There is a unified effort to move away from the dollar as a reserve currency, but no clear alternative has presented itself. To me the catastrophic event would be an alternative that people pile into and just shed the dollar. But we don’t see anything like that right now.
So everybody is in, sort of, the same bucket, saying, what are we going to do now? What happens to countries like China, Japan or the oil producing countries that have all that dollars that they hold?
In a way, it looks like short-term speculation. They are holding on to the dollar while the dollar is what it is, but they are looking for viable alternatives. Historically, US treasuries and the dollar have been a fairly safe investment. It was interesting that during the credit crisis last year in September, interest rates were negative for some time, and people would rather have the government hold their money and lose a little bit on it than lose all their money in the stock market.
The dollar rallied phenomenally as a lot of cash got repatriated. Lot of people got scared and pulled their money back from overseas, and so the dollar rallied. That event shocked us a little because of the severity with which both the dollar and treasuries reasserted themselves as flight-to-safety trades. In that sense, it;s smart for China, India and South Korea etc to hold treasuries and dollar-based assets, they continue to be the safest on a speculative level, despite the fundamentals.
Recently there has been news of China buying gold?
We keep hearing rumours that they are accumulating behind the scenes. They may or may not be. They wouldn’t want to announce if they were, because if everyone knew that they are buying gold, then that itself would be an alternative. That’s why you see gold hovering around all-time high.
What will happen to all the debt that the US has accumulated?
My feeling is that they won’t be able to repay. In some way it’s in US’s interest to have a cheaper dollar because that is the only way they can even pretend that they are going to pay back.
The number that we follow is $67 trillion, but those are promises, it’s not a debt yet, they are the unfunded liabilities of the government. What is going to happen is that huge number will be erased by some sort of accounting trick in future.
We are already approaching $12 trillion on debt alone that we have to service. We have to pay interest on that debt as it is. The Congress is incapable of dealing with this. It is ruled by committee and they won’t move till forced to and one of the things that will push them is the potential downgrade of US debt by the rating agencies, which is kind of a joke in itself.
I read this in the Financial Times that in January 2008, there were 12 companies in the world with AAA ratings and there were 64,000 derivative instruments with AAA ratings. The real threat of the US debt being downgraded from triple AAA is zero because the rating agencies just won’t do it. But the quality of that debt is degrading rapidly. One of the ways in which they will default on those promises is by printing more and more dollars until they can pay off at least the national debt.
What is your take on the current ‘recovery’?
This is a classic sucker’s rally. The government stimulus, the monetary easing, they are working their way through the system. Like the US gross domestic product is supposed to have risen by 2.8% or something in the third quarter, but in that number, they include government spending. So it’s a victory for Ben Bernanke and the Federal Reserve, because the numbers look better. But it is not real economic growth, it is government spending.
Consumers are still wondering. In September, they backed off a little bit. The savings rate dropped a little bit to below 3%. Consumer credit rose again, which, probably, is a reaction to this recovery noise as well. Our line is that people can’t spend more than they earn forever. And they can’t spend their way to wealth. That seems to be the model that the government is trying to recreate.
The effect of the entire stimulus and the monetary easing is more speculation in stocks around the world. The Sensex is up. People are all excited here in India too. The rising stock market, even if the economy is not looking so good, draws more and more people to the market, until the market gets overvalued and sells off again.
The Dow Jones re-crossed 10,000 recently. What does that tell us?
It is not surprising that the Dow went over 10,000; there is a lot of money being pumped into the system trying to combat a deflationary credit bust. The money goes into the system, people are reading the cues, there is no enterprise, real economy is not producing, consumers aren’t sure what to do, corporations are trying to figure out their own balance sheets, so the only place where people can speculate now is the stock market. The (US) housing market is dead.
People are piling back into stocks and they are borrowing money at cheap rates, speculating. It is not surprising that Dow is over 10,000. It’s a speculation again. It’s a reflation of the bubble that we just withdrew. It is like people have collective amnesia and they don’t remember.
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