Perspectives on the global economic meltdown (Jan 26 2010)

[shyam]

Not A Single Republican Voted To Raise The Debt Ceiling In February

If the Congress does not vote to hike it, the US will basically go into default right away, and that would create all sorts of havoc for the global economy.

[SwamyG]

^^^
I heard if things don't pan out, USA could go into debt as early as March 2011 and as late as June 2011. The other option is increase taxes, no ?

[Christopher Sidor]

^^^^
Or print more dollars. Wait isnt that another word for QE-II ?

[SwamyG]

We know and talk about China fudging numbers. Here is a video talking about how American politicians have been doing the same for 40 years now.

It gives nice simple explanation of Inflation and how it is being calculated. Explains with examples the terms Hedonics, Substitution and Weighting.

[paramu]

It is official, QE2 = $600B

No, it is $900B

http://www.federalreserve.gov/newsevent ... 1103a1.pdf

Taken together, the Desk anticipates conducting $850 to $900 billion of purchases of longer-term Treasury securities through the end of the second quarter. This would result in an average purchase pace of roughly $110 billion per month, representing about $75 billion per month associated with additional purchases and roughly $35 billion per month associated with reinvestment purchases.

[Prem]

Why China's Economic Growth Is More Bark Than Bite

http://www.thestreet.com/story/10909025 ... -bite.html

Three Factors That Could Slow Chinese Economic Growth

Allow me to throw some eye-opening statistics your way.Industrial Growth: Already into its 13th year, China's investment-led industrial growth is now very long in the tooth. Research by Pivot Capital Management shows that the longest previous period of investment-led economic growth was nine years (in Thailand and Singapore). But China's real fixed investment has increased at a faster rate than GDP in nine of the past 10 years.Investment is at 70% of GDP and the return on every marginal dollar invested in China is decreasing. In 2000, it took $1.50 of credit to generate $1 of GDP. But by 2008, it took $7 of new credit to generate a $1 increase in GDP.China's bank lending explosion has led to credit-to-GDP rising to 140% -- levels equal to America in 2008 and Japan in 1991, just before their market meltdowns.You Think U.S. Unemployment Is Bad? Try China
"There are worrisome signs that China just doesn't get it, that it's clinging to antiquated policy and economic growth strategies that pre-suppose a classic snapback in global demand."So says Stephen Roach in The Next Asia.
Since the Communist Party bases its legitimacy largely on producing high levels of economic growth and employment, internal pressures and sharp divisions on how to deal with the slowdown within the party will emerge. Analysts already believe that unemployment is more than 10% -- and will worsen to uncomfortable levels.So could China fulfill bold predictions that label it the long-term growth story of the century? Perhaps. But a closer look behind the headlines is enough to raise doubts about the sustainability of China's economic growth, as noted by investors like Jim Chanos.
And when it sinks in that China, rather than a provider of global growth, is actually in the same slow-growth/high debt boat as America and Western Europe -- and without durable political institutions -- all bets will be off.

[Theo_Fidel]

And when it sinks in that China, rather than a provider of global growth, is actually in the same slow-growth/high debt boat as America and Western Europe -- and without durable political institutions -- all bets will be off.

If China ever runs into trouble the Western rats will jump ship so fast your head will spin.

Time to look for the safe harbor to avoid the splash.

[paramu]

Fun to watch:

Bernanke in Denial 2005-2007

[shyam]

QE of $900B for less than 8 months period is quiet significant. We have to wait to see whether this results in currency war between export dependent countries and US.

Bernanke Confirms That The Key Goal Of The Fed, And QE2, Is To Boost Stock Prices

First, we had Bernanke's predecessor Greenspan confirming in late July on Meet the Press what everyone knows: namely that the primary goal of the Fed is merely to encourage higher stock prices: "if the stock market continues higher it will do more to stimulate the economy than any other measure we have discussed here." And now, courtesy of an Op-Ed by the current chairman, we get confirmation, again, just three months later, from the current chairman, that the Fed cares mostly about stimulating high stock prices, solely to create the completely artificial illusion of "wealth" for the few, the proud, the shareholders, and the banking oligarchy.

