你好 Nǐ hǎo-
Interesting rumblings over the weekend.
· BEIJING, June 20 (Reuters) - China's announcement that it will resume currency reform made waves globally but caused barely a ripple at home on Sunday, with major newspapers merely reprinting the central bank's statement.
· The People's Daily, the main organ of the ruling Communist Party, put the news on its back page, while the banner headline on the website of the official Xinhua news agency was about torrential rain in southern China.
China, which the US now owes $877.5 bln, is going to take steps to allow the dollar to depreciate against the Yuan. This will “feel” better in the short run as it allows the USD to depreciate against the Yuan for a season.
China thoughts:
First, the fall in Chinese export growth due to the long-term slowdown in first world consumption was intended to be offset in the short-run by Chinese infrastructure and then a hoped for rise in Chinese domestic demand for Chinese goods. This is now deficient. Financial endeavors and mostly a run in real estate on the back of excess liquidity took up the slack for Chinese exports since ‘08. This has now ceased as the Central Bank has shut off funding by raising reserve requirements. Property transactions volume has come to a screeching halt now falling 50% a month.
Secondly, the Chinese now see the dollar as largely being a “stronger currency” that will no longer serve their needs as a massive export nation, as it did years ago when they deemed the dollar a “weak currency”. It appears to me that if they have chosen, at this time, to de-link to the dollar it is because it is in China’s best interest to do so. Plainly, the dollar is strengthening as the Euro vanishes into thin air and the Chinese do not want to be tied to it.
Though this allows the US to depreciate their way out of the Chinese debt it will come at a great cost to the US if this policy is pursued. It may feel better in the short-run (or not), but it may facilitate further Federal attempts to inflate the economy along its way to (zero to sub-par) meager growth, all the while sustaining larger government spending.
Though Europe may end up with several more currencies in the end, each country is being forced to do the hard work of trimming spending and cutting programs. Washington appears instead to be satisfied pulling a Japan or they are so busy shooting each other or BP or engineering and re-engineering financial schemes to keep the status quo alive, that they are in peril of damning the US to an economic limbo for years. Few of the problems that got us here are being resolved nationally, however, savings rates are jumping sharply as entrepreneurs to remain sidelined.
Thanks to Scotia Capital and Mike and Dick for the following graphic which shows dramatically that things are not better. Further, the Congressional Budget Office quietly predicts that the final bill for Freddie Mac and Fannie Mae could reach $389 billion from $146 bln now. You know a couple of hundred billion here and a couple hundred billion there and these smart guys are racking up quite a bill!
Perceived higher taxes are dis-incentivize capital formation and promoting uncertainty and holding cash in reserve and in step money supply though fluctuating has stopped growing since last Fall.
And Jobless claims have stopped declining…because business are not being formed or grown and hiring has flatlined.
The Peoples Republic
Primary in Leadership is the need to constantly define reality to those in your charge.
Reality:
1. Trust builds solid partnerships and certainty in any business climate.
2. Lower taxes incentivize growth.
3. Transparency in financial matters builds entrepreneurial confidence.
4. Entrepreneurs create businesses.
5. Businesses create jobs.
6. Jobs create income.
7. Income drives consumption.
8. Consumption drives business.
Fiction:
1. Browbeating business and industry, lawsuits and taking away shareholder’s rights helps the people.
2. Higher taxes helps the people.
3. Creative unregulated “new” governmental solutions funded with deficits help the people.
4. Government creates jobs.
5. Taxes used to create new governmental departments to oversee, new governmental entities, hiring new government employees, helps the people.
6. Higher taxes helps the people.
7. Consumption is bad, higher taxes are better for the people.
8. Government drives business.
As I said to my voting aged daughters during the election. “I think Obama is a great speaker who has almost no experience in leading anything, not least of which is a business.”
From a business perspective, his Cabinet level appointments are about as frightening, given the global economic situation, as I could imagine.
The current Administration’s Reality does not come from industry - making, saving, investing money in business – it appears instead to be largely derived from the theories of academia and the political realities of getting appointed/elected or re-appointed and re-elected.
Given the Administration’s recent actions regarding BP, the investment world seems to be taking a moment to think about the thesis of US Dollar strength.
It had been a one way trade with the European situation, but Europe overall is enacting plans to reduce spending.
We will too, eventually when the hide the deficit games stop.
The dust will clear and the cost of leadership will be paid.
All the best,
Leon
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