edward hugh: qe2 might be about devaluing the dollar

[jk]

http://eurowatch.blogspot.com/2010/1...ent-which.html

[Chomsky]

Re: edward hugh: qe2 might be about devaluing the dollar

great piece, thanks.

[Mega]

Re: edward hugh: qe2 might be about devaluing the dollar

Bit busy tonight, in a nutshell what did he say?
Cheers
Mike

[we_are_toast]

Re: edward hugh: qe2 might be about devaluing the dollar

Bit busy tonight, in a nutshell what did he say?
Cheers
Mike

He makes it sound like QE2 would be a big shot in the currency war, aimed at Japan and Europe. It's a good read, but I have a problem with believing the FED would be deliberately going after Japan and Europe. Risking damage to those fragile economies doesn't make a lot of sense. But then again, I don't buy the main reason for QE2 as lowering interest rates either.

[ASH]

Re: edward hugh: qe2 might be about devaluing the dollar

Bit busy tonight, in a nutshell what did he say?
Cheers
Mike

Here's my condensed version:

1. Rapid growth of debt in the developed world since ~1980 was the price paid for smoothing out the business cycle during "The Great Moderation", when globalization reduced manufacturing labor costs, allowing central banks to run loose monetary policy every time the economy slipped into recession -- and allowing governments to run stimulative fiscal policy -- without fear of high consumer price inflation.

2. The rich world's ability to take on additional debt is near its limit, so that implies an end to The Great Moderation, and a return to the business cycle pattern of old in which there were longer recessions and shorter periods of economic growth. Governments are no longer in a position to borrow and spend to shorten recessions.

3. If another recession hits as soon as might be predicted, there will be hell to pay, so authorities everywhere are trying to figure out how to stave that off. (Note: the time scale predicted is pretty close to EJ's prediction of by 2013.)

4. The US seems set on a course to intentionally devalue the US dollar to rectify our current account deficit, and QE2 has more to do with exchange rates than supplying credit to the American economy.

5. Since we're all at the end of our debt rope, pretty much the entire rich world needs to run current account surpluses to retire debt and pay for entitlement programs, but we can't all do it at once, so there's a problem. (Plus the developing world isn't keen on the idea, either.)

Honestly, I'm not sure if my summary reflects everything in the article, but that's what I got out of it.

[Mega]

Re: edward hugh: qe2 might be about devaluing the dollar

Oh you mean we fu8ked?

[ASH]

Re: edward hugh: qe2 might be about devaluing the dollar

Oh you mean we fu8ked?

Well... that's not really news, but sometimes it is diverting to analyze in great detail the manner in which we (collectively) are to be screwed, and whether some of us might be more or less screwed than others, and so forth.

I'm not entirely sold on QE2-as-currency manipulation. Obviously, QE does impact exchange rates, and is relevant to tensions over same. I'm just not sure that exchange rates are the primary objective here. Although it is desirable to run less of a current account deficit and generally correct the global imbalance between deficit and surplus countries, I don't think the impact of a weaker US dollar would be game-changing for US employment or our debt position in the short term. I think QE2 is strictly short-term thinking, and is mainly focussed on offsetting fiscal tightening with loose monetary policy.

[jk]

Re: edward hugh: qe2 might be about devaluing the dollar

Well... that's not really news, but sometimes it is diverting to analyze in great detail the manner in which we (collectively) are to be screwed, and whether some of us might be more or less screwed than others, and so forth.

I'm not entirely sold on QE2-as-currency manipulation. Obviously, QE does impact exchange rates, and is relevant to tensions over same. I'm just not sure that exchange rates are the primary objective here. Although it is desirable to run less of a current account deficit and generally correct the global imbalance between deficit and surplus countries, I don't think the impact of a weaker US dollar would be game-changing for US employment or our debt position in the short term. I think QE2 is strictly short-term thinking, and is mainly focussed on offsetting fiscal tightening with loose monetary policy.

i think hugh is looking at the medium term consequences of what is likely - i agree- short term thinking. still, it's interesting that those medium term consequences will be consistent with the weaker dollar that some will say is aimed at reducing trade deficits, and others -- like ej -- will say is aimed at producing inflation at home. a weaker dollar is the policy that dares not speak its name.

[jpetr48]

Re: edward hugh: qe2 might be about devaluing the dollar

John Hussman's view on reducing trade deficit in US with devaluing of dollar
"The Fed might like to believe that a cheaper dollar will improve trade by increasing U.S. exports and reducing imports. However, over the past two decades, and particularly in recent years, U.S. imports have been much more elastic in response to fluctuations in the U.S. dollar than exports have been. This suggests that provoking further dollar depreciation is likely to have negative effects on the global economy, owing to a shift away from imports, but with few positive effects for U.S. economic activity."

[jk]

Re: edward hugh: qe2 might be about devaluing the dollar

devaluing the dollar, however, is guaranteed to produce inflation.

[jiimbergin]

Re: edward hugh: qe2 might be about devaluing the dollar

devaluing the dollar, however, is guaranteed to produce inflation.

But Geithner says the US will not devalue

http://www.cnbc.com/id/39727927

jim

[Starving Steve]

Re: edward hugh: qe2 might be about devaluing the dollar

The way to dig-out of a debt-hole is to produce and export. The way to export is to cut-prices of products. Lower prices can be obtained by cutting salaries and cutting administration, and also by innovation and by automation. Land costs could be cut, and rents could fall for producers. Raw-material and energy costs could be cut.