[shyam]

Peter Schiff claims that Fed does QE2 because there are no buyers for US treasury bonds. For treasury to service bonds that are due, it has to issue new bonds and there are no takers - not even China. Only buyer then is Fed who can buy it using money from thin air. That is the only way it can keep long term interest rates low. For private investor to enter the bond market, the interest rate has to be much higher.

BTW, by the end of QE2, Fed will overtake China as the largest US treasury bond holder.

[shyam]

Well...

Emerging Markets Lash Out Against Bernanke's QE2 With Calls For Capital Controls

The immediate reaction to the Fed's $600 billion bond-buying announcement from nations such as Brazil, South Korea, and China has been one of defiance.

They can't control what the U.S. central bank does, but they can threaten to punish investors/speculators who pour money into their economies as a result of what the Fed does.

Reuters:

South Korea's Ministry of Finance and Strategy sent "a message to the markets" on Thursday saying it would "aggressively" consider controls on capital flows while Brazil's Foreign Trade Secretary said the Fed's move could cause "retaliatory measures"

[Hari Seldon]

O yes yes, lotsa interesting stuff happening all around. Meanwhile, moi finally got a breather of sorts from work a while. Shall be back in form, soon.

Hajaar happy deepavali to all thread regulars, btw. Price Inflation in crackers is to be seen to be believed, I tell ya....

[SwamyG]

QE of $900B for less than 8 months period is quiet significant. We have to wait to see whether this results in currency war between export dependent countries and US.

Bernanke Confirms That The Key Goal Of The Fed, And QE2, Is To Boost Stock Prices

First, we had Bernanke's predecessor Greenspan confirming in late July on Meet the Press what everyone knows: namely that the primary goal of the Fed is merely to encourage higher stock prices: "if the stock market continues higher it will do more to stimulate the economy than any other measure we have discussed here." And now, courtesy of an Op-Ed by the current chairman, we get confirmation, again, just three months later, from the current chairman, that the Fed cares mostly about stimulating high stock prices, solely to create the completely artificial illusion of "wealth" for the few, the proud, the shareholders, and the banking oligarchy.

I see value in increasing the stock prices; stock prices reflect the aspirations, fears and desires of investors. It translates to some deal of consumer confidence. But as we have seen just because the stock prices go up, does not mean unemployment will go down or the companies will start hiring/producing more. Neither does it translate to the big banks lending money to the small businesses, they continue to be involved in carry-trade.

By just observing the facts and Fed's reason, it appears they care for just a few. But entities have a survival instinct and will strive to survive with least cost.

[Hari Seldon]

PIMCO's El-Erian takes apart Sri Bearnake's hope and change optimism about QE2. Actually, Sri Ben himself admits that the whole point of QE2 is to keep stocks high, Goldman now estimates QE2 magnitude to breach $2trn from the mere $600bn announced thus far and word on the street is rates will have to remain low till 2015 for the bankster beneficiaries to realize a modicum of gain from the policy.

QE2 blunderbuss likely to backfire (El-Erian in FT)

Other government agencies are paralysed by real and perceived constraints, seemingly happy to retreat to the sidelines and let the Fed do all the heavy lifting. But liquidity injections and financial engineering are insufficient to deal with the challenges that the US faces. Without meaningful structural reforms, part of the Fed’s liquidity injection will leak right out of the US and result in yet another surge of capital flows to other countries.

The rest of the world does not need this extra liquidity, and this is where the second problem emerges. Several emerging economies, such as Brazil and China, are already close to overheating; and the eurozone and Japan can ill afford further appreciation in their currencies.

Despite polite rhetoric to the contrary in the lead up to the Group of 20 leading economies summit in Korea this month, other countries are likely to counter what they view as an unnecessarily disruptive surge in capital flows caused by inappropriate and short-sighted American policy. The result will be renewed currency tensions and a higher risk of capital controls and trade protectionism.

The third issue relates to the gradual erosion of America’s central role in the global economy – including as the provider of both the world’s reserve currency and its deepest and most predictable financial markets. No other country or multilateral institution can displace the US, but a combination of alternatives can serve to erode its influence over time. No wonder commodity prices surged higher and the dollar weakened markedly in anticipation of QE2, pointing to increased input costs for American companies and unwelcome pressures on their earnings.

