Marc Faber on the mess

[DRumsfeld2000]

http://www.zerohedge.com/news/marc-f...old-and-greeks

He basically thinks that gold was due a correction and that gold stocks could fall heavily. Some of my gold stocks are down a long way, 20-30%. He believes in gold for the long term due to money printing coming.

[Starving Steve]

Re: Marc Faber on the mess

How can the U.S. print if China would dump a sea of U.S. dollars and U.S. bonds onto the world market? Furthermore, if the velocity of money increases in the U.S, hence inflation increases in the U.S, China might dump U.S. bonds and U.S. cash onto the world market, and especially if Bernanke keeps interest rates below the rate of inflation. So, Bernanke's hands are tied. Thus, China will have the last word on U.S. monetary policy, not Bernanke.

We might have witnessed the all-time peak on gold unless Bernanke chooses to ignore China and print regardless of what happens. So far, Bernanke's printing has had little or no affect upon inflation because the velocity of money has declined to zero. Cash is now going into safe deposit boxes and being plastered inside the walls of homes... In all my life of 63 years, I have never witnessed anything like this before.

Lending standards (credit) is being tightened in America, and consumers are paying-off debt. So, the velocity of money might even be negative in America; i.e, the money supply might be shrinking regardless of Bernanke's printing.

[GRG55]

Re: Marc Faber on the mess

How can the U.S. print if China would dump a sea of U.S. dollars and U.S. bonds onto the world market? Furthermore, if the velocity of money increases in the U.S, hence inflation increases in the U.S, China might dump U.S. bonds and U.S. cash onto the world market, and especially if Bernanke keeps interest rates below the rate of inflation. So, Bernanke's hands are tied. Thus, China will have the last word on U.S. monetary policy, not Bernanke.

...

Come now Steve. For China to sell all those Dollars and Treasuries someone else has to buy them. Who, pray tell, is that going to be?

Bernanke is going to win. It is China's hands that are tied. The Fed may have limited options...China would appear to have none.

[Starving Steve]

Re: Marc Faber on the mess

Come now Steve. For China to sell all those Dollars and Treasuries someone else has to buy them. Who, pray tell, is that going to be?

Bernanke is going to win. It is China's hands that are tied. The Fed may have limited options...China would appear to have none.

Let's say we have a 1.5%/year inflation rate in America, more or less as what the Fed indicates now. Then, China might have to sell bonds which yield a 4.5%/year interest rate (for a 3% real return), and China would have to discount the principle it paid on the bonds in order to offer bonds which yield a 4.5% rate of return. Thus, if China bought a bond that yielded 1%, and the principle on the bond was $1 initially, then China would have to offer the dollar bond on the world market at $0.965 in order to yield the 4.5%/year, give or take. And that would mean that China would have to take a hit on the bonds of 3.5% per year.

So, at an attractive yield, the world market might accept U.S. treasury debt, even with Bernanke at the Fed. The next move in this chess game is up to China. It would appear with one year U.S. paper not even yielding much over 0% that China is going have to take a big hit on its principle. Or, Bernanke is going to have to engineer a de-flation in the U.S, in order that his 0% paper would still be worth buying.... My guess is that he (and the Fed) are following this latter course; i.e, they are engineering a controlled and slow de-flation and meanwhile telling the public that helicopters are going to drop money and the Fed's printing-presses are running day and night.

[GRG55]

Re: Marc Faber on the mess

Let's say we have a 1.5%/year inflation rate in America, more or less as what the Fed indicates now. Then, China might have to sell bonds which yield a 4.5%/year interest rate (for a 3% real return), and China would have to discount the principle it paid on the bonds in order to offer bonds which yield a 4.5% rate of return. Thus, if China bought a bond that yielded 1%, and the principle on the bond was $1 initially, then China would have to offer the dollar bond on the world market at $0.965 in order to yield the 4.5%/year, give or take. And that would mean that China would have to take a hit on the bonds of 3.5% per year.

