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parallels: euro-core:euro-periphery not quite= oecd-core:em-periphery

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  • aaron
    replied
    Re: parallels: euro-core:euro-periphery not quite= oecd-core:em-periphery

    Sometimes, for a few seconds, I catch myself pretending Bernanke cares about Americans, that he took his oath of office (if he actually has to take one) seriously.

    His goal is to weaken the dollar and deflate the debt, just as EJ has described. This allows for America to continue on.

    The problem is, it is not easy to weaken the dollar yet maintain the current world order. And, there are some great benefits to having an over-valued dollar. He can buy tons of treasuries. The Japanese kept their economy going for the past 20 years. Why not the USA?

    So, the trick is to weaken the dollar as slowly as possible while printing as much as possible. You got to admit, he is doing a darn good job. The dollar is about at the same level that it was a few years ago, and yet he has printed trillions.

    We must be coming to a market crash. I am feeling better about the future.

    Leave a comment:


  • jk
    replied
    Re: parallels: euro-core:euro-periphery not quite= oecd-core:em-periphery

    Originally posted by *T* View Post
    The universal assumption seems to be that qe3 will not be attempted without a dump first - to provide political cover. I remember a similar discussion before qe2. But, the fed just went right ahead and did qe2 anyway.
    look at some charts of the equities and commodities markets, and you'll notice there WAS a big dump over the summer of '10, following the fed's noisemaking about "exit strategies" in the spring of '10. the dump was only reversed when bernanke announced qe2 at jackson hole.

    Originally posted by *T*
    The fed does not accept inflation as being caused by qe. Ergo, qe will be based on the employment situation, over inflation. Also, the fed are accountable first to the banking system and its continued health/existence/profitability. The accountability to the legislature is illusory.
    In any case, the administration's main concern before inflation is to ensure a buyer of Treasury debt, which these days, means the Fed. Inflation is a transfer mechanism, and those who are benefiting are in charge. The fed does not need political cover for qe3.

    For these reasons, I do not think the fed will pause before qe3.
    i think you're wrong. the fed has been subject to a lot of criticism about qe and is itself divided about just how dovish to be. further, i think the fed members spend a lot of time talking with bankers, and since bankers are doing well they genuinely believe that the economy is on the mend. also bernanke has said explicitly that he was relying on a wealth effect from rising equities to help the economy. the fed would not mind at all seeing COMMODITY PRICES down, but would be alarmed by an equity selloff. they know that there is structural unemployment, that it will take a long time for unemployment to come down, and that unemployment is a lagging indicator. so the current level of unemployment will not in itself be an adequate justification for more qe. if unemployment rises from current levels, however, they are more likely to be alarmed. so in order to act they need rising unemployment and a plunging stock market.

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  • *T*
    replied
    Re: parallels: euro-core:euro-periphery not quite= oecd-core:em-periphery

    The universal assumption seems to be that qe3 will not be attempted without a dump first - to provide political cover. I remember a similar discussion before qe2. But, the fed just went right ahead and did qe2 anyway.

    The fed does not accept inflation as being caused by qe. Ergo, qe will be based on the employment situation, over inflation. Also, the fed are accountable first to the banking system and its continued health/existence/profitability. The accountability to the legislature is illusory.
    In any case, the administration's main concern before inflation is to ensure a buyer of Treasury debt, which these days, means the Fed. Inflation is a transfer mechanism, and those who are benefiting are in charge. The fed does not need political cover for qe3.

    For these reasons, I do not think the fed will pause before qe3.

    Leave a comment:


  • jk
    replied
    Re: parallels: euro-core:euro-periphery not quite= oecd-core:em-periphery

    i don't think the revaluation scenario is an expression of disrespect for the quality of chinese labor and chinese knowledge. to the contrary. and the fact that the "periphery" are the creditors globally is precisely the non-parallelism to which i pointed.

    to the degree that the chinese have spent on genuinely productive assets, they will be the long term beneficiary of that spending, and suffer less of a crash, should they crash at all. if the global "core" of developed economies go into a tailspin, however, china won't be spared the consequences. and it will be a time when revaluing their currency would appear attractive.

