Race to the Bottom

[Magox]

New Newsletter, it's a topic that I find very interesting and I absolutely believe this is what we will see over the next few years.... Wouldn't mind to hear some of your opinions...

 

RACE TO THE BOTTOM

 

Just about every major developed nation is struggling to grow their economy. Countries in Europe are suffering even more so now with all the austerity measures they have implemented to reduce their debt, Japan hasn’t whiffed a scent of growth for two decades now, and the U.S. is barely growing AND that is with all the unprecedented “stimulus” that has been provided by the U.S. government and Federal Reserve.

 

It’s quite clear that all these economies are now overstretched and there simply isn’t enough political will or for that matter money, to try to sustainably stimulate these economies. All the policy prescriptions that have been provided have largely been temporary band-aids which did very little to improve our structural employment problems. As I have always argued, structural problems require a structural solution which is why the Obama administration’s remedies have for the most part all come up short.

 

So this leaves the Federal Reserve, and they understand or should I say they believe, that they are the last beacon of hope. We’ve addressed this topic in our INFLATION THROUGH DEFLATION newsletter, where we forecast that the Federal Reserve would continue another round of QE sometime during the second half of this year. I’m sure some of you have heard this QE acronym but maybe some of you haven’t. Basically in a nutshell, it means that the Federal Reserve will print money to try to artificially stimulate the economy. The idea is to bring down interest rates for mortgages, auto and business loans, and to flood the banks with cash so that they will lend it in order to stimulate the economy. Sounds good, the problem is that rates are already at record lows, banks have more cash than they’ve ever had, and corporations are sitting on a record $1.8 Trillion. So the issue isn’t that the cost of capital is too high, it’s that there is a lack of sustained domestic demand for goods and services, too much restrictive nonsensical populist regulation imposed by the government, lack of credit-worthy borrowers, and a continuing deterioration of RE assets sitting on the banks balance sheets that undermine their confidence to lend and that were never addressed in the flawed big bank bailouts of 2008.

 

In any case, the Federal Reserve will push through with another round of QE, which they now are dubbing it as QE2. The word on the street is that it will be to the tune of a $1 Trillion dollars. Remember folks, they’ve already printed $1.4 Trillion in the first round of QE back in 2009, so this would now push it up to close to $2.5 Trillion. So what are some of the possible and likely side-effects of printing such a massive amount of money? I mean, you can’t just keep printing money without side-effects, right? If there were no consequences then the Federal Reserve could print $10 Trillion and send everyone checks for $200,000 and life would be just lovely. The reality is that these actions do come with a price tag and that price tag is a weaker dollar and future inflation.

 

However, there is a positive possible outcome to weakening the dollar and it does actually structurally help solve part of our labor market problems. We all know that growth in the developed economies such as Europe, Japan and the U.S. is virtually non-existent, but there is very strong growth in the emerging market economies such as Brazil, Russia, India and China, and it’s not just limited to them; the Middle East is growing with those impressive oil revenues and just about all the periphery Asian and Latin American economies are growing as well. So one of the best ways for the developed nations to grow is to cater to the needs of the Emerging market economies. These economies are growing and they are growing fast, and they demand goods and services. If countries like Japan, Germany, and the U.S. can manufacture goods and ship them out to these countries, then that will help them grow which in turn would produce more Jobs. That’s what it all comes down to folks; JOBS JOBS JOBS. Even our community organizer, oops, I meant to say president, understands this when he recently said “The more American companies export, the more they produce, and the more they produce, the more people they hire, and that means more jobs -- good jobs that often pay as much as 15 percent more than average.”

 

One of the best ways that each of these respective economies can compete with one another is to devalue their currency. If the value of the dollar becomes worth less then that means if a country like China wants to buy our goods it would make it cheaper for them to do so. Sounds like a good strategy; the problem is that we aren’t the only ones who realize this. Every Central bank understands this, which is why you are seeing England institute QE policies; the Euro recently embarked on QE as well and now Japan for the first time in six years decided to intervene in their currency markets to push down the Japanese Yen. Over the past few years they have all complained of how they believed their currency was too high relative to others. Of course this affects their exports and since everyone realizes that there is little hope to grow domestically they are all desperate for this competitive advantage. So it’s off to the races, a race to the bottom.