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 Wednesday’s QE2 announcement is unlikely to be the end of unusual Fed policy activism.

Mish sums up Erian's arguments cogently and in brief thus:

1. The Fed is going it alone, without meaningful structural reforms
2. Emerging economies burdened by capital inflows in the wake of QEII will react with currency wars, protectionism, and capital controls
3. Resultant commodity price increases will increase input costs and reduce earnings of American companies

Meanwhile the usual suspects - the enfant terribles on twitter are all agog onlee....
http://twitter.com/#!/zerohedge

Video Footage Of Protests In Ireland, Ministry Of Finance Besieged http://bit.ly/cLxbjo

El-Erian Warns QE2 To Backfire, Sees QE3 Coming Soon http://bit.ly/9qwEJb

Citi's Englander On The Dollar's Fate After QE2: "Further Drop" Coming http://bit.ly/9FhVqT

Former Central Banker Warns Entire World Is On Verge Of Another Bubble That "Could Burst With Disastrous Consequences" http://bit.ly/atYD0d

The Ultimate Insiders' Take on QE2 and Basel 3--Treasury Encouraged to Issue Debt to Match Fed Purchases http://bit.ly/dcx30N

According to a report, Russian sovereign funds won't buy Spain and Ireland assets

dont look now but Irish bonds just went bidless

Irish, Greek, Spanish spreads surging all day.

Portugal Government rules out resorting to aid from abroad over debt woes - cabinet minister; Odd, Greece did the same in January

And on and on....

[svinayak]

I see value in increasing the stock prices; stock prices reflect the aspirations, fears and desires of investors. It translates to some deal of consumer confidence. But as we have seen just because the stock prices go up, does not mean unemployment will go down or the companies will start hiring/producing more. Neither does it translate to the big banks lending money to the small businesses, they continue to be involved in carry-trade.

US consumers have been psy conditioned for good news and rising stock prices. This keeps the public in good mood and spending mood. This has been studied for a long time.

[shyam]

US consumers can continue to spend. But as long as there is no productive economy, this mindless consumption has to stop somewhere.

The problem I see is that there is no real attempt to create production jobs in US. Atleast show attempts to make PRC 51st state of US

[SwamyG]

A friend asked me a (good) question - about the inflationary pressures caused by foreign capital inflows. I did not have a good answer, so I come here to you gurunomists. His question was, say dollars flood more into India, would not India use the money for building bridge, roads (i.e infrastructure projects) & create jobs in other areas. So is the inflows not good? Why are countries, including India, thinking about restricting foreign inflows.

ps: All earned gyan will be spread.

[SwamyG]

I see value in increasing the stock prices; stock prices reflect the aspirations, fears and desires of investors. It translates to some deal of consumer confidence. But as we have seen just because the stock prices go up, does not mean unemployment will go down or the companies will start hiring/producing more. Neither does it translate to the big banks lending money to the small businesses, they continue to be involved in carry-trade.

US consumers have been psy conditioned for good news and rising stock prices. This keeps the public in good mood and spending mood. This has been studied for a long time.

I agree. Look at this excerpt from this article: http://blogs.wsj.com/marketbeat/2010/11 ... n-the-fed/

BTW the entire article is darn good.

Goldman Sachs: While Fed purchases are intended to work via their effects on asset prices, we must remain sensitive to the fact that asset prices are not the explicit target of monetary policy, and Bernanke delivered a strong message in the Washington Post yesterday that the Fed retains the tools to unwind QE2 and tackle any unintended consequences if required.

