The US dollar pegged to the yuan

[grantx]

Atilla,

"let the US depreciate the Dollar. What's the big deal."

US Treasury Secretary in 1987 was James Baker, blamed for precipitaing the Crash by his remark that the dollar will fall (further) if Germany failed to to keep their rates low, as agreed, in exchange for a stable dollar exchange rate.

As you imply in your post, where's the correlation between economics and the markets?

Grant.

 

[Atilla]

Atilla,

"let the US depreciate the Dollar. What's the big deal."

US Treasury Secretary in 1987 was James Baker, blamed for precipitaing the Crash by his remark that the dollar will fall (further) if Germany failed to to keep their rates low, as agreed, in exchange for a stable dollar exchange rate.

As you imply in your post, where's the correlation between economics and the markets?

Grant.

Agree 100%. Recently I have found out about the Plunge Protection Team - USA's working committee to prevent another melt down of the financial markets by fixing them.

This is a case of a free market economy championing the communist command economy.

We are in a similar scenario as in 1987. If confidence is rocked in America's financial system and ability to play fair then hot money will flow out. The international economies are in a catch 22. People want to dump the $ but as France has already called out all the countries in the world have to support the $ or their reserves will be worth that much less. We are on the cusp of a new wave of destruction on a much bigger scale than people can imagine.

The move will be controlled and gradual. Gold will rise $ will fall. Unless the US economy takes the medicine. You see people talking nicely about how the economy will slow down next year. It's already pencilled in to the books. It's not IF but just HOW MUCH is the question?

Any ideas?

 

[jimmyj]

Hi Grant & Dispassionate

Sorry it has taken a while to post, i just wasn't aware it was moving along and so much ground had been covered. I f i may i will just refer to your earlier post when you asked me to clarify my remark about importing inflation as i think this is the hub of the problem. Also i do like that analogy but in this instance when someone owns a trillion it is most certainly the Fed's problem....be interesting to see if Bernanke address it this afternoon.

Anyway with the defecit theoretically the $ should be lower, however that would cause problems funding it so i believe they have been helped immeasurably over the last couple of years by the enormous repatriation of overseas earnings by US corporations, but now that tax window is closed market forces should once again prevail. However over that time (and before) China has become an ever increasing issue, and i suspect they are flexing their muscles as they are not that keen to lose their economic unfair edge but also don't want to left holding depreciating assets. Nice conumdrum as if they diversify they may actually cause their own problem, and if the $ does depreciate then their exports suddenly (forex markets can move very quickly unless the companies have hedged ahead) become far more expensive to the Americans, and hence the imported inflation. How much this might add to the CPI is impossible to tell, but i believe it would not be inconsiderable, so if the $ dumps you have a slowing economy (durable goods just fell 8 odd%) and the potential for increasing inflation. Who would of predicted a year ago that the Fed needs the peg to be maintained and no pressure on the $ at the moment and have to be very nice to the Chinese to achieve it.

 

[grantx]

Atilla,

PPT. When I first read that I thought, Dirty Dozen meets the A-Team. If true, even more bizarre. Had to be down to Regan. “a case of a free market economy championing the communist command economy” This is the antithesis of free markets – has the whiff of Paul Wolfowitz about it .

Sorry, I don’t believe it. Bit too much of conspiracy theory about it.

Jimmy,

Thanks for the clarification re importing Chinese inflation.

The US deficit has also been financed by overseas investors, especially the Japanese Ministry of Finance, because of the US hitherto low, stable rates. Rising rates and a weakening currency deter investors.

If your interpretation is correct, the Chinese may allow a gradual devaluation to maintain US imports (and protect their dollar reserves). However, this may only be a temporary fix – I suspect the markets/investors would expect concomitant structural, economic and fiscal changes in the US.

As is the wont of posters, here’s an interesting tangent. I generally keep half an eye on the bond markets to gauge how far the markets seem to be losing it (in my opinion). My favourite reference here is the yield on junk bonds. I don’t have the figure but I know the yield is beyond my comprehension, ie the spread over treasury’s is too tight . The rationale here is that investors are chasing yield, and in so doing, force the price up (and the yield down).