 

Not only does this QE and currency devaluation strategy help stimulate exports but it also allows them to inflate their way out of debt. If you as a country have a national debt of $10 Trillion and all of a sudden over a period of a few years your policies devalue the currency by 30% then that would mean that you would tangibly only have to pay back 70% of your debt. Once again, sounds good, but those who will get screwed are the ones who were buying their debt because they would now be left with their battered currency, and more importantly it hurts every single consumer on the planet, specially lower to middle income earners because that means everything they buy will become more expensive. Understanding that, this artificially induced inflation that was produced from the Federal Reserve will not only punish U.S. consumers but also means we will export inflation overseas, which in fact would have a considerably larger impact on developing economies such as China where daily incomes on average are only a few dollars a day, and when oil and food prices go higher then it really takes a much larger bite out of their disposable income. Ouch!!!

 

The signs of inflation are already beginning to rear its ugly head; I know that the Federal Reserve and some of the CNBC cheerleaders will tell you that there is no inflation. HAAAA! Gasoline is around $3 a gallon, grains such as corn, soybeans and wheat are at multi-year highs, cotton is going through the roof, soft commodities such as coffee, cocoa and orange juice are soaring, copper is beginning to bust out, and gold is at record highs. Meanwhile this is all happening with the real unemployment rate hovering around 17%; YIKES!!! Yeah ok, there’s no inflation, pfffft.

I am here to tell you, that this is what you should expect. A Race to the Bottom….

[RkFast]

Money is cheap and going to get cheaper. But property taxes are still sky high, and so is the general cost of goods so no...another interest rate adjustments isnt going to help...at least not me.

 

And what about general consumer credit rates? They all took about a 10% jump due to the new regulations, right?

 

So basically Barry is drilling holes in the bow and the Fed is bailing out the stern.

 

I know little about economics, Im just giving some insight into the decision making process in the Fast household, as we are very much in the market for a new home.

Edited September 23, 2010 by RkFast

[KD in CA]

But property taxes are still sky high,

 

and will go higher along with every other tax since the idiots in Washington will "fight unemployment" by creating more useless, economy-draining, gov't jobs.

[Clip Smith]

I clicked on this thread thinking it was about Kim Kardashian.....

 

Sorry

[GG]

I clicked on this thread thinking it was about Kim Kardashian.....

 

Sorry

 

And I thought the thread was about Bills, Lions & Raiders

[/dev/null]

And according to Buffett we're Wasted Again in Recessionville

 

http://www.cnbc.com/id/39320992

[OCinBuffalo]

And according to Buffett we're Wasted Again in Recessionville

 

http://www.cnbc.com/id/39320992

Warren Buffett is also telling us that:

 

1. we shouldn't be upset with how things are going in Washington

(uh, yeah Warren, that wouldn't be because you supported Obama would it? )

 

2. the American economy will sort itself out, because capitalism works.....

 

....ok Warren, then why are you supporting the guy who doesn't believe that? To the point of spending trillions on bailouts, nationalizing whole industries, forced redistribution of wealth, and massive regulation? How the f is capitalism supposed to "work on its own" with your boy pulling all that crap, Warren? Why didn't we let capitalism work on its own 2 years ago, Warren?

 

That whole article, and especially the full transcript smells like a CYA job...to the point of irony.

[Magox]

I found this article today:

 

http://www.cnbc.com/id/39414025

 

 

"Were in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness.

 

This complaint by Guido Mantega, Brazils finance minister, is entirely understandable. In an era of deficient demand, issuers of reserve currencies adopt monetary expansion and non-issuers respond with currency intervention. Those, like Brazil, who are not among the former and prefer not to copy the latter, find their currencies soaring. They fear the results.

 

 

 

First, as a result of the crisis, the developed world is suffering from chronically deficient demand. In none of the six biggest high-income economies the US, Japan, Germany, France, the UK and Italy was gross domestic product in the second quarter of this year back to where it was in the first quarter of 2008.

 

These economies are now operating at up to 10 percent below their past trends. One indication of the excess supply is the decline in core inflation to close to 1 percent in the US and the eurozone: deflation beckons. These countries hope for export-led growth. This is true both of those with trade deficits (such as the US) and of those with surpluses (such as Germany and Japan). In aggregate, however, this can only happen if emerging economies shift towards current account deficit.