Translation: Part of what the Fed is doing is trying to drive the prices of assets such as stocks higher. That is supposed to stimulate the economy through the so-called “wealth effect.” (Short version: People feel better and do more shopping when their 401(k)s aren’t being crushed.) But driving up the prices of stocks and other assets is the means to and end, to the end in itself. So everyone betting big on the markets under the influence of the Bernanke & Co. be warned. -eds

[SwamyG]

The article is too good and I quote the entire thingy. Source: http://www.livemint.com/2010/11/0320304 ... g.html?h=B

The US Federal Reserve is desperately trying to fix the economic system that broke down in 2007. What was this system? It was, simply put, an economy that thrived on debt. Incomes in the US were skewed in favour of the rich, while the poor got skewered. So how do you ensure demand for the goods and services that businesses produce when real incomes remain stagnant for decades? The system did that by two methods—it relocated production to the emerging countries, where costs were very cheap, thus allowing final prices to be low while keeping profits high; and it piled on debt to consumers by keeping interest rates low. But how can you keep adding debt if incomes don’t rise? You do it by inflating asset prices. Higher asset prices make consumers feel they’re richer. In the US, house owners used their homes as piggy banks, borrowing against their rising values, while the paper profits generated by a rising stock market also helped people spend. This was the economic edifice that collapsed during the bust of 2007 and which the Fed is frantically trying to rebuild. The New York Fed’s Brian Sack underlined the rationale for QE2 (Quantitative Easing 2) recently when he said that “balance sheet policy can still lower longer-term borrowing costs for many households and businesses, and it adds to household wealth by keeping asset prices higher than they otherwise would be”.

That is the whole point of QE2—to get the old system up and running again by increasing asset prices, which would create a wealth effect which would induce consumers to borrow and spend. As PIMCO boss Bill Gross put, “Has there ever been a Ponzi scheme so brazen?”

Could it work temporarily, though? It might, if it succeeds in boosting asset prices. The US Fed doesn’t expect the unemployed in the US to go out and spend. But consumption in the US is heavily skewed in favour of the rich, with the top 20% being responsible for 65% of the consumption, according to Citigroup analysts. The Fed’s gamble is to make these Americans feel richer, through higher asset prices.

But stocks and bonds have already factored in a large boost from QE2 and the question is whether it’s already discounted. The yield on the US 10-year treasury note, for instance, has bounced back from the low of 2.41% seen in early October and was at 2.66% on 1 November. But then, with the fiscal conservatives becoming stronger in the US Congress, President Barack Obama has little choice but to use monetary policy and we could very well see larger and larger doses of QE.

The trouble with lower rates of interest in the US, however, is that investors will move into non-dollar assets, which will inevitably reduce the value of the dollar. The US dollar index has already fallen from 83.16 on 31 August, around the time the speculation on QE2 started, to 77.3 on 1 November. If QE2 succeeds, it will devalue the US dollar even further. That may be eminently desirable for US exports, but what does it mean for emerging markets?

To gauge that, take a look at what happened during QE1. On 25 November 2008, the Fed announced QE1, a plan for buying $100 billion of agency debt and $500 billion mortgage-backed securities (MBS). The 10-year yield fell from 3.35% to 3.02% immediately. But the shock of the Lehman Brothers collapse was still fresh and investors sought the refuge of US treasuries. Although the dollar index fell initially, it rebounded to a new high in early March. On 18 March, the Fed enlarged the scope of QE1, by increasing purchases of agency debt to $200 billion, MBS to $1.25 trillion and added another $300 billion of treasury securities to its purchase plan. The dollar started its long slide shortly thereafter, falling to a low of 74.7 at the end of November 2009. We all know how asset prices zoomed since March 2009. Commodity prices also moved up, with the Reuters/Jeffries CRB index moving up from a low of 200 in early March 2009 to 283 by end-December.

If it works, QE2 should have the same effects. The problem for India is its sensitivity to rising commodity and oil prices. The Fed wants a return of inflation in the US and a paper by three Fed economists in September argued that “if the increase in oil prices is gradual, the persistent rise in inflation can cause a GDP expansion”. Note that the Reuters/Jeffries CRB index is now at its highest since the recovery began. That’s the danger from QE2 that India faces.

For the world economy as a whole, the attempt to put a faulty and broken system on the rails looks a lot like madness, setting the stage for an even bigger crisis even if it succeeds. Who was it that said insanity is doing the same thing over and over and expecting different results?

Manas Chakravarty looks at trends and issues in the financial markets. Your comments are welcome at [email protected]

[Suraj]

A friend asked me a (good) question - about the inflationary pressures caused by foreign capital inflows. I did not have a good answer, so I come here to you gurunomists. His question was, say dollars flood more into India, would not India use the money for building bridge, roads (i.e infrastructure projects) & create jobs in other areas. So is the inflows not good? Why are countries, including India, thinking about restricting foreign inflows.

ps: All earned gyan will be spread.