So, at an attractive yield, the world market might accept U.S. treasury debt, even with Bernanke at the Fed. The next move in this chess game is up to China. It would appear with one year U.S. paper not even yielding much over 0% that China is going have to take a big hit on its principle. Or, Bernanke is going to have to engineer a de-flation in the U.S, in order that his 0% paper would still be worth buying.... My guess is that he (and the Fed) are following this latter course; i.e, they are engineering a controlled and slow de-flation and meanwhile telling the public that helicopters are going to drop money and the Fed's printing-presses are running day and night.

It doesn't matter what discount the Chinese offer up their US Treasuries. Nobody, other than the US Treasury, has the ability to buy the Chinese held US Dollar instruments in a meaningful quantity. It might be better for them the just let the portfolio run off as their Tbills and Tbonds mature, instead of making noises about liquidating.

China is stuck on a treadmill. If they try to get off they pop the bubble with immediate negative consequences to themselves. If they don't the bubble keeps getting bigger. That is what has been happening for years now. At some point it ends. Nobody can accurately predict when [EJ has suggested it starts to collapse before this year is out]. But when it does end it won't be because the Chinese want it to.

The Fed is engineering a de-flation in the USA, is it? Now I've heard everything...

[Starving Steve]

Re: Marc Faber on the mess

House prices are soft and apparently becoming softer, especially in California and British Columbia. A house, or the mortgage on a house, is the biggest expense for people. So, this alone is very de-flationary in the economy. Although consumer goods and medical services are rising in price, also although property taxes are rising and utilities are rising, groceries are stable with some prices up while other grocery prices down--- the net result of all prices including the outlay for mortgages on homes is a very low inflation ( like 1.5% or 2.0%/year ) with some evidence of a de-flation under-tow now beginning to appear in the economy. The reason why I said, "evidence of a growing under-tow of de-flation in the economy" is that house prices are de-flating; the capital cost of a house and its mortgage is by far the largest expense for people. That cost is de-flating.

Some benefits of a slow and managed de-flation, i.e. a de-flationary under-tow in the economy: a.) zero interest rates, at least nominally, so the U.S. national debt can be financed at zero nominal cost; b.) China ends-up subsidizing America by having to buy and hold U.S. bonds, and also by having to discount the principle on these bonds; c.) pressure on China (by holding U.S. bonds and losing money) might force China to buy U.S. products; d.) banks in America get re-liquified with cheap money from the Fed; e.) the U.S. dollar (by holding its buying power) would remain the world's #1 reserve currency; f.) deadbeats can pay-down their debts because they don't have to pay interest; g.) people can save for retirement because inflation does not eat-up their savings; h.) banks can hoard dollars and tighten their lending standards; i.) producers can borrow cheaply and expand their businesses; j.) the bubbles in the economy get de-flated, slowly; j.) speculators and deadbeats get their credit shut-off--- hence, no more NINJA mortgages; k.) ultra-low interest rates make for a de-flationary soft-landing in the economy, whereas double-digit interest rates make for a de-flationary hard-landing in the economy.

Actually, Bernanke might be brilliant, and Obama may go down in history as the best president America ever had. Plus, Obama is damn likeable, not just in America, but worldwide.

LEAN FORWARD

[c1ue]

Re: Marc Faber on the mess

It is true China can do nothing to protect the value of the Treasuries it already owns, beyond the swaps it has set up and purchases it has made thus far.

But it should also be noted that China has essentially stopped buying Treasuries for over a year now, even as China trade surplus with the US continues.

China wouldn't sell its existing Treasury pile anyway - it does serve as a nice MAD type defense against the US.

The question really is how far China is willing to go to rein in its internal asset bubbles - the tug on the brick routine iTulip has noted.

On the flip side, China isn't spending billions in blood and oil in foreign adventures.

Still not clear to me how the US gets out of this without losing all sorts of credibility, prestige, and economic subsidies.

And on a historical note: while everyone around the world suffered during the Great Depression, it was the growing economies which grew their way out of it.

It was the US then, will it be China now?

[GRG55]

Re: Marc Faber on the mess

House prices are soft and apparently becoming softer, especially in California and British Columbia. A house, or the mortgage on a house, is the biggest expense for people. So, this alone is very de-flationary in the economy. Although consumer goods and medical services are rising in price, also although property taxes are rising and utilities are rising, groceries are stable with some prices up while other grocery prices down--- the net result of all prices including the outlay for mortgages on homes is a very low inflation ( like 1.5% or 2.0%/year ) with some evidence of a de-flation under-tow now beginning to appear in the economy. The reason why I said, "evidence of a growing under-tow of de-flation in the economy" is that house prices are de-flating; the capital cost of a house and its mortgage is by far the largest expense for people. That cost is de-flating.