Raffael Correa is expected to be the victor in the forthcoming election in Ecuador, and promising to limit repayments on Government debt, the yield of which is around 600 bp over treasury’s, ie c 10.5% with a CCC+ rating.

Funding for NASDAQ’s (BB+) bid for the LSE is costing them 700 bp over dollar LIBOR, ie 12.3%. As long as repayments on the loan are outstanding, the rate will increase 1% every 3 months to a maximum (cap) of 19%.

I’m not an analyst but I reckon NASDAQ’s paper has got to be a steal, especially when compared to Ecuador’s – and others – crock of shti. Or am I way off?

Grant.

 

[Atilla]

Atilla,

PPT. When I first read that I thought, Dirty Dozen meets the A-Team. If true, even more bizarre. Had to be down to Regan. “a case of a free market economy championing the communist command economy” This is the antithesis of free markets – has the whiff of Paul Wolfowitz about it .

Sorry, I don’t believe it. Bit too much of conspiracy theory about it.

Jimmy,

Why not check out the following links...

The Telegraph

Washington Post

Wikipedia

Asian Times

Wake up and smell the coffee dude... :cheesy:

 

[jimmyj]

Grant,

Thanks for the links, at least they are a bit more open about it now, again learning from the Chinese as i seem to remember during the Asian crises a few years back the Hong Kong government stepped in and then waited a year or so then securitised it all and floated (privatised?) it as an investment trust.

Don't know if it will go that far but i do like your comments about yields, and being honest i don't know anything about junk apart from that which litters my office, but i am finding it hard to recall a time when there were so many economists at loggerheads with the Fed. The Fed Fund Rate is still indicating a fall early in 07 whereas Bernanke is (if i read it right) saying that rates are staying put for some time whereas the bond market seems to be agreeing with the fed funds rate but the currency is acting as if it wants to force the issue and push the Fed into raising rates. Going to be an interesting end to the year as i always thought equity markets hated uncertainty and until recently were hitting 5 year records............probably just me then, not getting it.

Interesting what you said about the Nasdaq funding, lets hope the cuts the LSE has just promised in trading costs doesnt blow too big a hole in their financing forecasts ho ho.

jimmy

 

[henry766]

If Fed have to raise rates , equity markets won't like it , that much is clear ,a falling dollar seems to make raising of rates more likely, ( if nothing else a weakening currency is inflationary)? which seems to make your comments about everyone else expecting a rise very interesting jimmy.

 

[henry766]

I think your right chump , earlier in this thread someone stated that countries like a strong currency , like you i'm not so sure , didn't it cause japan allsorts of problems in the end ? i think they wished for a strong currency until it happened.
i wouldn't feel too sorry for asian countries though , even if reserves are in dollars , their wages , and most assets , property , businesses /stocks ,can and almost certainly will rise in value to the dollar.
p.s. have they appointed greenspan? i thought he had an ok record years ago.

 

[Atilla]

I think your right chump , earlier in this thread someone stated that countries like a strong currency , like you i'm not so sure , didn't it cause japan allsorts of problems in the end ? i think they wished for a strong currency until it happened.
i wouldn't feel too sorry for asian countries though , even if reserves are in dollars , their wages , and most assets , property , businesses /stocks ,can and almost certainly will rise in value to the dollar.
p.s. have they appointed greenspan? i thought he had an ok record years ago.

I beg to differ Henry. If countries prefer weak currencies then let them depreciate their currencies. Why have Congress been calling on China and accusing it of dirty tactics asking them to raise the Yuan? US also runs a defecit against the Japaneese and Euro I guess (someone correct me if they have the facts). Surely it's better to depreciate the dollar to rectify the BoP position in the short term only.

However, the 7% defecit is not a short term problem.