For savers and investors, interest rates and dividend rates could go up. And if the currency is strong (i.e, tied to gold ), money flows-in from other countries. This new money is de-flationary because it is gold-backed. So confidence goes up, and people invest more and save more. This new gold-backed money is lent to producers and innovators, and the economy grows.

If people want healthcare, the government provides what is called, "socialized-medicine", but the government collects taxes to pay for it. If people want a strong military, the government collects taxes to pay for it. Consumption taxes work best because they cut waste in the economy. And government gets put onto a diet, too. The fat salaries and pensions and perks in the civil service are cut. Entire departments of government are cut.

De-flation is painful, but de-flation is the medicine to dig-out of a debt-hole.

Some lessons from Latin America and Israel that economists need to learn: Inflation fools no-one. Money flees from a weak currency, and it flows to the strong currency. Currency controls don't fool markets, and neither do central planners at the central banks fool markets.

The U.S. can take its bitter medicine of de-flation now, or it can perish. Keep the inflation going, and then people begin to flee to other countries. Manufacturers and innovators and producers flee, too. Then investors flee. Then comes ........ gang warfare and civil warfare. Then come the fascists who will destroy everything and everyone who remains.

I am no economist, but I would think economists would know better than to repeat the same mistakes of the past: inflation, debt, de-valuation, protectionism, currency-controls, deficits, debts, peeing-away money, stimulus, fake jobs, too big to fail, bail-out nation, bubble-economics, Greenspanese, manipulation of markets, zero interest rates, punishing-savers, punishing thrift, punishing efficiency, wishful-thinking, confiscating gold, faking data, a new paper currency, de-monetization, border walls, xenophobia, death camps, nazism, etc.

[touchring]

Re: edward hugh: qe2 might be about devaluing the dollar

The way to dig-out of a debt-hole is to produce and export. The way to export is to cut-prices of products. Lower prices can be obtained by cutting salaries and cutting administration, and also by innovation and by automation. Land costs could be cut, and rents could fall for producers. Raw-material and energy costs could be cut.

So you're advocating deflation?

If you factor in the dropping dollar, US exports has been falling almost all the time.
http://www.forbes.com/2010/10/14/bal...etschannelnews

Barack Obama's talk of boosting exports is just "talk".

Why an export strategy can't work:

1). China can make everything that America makes except for WMD.

2). What China doesn't make, China doesn't have to pay for it - software, movies are free for download and watching over the web. "Innovation" is free for copy within years if not months.

3). Many countries are pegged to the dollar, so a devaluing dollar doesn't boost exports.

4). Lower prices won't help because many Asian countries are providing it FOC, especially for hi-tech industries. Free land, even free factory building, no taxes for 5 years, zero taxes for top executives, and in some cases, they even provide you with engineers FOC for one year.

[sunskyfan]

Re: edward hugh: qe2 might be about devaluing the dollar

I'm not entirely sold on QE2-as-currency manipulation.

.... I think QE2 is strictly short-term thinking, and is mainly focussed on offsetting fiscal tightening with loose monetary policy.

I agree except it is broader than governments and fiscal policy. I kind of see the next round is about forcing entities (countries, corporations, hedge funds ect ... mostly china ) to repatriate dollars from the financial sector to the real world economy. Spend it or lose it is the implied threat. It is less about devaluing the dollar but more about devaluing the parking of dollars hedging the uncertainty in the world economy. Think less about inflation as the focus and more about the idea of the FED targeting devaluation of dollar denominated storage of money. The danger is that is a forced decision under duress better than waiting for the murky waters to clear. Evidently the powers that be have decided that the patience of "the people" is getting short.

[Starving Steve]

Re: edward hugh: qe2 might be about devaluing the dollar

So you're advocating deflation?

If you factor in the dropping dollar, US exports has been falling almost all the time.
http://www.forbes.com/2010/10/14/bal...etschannelnews

Barack Obama's talk of boosting exports is just "talk".

Why an export strategy can't work:

1). China can make everything that America makes except for WMD.

2). What China doesn't make, China doesn't have to pay for it - software, movies are free for download and watching over the web. "Innovation" is free for copy within years if not months.

3). Many countries are pegged to the dollar, so a devaluing dollar doesn't boost exports.

4). Lower prices won't help because many Asian countries are providing it FOC, especially for hi-tech industries. Free land, even free factory building, no taxes for 5 years, zero taxes for top executives, and in some cases, they even provide you with engineers FOC for one year.

Yes, I advocate a managed de-flation. No-one should be left unemployed forever and to starve. No-one should lose their savings in a bank, nor be left to die because of for-profit private hospitals and for-profit health insurance.

I saw to-day that one bottle of a 1982 vintage of wine sold for $5000 U.S. So, I think the rich in America are not taxed enough. Also, there should be a consumption tax and a luxury tax for everyone wasting money on McMansions, artwork, rare wines, racing cars, Hummers, etc.... But this is just my prejudice.

A federal sales tax in the U.S. is long over-due. And also, government departments and needless civil service should be cut. Golden pensions and fat salaries in government should be axed. School administrators need to be chopped. Teacher salaries need to be chopped.

Canada's civil service should also be chopped. Salaries and fat pensions should be trimmed.

California's state government needs to slim-down. Same thing. Chop, chop, chop.