We're Going to Tell Them What to Do?

Posted by: Tom Keene on September 29, 2010

FX Chartapalooza


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ADXY INDEX GP Q ROLL: Here is a snapshot of ascendant Asia. Its ADXY (35% renminbi, 14% Korea, 10% Singapore…). Note the lessons learned in 1997 (the collapse of their currencies) and the present retest of 2008 strength.


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USTRBROA INDEX GP Q ROLL: Here is the USD chart that matters. It’s the real, trade-weighted broad USD. It’s not as grim as other more media-frenzy charts but it is nevertheless sobering. The Plaza Accord spike and the 90s Rubin/Strong dollar spike give way to new dollar weakness.

Here is a Martin Feldstein piece that walks through the MUST of dollar weakness and why it is not to be feared and also this classic William Cline paper. If you want to play in the game or even participate in the chat, these are both must-read and must-understand.

Here are two books to raise your FX bar: Eichengreen and Cross

Drama Queens

I put the above two charts up because they capture the heart-of-the-matter. There are sideshows (and you never know which, and which sequence of sideshows will be regime change). Here are two drama queens of the moment.


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USDBRL CRNCY GP Q ROLL: Brazil is not happy. The currency tanked (see the 2003 spike of real weakness) then it made a Lula of a recovery. The new strength is Swiss-like, but tends to the same movement as commodity breatheren like Australia. Brazil is not Australia, and as a developing nation is not happy.


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WIRACHIN INDEX GPL Q ROLL: China is not happy. Here is a guesstimate of their FX reserves plotted semi-log so slope matters. It has eased off a bit, but at $2.45 trillion USD it gets your attention. We’re going to tell them what to do?

Discuss.

Reader Comments

A Bodgers Guide to Economics.

September 29, 2010 5:37 PM

Quite so, it's not a small problem. The other problem as I understand, is that only with US imports, can they buy raw materials for their own development, so that is an extra problem for them when exports wind down.
I think from a possible harmful control of US dollars, that point was passed some time ago, but is the problem of consequent shutting of foreign markets and taking employment and expertise away from the US an even larger underlying problem from the point of the United States.
As I see it the actions possible are 'do nothing' and continue to decline, or, stop further reduction of employment and expertise, and with the help of China, help each other survive, as is and to grow appropriately.
If China does not agree to that, the alternative of continuing decline is obviously at least to me, not acceptable, so in answer to your question yes, YOU are going to have clean up your mess.
It's a difficult thing to stand up and do what is necessary against threats, bullying, and maybe even foreign exchange manipulated weakening to the point that oil imports drain away everything, but whether you like it or not, you will have to, as the economic pirate of China is on this planet and is not going away.
The sooner done, the less any further damage to your economy will be.
Perhaps as the strength of Europe also depends on the strength of the US, that the EU, with Russia work in tandem with China if they start to play silly buggers.
I suppose capital controls could be introduced by the US and the Chinese reserves could be summarily 'hypothecated' to the US if they started to use that as a tool of warfare.
But where do you park $2.5 trillion dollars! in this world where everyone is shouting fowl. So abuse of their $ holdings I would say is highly unlikely unless they intend to become militarily involved as well.
It is China that have the problem, what will their already truculent population think when they see they have all that money invested in the US, and they can't get it out without destroying the world economic order, completely, this time. What sort of signal does that give to the impoverished rural peasants about the competence of their government. That money is ABSOLUTELY USELESS IN THE SHORT/MEDIUM TERM, unless as I say they want to destroy the economic world, out of which it is hard to see even their big knobs would gain anything, so I think you can dispense with that fear.
The West despite all the oohing and awing, have a huge pot of money still in their countries, even as is, generating some growth, don't have reserves wasting away in some dungeon, and they also are doing that without any exports to speak of, deficit economies.
So yes YOU are going to tell them what to do. The US and it's parliament and maybe the Europeans, have to stand up and push back.
There is no one else to help them, certainly not this 'clever bugger of a blogger'.
Where are all your heavy weight and single minded statesmen, aware of anything?

Christopher

October 1, 2010 10:00 AM

Hey Tom,

I miss your "on the economy" interviews already. Will your mid-day content be available through TKOD? Thanks for all you have put out. In this content matters world, you and Ken matter.

Thanks,
Christopher

Rodrigo Serrano

October 7, 2010 10:32 PM

Financially M.A.D

the boyfriend's vision

October 23, 2010 8:24 PM

Hi Tom,

The information on Europe which states that depends on the strength of the US, that the EU, with Russia work in tandem with China if they start to play silly buggers was knowledgeable. Christopher, I completely agree with you and was about to say the same thing.

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EconoChat captures Tom Keene's thoughts on economics, finance and investment. He is editor-at-large for Bloomberg News and hosts Bloomberg Surveillance and Bloomberg on the Economy on NYC1130, Sirius 129 and XM 130 and Surveillance Midday on Bloomberg Television. His complete interviews are at Tom Keene on Demand. Look for Tom on twitter @tomkeene

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