currency ... pocket additional exchange rate gains by paying back the weak currency loan with a reduced amount of your own currency.
The risk factor of course is that the relationships between the lender's currency, the currency your investment is denominated in, and your own currency, can abruptly change direction. In regard to this specific thread, the middle eastern Sovereign Wealth funds that have invested heavily in US dollar denominated stocks and bonds stand to take major losses if the US dollar devalues internationally. This is why the US gov't has had trouble recently in attracting (foreign) buyers for US bonds / treasuries. Also, to some degree at least, this same issue is contributing to 'shortage of capital' for US investment banks.
Re: weekend commentary - US loses control of foreign exchange dollar recycling
Quote:
Originally Posted by
Melonie
this is the functional definition of the 'carry trade' ... which has been going on with the Japanese Yen for years ! The concept is exactly what you described ... borrow a shitload of money at very low interest rates denominated in a currency that is stable or weakening ... invest that borrowed money in anything that is denominated in a currency that is strengthening ... sell off your profitable investment ... pocket the exchange rate gains from the strengthening currency versus your own currency ... pocket additional exchange rate gains by paying back the weak currency loan with a reduced amount of your own currency.
That's one of the strategies for shorting a currency, but the "sneaky" bit I was referring to was when the currency you're shorting is the one whose strength you are personally responsible for :D (i.e. when I say "Let the USD tank" in the above post, I was thinking that a government could short its own currency by racking up debt in it and then allow/cause their currency to collapse. Not that I think this is happening with the US.) I see similar devious abuses or market power in one of the markets I'm in... it should be illegal.
Re: weekend commentary - US loses control of foreign exchange dollar recycling
Quote:
but the "sneaky" bit I was referring to was when the currency you're shorting is the one whose strength you are personally responsible for
^^^ which serves to bring us right back on the topic of this thread ... that because of the huge amount of US dollars / US Treasuries that are in the hands of middle eastern oil shieks, Japanese bankers, Chinese central bankers, Russian central bankers etc., the US is no longer in a position to control the international valuation of the dollar.
The US Fed has enjoyed the ability to regulate the international valuation of the dollar ever since Nixon dropped the last of the 'gold standard' in 1971 ... but that ability now appears to be at an end as the number of 'trade deficit dollars' in the hands of foreigners now greatly exceeds the number of dollars available to the US Fed as foreign exchange currency reserves. Without the 'gold standard', the US dollar is now subject to large swings in international valuation based on the actions of Foreign Central Banks, Sovereign Wealth Funds, hedge funds etc.
Re: weekend commentary - US loses control of foreign exchange dollar recycling
Quote:
Originally Posted by
Melonie
^^^ which serves to bring us right back on the topic of this thread ... that because of the huge amount of US dollars / US Treasuries that are in the hands of middle eastern oil shieks, Japanese bankers, Chinese central bankers, Russian central bankers etc., the US is no longer in a position to control the international valuation of the dollar
Only if you are clueless about how a currency is valued. If US productivity goes up dollar goes up; as simple as that and US productivity is pretty much in US hands not others
If you had answered my question, how much would a $100 sell for in the street corner (in $ terms) you would understand value and prices, but pretty much every one of your post, you make the same basic mistake and assert some powerful forces control prices of assets.
The amount of cluelessness is directly proportional to the blame people put on single powerful forces controlling free market prices (Whether its God or Fed or the Chinese Govt or George Bush)
Re: weekend commentary - US loses control of foreign exchange dollar recycling
if the dollar was to depreciate substantially over a short period of time, wouldn't the CBs of other countries devalue their currencies somewhat because the higher value of their currencies would hurt their economies? Are we going to see at some point a disoderly flight from one currency to the next, then from that currency to another one? Let's say from Dollar to Euro, from Euro to RMB, from RMB to Swiss Franc? And then from Swiss franc to......?
Re: weekend commentary - US loses control of foreign exchange dollar recycling
Quote:
Originally Posted by
xanfiles1
Only if you are clueless about how a currency is valued. If US productivity goes up dollar goes up; as simple as that and US productivity is pretty much in US hands not others
If you had answered my question, how much would a $100 sell for in the street corner (in $ terms) you would understand value and prices, but pretty much every one of your post, you make the same basic mistake and assert some powerful forces control prices of assets.
The amount of cluelessness is directly proportional to the blame people put on single powerful forces controlling free market prices (Whether its God or Fed or the Chinese Govt or George Bush)
Uh. I guess all those talking heads on TV and the fiscal textbooks have it wrong about the Fed's influence on the value of the dollar. Thanks for the tip!
Re: weekend commentary - US loses control of foreign exchange dollar recycling
Quote:
Originally Posted by
Adelina
if the dollar was to depreciate substantially over a short period of time, wouldn't the CBs of other countries devalue their currencies somewhat because the higher value of their currencies would hurt their economies? Are we going to see at some point a disoderly flight from one currency to the next, then from that currency to another one? Let's say from Dollar to Euro, from Euro to RMB, from RMB to Swiss Franc? And then from Swiss franc to......?
I would say the US population will freak out before most of those other populations when it comes to a weaker currency.
Remember, we have put ourselves in the place where we cannot even make the clothes that we wear on our backs. Those other countries do.
It is amazing how this country has placed it's self into a dependency on other not-so-friendly countries. Here we have the Chinese suing CNN for 1.3 billion dollars because one of their commentators complained about lead paint in our toys and poison in our food. This is an example of how we have placed ourselves into a thorny situation.
Expect more of it.
Re: weekend commentary - US loses control of foreign exchange dollar recycling
Quote:
If you had answered my question, how much would a $100 sell for in the street corner (in $ terms) you would understand value and prices, but pretty much every one of your post, you make the same basic mistake and assert some powerful forces control prices of assets.
I already answered this question ... and the answer is 67 Euros ... no 64 Euros ... no 62 Euros ------ or alternatively 1.0 barrels of oil ... no 0.95 barrels of oil ... no 0.9 barrels of oil. Your attempted analogy of the US domestic economy being independent of foreign exchange rates simply doesn't work when the food we eat, the clothes we wear, the gasoline we use etc. are all de-facto priced in a foreign currency.