Andy Xie: Fear the Dark Side of China's Lending Surge

[doom&gloom]

Re: Andy Xie: Fear the Dark Side of China's Lending Surge

that is why i like Brazil!

[santafe2]

Re: Andy Xie: Fear the Dark Side of China's Lending Surge

We expect long term that the U.S. will deflate the debt against the monetary unit of debt, the dollar, by allowing oil producers to facilitate the devaluing of the dollar against oil rather than gold as in the 1930s. That is the essence of Ka-Poom Theory.

Fred, I'm not following this argument, can you add more detail or pointers to other posts? Here's my take away from the above: Oil, the thing that causes a great portion of our current debt moves up in value significantly causing further debt but it somehow lowers relative debt more quickly than it causes new debt accumulation? I'm confused, thanks in advance.

[ThePythonicCow]

Re: Andy Xie: Fear the Dark Side of China's Lending Surge

Fred, I'm not following this argument, can you add more detail or pointers to other posts? Here's my take away from the above: Oil, the thing that causes a great portion of our current debt moves up in value significantly causing further debt but it somehow lowers relative debt more quickly than it causes new debt accumulation? I'm confused, thanks in advance.

I think I've got this right. We'll see.

The USA goes back to its playbook with the oil exporting Arabs once again. The USA tells the Arabs that the USA will continue to provide military security for the Arab royalty and that it will raise (or allow the Arabs to raise -- same thing) the dollar denominated price of crude (more dollars to the Arabs), in turn for which the Arabs continue to sell their oil in dollar denominated contracts to the USA and continue to purchase vast quantities of US Treasuries.

As usual, when inflating the monetary base, the USA prefers to pick and choose who gets the fresh dollars first. The lucky recipient of the new money has to make some deal with the USA that is well beyond the capacity of us ordinary people.

The increase in the dollar denominated price of crude then filters its way back into the day to day economic environment of American citizens and corporations. First prices directly connected to crude oil rise, such as the prices of automobile petro, home heating oil, diesel fuel for trucks and asphalt shingles for residential roofs (which as an aside is why I am currently converting to a metal roof). Then prices once removed rise, then twice removed, and so forth. Wages and pensions don't rise much, unemployment remains high, and taxes direct and indirect climb higher. Prices for products that Americans import from other countries who are less willing to "make a deal" rise. That German BMW 750i I lust for gets priced further out of my reach.

American people end up with less money to spend while essentials cost more. Americans therefore buy less stuff. The USA government is happy as someone still loves their Treasuries.

[santafe2]

Re: Andy Xie: Fear the Dark Side of China's Lending Surge

I think I've got this right. We'll see.

But how does this deflate debt? It sounds like the units, (dollars), are deflating while we're adding units of debt at a faster pace - thus inflating and not deflating overall debt. Are we going to become fiscal conservatives in all other financial areas? I don't get how expensive oil does anything more than cause Americans to reallocate financial resources.

[raja]

Re: Andy Xie: Fear the Dark Side of China's Lending Surge

The USA goes back to its playbook with the oil exporting Arabs once again. The USA tells the Arabs that the USA will continue to provide military security for the Arab royalty and that it will raise (or allow the Arabs to raise -- same thing) the dollar denominated price of crude (more dollars to the Arabs), in turn for which the Arabs continue to sell their oil in dollar denominated contracts to the USA and continue to purchase vast quantities of US Treasuries.

The increase in the dollar denominated price of crude then filters its way back into the day to day economic environment of American citizens and corporations. First prices directly connected to crude oil rise, such as the prices of automobile petro, home heating oil, diesel fuel for trucks and asphalt shingles for residential roofs (which as an aside is why I am currently converting to a metal roof). Then prices once removed rise, then twice removed, and so forth. Wages and pensions don't rise much, unemployment remains high, and taxes direct and indirect climb higher. Prices for products that Americans import from other countries who are less willing to "make a deal" rise. That German BMW 750i I lust for gets priced further out of my reach.

American people end up with less money to spend while essentials cost more. Americans therefore buy less stuff. The USA government is happy as someone still loves their Treasuries.

I wonder if this scenario is also a possibilty . . . .

The US provides the exporting Arab royalty military support, therefore they fear to do anything other than continue to sell their oil in dollar denominated contracts.
The US economy continues to tank, and just like before, Americans cut back on gas consumption, and the price for oil plummets.

The Arabs don't like that, since the value of the dollar is going down at the same time, but what choice do they have? They don't want to lose America's business, and their other customers, who are also suffering economic malaise, are in the same boat. They will simply tighten their people's belts (while maintaining their own lavish lifestyles).

With energy prices staying low or even crashing, this allows manufacturers to lower their prices . . . they've got to if they want to maintain sales to the American consumers with their ever-shrinking pocketbook.

Ooops . . . we've got deflation.

(:eek: Egads . . . what did I say? Sorry Man of Metal, a moment of weakness . . . I take it all back! ;))

[nero3]

Re: Andy Xie: Fear the Dark Side of China's Lending Surge

But how does this deflate debt? It sounds like the units, (dollars), are deflating while we're adding units of debt at a faster pace - thus inflating and not deflating overall debt. Are we going to become fiscal conservatives in all other financial areas? I don't get how expensive oil does anything more than cause Americans to reallocate financial resources.