I also agree with you - I don't feel sorry for any country that's holding large volume of dollars. I would never hold my assets and reserves in one basket. Question is the game the US is playing is to force them into supporting the dollar. I don't see this happening though. They are switching to gold hence the rise from $500 to new level of $600 and probably to continue for the next foreseeable future.

Also, stable currencies are good for international trade and indispensable if you wish to claim to be a World currency.

No two ways about it... (Please forgive my punn on words )

1. Strong stable currency = Good strong economy. - Desirable
2. Weak fluctuating currency = Bad weak economy. - Undesirable

Can somebody explain the valuations of American companies and stock market indexes in these ages of doom, gloom and war, falling dollar, rising commodity prices and fierce competition from Asian tigers India - China - Russia and up and coming Latin America - Brazil Venezuela and probably soon to join them even cheaper labour than in China the continent of Africa?

Did I forget to mention global warming?

 

[Dispassionate]

If Fed have to raise rates , equity markets won't like it , that much is clear ,a falling dollar seems to make raising of rates more likely, ( if nothing else a weakening currency is inflationary)? which seems to make your comments about everyone else expecting a rise very interesting jimmy.

Wrong cause/effect attribution there no?. Rates are expected to fall because the economy is weakening therefore the dollar is falling.

 

[jacinto]

What is the net effect of the dollar being pegged to the yuan?

errr, ain't it the other way around? :cheesy:

 

[Atilla]

errr, ain't it the other way around? :cheesy:

The interest rate is the price or value of money.
Fall in interest rates = Supply of Money > greater than > Demand for Money.
Rise in interest rates = Supply of Money < less than < Demand for Money.

The exchange rate of the dollar in theory is the equilibrium value required to bring US exports and imports into balance.
If Exports > Imports - $ will rise
If Exports < Imports - $ will fall.

Rates don't go up or down because of economic strenght or weakness. That's a policy decision taken by Central Banks or Governments in response to their government policy objectives. Interest rates are set by men.

If Objective 1
Stable strong dollar = rise in interest rates - slow economic activity

If Objective 2
Economic growth and low unemployment = fall in interest rates - increased economic activity

These two rules you can buck in the short term but in the long term they hold strong like stonehenge or the pyramids they have stood the test of time. :-0

Interest rates talk is simply supply side controls. As Keynes pointed out you really need another instrument like taxation to control the demand side for economics. If the US is serious about the economy it must

1. Tackle it's budget defecit
2. Reduce it's balance of payments defecit

This takes a lot of political ******** which is sadly lacking in politicians.

At the moment this basic theory is at the crux of the matter and in my view it's very important to understand well. At the moment the markets are doubting what Mr Bernanke is saying. He needs to act.

Sadly, we have a situation approaching stagflation where we have inflationary prices and stalling economic activity. ie BofP and budget defecit in the US coupled with reduced manufacturing and housing activity with inflationary pressures. Uncle Sam's $500 bn spent on wars + Bush tax cuts + historically low interest rates for the last so many years has meant too much money with no real production increase = inflation.

So this is why the US economy very shortly probably next year as predicted is going to have a very tough time.

Time will tell.

 

[bizmanny]

Can somebody explain the valuations of American companies and stock market indexes in these ages of doom, gloom and war, falling dollar, rising commodity prices and fierce competition from Asian tigers India - China - Russia and up and coming Latin America - Brazil Venezuela and probably soon to join them even cheaper labour than in China the continent of Africa?

Hi Atilla,

What factors make you believe Continent of Africa is gonna join the likes of China, India and Russia anytime soon. I am interested o know what is going on there apart from South Africa.

 

[Atilla]

Hi Atilla,

What factors make you believe Continent of Africa is gonna join the likes of China, India and Russia anytime soon. I am interested o know what is going on there apart from South Africa.

Perhaps soon needs to be explained as being 10 or 20 years away.

There are many other resource rich countries other than South Africa. West Africa is rich in oil and gas. Tin & copper mines (Namibia) are equally of value in todays rising commodity prices.

