Plaza Accord II = %100 inflation scenario?

[Alfredo Dominguez]

Picked this up tonight:

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Prestowitz urges Koizumi to call for 'Plaza Accord II' at G-8

TOKYO - Japanese Prime Minister Junichiro Koizumi should take the lead at a Group of Eight meeting in calling for a "Plaza Accord II," former U.S. trade negotiator Clyde Prestowitz said Tuesday.

"We all need to cooperate on diminishing the role of the dollar in international trade," said Prestowitz, now the president of the Economic Strategy Institute which he founded, at a lecture at the Foreign Correspondents' Club of Japan.

http://www.tmcnet.com/usubmit/2006/03/28/1510332.htm

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Now, given that the current account deficit was 3.5 percent of GDP in 1985 whereas it now stands at 7 percent, this certainly seems to make the 100% inflation scenario seem more likely, depending, of course, upon whether or not everyone plays nice.

[blazespinnaker]

What do you think the chance is that global countries will react to significant increases in the m3 by increasing their own m3s?

If the fed floods the supply and the dollar starts to drop, isn't it likely that exporting countries will do the same so that their prices will still be cheap enough to export to the US?

The result, massive worldwide inflation, with only the chinese manufacturers keeping wages and prices down (ie, asset inflation .. gold/re/art/etc going up in prices. but maybe not stocks due to globalisation pressures?)

Clearly a plaza accord is necessary to deal with this.

Talk about some history.. how did they deal with it before? Time for some googling..

[jeffolie]

THE FED'S PLAN TO LET HOUSING CRASH AND SAVE THE DOLLAR

They will deflate by having the overseas investors taken down while sparing the T-bill market with the "NewBank". In a flight to safety investors will jump on treasuries strengthen the dollar and crashing gold. Searching NewBank, check out
http://www.dailyreckoning.com/Writer.../MG030706.html
Very funny.

The first US bank to go down will be JP Morgan. Over 800 US banks hold derivatives. Check out: http://www.occ.treas.gov/ftp/deriv/dq305.pdf You'll see that the amount of derivatives in "insured" commercial bank portfolios increased by $2.6 trillion in the third quarter of 2005, to a whopping $98.8 trillion. 98% of these are concentrated in 5 banks. Total assets of these top 5 banks is $3.3 trillion if I am reading the chart correctly. Just look at the charts like the year ends 91-2004 chart (Graph 3) and you'll see a chart shooting straight to the moon. Maybe these bankers are smarter then me, but this is a house of cards in my book.


Most of the $570 trillion in derivatives are held by overseas investors. These will collapse from the housing bust causing defaults. The default follow like dominos to mortgage backed securities, then collaterized debt obligations and lastly to derivatives.

Controlled deflation will be the Fed's goal so that the dollar will rise. This will help the US government as investor, institutions and countries buy Treasuries as a safe haven. US Treasuries held as reserves will not be sold off (by China and Japan) avoiding a dollar devaluation. Win -Win for the Feds. Lose-lose for derivatives, MBS (which are explicitly not backed by the US).

Controlled deflation is the Fed best choice among bad choices.

I doubt the deflation can be controlled by lowering Fed rates to zero, but the Fed will try to "mop up".

I predict a head and shoulder top in the stock market. The bottom may not drop out until the mortgage defaults are large enough to collapse mortgage backed bonds, collateralized debt obligations and lastly derivatives.

[blazespinnaker]

I really don't buy a deflation theory. Why not simply push up long term interest rates but stimulate the short term economy with money?

This way everyone can afford the houses that affordability has pushed out of reach, the economy continues to do well, the value of the dollar steadily declines, and life is good all around.

The question is .. can the dollar move downwards in an orderly fashion? Hard to say.

[EJ]

The debate is not so much between deflation vs inflation, rather between managed inflation (The 100% Inflation Scenario) and unmanaged inflation, a hyperinflation.

ebtor Nations Dream of Deflation
Think this bubble is big? Wait until you see the next one. Part One of three.
http://www.alwayson-network.com/comm...=9646_0_11_0_C

Which we get depends on how the process is managed politically. The wild card is how well Asia holders of U.S. currency reserves are able to cooperate with each other to prevent competitive devaluations among themselves as occurred in the last crisis, and "allow appreciation collectively," as a senior Asian Development Bank official suggested last week.

http://www.iht.com/articles/2006/03/28/business/adb.php

[jeffolie]

HeliBen has no where to go to avoid the deflationary collapse. He must raise rates because the economy is relatively strong with lower unemployment. He must raise rates because commodities are going ever skyward. He must raise to bust the HOUSING BUBBLE.

As rates rise, the adjustable mortgages ( I/O & ARMs, plus HELOCs) raise monthly mortgage payments and default and foreclosures go up. As houses held by flippers and investors try to liquidate prices decline. As prices decline the MEWs (Mortgage Equity Withdrawals) disappear. Greenspan stated the MEWs added $700 billion to the 2005 economy or 70% of the 2005 growth.

Investors and flippers were 24% of the housing purchases in 2005 nationwide. 50% of mortgages in 2005 were adjustables which will easily be underwater with a 14% decline. The subprime lenders disappear when house owners cannot borrow when they have no equity. No subprime lenders means not MEWs for cars, vacations, educations, etc. As unemployment rises and more houses go into default, the mortgage backed bonds (MBS) default or become impaired. The GSEs (Freddie and Fannie) go from not reporting their earnings to the NYSE. The pools of MBS which become CDOs and become sold outside the Fed's control and regulation as derivatives worldwide in the hundreds of Trillions. HALF THE VOLUME OF THE US STOCK MARK COMES FROM DERIVATIVES. -- end game worldwide.

[JC Ernharth]

I think you could have some pretty nasty crosscurrents between inflation and deflation. Hold on to your hats.

Stay Vigilant!