Some benefits of a slow and managed de-flation, i.e. a de-flationary under-tow in the economy: a.) zero interest rates, at least nominally, so the U.S. national debt can be financed at zero nominal cost; b.) China ends-up subsidizing America by having to buy and hold U.S. bonds, and also by having to discount the principle on these bonds; c.) pressure on China (by holding U.S. bonds and losing money) might force China to buy U.S. products; d.) banks in America get re-liquified with cheap money from the Fed; e.) the U.S. dollar (by holding its buying power) would remain the world's #1 reserve currency; f.) deadbeats can pay-down their debts because they don't have to pay interest; g.) people can save for retirement because inflation does not eat-up their savings; h.) banks can hoard dollars and tighten their lending standards; i.) producers can borrow cheaply and expand their businesses; j.) the bubbles in the economy get de-flated, slowly; j.) speculators and deadbeats get their credit shut-off--- hence, no more NINJA mortgages.

Actually, Bernanke might be brilliant, and Obama may go down in history as the best president America ever had. Plus, Obama is damn likeable, not just in America, but worldwide.

If the Fed was "engineering a de-flation" the last thing it would be doing is buying further out on the yield curve to lower mortgage interest rates in a last ditch effort to prop up the housing market...

[brent217]

Re: Marc Faber on the mess

It is true China can do nothing to protect the value of the Treasuries it already owns, beyond the swaps it has set up and purchases it has made thus far.

But it should also be noted that China has essentially stopped buying Treasuries for over a year now, even as China trade surplus with the US continues.

China wouldn't sell its existing Treasury pile anyway - it does serve as a nice MAD type defense against the US.

The question really is how far China is willing to go to rein in its internal asset bubbles - the tug on the brick routine iTulip has noted.

On the flip side, China isn't spending billions in blood and oil in foreign adventures.

Still not clear to me how the US gets out of this without losing all sorts of credibility, prestige, and economic subsidies.

And on a historical note: while everyone around the world suffered during the Great Depression, it was the growing economies which grew their way out of it.

It was the US then, will it be China now?

It isn't really "MAD" if the US dollar is still the world's reserve currency. If the Chinese dump their holdings, I cannot see the American dollar falling more than 10% per trillion dumped... in the long run; if the Chinese wanted to play nasty they could try to dump them all at once, which would depress the American dollar a lot for a few months, but the dollar would then rebound, and the one hold the Chinese have over the Americans would be gone.

[Starving Steve]

Re: Marc Faber on the mess

If the Fed was "engineering a de-flation" the last thing it would be doing is buying further out on the yield curve to lower mortgage interest rates in a last ditch effort to prop up the housing market...

The way I see it, and I am NOT an economist, is that two things cause a de-flation: a.) making interest rates so cheap that credit is shut-off, the money supply shrinks, and people/banks hoard cash. Then asset prices fall. b.) making interest rates so expensive that no-one can borrow, hence credit is cut-off. The supply of money shrinks, and people/banks invest in certificates of deposit or bonds, and not in assets. Then asset prices fall.

The way to inflate is to make money relatively cheap, but not cheap enough to freeze-up credit. Hence, the way to inflate is the middle nominal interest rates, 3% thru maybe 6%. Then credit runs wild, and speculation abounds. So long as the Fed feeds this with money, inflation takes root and accelerates.

So what the Fed is doing is choosing the ultra-low nominal interest rate strategy ( the ZIRP ) and freezing-up credit. Banks refuse to lend except to the most credit-worthy people/businesses, and even to them with collateral only. And what the Fed is doing now to lower long-term interest rates is just the same strategy. The benefit of the ultra-cheap money is that asset bubbles will be de-flated slowly, and the economic landing will be soft. Banks will hoard cash and make money via other rackets the banks have always run like: foreign exchange spreads, safe deposit-box rentals, foreign currency arbitrage, gold brokerage, real estate brokerage and commissions, insurance services, stock and bond brokerage, buying govn't bonds, loaning only to the most credit worthy customers, running their traditional credit card operations ( revolving finance ), running apartment buildings, leasing ( like GE Capital is doing ), trust-fund management, estate management, and by charging fees for all banking services--- even fees for cash withdrawals.