Africa produces sugar. Brazil has managed to produce ethanol from sugar cane. Currently powering it's cars - reducing it's dependence on oil. With global warming sugar plenty now with cheap prices will become sweet gold to replace black gold.

China is already investing in Northern Africa (As well as Latin America). Ghana has Chineese businessmen searching/wanting to rent good property.

Here is one article in the Economist magazine. China is rapidly buying up Africa's oil, metals and farm produce. That fuels China's surging economic growth.
This article then questions whether this is good for Africa. (No probably not as the super powers after China & India's interest in Africa - for the first time have pricked their ears and started sniffing what if...)

India has doubled it's investment in Africa also. I accept it's nominal $2bn or something but the doubling of investment is significant in my view.

In crude terms Africa may not have Capital or Technology but it has abundance of Land & Labour. Perhaps we should add Sunshine in there too once humans harness all that free energy. It needs a big player like China to recognise it's value and the rules will change.

Looking at the globe just about every continent is going through transformation. Is there any particular reason why Africa should not be included in this modern day revolution? I have read some articles that Africa may leapfrog some of our past mistakes such as using Wireless technology for phone network infrastructure or using ethonal for cars as energy. Using good technology and fast comms network is there any reason why it can't replicate India's IT infrastructure.

Once again cheap Labour and Land will be major attractions to multinationals.

I'd say European investment if they can get their act together would allow us to counter the compete againts cheap imports.

I believe one needs to look forward and anything is possible. Atilla the Hun united squabling tribes and led them across half the world and took on the Roman empire at it's height. The Huns defeated 50,000 highly trained Romans, sophisticated in the art of war with 30,000 men.

In reply to your question what would you say are the drawbacks to these potential developments outlined above and why can Africa not become a Lion as a competitor to the Asian Tigers?

Time will tell all...

 

[TWI]

I think a fundamental problem with Africa is the culture. The culture is not one of nationalism so much as tribalism and so long as this persists nepotism, violent suppression , thinly veiled dictatorship and out of control corruption will prevent the economy from evolving far. How do you attract broad based investment when you could have your investment nullified tomorrow by the next coup or some vote winning nationalisation. Was a much safer bet when it was colonised. One day maybe things wil change but that is a long way off.

 

[Atilla]

I think a fundamental problem with Africa is the culture. The culture is not one of nationalism so much as tribalism and so long as this persists nepotism, violent suppression , thinly veiled dictatorship and out of control corruption will prevent the economy from evolving far. How do you attract broad based investment when you could have your investment nullified tomorrow by the next coup or some vote winning nationalisation. Was a much safer bet when it was colonised. One day maybe things wil change but that is a long way off.

I think investing in Russia and China are far more riskier than Africa. But companies see big potential markets, hence value and so they do.

People don't see value in Africa (purchasing power or demand) and so perceive only risk with little returns. As investment & wealth of these states rise so will demand.

I do agree that tribalism exists but would add with good strong leadership, economic development and some distribution of wealth thinks will change. Hence my parallel with Atilla the Hun.

The Catalonians in Spain think they are superior and should be separated from the rest of Spain along with the Basques but not as extreme.

Northern Italians believe they are superior and shouldn't have to subsidise the Sicillians.

Balkans went through a bloody war recently.

Europe is not that far away from Africa and only in the last 50 years really united. 3-way Contention still exists between UK, France & Germany the dominant European countries.

Coming back to the question, considering the potential, there are rich pickings in Africa. (South Africa is only one country not a continent). China's investment will bear fruit in another 5 - 10 years.

Time will tell all...

 

[jimmyj]

hi Henry
i suspect Thursday will be very interesting after the ECB and MPC announce, as i have been considering this for a bit and it strikes me that the timing of the sudden move, over thanksgiving and the Chinese central bank seminar, is the root of the confusion. Is it the fear factor of the asian $ holders fleeing into an asset less likely to depreciate or is it purely economical and the markets are discounting a Fed cut in March (which seems to be what bonds and the fed fund futures are predicting, although what Bernanke is trying ever so hard to be non-committal about). I suspect that the currency market will be the focus for everybody else over the next week or so and for what's its worth, and its not a lot i understand, but i think that the initial move (because of the timing of it) was out of fear of the Chinese diversifying but now that has brought the searchlight down on the currency and highlighted the economic aspects/problems to all and sundry.
As i said i suspect what happens on Thursday should muddy the waters enough for everybody whereas the Chinese (for those that play Mah Jong) will be happy to "twitter the sparrows" again.

