Friday, 15 April 2011

Japan: Impact Of Earthquake

Despite the initial shock, people have forgotten about that all together.

But the problems will only emerge on economic data after few months.  Anything released now will not be particularly useful.

The nuclear crisis causes lower electricity production, which will be a big stumbling block for the resumption of industrial production.  That is affecting the global supply chain, particularly in the electronics and auto sector.

The crisis will also means more borrowing from the government, and shortages of various goods and services.  The earthquake should weaken yen and (finally) produce inflation for Japan.

Though it will be bad for government, which is having debt amounted to 200% of GDP.

Thursday, 14 April 2011

Euro And Gold Standard

Gold standard is a barbarous relic.

Gold standard has no difference from any kind of currency-peg system.  The single currency is just a currency peg in another form.

Greece, Ireland, Portugal and Spain, their problem is that they are tied to the Euro, which is nothing but another gold standard.

They will have to adjust prices internally, but their debt is still in Euro.  That is, wages have fallen, prices will fall, everything will fall except the debt burden.

Giving them finances in short-term will not solve the problem because they are already indebted, and these ECB IMF whatever stuff more debts to them.

How to solve this?

Either they leave the euro, or Germany and France should leave the Euro.  Just like when UK leaving gold standard after great depression.

Wednesday, 13 April 2011

China: More Indebted Than You Think

China has a terrible debt problem that no one is talking about.  Its local government debts are huge, and they rely on real estate developers to finance themselves.

They sell land to developers at high prices in order to obtain revenue.  As a result, it is of their interest to keep land prices high, and it is important for them to have a hot real estate market to keep the music playing.

But as China continues to tighten, it is much harder for them to do so.

Tuesday, 12 April 2011

China and US

China is keeping its currency low to help export to America.

By that, they allow the US to buy its goods by accumulating foreign exchange reserve and creating huge bubble and inflation at home.

How long can this party last? Once the Yuan is allowed to appreciation significantly, things might start falling apart.

Monday, 11 April 2011

US dollar

US dollar is now regarded as potentially worthless.

Truth be told, everything can ultimately be regarded as worthless from a more philosophical perspective.

Sunday, 10 April 2011

Inflation, Hyper-inflation and Money

Hyper-inflation is a rejection of a currency.

Because prices rose so much in short period of time, currency becomes worthless, and people reject the currency.  In the past, this has been associated to some sort of dollarisation, where people in highly inflationary countries would prefer holding US dollar instead of the currency of their own countries.

Now, there isn't any such things happening, yet some people are expecting that to happen, and so they reasoned that they should buy gold and silver, which, to them, are currencies, believe it or not.

Gold and silver is just like paper money except no central banks can print it.  Gold and silver can be just as worthless as fiat money.  People constantly saying that gold and silver are some sort of ultimate store of value apparently has no understanding of what money really is.

Friday, 8 April 2011

United States: Problems Of Fiscal Deficits

Deficit spending has traditionally been associated with inflation.  The reason is obvious: if the government want to sustain the deficit spending, the obvious way is to print more money and inflate the debt again.

However, the story isn't as easy as that.  Japan is a good example where huge deficit, high debt level, and continuous monetary expansion all failed to produce any inflation at all.

So which side should I bet on?

My answer: deflation for the next 5-10 years or so, and hyperinflation at the end.

Because the economy is deleveraging, that is profoundly deflationary.  The government is also now threatened to cut spending, which will ultimately be deflationary as well.  So demand is low, the economy slows.  Businesses wouldn't want to invest and individuals now save more.  That means increasing the monetary base dramatically will not be multiplied through the banking system because banks have no demand for their lending.

But inflation will eventually come back, sometimes.  We just don't know when.