Banks go bankrupt under the ZIRP? I don't think so.... In fact, by hoarding cash when cash is disappearing, banks might become even piggier and more powerful.

[Southernguy]

Re: Marc Faber on the mess

I think ZIRP is arriving at its final stages.
The FED is pushing on a string. So, in essence, TWIST is irrelevant. The political environment is definitely deflationary. The logical course (not I say its good or bad) would be Q3. That did not happen because of political constraints.
And the same is happening in Europe, they are just printing enough to avoid the worse outcomes, always running behind the facts.
So if you look at Greek bonds yields, they are flat these days. My guess is that ECB is buying, just enough to avoid yields of 10 years bonds going back to 30% or more. They have been stuck at 23% for several days.
They do not take definitive actions to inundate the system with liquidity as the FED did in 2008, but they dont let everything fall to the ground either.
Thus we see prices of commodities falling, copper, silver, very sharply, agri ones slowly.
I think one cannot guess what will happen soon. It all depends on the political decision to inflate again.
If they dont act decisively we shall be a deflationary time the next months.
What shall happen to the real economy?
It shall be very, very ugly. Unemployment shall go up fast, production, commerce, etc shall go down.
As long as hawks are in control, as they seem to be now thatś the way things shall go.
The dollar is set (in that environment) to strengthen further. Gold could go down also.
The question is, then: when shall political pressure for more episodes of gov spending-money printing get strong enough to overcome hawkish politicos?
Of course a deflationary environment is very dangerous for debtors and hence for creditors also. If currency relative value strengthens, then debts follow. More debtors default, more creditors are in danger.
We could see very big banks on the brink again.
Shall times come to buy (those who still have liquidity to do it) to buy more gold?

[jk]

Re: Marc Faber on the mess

steve, did you ever hear the line about how if you owe the bank a million dollars, you have a problem, but if you owe the bank a billion dollars, the bank has a problem? how about if you owe the bank 2 trillion dollars? who has the problem?

[c1ue]

Re: Marc Faber on the mess

It isn't really "MAD" if the US dollar is still the world's reserve currency. If the Chinese dump their holdings, I cannot see the American dollar falling more than 10% per trillion dumped... in the long run; if the Chinese wanted to play nasty they could try to dump them all at once, which would depress the American dollar a lot for a few months, but the dollar would then rebound, and the one hold the Chinese have over the Americans would be gone.

What good would the world's reserve currency be if the largest exporter doesn't accept it?

Do you really think $1.2 trillion in Treasury bonds/bills plus $1.8 trillion in various other agency/corporate bonds, plus some stock equity holdings, would be just a drop in the bucket?

Certainly China needs the US as much as the US needs China - a unilateral or even bilateral severing of relations would be hurt both nations immensely.

The analogy would be a variation on the Bretton Woods gold window.

In the '60s and early '70s, people were willing to give the US stuff for dollars because they knew the dollars could be exchanged for gold.

After Nixon withdrew from BW, everyone had to re-examine this economic tradeoff. The Arabs' response was to double and triple the price of oil.

Yes, the embargo in the long run was counterproductive as it incentivized the US to become much more fuel efficient, but in the short run of 1973-1985, life really sucked for the US.

Chinese labor isn't quite so vital as oil, but then again the ramifications of skyrocketing inflation is equally a huge problem for the US.

[touchring]

Re: Marc Faber on the mess

What good would the world's reserve currency be if the largest exporter doesn't accept it?

Do you really think $1.2 trillion in Treasury bonds/bills plus $1.8 trillion in various other agency/corporate bonds, plus some stock equity holdings, would be just a drop in the bucket?

Certainly China needs the US as much as the US needs China - a unilateral or even bilateral severing of relations would be hurt both nations immensely.

I believe the CCP needs the US more than the US need them. Can the CPP survive without being able to export to the USA?