I think you can look to this:
http://1.bp.blogspot.com/_pMscxxELHE...avingMay09.jpg

unless there is even further to go on the household debt to GDP, like it was in the seventies, I think there will be a trend of lower household debt, at the same time public debt increase, and even things such as the deficit is monetized. The result is deleveraging by the household sector and inflation, and a weaker dollar, similar to the 1940-s. After the fed hikes after this expansion, I think there will be a deflationary expansion, accompanied by a strong dollar, similar to after 1949.

[jk]

Re: Andy Xie: Fear the Dark Side of China's Lending Surge

We expect long term that the U.S. will deflate the debt against the monetary unit of debt, the dollar, by allowing oil producers to facilitate the devaluing of the dollar against oil rather than gold as in the 1930s. That is the essence of Ka-Poom Theory.

Fred, I'm not following this argument, can you add more detail or pointers to other posts? Here's my take away from the above: Oil, the thing that causes a great portion of our current debt moves up in value significantly causing further debt but it somehow lowers relative debt more quickly than it causes new debt accumulation? I'm confused, thanks in advance.

i'll take a swing at it.
after the next leg down in the economy and markets [the rationale behind buying long bonds recently], commodity- especially oil - prices will lead the recovery. this will produce inflation [general rise in price levels across the economy]. eventually, btw, this will filter back and be reflected in increased wages. that general inflation LEADS wage inflation is the theory supported by the fed research paper referenced in earlier threads.

the trillions in debt held by foreign cbs and swf's will thus be reduced in real value, since nominal prices have risen. foreign debt holders will then start moving more quickly out of dollar assets [they are already tiptoeing]. this is the beginning of "poom."

yes, while the value of already extant debt is being reduced, new debt is being created. it is a question of great interest- who will buy this new debt?

i see the "friendly" petrostates as continuing purchasers, and as long as oil is denominated in dollars, other surplus countries- e.g. other commodity exporters - will accept dollars that they can use to buy oil. the utlity of dollars in purchasing commodities then will also support their continued acceptability for manufactures. the oil sellers will recycle the dollars back into tbonds.

the pricing of commodities in dollars in thus key. the alternative will be to have the fed print money to buy the new debt. the fed has already made some purchases as part of quantitative easing. [i have seen this referred to as "queasing," and it certainly makes me queasy.]

the net effect of rising oil prices and inflation will be that the current creditors of the u.s., e.g. china and japan, will find their holdings progressively devalued. meanwhile, the petroleum exporters will find their holdings of u.s. debt increasing in value. we will be reducing china's claims on u.s. assets and production while increasing the claims of the saudis, i.e. moving the claims into "friendlier" hands. this can simultaneously be viewed as a change in the terms-of-trade, as manufactures become less valuable relative to raw goods and energy.

[santafe2]

Re: Andy Xie: Fear the Dark Side of China's Lending Surge

Ooops . . . we've got deflation.

All Ka, no Poom? But doesn't the Fed/Treasury continue to pump up the volume of dollars until Poom finally happens?

[nero3]

Re: Andy Xie: Fear the Dark Side of China's Lending Surge

One thing I find very funny is that my best stock, I got around a 1000 % so far (and I think it will go to around 8000%), is that it's a pure deflationary play (that is car rental).

[nero3]

All Ka, no Poom? But doesn't the Fed/Treasury continue to pump up the volume of dollars until Poom finally happens?

In the 1950s you certainly had that combination of deflation (think CRB), boom, and massive government stimulation. I think it is a certainty, I just don't know when it starts. If it now, or after this expansion. The CRB have already expanded 3,5 times, like it did in the seventies, so it could be now. If that is the case, I think US companies will face increasing profit margins, however I kind of doubt it, it just seems the CRB are ready for further gains, before the cycle is over.

[santafe2]

Re: Andy Xie: Fear the Dark Side of China's Lending Surge

i'll take a swing at it.
after the next leg down in the economy and markets [the rationale behind buying long bonds recently], commodity- especially oil - prices will lead the recovery. this will produce inflation [general rise in price levels across the economy]. eventually, btw, this will filter back and be reflected in increased wages. that general inflation LEADS wage inflation is the theory supported by the fed research paper referenced in earlier threads.

the trillions in debt held by foreign cbs and swf's will thus be reduced in real value, since nominal prices have risen. foreign debt holders will then start moving more quickly out of dollar assets [they are already tiptoeing]. this is the beginning of "poom."

yes, while the value of already extant debt is being reduced, new debt is being created. it is a question of great interest- who will buy this new debt?

i see the "friendly" petrostates as continuing purchasers, and as long as oil is denominated in dollars, other surplus countries- e.g. other commodity exporters - will accept dollars that they can use to buy oil. the utlity of dollars in purchasing commodities then will also support their continued acceptability for manufactures. the oil sellers will recycle the dollars back into tbonds.

the pricing of commodities in dollars in thus key. the alternative will be to have the fed print money to buy the new debt. the fed has already made some purchases as part of quantitative easing. [i have seen this referred to as "queasing," and it certainly makes me queasy.]

the net effect of rising oil prices and inflation will be that the current creditors of the u.s., e.g. china and japan, will find their holdings progressively devalued. meanwhile, the petroleum exporters will find their holdings of u.s. debt increasing in value. we will be reducing china's claims on u.s. assets and production while increasing the claims of the saudis, i.e. moving the claims into "friendlier" hands. this can simultaneously be viewed as a change in the terms-of-trade, as manufactures become less valuable relative to raw goods and energy.

