There is a great deal of political noise reverberating out of the Chinese political system as President Xi has asserted his Mao-like vice grip over China’s political, social and military reins of power. The rule of the DENG XIAO PING — HIDE AND BIDE — is officially closed. China, through XI, has revealed it will no longer HIDE its wealth/power or bide its time. The newest threat to the Bretton Woods HEGEMON has stepped to the fore to directly compete with the US Empire. The outcomes of Xi’s newest maneuvers will not be revealed for a time period but be assured that changes are afoot in the Pacific Region. How the wealth outcomes are determined will take a long time but if the competition is violent the destruction will be vast. Hopefully, the world — including the US — will engage in firm but friendly competition rising the standards of construction to new and enhanced levels for the entire globe.
Professor Graham Allison has posited his Thucydides trap theory for many years in which a recognized HEGEMON makes room for a rising POWER (think Athens and Sparta). There are many theorists posing as soothsayers but no model can be sure of a prescribed outcome. The GLOBAL ECONOMY is very fragile because of the uncertainty created by the Covid pandemic and the central bank policies that helped smoothed the way for a transition from a global slowdown that pushed the world to a near depression. Ultra-cheap money from the FED, ECB, BOE, BOJ and others led to huge debt overhangs that create great uncertainty for DOLLAR DEBTORS. In Asia, the two major economic powerhouses, China and Japan, are taking a go-slow monetary approach, keeping loose policies in place even as incipient inflation is causing their currencies to weaken.
The YEN the lowest levels in two-and-a-half years versus the DOLLAR and three-decade lows against the Chinese yuan. How long can the world tolerate a weak YEN with a rapidly slowing global economy?The Japanese manufacturing juggernaut using a weakened YEN is a threat to China and Germany, although a weak YEN does keep Chinese imports of Japanese machine tools and high engineered goods down. The issue of the strong DOLLAR is one of the pillars of US attractiveness but when does an overly strong dollar become an exorbitant burden to the competitive designs of the US foreign policy designs.
There have been many views on the KING DOLLAR being a positive for U.S. anti-inflation policies but my sense is that the advantage received by the US is minimus. Unless the weight of an ultra-strong DOLLAR on the world’s DEBT holders leads to major fissures in the international financial edifice. Many articles have recently appeared casting doubt on the FED‘s continued fight against inflation as it is leading to other nations to race the central bank to ever higher interest or absorb the pain of a continuing weakening currency.
Former FED economist Claudia Sahm wrote a piece in July titled, “A Fed-Induced Recession is a Medicine Worse Than the Disease.” Sahm advised, “Even so, a recession is worse than inflation. A lost pay cheque or even lost hours would far exceed the extra monthly costs due to inflation. And the chance of losing one’s pay cheque is not the same for everyone.”
Following this up on Bloomberg Television last Friday Sahm warned that the aggressive action by Powell in chasing the flawed inflation of the Phillips Curve model was causing all central banks to raise rates all over the world. This is resulting in the US exporting inflation because the cost of services become higher as it takes more domestic currencies to purchase the needed dollars, driving inflation higher for the rest of the world.
The amount of US goods imports with somewhat lower prices is has minimal effect of goods price inflation but acts to place a severe burden on those having to earn enough DOLLARS to meet debt obligations. The weakening EURO is a prime example of how a weakened currency drives the DOLLAR-priced imports even higher.
The US Treasury, under the leadership of Secretary Janet Yellen, has begun raising alarms about the need for Treasury to purchase US NOTES and BONDS in an effort to calm the market. It seems Japan and others have begun selling Treasuries in an effort to raise needed DOLLARS putting ever more pressure on US bonds. Remember, the FED is not buying but rather letting its Treasuries roll off as QE has ended and QT is well underway. The question remains: Who wants to buy a 10-YEAR TREASURY at 4.2% with stated inflation at 6.2%, especially as broker-dealer/bank balance sheets are restricted by regulation.
Many sellers, few buyers. No wonder the 5/30 curve has moved so dramatically following on the heels of the British pension boondoggle. Secretary YELLEN has certainly had some recent concerns about increased volatility in the debt markets, raising the issue of whether or not the Treasury will foam the runway.
In addition to Yellen, Barry Eichengren, the most renowned economist on the DOLLAR since Robert Aliber, had a Foreign Affairs article warning of the “Dangers of a Strong Dollar,” suggesting that central banks “diversify their reserves and for countries to diversify their transactions away from the DOLLAR and towards the currencies of the eurozone, China and smaller economies. Doing so would leave countries less exposed to one bank.” Dollar debt sustainability is a great problem, something the FED/TREASURY needs to be very aware of as it will create the greatest financial breakage.
Tags: China, Federal Reserve, Janet Yellen, Jerome Powell, US dollar, US Treasury Market
October 25, 2022 at 8:31 pm |
What happens when Xi raises an emerging market revolt against an “ultra-strong DOLLAR” using a Hong Kong woods agreement to redefine the fiscal boundaries. Perhaps a FIAT crypto currency using proof of stake, sharding and then public/private rollup entities. All monitored by the participants.
Watt Tyler had an effect as did Cromwell so why not XI?
October 26, 2022 at 6:08 am |
Sir–a relevant comment and your deep DARK voice has been missed—going to fetch a cup of hot water with a LIME to keep from getting Scurvy
October 26, 2022 at 8:39 pm
when over scurvy a dram of the malt is the thing to sit around fires and talk of things that others miss. An excellent series of observations trotsky, well said.