 

[jimmyj]

OK...............but will definately have to improve my typing speed.............sorry evidently can move qite fast these topics so my apologies.

 

[bizmanny]

Atilla

You are making good points.

It is common knowledge that the continent is very rich in natural resources, land and human resources.

If Africa can get together and moves away from wars, tribalism, corruption, religion conflict, civil wars, unequal distribution of wealth, capital flight and curbs spreads of diseases then the continent will have a chance. African also need good infrastructure.

I agree with you Atilla it can be done but i think will take longer than 10 years. May be 20 years or more. No doubt Africa have potential to catch up will Tiger economies. But don't underestimate the scale of the task and how many variables are involved. although i agree with you it can be done.

At the moment there are few African countries which have just come out of civil war and some are still fighting.

All these factors will make more difficult for Africa to achieve the Level of success of likes of China sooner.

As you say time will tell all

 

[Atilla]

Africa , TWI put it right...lack of the right politcal will and that does not happen overnight and unless the circumstances are right it does not happen at all. In this case not this half century unless something happens to reverse what has been happening throughout Asia etc. Frankly the world could not cope with a significantly expanding Africa for the forseeable future , it's going to have enough of a challenge just trying to satisfy the currently emerging countries who we will be referring to has developed nations in the next half a century just as we today think of that term in relation US , Europe etc (and perhaps Australia ) Everything in time is possible , but not just yet . History shows we have a tendency to swing from political and economic stability to instability the latter preparing the way for a new equilibrium ..this time around it appears that the names out of the hat do not include Africa.

The political risk attached to Russia and China shouldn't be ignored ,but at the moment a balanced view might say the situation remains a two endged sword in that they need our markets just as much as we need their resources which might stop either party doing something economically stupid. That said the obvious high reward , high risk remains a truism and as I once commented somewhere else on TW investing your capital in those areas remains a great position as long as you have anchored it sensibly to your overall asset worth and allocation. Judging by the moneyflow into those areas at the moment I suspect many have not which comes as no great surprise , chase the reward at your own risk is my view.

I would hope our central banks this time around could act with bit more prudence and allow demand to do what comes naturally rather than buy another growth cycle. That would bring the Chinese and to a greater extent the Russians and Putin to heel. The latter are getting the impression that the tail wags the dog and could use a dose of economic reality. If we don't buy and use they go nowhere , in other words they need to understand that it is our foot on the accelerator and not theirs ...what makes that true ...where's the money ?

I would say this is a sadly biased view in my opinion.

I reject the view the world can't cope with an expanding Africa. :!: Are you sure? The world can cope with expansion but not contraction. How is it that it's all good news when US European, Indian and Chineese economies expand and suddenly it's bad news if Africa expands and the World can't cope. For example when the Chineese earn more money they'll inevitably wear jeans, drink coke and buy material goods and travel abroad.

Your indicated view that growth is exclusive is incorrect. Internatioanl trade and economic growth is mutually inclusive. That's why international trade boosts economic growth all over the world for those countries taking part. :!:

I beg to differ with your political risk perception with respect to African countries. Shell oil exploration in Russia is facing a massive poiltical risk at the moment. We are talking $10 - 20 Bn... Not sure of the outcome yet. I wouldn't bet against Russia not having it's way.

My initial response was to answer the question other than SA what other potential was in Africa. China's investment in Africa and Indias doubling of investment is a fact. This endorses the view there is potential there. Obviously they see a return justifying the risks. Ditto re: investments in Russia and China.

At the end of the day money talks :!: