Debt Rattle July 23 2015

[Raúl Ilargi Meijer]

Harris&Ewing No caption, Washington DC 1915 • Mining Shares Plunge As Commodities Index Hits 13-Year Low (FT) • Gold Isn’t Even Close To Being The Big
[See the full post at: Debt Rattle July 23 2015]

[Raleigh]

Ambrose Evans-Pritchard says:

“Charles Dumas at Lombard Street Research says capital outflows – when will we start calling it capital flight? – have reached $800bn over the past year.”

$800 bn is a lot of money. Is this the carry trade unwinding? Investors borrow cheaply in the U.S. and then seek higher returns in China (and other emerging markets)? Is this money coming back because investors fear a devaluation of the yuan or other currencies? Is this correct?

And then he says:

“‘If the authorities wanted to quickly and radically ease monetary conditions, exchange rate depreciation would be the obvious way to go,’ he said.

This relief is blocked – for now – because it would risk other nasty side-effects. Chinese companies have $1.2 trillion of US denominated debt. A yuan devaluation would anger Washington and risk a beggar-thy-neighbour currency war across Asia, with lethal deflationary effects.

Mr Slater says China may instead have to slash interest rates to zero and even resort to “monetary-financed deficit spending” in the end, knowing that this stores up an even greater crisis later.

The early signs are that Mr Xi will now revert to stimulus again – hoping that he can calibrate the dosage, despite the Party’s failure to do so on every previous phase of the stop-go cycle – concluding that it is too dangerous to let market forces do their worst after such vast imbalances have accumulated.”

I’m trying to understand the above. Why would a yuan devaluation anger Washington? If China did devalue, U.S. exports into China would become more expensive (hurting U.S. exports), but Chinese exports into the U.S. would get cheaper for the U.S. consumer. What am I missing? Hasn’t this been the scenario for the past 30 years – cheap imports into the U.S.? I mean, close to 60% of exports out of China are from U.S. multinationals, anyway. Did I just answer my own question? So U.S. multinationals operating in China would have to pay more to import their U.S. components into China (if the yuan devalued), and then would get dinged on the other end when they sold? What am I missing? Why would Washington be angry if they devalued?

China has several choices: they can stimulate with monopoly money (and buy up the world from nothing), they can devalue, or they can lower interest rates, or a combination of the above. If they devalue, does it then cause China to cash in some of their U.S. Treasury hoard? Is this why Washington would be angry?

Can someone help? You’d think that I would understand all of this by now (and sometimes I actually do, but then the knowledge slips away). What happens in the above scenarios?

[Greenpa]

I would guess most folks here know this; but just in case: one of the causes of Owners pulling money from various commodity markets is that not only have they not been making money there, they do not believe those directions are going to make money again anytime soon. So; they’re taking their money out; and re-investing it.

Where? Iowa. Illinois. Etc. Farm land. They’re buying it as fast as they can; and driving land prices up far beyond the ability of traditional family farmers, or young folks wanting to start, to pay. There are now, of course, “investment services” corporations that will cheerfully find your farm land for you, and farm land funds where you can buy shares. They now compete against each other, driving prices up farther, faster.

Very very bad stuff; tons of historical precedents back to antiquity, and it never ends well.

[Author]

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