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“If you do not change direction, you may end up where you are heading.”

Lao Tzu

FX Trading – Dollar Shrug! No surprise.
Is Mr. Geithner speaking today? He is becoming such a joy for dollar bears, as John Ross mentioned in his closing to CC yesterday. And the dollar doom and gloom crowd is smelling blood in the water; rightly so!

There are a lot of short dollar trades on it seems. We surmise Pimco has a big dollar short position given Bond King Bill Gross’s recent public musing about the US may lose its AAA rating. Comments like that shouldn’t be a surprise to anyone given the US government’s desire to take on the role of global stimulus King instead of just worrying about getting its own house in order—pathetic!

Mr. Geithner says the US depends on other countries to grow and chastises them for not throwing enough of their taxpayers’ money into the “stimulus” program. Maybe he should take a look at that before he speaks…Of course the crony insiders tell us how “smart” Mr. Geithner is, and we don’t doubt his intelligence. Anyone that can avoid paying personal income taxes and still pull-off an appointment to Treasury Secretary (and run the IRS) is pretty smart. But our gripe is the fact that the guy instills negative confidence in the market place not because he lacks “leadership qualities,” as some have suggested, but because his economics seems all screwed up in my most humble opinion.

We are in a gut wrenching transition in the global economy because the wildest orgy of debt the world has ever seen is over. Thus, excesses across all sectors, especially financial, must be removed from the marketplace in order for real quality long-term globally balanced growth to take hold. Instead, day after day we witness dinosaur saving from Geithner and friends, while stunningly they tell us this with a straight face (as straight as any government official possibly can) that we need to put more debt into the market in order to solve the problem of too much debt being in the market. Mr. Orwell call your office!

Now granted, few of us have toiled away at the top economic Ivy League institutions and rubbed elbows and other things against the top seers. Granted, we don’t have the luxury of feeding our ideas and inputs into the most sophisticated econometrics models imaginable built of course by the “best and brightest.” But it seems our angst grows from something the power elites don’t have—common sense.

Putting more debt into a system desperately working to alleviate debt is just plain stupid no matter how the Neo-Keynesians slice or dice it. Is it any wonder why the globe is losing confidence in the dollar?

It seems the guys that are supposed to be on our side consistently cow-tow to the other side. And of course, you know where I’m going here—China.

It is farcical when China criticizes the US for overconsumption and not saving enough. They were enriched precisely because of the overconsumption, besides playing our multi-national “leaders” like a violin by offering cheap labor and short-term riches in turn for giving them technology which sooner or later will lead to the wiping out western business and sunk shareholder value as we know it. But that is another story for another day.

The symbiotic game of China shipping containers full of stuff to the US for Federal Reserve Notes dwindling in value ended with the credit crunch. And guess which of the two formerly symbiotic players is getting crunched harder—if you said China you would have been right.

But, in their Orwellian world of global chess, the Chinese pretend they are outperforming anything that moves. And their noises and lies and bluffs and fake economic numbers cannot deny the fact that if Mr. US Consumer does not get this symbiotic game of dollars for stuff going again, the Politburo may be out of a job—literally thrown out of a job, if you know what I mean.

So, instead of realizing this upper hand of consumer demand the US possesses, the US government economic “leaders” agree with China that yes—it is highly important to stimulate the globe, we want 2001 again. If successful it would mean China continues to add global market share to their manufacturing behemoth and can avoid the dirty hard job of developing a domestic market…a few slides below from a presentation I gave about the Chinese US trade relationship a year ago. The key slides are the symbiotic relationship slides number 3 & 4 below. The core of this game begins with credit expansion and US consumer demand.

No hiding from the game called mercantilist trade policy!

…but they’re policy is clear; it’s a powerful application of the East Asian trade model:

  • A labyrinth of tariff and non-tariff trade barriers
  • An artificially undervalued currency
  • A policy requiring technology transfer and local manufacturing
  • Export subsidies to key industries

US-China Symbiotic Relationship in Trouble
Single Currency Zone Argument

US-China Symbiotic Relationship is Toast

Sustained Undervaluation of RMB

  • Drives FDI, hot money, and juices money supply
  • Subsidizes local producers/Detriment to local consumers [Forced Savings!]
  • Subsidizes foreign consumers/Detriment to ex-Asian producers
  • Creates ex-Asian corporate profit/Detriment to ex-Asian jobs in mfg
  • Bottom Line: Creates a jobs for goods exchange in the West

Are the stars in allingment?

…Or in other words, is it in the best interest of China to change policy and “hide its claws”?

  • Inflation: 8.2% in April; food up 22.1%
    • Can you say “Tiananmen Square”?
  • Western import demand waning
    • Ahhh…all those savings domestically
  • Bubbles
    • Real Estate and Stocks

I provide these to show one thing—that all of this stuff we talk about revolves around Mr. US Consumer and credit. Granted, if you are happy with China’s role in the world, and the riches you enjoy flowing from that, you want this game to work. I find the idea of China hegemony very scary—a cold mean dark world will follow for those not politically connected would ensue. I am talking about those who don’t buy into the propaganda and silly mantra of what the west does with China has anything to do with free trade.

The US government seems to think the worst that can happen in the world is for the US consumer to save more. It goes to show how messed up their economic thinking is and goes to show how political their thinking is. Sadly, party doesn’t seem to matter in this game. Both Twiddle-dee and twiddle-dumb like to play. Consumer spending is at the core. But there is one true source of from which all wealthy eventually grows—savings.

“Not only that: for [Ludwig von] Mises the worst form of intervention would be to prop up prices or wage rates, causing unemployment, to increase the money supply, or to boost government spending in order to stimulate consumption. For Mises, the recession was a problem of under-saving, and over-consumption, and it was therefore important to encourage savings and thrift rather than the opposite, to cut government spending rather than increase it. It is clear that, from 1936 on Mises was totally in opposition to the worldwide fashion in macroeconomic policy,” writes Murray Rothbard.

And so it goes…

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Have a great weekend!