More dollars = lower value of dollar = stronger Rupee. Stronger rupee = cheaper imports but less competitive exports (merchandise and services). Yet, we have a concerted policy effort encouraging our exports, through the SEZs (which have so far been quite successful). The uncontrolled inflow of dollars hampers this policy.

Further, these capital inflows are not fixed asset investment capital. They are primarily going into the equity markets in the form of FII inflows. This leads to asset price and general inflation. To control inflation, countries are typically forced to raise interest rates, but this affects real economic growth. Further, it increases capital inflows because the interest rate gap between US and other countries increases, making the other country even more attractive to put money into. Hence, capital inflow controls.

[Prem]

Credit Suisse: QE2 Just Made China's Inflation Threat Much, Much Worse

Inflation is a threat in China, and it is at least partially driven by speculative capital entering China due to expectations of a yuan appreciation, higher interest rates in China vs. the developed world, and strong relative Chinese GDP growth.Yet should China hike its interest rates to control inflation, it will only widen the gap with U.S. interest rates, which could attract even more capital. If China does nothing, then inflation could get worse.
Problem now is, Bernanke's QE2 just gives capital yet another reason to choose China over the U.S., threatening further inflation. It thus compounds the problem above.

Credit Suisse's Dong Tao:

With the Fed conducting QE2 and hot money flooding into China, we believe the PBoC may hold back from another rate hike before the end of this year to avoid widening the interest rate gap at this time. The risk of raising the reserve requirement ratio before the year-end would be higher, in our view. Nevertheless, we believe the negative real interest rates will eventually force the central bank to raise nominal interest rates again in 1Q11.We project CPI inflation to reach 4.5-5% in 2Q11. This may lead to a total of three to four interest rate hikes in 2011, with the deposit rates rising faster than lending rates, and rates for longer duration rising faster than those in the short-end, in our judgment. It has also become more likely that Beijing may re-introduce price controls in areas such as fuel and grain at the retail level, similar to what it did back in 2006 and 2007.
However, the one thing they won't do is budge on the yuan-dollar exchange rate:
We maintain our view that Beijing is unlikely to allow the RMB to appreciate anything more than in a symbolic sense, even if this means possible trade wars ahead. China seems to be making adjustment in the RMB real exchange rate, via wage increases, much more aggressively than in the nominal exchange rate.

http://www.businessinsider.com/credit-s ... z14KymQf58

[ramana]

So QE in US fuels inflation in other countries unless steps taken to curb it?

What about all those pious statements at G20 asking other countries not to revalue etc?

[Suraj]

So QE in US fuels inflation in other countries unless steps taken to curb it?
What about all those pious statements at G20 asking other countries not to revalue etc?

Nothing pious about it - competitive devaluation is a response from other countries to keep their exchange rates stable in the face of pressure on their currencies to appreciate against the dollar, because of the capital inflows. The standard inflation management approach of raising interest rates does not work because it makes capital inflows even stronger due to the wider interest rate arbitrage gap. The G20 approach was just an attempt at Plaza Accord II by forcing through a new exchange rate equilibrium on US terms, since they print the primary reserve currency. It's just that unlike Japan and Germany in 1985, the G20 didn't acquiesce.

[Prem]

Don know if this was posted.
http://www.washingtonpost.com/wp-dyn/co ... 07372.html
What the Fed did and why: supporting the recovery and sustaining price stability
By Ben S. Bernanke

While they have been used successfully in the United States and elsewhere, purchases of longer-term securities are a less familiar monetary policy tool than cutting short-term interest rates. That is one reason the FOMC has been cautious, balancing the costs and benefits before acting. We will review the purchase program regularly to ensure it is working as intended and to assess whether adjustments are needed as economic conditions change.
Although asset purchases are relatively unfamiliar as a tool of monetary policy, some concerns about this approach are overstated. Critics have, for example, worried that it will lead to excessive increases in the money supply and ultimately to significant increases in inflation. Our earlier use of this policy approach had little effect on the amount of currency in circulation or on other broad measures of the money supply, such as bank deposits. Nor did it result in higher inflation. We have made all necessary preparations, and we are confident that we have the tools to unwind these policies at the appropriate time. The Fed is committed to both parts of its dual mandate and will take all measures necessary to keep inflation low and stable. The Federal Reserve cannot solve all the economy's problems on its own. That will take time and the combined efforts of many parties, including the central bank, Congress, the administration, regulators and the private sector. But the Federal Reserve has a particular obligation to help promote increased employment and sustain price stability. Steps taken this week should help us fulfill that obligation

