Dollar Insanity flotsam bbs.chinadaily.com.cn Updated: 2005-07-19 15:44
China and Japan have massive reserves of dollars. To stop their savings
devaluing, they buy MORE. The FED in turn must print more to stop deflation
meaning consumers purchase more Asian goods meaning they have to buy more
treasuries. This insane spiral will lead to collapse of the dollar. It is for
this reason, that China and Japan have to purchase real assets rather than
dollar assets such as treasuries. China is even willing to buy crap car firms
such as Rover in the UK or pay far too much for Unocal.
The Anglo-Saxon nations on the other hand are debtor nations. It is in their
interest to devalue dollars because their debts are in dollars. By sheer luck,
America can print as many dollars as it likes.
Combatting Deflation US vs UK
Deflation is death to debtors and this is what the Anglo-Saxon nations are
staring in the face right now. What's particularly scary is that deflation is
self-reinforcing. Britain's retail sector has collapsed and massive price cuts
are in evidence. One only has to wander around the shops to see shelf after
shelf of goods marked down in price by 50% or 80%. Only one newspaper has
admitted to deflation so far. All the others have kept silent even though it is
obviously here. The corrupt finance minister, Gordon Brown insists that there is
a low level of inflation but not deflation. When Japan entered deflation, the UK
media were quick to claim it was incestuous investments and corruption at the
root of the problem. In reality it was the aftermath of the boom generated by
the Plaza and Louvre agreements designed to generate consumption of US products
in Japan. There are no such braying comments now.
Wage deflation is also evident in spite of the massive monetary inflation.
Brown is imposing massive tax increases to pay for the massive hiring in the
public sector. What he's hoping is that maintaining employment levels will
encourage spending to counter the deflation.
Note: Inflation and deflation used to refer solely to monetary matters.
Nowadays, it is used to describe price changes. So a general rise in goods
prices is described as inflation and similarly there is wage inflation.
Competitive Devaluations
The price of oil and gold is evidence of monetary inflation and devaluation
of the pound. Only the competitive devaluations around the world stops the pound
collapsing completely and disguises its fall. The euro, for example, has not
risen against the dollar, it's just fallen less. With record low interest rates,
investors have little choice but to buy UK assets where interest rates are just
a little higher. One old investment book I have says to avoid treasuries if
interest rates are below 8% because interest rates are expected to rise
thereafter and the price of treasuries would fall. Yet, with interest rates at
4.75%, the markets are expecting a cut in August in the UK.
Price Controls
During the Great Depression, crackpot Franklin Roosevelt destroyed crops and
culled farm animals to artificially generate price increases. In the UK, there
has been BSE during the Conservative government and then Foot and Mouth disease.
F&M is not fatal to humans and there is a vaccine for the animals. The
argument against vaccination is that once vaccinated, they can't tell if they
have the disease or not a facile argument. All they have to do is mark the
animal as having been vaccinated. In response to F&M, Blair culled the UK's
livestock and paid MORE per head than the market price. Ridiculously, he stopped
the culling when the costs got out of control. Even more ridiculously, the media
made a story of one calf that had survived the culling and Blair personally
intervened to save the calf purely for schmaltzy political gain. In the US, the
FED has threatened/promised that it could purchase assets with newly printed
money to maintain price levels. This is sheer insanity. During the Roosevelt
folly, the culling of animals and trampling of crops resulted in starvation.
Protectionism
The US is clearly involved in illegal protectionist measures with its
spurious claims of dumping, tariffs, subsidies etc. whilst committing all the
offences it accuses everyone else of.
Banking Crisis
When there are a large number of defaults, a credit crunch and large numbers
of borrowers who pay off their debts, the money supply decreases and there is
massive monetary deflation. This counters what the government is trying to do in
printing fresh money. The classic insane response would be to drop money from
helicopters. FED governor, Bob McTeer admits that after 9/11, they broke the
law. Instead of waiting for cheques to clear, they cleared them immediately. The
planes were all grounded so the cheques could not be physically collected for
verification. Mortgage defaults would mean that the banks would collect on their
collateral, the houses and would be saddled with many houses they don't want.
Selling them off further increases the deflation problem. Despite a record
number of bankruptcies in the UK, mortgage defaults have been kept low as the
banks have re-negotiated the terms. During the last housing crash there were far
higher numbers of home repossessions. It has yet to be seen whether this will
solve the problem or merely delay until a far worse bursting of the housing
bubble will occur. The biggest default of all would be the US dollar collapsing
and the US dollar denominated debt being wiped out.
The US practise
This is text book Keynesian deficit spending. Bush has massively increased
the budget deficit. This involves printing government bonds which the FED
purchases and prints fresh money to do so. The government takes this money and
spends it which is why Bush has increased government spending by 33% since
coming to power. This is monetary inflation which has averaged double figures
whilst the long term average is less than 7%. Bush has implemented massive tax
cuts and US consumers have duly increased spending by almost exactly the amount
of those cuts. The US has been the cause of all economic crisis since Nixon
defaulted on gold payment in 1971. Ever since then inflation has rocketed.
Dollars in exporter nations are sanitised when the government prints the local
currency and purchases dollars earned through exports. In effect dollars are
pyramided on US treasuries and the local currency is pyramided on the sanitised
dollars. The US has relied on everyone else getting it in the neck to stop a
global collapse. They created the Great Depression, now these parasites are
going for a new record.
The UK practise
Brown is also increasing the money supply. But as well as double digit money
supply increases, he is increasing taxes to pay for government spending (a
whopping 20% now work in the public sector compared to 11% in Germany and
Holland). Business rates in parts of the UK have increased 50%. Car drivers have
been punished with massive 80% fuel duty; it's just tax with some free petrol.
The result has been that Brown's deficit is lower than that of the US, but UK
companies have fled in terror. UK supermarkets are hiring legions of idiots to
try and maintain employment levels and consumer spending. Basically, Brown is
tapping businesses and the public purely to save his own reputation. Whilst the
UK's budget deficit is under control the economy has completely collapsed. Any
fool can raise taxes and Brown is certainly a fool a crook or both.
In both cases, however, unemployment is a feature of deflation. The
competition from China and India means higher unemployment. The lower profit
margins mean hgher unemployment. The rising input costs of commodities and oil
attack the profits from the input side too. This has largely been blamed on
China but is also due to the monetary inflation response to price deflation by
the UK and US governments. Unemployment, then stymies monetary inflation as
fewer people borrow and the fraudulent fractional reserve system becomes
"pushing on a string".
The above content represents the view of the author
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