    Leave a comment:


  • c1ue
    replied
    Re: parallels: euro-core:euro-periphery not quite= oecd-core:em-periphery

    The problem I have with the Dalio synthesis is that it makes unwarranted assumptions on the underlying structure of production and productivity.

    Yes, there is a present dynamic of low cost labor in China further subsidized by an undervalued RMB.

    But Chinese workers aren't all skill-less, half-witted, human automatons.

    Even as FoxConn assembles bits into iPads, China continues to make larger and larger inroads into non-labor intensive areas like routers. A similar dichotomy exists in any number of other fields besides electronics.

    Furthermore while certainly China as a whole is spending an undue amount on real estate - hence the bubble - at the same time the dynamic is different than the EU/PIIGS: while the PIIGS used their found wealth of the euro to blow massive amounts of spending on essentially non productive areas like defense (Greece), alternative energy tax farms (Spain), real estate (Ireland), and general public sector spending (all 5), China is spending huge amounts on basic infrastructure of roads, dams, bridges, power plants, and rail as well as empty residential sky rises.

    Or to put this more succinctly: how much of China's growth is due to residential real estate spending as opposed to anything else (infrastructure building, exports, etc etc)?

    http://www.ibtimes.com/articles/5955...masks-risk.htm

    The real estate sector has certainly contributed to the high nominal GDP figure. Last year, 14 percent of the nominal GDP growth came from property sales, whose impact on GDP was boosted by rising land prices. Since 2002, land prices have increased about 10 times overall, 30 times in certain coastal cities, and over 100 times in the most speculative areas, said Xie.
    From mid-2002 to mid-2010, China's nominal GDP grew about 18.5 percent per year. Real GDP growth, however, is less than that.

    During the same period, money supply, including off-balance sheet expansion of financial institutions and underground finance activities, may have expanded around 22 percent per year, said Xie. Meanwhile, electricity consumption, which is a gauge of real economic activity, grew 13 percent per year.

    In the 1990s, electricity consumption was 0.8 of real GDP growth. In the last decade, heavy industries boomed, so the economic growth relied more on electricity. If electricity consumption is equal to the real GDP growth – which is a reasonable guess, said Xie – China's real GDP from mid-2002 to mid-2010 was closer to 13 percent per year.
    According to this article - based on work by Andy Xie - only 13% or so of China's growth is dependent on real estate.

    How much of Ireland's GDP on the way up was due to real estate? Judging from the path down, it was a lot more than 13%, and furthermore Ireland was overall was a net debtor whereas China is a net creditor.

    Leave a comment:


  • jk
    replied
    Re: parallels: euro-core:euro-periphery not quite= oecd-core:em-periphery

    Originally posted by *T* View Post
    Things continue until they can't - which is why I see your second scenario as less likely. It would require proactive rejection of the status quo.
    Do you see any possibility of a continuing commodities meltup, via a weakening dollar?
    i think the 2nd scenario-a sharp, one-off upward revaluation of asian currencies- would only happen after some kind of turbulence or crisis. i can only imagine a continuing commodities meltup if the u.s economy proves to be stronger than i suspect it is. if there's a slowdown in H2, let alone a double dip, commodities will drop sharply. i think the end of qe2, the exhaustion of the effects of prior years' fiscal stimuli, the new leg down in housing, will all conspire to produce a downswing in equities and commodities. bwtfdik.

    there will not be any more fiscal stimulus til 2013, if then. that puts any action on the fed. things have to get noticeably worse, however, before the fed gets political cover for qe3.

    Leave a comment:


  • *T*
    replied
    Re: parallels: euro-core:euro-periphery not quite= oecd-core:em-periphery

    Things continue until they can't - which is why I see your second scenario as less likely. It would require proactive rejection of the status quo.
    Do you see any possibility of a continuing commodities meltup, via a weakening dollar?