October 25, 2022 at 11:50 pm |
The Fed leaker of choice had shifted from Hilsenrath to Timiraos. Friday was a typical Fed maneuver to fix our “free markets”. I wonder who made a bundle on that one. From a pre-market strong down day it closed strongly up. The following two days have continued the up move. Supporting the markets is the primary mandate of the Fed. They tried jawboning but as I said the last time it would amount to one to three interest rate increases. QT will soon come to a stop as well, supplanted by the next round of QE. The dollar is becoming junk currency but in comparison to the others, it is king. In a world of blind men…
The stock market is programmed by algorithms to react to Fed statements or leaks. Free markets and fundamentals be damned. But in a spiraling recession (or impending D word economy) fundamentals will always win out. Stocks will always reflect future cash flows. But in the short term we get these bear market rallies.
Gold suppression will soon end. That is something China and Russia have up their sleeves.
October 31, 2022 at 3:50 am |
I am not 100% sure, Asherz. I am probably too myopic in my view, but for the first time in my 43 years of life, I have been massively impacted by inflation. To the point I have to seek new employment opportunities. I work for the federal government and our annual raises are normally around 1%. Last year was 2.3% and this year is 4.6%. Compare that to Social Security increases which was 5.9% and 8.7% over those same two years and only God knows what the REAL inflation rate is (10-15% inflation?).
Considering the cost increases of gas, food, and housing… The majority of federal workers (the largest workforce in our country), cannot afford to live comfortably with these inflationary increases. And we are the ones with the “stable, good jobs” relative to the average. For the first time in my adult life I see a plethora of people wondering how they can afford food, gas, or anything else for that matter, and yes worse than the GFC. I have no idea how the Fed can allow for inflation to continue unabated and if they stop QT and pivot, I think inflation will SKYROCKET. The stock market, IMO, is being counter-productive and is going up like there is nothing to worry about as equities are used to “shots in the arm” over the last 2 decades. I don’t think that shot is coming this time…
I think GOLD and silver will be significantly lower short term as the Fed goes higher for longer… the Premiums on Silver Eagles and Gold Eagles are INSANE right now. Just like they were prior to its fall about 6-8 years ago (2014-2016)… Keep in mind, I am normally wrong, but the anecdotal evidence seems too astounding right now. I get the debt is high and there are other scary factors in bonds/treasuries, but price stability is non-existent. Just look at the housing markets across the country.
October 26, 2022 at 6:06 am |
Asherz—-this song you sing is spot on kEY—but you don’t need me to confirm that nugget of thought.The world is in turmoil and things are certainly moving in dynamic fashion with so many variables in motion.I agree wholeheartedly that as turmoil evolves FUNDAMENTALS will shoot to the surface –one critical one will be the COST of financing the US deficit which will cause political uproars as Mr.McCarthy from Hobart warns that when the interest on the DEBT reaches the defense budget Lucy we will be in political stress—just one of the many issues facing the new Congress—algorithms are great for reading the headlines and moving volatility …..but NOTES FROM UNDERGROUND readers will do the reminder to in an effort to send the market relevant signals.The FED broke the bond market until it didn’t as the VIGILANTES have found new purpose in a global fashion—all for one and one for all MR/MRS sovereign debt
October 26, 2022 at 10:44 am |
If cost of financing US deficit becomes a problem, de facto response will be YCC. For now, we all await an answer to the question: With the student loan moratorium over in December, the fiscal transfers are pretty much over. If the inflation was due to helicopter money, then do we revert to the pre-Covid deflationary regime, or has something fundamentally changed?
October 26, 2022 at 4:20 pm |
I thought this video about the new CCP leadership was worth sharing in this blog.
https://youtu.be/A6JtM8Cqr_4
October 26, 2022 at 6:00 pm |
Pierre,
A very worthwhile video. And thanks!
October 28, 2022 at 4:26 am |
You’re welcome Richard.
October 27, 2022 at 6:08 pm |
Pierre wonderful addition and thanks for posting it—better then Yellowstone
October 30, 2022 at 8:36 am |
Investing icon Stanley Druckenmiller sits down with Joe Kernen at CNBC’s Delivering Alpha
October 30, 2022 at 9:09 am |
Read a bit about the Thucydides trap theory. There are some assumptions in the solutions that don’t lead to war. 1. Stable consistent policy—>that’s almost impossible with the way the two US political parties view the world and the absolute mistrust between the two parties as they struggle for power. America itself might be headed to a revolution or civil war.
2. Both sides willing to recognize the opportunity costs of war are higher than the costs of war. I am not sure the communists of China calculate them that way (but have not data other than gut feel to determine it)
3. Is either side really prepared for war? Clearly Russia was not. After 20 years in the Middle East, I don’t think America is. Is China or are they sabre rattling?
4. Xi is consolidating power; but will he be able to retain it and be able to fight a war?
November 1, 2022 at 8:30 am |
Points—these are four really good points and the world is not as easy as most dedicated followers of the MSM wish to believe .Why it is important to support Doomberg,Bridgen and Notes from Underground
November 2, 2022 at 4:42 am |
Global bankers ‘very pro-China’, says UBS chair
“We’re not reading the American press, we actually buy the [China] story,” said Kelleher, chair of the world’s biggest wealth manager.
https://www.ft.com/content/037cc9d0-b214-43a6-8bcb-43f76507f9c5#comments-anchor
November 10, 2022 at 2:55 pm |
Globalism has treated China well.