Edited September 29, 2010 by Magox

[/dev/null]

The government couldn't find the bottom of the housing market with free money (near 0% interest rates and 8k bribes), but it looks like the private sector is about to figure out how to stop the decline:

http://www.cnbc.com/id/39441529

 

Temporary fix to the housing prices unfortunately. Just puts the bottom another couple years out while folks live for free in homes they shouldn't have bought in the first place

Edited October 1, 2010 by /dev/null

[Magox]

The government couldn't find the bottom of the housing market with free money (near 0% interest rates and 8k bribes), but it looks like the private sector is about to figure out how to stop the decline:

http://www.cnbc.com/id/39441529

 

Temporary fix to the housing prices unfortunately. Just puts the bottom another couple years out while folks live for free in homes they shouldn't have bought in the first place

So many distortions in the market place, all this does is increase and prolong deflation expectations in the housing sector which make up 25% of the core inflation readings, meaning that interest rate policy will remain lower for longer creating even more asset bubbles.....

[Magox]

http://noir.bloomberg.com/apps/news?pid=20601087&sid=a0r537hjz3b0&pos=4

 

World Bank President Robert Zoellick said he sees tensions arising from currency devaluations as nations seek to buoy their economies, though he doesn’t expect them to turn into “wars.”

 

“I don’t foresee that we’re moving into an era of currency wars but there’s clearly going to be tensions, particularly if you have countries that have trade or current-account surpluses that are intervening to keep their currencies at lower rates,” Zoellick said on a conference call with journalists today.

 

At the same time, emerging economies face “weak” bank lending and food prices are “a serious cause for concern” in some nations, Zoellick said.

[Magox]

Yeah, I know I know

 

 

http://www.cnbc.com/id/39539787

 

The global race to the bottom in currencies may be less a war than it is an inevitable reaction to the growth of developing countries and the need for export-driven economies to stay competitive.

 

That's the view of experts who, while not wholly subscribing to the idea of a currency war, believe weakness in the US dollar, Chinese yuan and other major global currencies represents what could be the early days of a trade battle triggered by the strength of emerging markets.

 

While countries have different reasons for devaluing their currencies, one of the common threads is a desire to keep up with the cost of goods from other export-driven nations in the global marketplace.

 

I'm good

[Adam]

As with many other things, the two ruling kingdoms (parties) will point the finger at each other and the weak-minded American people will play along- that is the real reason for all of our problems.

[drnykterstein]

As with many other things, the two ruling kingdoms (parties) will point the finger at each other and the weak-minded American people will play along- that is the real reason for all of our problems.

The whole while the corporations will sit on the sidelines on their piles of money they've bought with the blood from our fight.

[IDBillzFan]

The whole while the corporations will sit on the sidelines on their piles of money they've bought with the blood from our fight.

I love how you liberal turdballs look at companies who sit on their profits with such a sense of entitlement; as if these companies OWE IT to everyone to spend that money to hire people.

 

Is it any wonder the left found a way to piss away full control of the government in less than 18 months.

[KD in CA]

The whole while the corporations will sit on the sidelines on their piles of money they've bought with the blood from our fight.

 

 

 

Yeah, I bet they got at least 2 drops out of whatever pathetic efforts your ignorant mind is able to produce!

[Magox]

As with many other things, the two ruling kingdoms (parties) will point the finger at each other and the weak-minded American people will play along- that is the real reason for all of our problems.

This has very very little to do with currency devaluation. How in the world did you come up with this post?

 

This has to do with trade imbalances and central bank monetary policy....

 

The whole while the corporations will sit on the sidelines on their piles of money they've bought with the blood from our fight.

And you're an idiot...

[3rdnlng]

The whole while the corporations will sit on the sidelines on their piles of money they've bought with the blood from our fight.

 

Just what is this "blood from our fight" that you are talking about?

[Adam]

This has very very little to do with currency devaluation. How in the world did you come up with this post?

 

This has to do with trade imbalances and central bank monetary policy....

I am talking about the overall economy and deficit. Neither side will stop spending, because they want to be popular and get votes. Then they just point to the other side of the aisle. It won't change because the american people are too cowardly to force change.

[Magox]

I am talking about the overall economy and deficit. Neither side will stop spending, because they want to be popular and get votes. Then they just point to the other side of the aisle. It won't change because the american people are too cowardly to force change.

What does that have to do with, oh !@#$ it, nevermind