-- Posted Monday, 20 September 2010 | Digg This Article
| | Source: GoldSeek.com
Rick’s Picks
Monday, September 20, 2010
“Phenomenally accurate forecasts”
Leave it to the Wall Street Journal to wax enthusiastic over a perpetual-motion engine for the U.S. economy that in reality can no more exist than a unicorn. Here’s the headline, proffered by the Journal under the dubious title “Economic insight and analysis” and written by one Alex Frangos: “Don’t Worry About China – Japan Will Finance U.S. Debt”. Frangos notes that Japan has stepped up its buying of U.S. Treasurys, as indeed it has, in order to slow the rise of its own currency. This is a crucial task for Japan Inc., since even a relatively small increase in the value of the yen can wipe out a competitive advantage that its exporters have worked hard for decades to achieve. The damage has already occurred to a significant extent, since the yen has rallied 15 percent since May. However, Japan’s most recent interventions have been so aggressive as to suggest the goal is to scare yen buyers out of the market for a long while. We have our doubts this tactic can succeed, especially since China has become one of the yen’s biggest buyers, but for the time being it has driven the yen sharply lower.
The crazy idea here is not merely that stepped-up Japanese purchases of U.S. Treasury paper will somehow take up the slack now that China has begun to aggressively diversify its $2.5 trillion reserves away from the dollar. What Frangos is suggesting is that China’s move out of dollars will stir up strong new demand for greenbacks among China’s major trading partners, all of whom will supposedly be more eager than ever to keep their currencies cheap relative to the dollar. Under this scenario, countries such as South Korea, for one, will be so vigilant about keeping the Chinese from gaining a further currency edge that they will ultimately buy even more U.S. Treasury paper than China was buying, thus supporting the dollar.
Boldly Stupid
To the extent this prediction could become self-fulfilling, at least for a short while, it may drive Tim Geithner to apoplexy. Lately, the Treasury Secretary has been working overtime to promote the boldly stupid idea -- universally believed by the press and many economists, evidently – that a stronger yuan would help U.S. exports sufficiently to rejuvenate our economy. (As plausible as this may sound, it ignores the fact that, besides Hollywood movies, Boeing aircraft and Caterpillar tractors, “financial products” now more or less shunned by the world have long been America’s biggest export by far.) If Geithner has to widen his jawboning campaign to include South Korea and the other Asian tigers, he’s going to look even more pathetic, since the U.S. will find itself moving further out on the financial ledge, telling our creditors in effect that we’ll jump if they don’t as we ask.
Whatever happens, it’s going to be a lose-lose situation for the whole world, since the financial shell game is many orders of magnitude larger than real trade in goods and services. By holding the global economy hostage to currency shenanigans, the central banks risk subjecting actual commerce to something like the “flash crash” that occurred on Wall Street back in May. China would have more to lose than anyone, given the size of the country’s dollar reserves. They undoubtedly can see a disaster taking shape but know they cannot escape it without further destabilizing the markets. However, it must be comforting to them to know that, alone among nations, China can survive a trillion-dollar hit and someday come roaring back – as they eventually will.
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Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. There is a substantial risk of loss in futures and option trading, and even experts can, and sometimes do, lose their proverbial shirts. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2010, Rick Ackerman. All Rights Reserved. www.rickackerman.com
-- Posted Monday, 20 September 2010 | Digg This Article | Source: GoldSeek.com