[RamaY]

* Fed buys back $600B bonds - Releases that much cash into the market (printed money)
* $value falls down in international market (as money supply increased)
* export oriented economies have to adjust their currency valuation to keep their exports competitive
* Export economies have to print their currency to peg their currency to reduced $value.
* Money supply increased in export economies > inflation
* To release more money export economy has to maintain corresponding gold reserves.

Removing the conversion factors etc...

US is printing currency at the cost of emerging economy's gold reserves...

Is this understanding correct?

[Gus]

ok..help me understand please..if Fed/GOTUS is doing 'quantitative easing'/'binge bond buying' etc..I am presuming it is to weaken the dollar? to help Industries in US? to reduce debt burden?

And what would this do the INR exchange rate? in near term..for a few months and long term like a year or two?

[ShivaS]

Ramay>> US is not printing Dollars at the cost emerging economies Gold.

Dollar has been delinked from Gold long back...

By printing dollars you are its devaluing $ relative to other currencies and hedging commodity like Gold.

I had said earlier all currencies will slide (like PRC is doing by pegging their currencies lower by fiat or otherwise) to keep their (emrging economies) exports competetive other wise they will lose exports/export earnings, this so because imports will become expensive into US which inturn will spur local manufacturing or US will find alternative countries.
In addition PRC being the largest holder of US debt will lose the value of their asset. This is getting to be scortched earth policy by US..

GUS>> yes to weaken the dollar, to stem imports and get trade deficit into order and balance of payments. The intrensic value of dollar is about 25 to 30 Rs and about 3 yuan according to my calculation.

In the yester years american fiscal policy guys used to keep $ artificially high for two reasons
1) Presitige 2) to make Walmart like companys make huge profits 3) Make believe americans that US is strong as strong dollar is strong US... 4) to preserve the hegemony of the USD to buy oil cheap and burn it in leisure..
2) Now that balanced budgets are gone out of the windows and the accounting health of US is not good, the lenders are worried that US may default like Greece if unabated deficits continue..

If INR continues to gain against (declining) Dollar export incomes for India will take a hit. Second profit margins will fall, third importers will seek cheaper alternative suppliers.. Like Phillipines is being touted as next BPO hub for US industry...
why even Kenya might be one or for that matter South Africa too.

It is in the best interest of PRC and emerging economies to fuel US consumption..

[shyam]

So QE in US fuels inflation in other countries unless steps taken to curb it?

US is only trying to cover up its own problems. It is the side effect that causes inflation in other countries. The reason is that USD is the global reserve currency and other countries survive by exporting to US. This QE is not an issue for low interest rate countries, like Japan and EU, but is a major problem for high interest rate countries. Only solution is to add currency controls.

What about all those pious statements at G20 asking other countries not to revalue etc?

The G20 countries look like fools for agreeing to not devalue their currencies just based on uncle's words. I thought leaders of these countries are smart enough to see through this and get a commitment against QE, in return for theirs.

Is this a staged program to get these countries to move away from USD and accept IMF SDR?

[SwamyG]

Suraj: Thanks for the explanation.

Gus: Yes, USA is trying to weaken the dollar. Some call this a departure from Clinton era's Strong Dollar Policy to a Weak Dollar Policy. John Butler says this is being done to import inflation, because when the dollar weakens the import prices increase of both the imported goods and commodities.

In near term this will stress INR to climb higher. Leaders across the globe are threaten by QE1 and QE2 - SoKo, Germany, China, Brazil, India itaydi.

[Neshant]

The whole concept of some clueless guy like Bernanke fiddling around with interest rates & money printing at the top has always struck me as absurd. This is a guy who practically slept his way into the biggest bubble in history. Its astounding how an incompetent guy like that can still be on the job fiddling around with trillions of dollars.

Bernanke is destroying the wealth of the productive economy. The only thing money printing will accomplish prior to the next major crash is offloading losses of the the federal reserve private banking cartel onto suckers. It will end disasterously.

My prediction : the federal reserve will be shut down in 3 to 5 years after wrecking the economy.

[shyam]

Europe and UK are taking austerity measures and only US is taking this disastrous step that is against common sense. May be the situation in US is so disastrous that they don't see any meaningful way to fix that without affecting their superpower status. This way, they might be hoping to take entire world down with them.

[shyam]

Geithner's 4% Solution May Be `Unworkable' as APEC Gathers

Added later:
I think following is applicable to US too...

Hooters Shows Why Deflation May Never Go Away: William Pesek

Anyone who still thinks falling prices are a cyclical phenomenon isn’t looking closely. It’s secular, and the sudden ubiquity of discount outfits shows how Japanese consumption has become a race to the bottom of the pricing spectrum.

Japan used to be an automated-teller machine for brands like Prada, Gucci and Louis Vuitton. Women thought little of plopping down $2,000 for the latest fashions from Milan and Paris. Men didn’t blink at paying $200 for a tie. That’s all fashion-industry history now. Sliding wages and rising job insecurity brought budget-shopping into vogue.

No matter how much yen the Bank of Japan pumps into the economy, deflation deepens. It’s all about confidence, of which there is virtually none. Companies don’t trust that growth will return and so they avoid investing and hiring and trim salaries. Households fret about the future. {Talk to anybody in US, they all agree that stock market is rigged and doesn't reflect its true value. Whatever Bernanke is hoping for is very unlikely to happen}
...
It’s telling that the hottest company in Japan is a bargain clothier. In fact, Fast Retailing Co.’s Uniqlo chain was the only Japanese name in Fast Company magazine’s 2010 story about the world’s most innovative companies. That’s quite a comedown for a nation famed for the Walkman and other world-changing technologies. Its headline-grabbing exports these days are bargain-price T-shirts and underwear made in China. {Looks like when countries lose economic momentun, they lose ability to innovate}
...
Getting households to spend more of the roughly $15 trillion of savings sitting under tatami mats is the key to ending deflation. That’s not going to happen with workers increasingly referring to themselves as “precariats” -- a word combining precarious and proletariat.
...
Russia got into the dissing-Japan act this week. President Dmitry Medvedev visited disputed islands claimed by both countries, prompting Japan to recall its ambassador to Russia. All we need now is a row with India to complete the Asian-giant trifecta.{ha ha...}

[Pranav]

x-post from India and the New World Order thread:

People will be rushing to get out of the dollar before it's devalued. A chunk of that money will end up in India. In India, that will cause higher inflation, a booming stock market, rising property prices, and also upward pressure on the rupee vis-a-vis the dollar.

India will have to choose between keeping the exchange rate stable (vital for exporters and domestic manufacturers) and controlling inflation (vital for 80% of the population living on $2 per day or less).

The options available to India are:
- capital controls - put limits on investments in Indian assets (especially the strategic ones)
- levy a tax on capital inflows
- increase import duties to protect, if not the exporters, at least the domestic industry.

[shyam]

^^^
India has to protect real estate. It is becoming unaffordable for comman man.
It is not a good idea to make citizens spend their life paying unaffordable mortgage.

Raising mortgage rates may be a good thing.

[vic]

My layman school level economics tells me that inflation makes rich richer and poor poorer. And I thought OBAMA was elected by poor. Now I think that he is a figure head of some very important interest groups and is just doing their bidding

[vic]

From DFI forum Ray


Why Are Americans Jobless?
John Smith started the day early having set his alarm clock (MADE IN JAPAN) for 6 a.m.

While his coffeepot (MADE IN CHINA) was perking, he shaved with his electric razor (MADE IN PHILIPPINES) .
He put on a dress shirt (MADE IN SRI LANKA), designer jeans (MADE IN SINGAPORE) and tennis shoes (MADE IN VIETNAM). After cooking his breakfast in his new electric skillet (MADE IN INDIA), then he sat down with his calculator (MADE IN MEXICO) to see how much he could spend today.