Thanks jk, nero3. I've got to review this tonight when I have more time.

[ThePythonicCow]

Re: Andy Xie: Fear the Dark Side of China's Lending Surge

But how does this deflate debt? It sounds like the units, (dollars), are deflating while we're adding units of debt at a faster pace - thus inflating and not deflating overall debt.

What Fred said was:

We expect long term that the U.S. will deflate the debt against the monetary unit of debt, the dollar

That could mean one of two things, either less real debt, or the existing dollar-denominated debt is worth less because the dollar is worth less (more of them). It seems rather painfully clear that "less real debt" is not in the cards so long as the present bunch of scoundrels is dealing.

The American Banksters and their co-dependent political hacks are debt addicts. They are like the foolish person whose idea of dealing with excess debt is to get more credit cards or another home equity loan, to meet the payments on the current debt.

Because simply printing money is still rather unpopular, more dollars means more Treasuries. The only major potential consumers of Treasuries who haven't been flipping us the bird lately are the petro-Arabs. Perhaps Obama made the right decision to bow before the Saudi King.

somehow lowers relative debt

Hah -- lower debt -- hah -- no way! Queue sound affects of a Cow errupting in the Mighty Mogambu Guru Laugh (MMGL). Beware, it is a truly terrible sound!

[raja]

Re: Andy Xie: Fear the Dark Side of China's Lending Surge

All Ka, no Poom? But doesn't the Fed/Treasury continue to pump up the volume of dollars until Poom finally happens?

Didn't Japan try that . . . and it didn't work?

[santafe2]

Re: Andy Xie: Fear the Dark Side of China's Lending Surge

the trillions in debt held by foreign cbs and swf's will thus be reduced in real value

Treasury says $3.26T in public debt is held by foreign entities. About 1/4 of this is held by China. Their holdings are up over 50% in the last year and this is about 1/4 the Chinese GDP so no wonder China is getting nervous. Why have the Chinese been buying Treasuries instead of oil? With the Ts they bought in the last year they could have paid for all the oil they used. We obviously won't let them off the hook.

i see the "friendly" petrostates as continuing purchasers, and as long as oil is denominated in dollars, other surplus countries- e.g. other commodity exporters - will accept dollars that they can use to buy oil. the utlity of dollars in purchasing commodities then will also support their continued acceptability for manufactures. the oil sellers will recycle the dollars back into tbonds.

So China and Japan will actually not have to buy a hundred billion in Ts each year so we can afford their stuff? We'll just make the oil exporters take the T Bond IOU? Sounds great in year one but once they're locked into a 30 year T and the US$ keeps tanking they're screwed.

the net effect of rising oil prices and inflation will be that the current creditors of the u.s., e.g. china and japan, will find their holdings progressively devalued. meanwhile, the petroleum exporters will find their holdings of u.s. debt increasing in value.

I think they are all screwed unless someone is proposing to pay interest on Ts at a fluxuating rate based on the average cost of oil.

we will be reducing china's claims on u.s. assets and production while increasing the claims of the saudis, i.e. moving the claims into "friendlier" hands. this can simultaneously be viewed as a change in the terms-of-trade, as manufactures become less valuable relative to raw goods and energy.

And once their oil runs out, their power and control runs out and their own people finally run them out of office and we confiscate their claims....clever.

[jk]

Re: Andy Xie: Fear the Dark Side of China's Lending Surge

Treasury says $3.26T in public debt is held by foreign entities. About 1/4 of this is held by China. Their holdings are up over 50% in the last year and this is about 1/4 the Chinese GDP so no wonder China is getting nervous. Why have the Chinese been buying Treasuries instead of oil? With the Ts they bought in the last year they could have paid for all the oil they used. We obviously won't let them off the hook.

they bought all the oil they could. they wanted to buy more, e.g. unocal, but couldn't. they bought enoughh treasuries to keep the value of yuan tied to the dollar, and then perhaps a bit more with whatever they couldn't spend on commodities.

So China and Japan will actually not have to buy a hundred billion in Ts each year so we can afford their stuff? We'll just make the oil exporters take the T Bond IOU? Sounds great in year one but once they're locked into a 30 year T and the US$ keeps tanking they're screwed.

i doubt the saudi princes' lifestyles will be impacted for some time. what's important are those aircraft carriers offshore, standing behind the regime.

I think they are all screwed unless someone is proposing to pay interest on Ts at a fluxuating rate based on the average cost of oil.

And once their oil runs out, their power and control runs out and their own people finally run them out of office and we confiscate their claims....clever.

i think saudis have enough oil to last for a long time, and even as the quantities diminish, the value will go up.