29 September 2010

Beggar Thy Neighbour - or how far will devaluation go!


The number one topic on everybodys lips this week is devaulation.  Yes fokes, we got it few years ago, traders got it some time ago, and media is getting it now.  There is no other way out of this mess, but to inflate the value of our assets, deflate the real value of debt, and let the monopoly game restart.

Indeed it is much less painful than cutting 25% of the state jobs, raising rates to 5%, or taxes to 70%*.  United States is borrowing 42 cents on every dollar it spends, a horrific measure by any standard.  If United States were located in the Emerging Markets - as some say it should be - its CDS would easily reach triple digits by now (in basis points), but as it is still the "reserve currency" in the world, and with debt only in USD, its strength comes from elsewhere.

Indeed, we can argue that United States by being such a major force in the World Economy (after all someone has to buy these Chinese products, even if they are sold in exchange for worthless paper), US has created a status of simply untouchable.  It is too big to fail.

Co lets try to put a Vision on what can now happen.

Scenario 1: lets talk

1.  USA prints money
2.  Others print money
3.  USA prints money
4.  Others complain, trying to establish a World Currency Order, and in a quantitative way changing the strength of some currencies (China, Middle East appreciates, USD, Euro depreciates). Another meeting on neutral ground, big hype, and monday morning news headlines that "everyone is a winner" - where as in fact it will be USA, Euro, GBP and some other particularly badly managed economies.

Scenario 2:  lets fight

first: solving the debt issue
1.  USA prints money
2.  Others print money
3.  USA prints money
4.  Others print money
n.  USA prints money

after a series of US countermeasures - that were needed to do in order to protect ourselves from for example Japanese (I find it difficult to believe that USA did not know about the moves of BoJ, perhaps even coordinating their issues to have an alibi for further easing) - debt is already halved

second: solving the competition issue
1. USA establishes import duties at 40% from China, as a countermeasure of course to China printing money

After all establishing an import duty, although totally against the GATT agreements, will have a similar effect to that of Yuan appreciation.  Furthermore, via tariffs one can actually isolate only Yuan, and not for instance Yen or Euro - so we can argue that the policy of tariffs is on the rational basis more effective at making Yuan - trade wise - stronger.

Now it is difficult for us to forecast which scenario will actually take place, the one of moderate talks, or the one of total wipe out, but we are confident that somehow USA is much better positioned to tackle its problems than everyone thinks.  Just as Euro is held ransom by its PIGS, the world is held ransom by USA and its debt problem. Seems like the good guys do come last afterall.

So do expect significant inflation - though managed, gold raising from 1270 today to 3,000,- 4,000 (followed by rapid drop - after all most minds agree that gold is nothing but a shiny piece of metal  - outside of India not even that fashionable anymore), significant - though manageable - loss of US quality of life, but with everything under full control and the American dream not that badly affected.  Memory of markets is very short indeed.  Some would even argue... what memory?

*watch out for our coming report on taxes.. and how in the global world, one thing not being globalized is the tax system.