After setting his watch (MADE IN TAIWAN) to the radio (MADE IN CHINA ), he got in his car (MADE IN GERMANY ) filled it with GAS (from Saudi Arabia) and continued his search for a good paying AMERICAN JOB.

At the end of yet another discouraging and fruitless day checking his computer (MADE IN MALAYSIA), John decided to relax for a while. He put on his sandals (MADE IN BRAZIL) poured himself a glass of wine (MADE IN FRANCE) and turned on his TV (MADE IN KOREA), and then wondered why he can't find a good paying job in AMERICA .

AND NOW HE'S HOPING HE CAN GET HELP FROM
HIS PRESIDENT (MADE IN KENYA)

[RamaY]

Ramay>> US is not printing Dollars at the cost emerging economies Gold.

Dollar has been delinked from Gold long back...

By printing dollars you are its devaluing $ relative to other currencies and hedging commodity like Gold.

I had said earlier all currencies will slide (like PRC is doing by pegging their currencies lower by fiat or otherwise) to keep their (emrging economies) exports competetive other wise they will lose exports/export earnings, this so because imports will become expensive into US which inturn will spur local manufacturing or US will find alternative countries.
In addition PRC being the largest holder of US debt will lose the value of their asset. This is getting to be scortched earth policy by US..

ShivaS garu,

I am talking about the indirect process. Upto the point above we both are on the same page.

Now how can China/India reduce the value of their currencies? I don't know about PRC but for India, in order to reduce the value of INR, India has to print more INR into the market (buy $$$ so it can keep in sync with Rs).

Are you saying even countries like India to de-linked their currency from Gold reserves?

[ShivaS]

yes we are linked to SDRs, Pound Sterling and Dollars only

[Rahul Mehta]

... say dollars flood more into India, would not India use the money for building bridge, roads (i.e infrastructure projects) & create jobs in other areas. So is the inflows not good?

Arrival of any money (NOT debt, but in form of investment or against purchase of goods) is always good, except that we must NOT allow investment of foreigners in strategic areas.

Aside : And btw, any answer that common sense gives always at least as good or better than answers guru-log give. So consider your common sense and first and final guru. Use common sense, and you will need no guru.

Why are countries, including India, thinking about restricting foreign inflows.

The officers and Ministers in-charge dont act necessarily in the interest of the country all the time. That should be more than clear to all by now. If they are trying to restrict someone from buying non-strategic goods, service or capital item, they are only hurting interest of someone to protect the persons that sponsor them. eg say you want to sell away a non-strategic company's share. Is there a good reason why highest bidder should not get it? I cant think of any. Can you think of any good reason?

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In India gets dollars, we can us it to pay all the debt and buy crude-oil and useful metals like copper etc make reserves of crude-oil and metals. There are many good use of dollars.

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Printing dollars en-masse will benefit US in short as well as long run. In short run as well as long run, their debt in real terms decreases. The private debt also decreases in real terms. The salary will rise as dollars volume increase. Best way to measure real private debt is in terms of number of months a person has to work to pay off that debt. So as salary rises, debt will decrease. The domination of US will be unaffected as US has best Military, it has usurped all oil wells of Iraq, Saud and Kuwait and US is number one it terms of intellectual property like movies, music, medicine, weapons, IT and chips. Movies and music can be pirated, but some real sale also occurs. Further, elitemen all over world including China and India are now become more and more wary of upheavals in their native countries, and so they will buy homes etc in US so that that can flee in case upheaval occurs. And they will also invest in US businesses.

As more dollars get printed, prices of goods like crude oil will rise. I am dont rule out $200 per barrel in a year or two. The US economy will benefit, as the oil money will go to US companies in Saud and Kuwait, and also from the fact that every square inch of Iraq is now US property. Japan will be screwed as Japan imports all its oil. India too will be heavily hit.

[SwamyG]

Neshant: I think you are wrong in concluding they are incompetent. We should be ready to entertain the thought that these people are actually corrupt and work according for their 'controllers'.

Rahul: Thanks for your explanation. But it does not exactly address my question, no?