    Leave a comment:


  • parallels: euro-core:euro-periphery not quite= oecd-core:em-periphery

    ray dalio recently compared the situations of creditor emerging nations to that of debtor developed ones. the emerging world is overheating, with rising inflation and asset bubbles, while the developed world is mired in sluggish growth, high unemployment and low but rising inflation.

    this comparison made me think that the world looks a bit like the eurozone did some years back, writ large. when the german and other euro-"core" economies were sluggish, the ecb ran its one-size-fits-all monetary policy to stimulate the core. this overstimulated the periphery, notably the piigs, and set them up for a later crash.

    countries, like china, which peg their currencies to the dollar essentially have to follow the monetary policies of the u.s. fed, so in a similar way a loose policy for the sluggish developed world core is being applied to the periphery-developing countries, leading to overheating in china et al.

    the most frequently identified asset bubble in the emerging world is in chinese real estate, characterized by overbuilding and ever-rising prices.

    so Asian real estate is looking a bit like spanish and irish real estate a few years back- bubbling up in price. HOWEVER, the proficiency of the periphery-developing countries as exporters is in sharp distinction to what happened in europe. there, the peripheral countries are IMPORTERS from the core countries, especially from germany. globally, however, it is the core, the developed world - the u.s. especially- which are importers.

    mounting trade surpluses exerts pressure on em currencies. in order to prevent their currencies from rising, the em central banks intervene. but this creates more inflationary pressures for them. the pboc has been trying lately to apply countervailing pressures internally with increased reserve requirements and administrative controls on the real estate market. but the pressures continue to mount toward higher interest rates and higher exchange rates.

    the ecb runs monetary policy essentially around the needs of the core [this could be because the core is by far the biggest part of the eurozone economy, and/or because the ecb has felt it must live up to the mantle of its predecessor, the bundesbank. under the pressure of global sluggishness, this latter effect appears to be diminishing over time.] so lately, as the german economy is heating up, the ecb has recently raised rates. austerity in the euro-periphery, however, will hurt german exports within the eurozone, just as a strong euro will hurt german exports to the rest of the world, so i doubt we will see much follow-through from the ecb.

    the fed, too, runs its policy around the needs of the "core," the u.s., but in this instance it must continue to lean toward ease.

    although em's have complained that u.s. money printing has exported inflation to the world, it would be easy enough for them to counter this effect by letting their currencies rise. however, to do so means giving up some of their ability to export, something they are loath to do. in the u.s., the end of quantitative easing ii and the wearing off of prior years' fiscal stimulus, combined with a rising political urge for austerity, will produce a further slowing in the global core. this would relieve inflationary pressure for the em's, but also reduce their ability to export by crimping core demand.

    this diminution of exports may be sufficient to prick the asset - especially real estate- bubble in china. in such an event, i would expect the chinese to stimulate with further public works, more train lines, more road building and so on, just as they did 2-3 years ago. but although this would ameliorate a chinese crash in the short run, it is not an intermediate-term solution. that would only come from another round of easing in the core, re-establishing demand for chinese exports, or from the cultivation of chinese domestic demand.

    i expect a u.s. slowdown to take down commodity prices. but if a slowdown in the core does indeed crash the periphery, expect a MAJOR selloff in commodities, with the possible exception of gold, which is likely to selloff too, but more modestly.

    an alternative scenario would be for the chinese to sharply revalue their currency upward at the same time that they effect domestic stimulus. [this was dalio's prediction.] since exports would already be constrained by the weakness of the core, there is less to lose by having a stronger yuan. the revaluation, however, would immediately reduce inflation by lowering their domestic currency price for imported oil, food and raw materials. and the purchasing power of yuan-based incomes would rise to offset, at least partially, the effects of chinese economic slowdown. increasing domestic purchasing power would also be a step toward cultivating domestic consumption markets.

    in this latter scenario, commodities might not selloff quite as much, since chinese demand would be more resilient. [i.e. oil and food would go down in dollar price in the core, but go down a lot more for chinese purchasers spending their newly strengthened yuan.]

    i have focused on the chinese case, as it is the most important of the creditor-exporting-developing nations. the same analysis applies to a somewhat lesser degree to the other developing/periphery countries. resource exporters like russia, chile, peru and brazil, for example, are likely to be hurt more by a fall in commodity prices.

    COMMENTS AND CRITICISMS WELCOME!
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