Comments on: The third bubble

By: rapier

rapier — Sun, 21 Dec 2003 12:04:47 +0000

links First the slightly influential among bears, non political, Doug Noland and his weekly Credit Bubble Bulletin http://www.prudentbear.com/archive_home_com.asp?category=18 For a totally off center peek at some of these issues here is an article to ponder. http://www.atimes.com/atimes/Global_Economy/EH14Dj02.html

By: jimbo

jimbo — Fri, 19 Dec 2003 13:35:09 +0000

D^2: Surely, with all the talk about a “jobless recovery”, “2 million jobs lost”, etc., you of all people would not want to argue that we are at full employment! I define “full employment” as being a situation where anyone who is willing and able to work can find a job with some minimum of effort. By that measure, yes, I would say that we have not been at “full employment” for quite some time. And the last time we had true “demand pull” inflation was during the “guns and butter” days of the Vietnam war.

By: jimbo

jimbo — Fri, 19 Dec 2003 01:23:01 +0000

Sorry – I mispoke. (I have trouble keeping it stright in my head, myself) What the Chinese are doing is buying dollars to maintain the peg at a artificailly low level. Long and short – Chinese industry sells to U.S. for dollars, turns in dollars to Chinese CB for Yuan. Chinese CB keeps buying them by issueing Yuan, keeps building up reserves in order to keep Yuan low. Since Yuan is so low, Chinese can’t afford to buy U.S. products, so export surplus is maintained. The net effect is to impoverish your native population in order to build up financial claims that are of uncertain value (since the U.S. dollar is not pegged to anything and freely floats) China is doing this because it is undergoing a wrenching transition, unemployment is high, and it believes it cannot afford the disruption that a strong yuan would cause (specifically in it’s ailing agricultural sector). But like I said – it’s their problem, not ours, and we benefit from it in real terms…

By: jimbo

jimbo — Fri, 19 Dec 2003 00:52:56 +0000

Tom – You don’t get it – they can do all of those things, but the that just moves the dollars around. The only way that the dollars are “removed” from the system is to exchange them for U.S. bonds. Remember – dollars never “leave” the U.S. – their only existance is as accounting data in U.S. banks. They are created when the Fed writes a check, and only destroyed when the Fed cashes one (or acts as intermediary for the Treasury doing it, which is the same thing). The Chinese are attempting to maintain a peg of their currency against the dollar. In order to do that, they must be willing to continously sell dollars on the open market at their peg price. (In the same way the U.S. treasury used to sell gold at $35 an ounce to anyone who showed up in order to maintain the gold standard) Accordingly, they have to obtain those dollars to have on reserve. Fortunately for them, they don’t have to dig them up somewhere – we are willing to give them all the dollars they need, in exchange for stuff they send us. What this means is that the more demand there is for their currency, the more dollars they need to maintain the peg. In real terms, they are giving us boatload after boatload of stuff, and in return we are incrementing the numbers on their central bank’s account at the Fed. (we don’t even have the decency to send them fancy bits of paper, anymore) Can this go on forever? Probably not – but it is their problem, not ours. We are getting $100B dollars a year in free stuff that we don’t have to work for. It’s not like they can come over here and take it back when they realize they’ve been had. So our currency drops – who cares? Income is transfered from the import sector to the export sector. The level of a currency has nothing to do the real wealth of a nation. If statemen would only realize that, a lot of bad policy would go away…

By: nnyhav

nnyhav — Thu, 18 Dec 2003 22:41:08 +0000

More like a bubble of bubble theories. Mere misvaluation does not a bubble blow. But I shan’t further interrupt your buying into a self-sustaining frenzy.

By: TOm

TOm — Thu, 18 Dec 2003 19:50:31 +0000

“The Chinese and other trading partners are buying bonds because they are set on accumulating dollar assets by exporting to us more than they import from us, and the only alternative to buying bonds is to hold onto non-interest bearing reserves.” I wouldn’t say that’s the ONLY thing they could do. They could also buy US real estate or stock. Or they could exchange the dollars for, say, euros, and invest in something over there. Or import something from over there.

By: dsquared

dsquared — Thu, 18 Dec 2003 18:12:15 +0000

You know I love your stuff, jim, but why do you say: Inflation will only result if aggreagate demand exceeds aggregate supply, and we haven’t been anywhere near that since the late 60’s… Shurely with unemployment at amazingly low rates and consumer borrowing through the roof, it’s a bit hard to make the case that the USA has deficient aggregate demand?!?

By: russ e

russ e — Thu, 18 Dec 2003 17:38:01 +0000

Whatever you call it, when us “whiny baby boomers” retire something’s going to go bust. Stop us before we bankrupt us all!

By: jimbo

jimbo — Thu, 18 Dec 2003 16:00:23 +0000

“Credibility” has nothing to do with it; the fed can maintain short-term interest rates at any level it chooses, for as long as it wants to. Long term rates are determined by two things: what the fed is doiong right now, and what traders think the fed will od in the future. “Supply and demand” is inoperative in the case of financial instruments. Inflation will only result if aggreagate demand exceeds aggregate supply, and we haven’t been anywhere near that since the late 60’s… The Chinese and other trading partners are buying bonds because they are set on accumulating dollar assets by exporting to us more than they import from us, and the only alternative to buying bonds is to hold onto non-interest bearing reserves. (there’s no other place for the money to go) “Financing the trade deficit” is also a nonoperative concept in the case of a floating exchange rate regime.

By: Matt Weiner

Matt Weiner — Thu, 18 Dec 2003 15:23:55 +0000

this only leaves the question of why putatively rational investors did not sell earlier Davies’ law, perhaps? (Per tomd, I assume you meant “overvaluation of the dollar.”)

By: Greg Hunter

Greg Hunter — Thu, 18 Dec 2003 13:35:21 +0000

“You can see this in the data supplied by the Bureau of Economic Analysis.” No, I cannot see where the data suggests that Asians are buying the bonds. I believe that the Asians are buying, but it is not presented in the data. The Asians are buying because the U.K. and U.S. Corporations own sweat shops in Asia that need natural resources to operate. The US/UK governments have agreed to supply the resources as long as the Chinese supports the West in a life that it has become accustomed. They have to buy the bonds.

By: TomD

TomD — Thu, 18 Dec 2003 12:25:31 +0000

“The second bubble, noted by plenty of economists was the glaring overvaluation of the bubble.” What? You mean Americans are now paying for their groceries in bubbles? Bubbles on the brain, more like.