Sunday, August 7, 2011

Sunday Update

So as the Asian markets opened up, there is a flurry of significant Global financial items hitting the newswires.

As expected, precious metals spiked upward as Gold hit $1,692/oz and Silver was up almost $2/oz.

Goldman Sachs immediately revised it's gold price forecasts:
  • "we are raising our gold price forecasts to $1,645/toz, $1,730/toz, and $1,860/toz on a 3, 6, and 12-month horizon, respectively."
The G-7 have come out with a statement saying they will do everything to keep the markets from plunging tonight and tomorrow. From their statement:
  • The Finance Ministers and Central Bank Governors of the G7 on Monday made the following statement ahead of the opening of trade in Asian markets and following the downgrade of U.S. debt on Friday. "In the face of renewed strains on financial markets, we, the Finance Ministers and Central Bank Governors of the G-7, affirm our commitment to take all necessary measures to support financial stability and growth in a spirit of close cooperation and confidence. We are committed to addressing the tensions stemming from the current challenges on our fiscal deficits, debt and growth, and welcome the decisive actions taken in the US and Europe."
Meanwhile little Timmy Geithner (US Treasury Secretary) was on NBC discussing the S&P downgrade of US debt. Geithner continues the Administration attack on the ratings agency's decision to downgrade the US creditworthiness:
  • "The S&P decision to cut U.S. credit rating shows stunning lack of knowledge about basic U.S. fiscal budget math."
He added that S&P made a "terrible judgment" and reached the wrong conclusion and added that the S&P decision changed nothing on the safety of Treasuries and that China remains a strong investor in the US.

It's that last point that is most poignant because it was China that has provided the most interesting news item of the evening so far.

Yu Yongding, a former member of the Monetary Policy committee of the Chinese Central Bank, made this statement carried in the Financial Times. After 30 years of the "great montetization" in which China has been relentless recycling the Chinese trade surplus in the form of US paper which is increasingly looking like it will never get repaid, Yu Yonding said:
  • "the situation is ultimately unsustainable. The longer it continues, the more violent and destructive the final adjustment will be."
In his statement Yu asks a very important rhetorical question:
  • "What losses is China willing to bear in its foreign exchange reserves in order to slow the pace of the renminbi appreciation?"
Understand the huge significance of what is transpiring right now, dear reader.

In Europe you have the question is what amount of gross economic loss is Germany willing to sustain in order to backstop Europe's insolvent countries. In America the question is the same for China.

How much is Germany willing to lose in order to backstop Europe's insolvent countries  simply to keep the euro up and running, and its export sector humming courtesy of no return to a DEM?

How much risk is China willing to take with its US-based paper holdings in order to keep its own export sector moving along courtesy of a weak CN?

The irony is that the longer Germany and China pretend all is good, the greater the impairment of their natural import partners. And in a globalized economy, even having the cheapest (no matter how artificially contrived) currency does nothing if the global economy tanks and import level implode.

At that point it will be too late for Germany and China to do anything about their flawed mercantilist policies because at that point, a third and final depression will be here.

So what is the right move right now?

Yu Yongding spells it out:
  • "The danger for China is that it does not learn the right lesson - namely, that now is the time to end its dependency on the US dollar."
The time for China to strike, if it really means it, is now.

And if they do, if China announces it is freely floating the renminbi, it will trigger sheer chaos and market panic as confidence is lost in the US dollar.

Which brings to mind this sensationalized account on youtube that was released last year envisioning just this scenario.

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1 comment:

  1. printing to band aid over speculation is the way

    let the interest rates go to 0% and watch the last of the speculators feed the bubble that is now in full deflation.

    if there is even a small recovery next week it will be offset by companies and the public saving instead of spending.

    welcome to ugly.get out of r/e now!