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How to Win a Currency War
- m_a_g 7y agoJapan has $1.2 Trillion worth of U.S. treasury bonds. I wonder what will be their next move if the U.S. dollar weakens.
- hogFeast 7y agoThere is no other move. The reason they own that much is because USTs are deep and liquid. There is virtually no other market in the world where you can deploy $1trn (certainly no market outside the US).
- brettproctor 7y agoSometimes the only winning move is not to play :-) At some point it becomes irrational to keep holding USTs. I'm well aware it seems right now there aren't any other good options, but that can definitely change quickly.
- ysw0 7y agoThey're in a good position as a net creditor nation. While they have a large national debt and have been undergoing QE, they have a steady income stream from treasury bills.
- roenxi 7y agoThe income stream is unlikely to be steady; the real value of the fixed stream of dollars is (probably) going to drop. It isn't really conceivable at this point that the US reduces their debt:GDP load without a currency crisis. Their period of service as the reserve currency is probably also drawing to a close; based on the poor fundamentals that the article mentions.
- hogFeast 7y agoI don't think you understand. I am not saying there are no other good options, there are literally no options. You understand that having $1trn isn't like your TD Ameritrade account. Thought experiment: they put the money into Japanese banks. First, the JPY starts trading at 50 against the USD. Japanese industry is over. Second, Japanese banks literally cannot pay the interest on these deposits because they can't find enough people to lend to. There aren't enough European govt bonds. They aren't enough corporate bonds (and they aren't liquid enough). Literally, there is no asset class in the world large enough for them. The only other asset class that was large enough was MBS...which some people feel skittish about since 2008 (but which Japan and China do own large amounts of...again, because there is nothing else). Just as an example: in the 1970s the oil crisis caused a huge boom in earnings for Middle Eastern nations. Most govts there weren't financially sophisticated, they had no idea what to do with all this money so they started depositing it in US banks. These banks had no idea what to do with it either. They couldn't find enough borrowers (rates were pretty high then) so they started lending to govts in emerging markets. This trigged a decade-and-a-half long financial crisis from 1980 when these borrowers started defaulting (in 1980, Citibank was effectively bankrupt because of these loans). Again, this isn't like your Ameritrade account...when you have a lot of money, you start changing how financial markets fundamentally work. So you have to be very very careful. Hopefully that makes it clear.
- yingw787 7y agoWhen you say it like that, it makes U.S. Treasuries sound like the S3 of the financial world. Simple, reliable, and comparatively inexhaustible. malloc() for the financial web. Also very opaque to the average person.
- brettproctor 7y agoI'm aware of the impracticability of everyone divesting out of USTs right now. Your points are entirely valid and are the reason the system is still being held together. My point is there exists some set of circumstances in which that assumption changes. As an example, at some fed balance sheet level + inflation level, your options are either: 1) Do nothing and end up with nothing 2) Do something and end up with more than nothing I've lost count of total fed pledges at this point, something on the order of $8T? Say things drag on and that goes to $12T+? And say inflation takes off, is the fed really going to fight inflation? It can't. You start seeing high double digit inflation while the fed is printing money and keeping rates at zero, and at some point you have to move your USTs into something. If you don't, you'll be left with nothing. I realize this is incredibly hard to imagine given the current system, but things that can't go on forever wont'.
- 0x8BADF00D 7y agoWell, that’s simple. If the dollar weakens and there is inflation, interest rates will rise. You don’t want to hold onto bonds when the interest rate rises. The price of a bond is inversely correlated with the interest rate.
- thedudeabides5 7y agoOk so sell USD to buy what? EUR? How about after they figure out Italy JPY? More debt than US and lower rates. CNH? Ha Gold? Sure, but it’s not a currency
- sytelus 7y agoAlso, gold is expensive like hell right now. As COVID winds down, I would expect markets react vigorously and gold in free fall. It's also important to know that long term holding of gold has fairly lower relative returns compared to S&P and also no dividends. So only suckers would get in to gold right now.
- blazespin 7y agoUnless you are a very long term gold trader with very deep expertise, I would almost guarantee that the market knows a lot more about the correct price of gold than you do. It's not "expensive as hell" but likely fairly priced.
- sytelus 7y agoThis view that market knows the best is actually quite misguided. Market does prices assets correctly after long enough period of time but it oscillates and bounces a lot before that happens. It's wrong to say that any point in time market knows the best and current price are exactly the fair price. If this was true, asset prices simply don't keep swinging 10% for days on. Gold isn't worth $100 at 9 AM and suddenly becomes worth $70 at noon.
- jameslevy 7y agoKRW (Korean) is interesting, although I'm hardly an expert in currency trading.
- brettproctor 7y agoMost gold proponents would say gold being money and not a "currency" is the whole point.
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- chrisco255 7y agoI love that Lyn's articles are getting top billing on HN. She's got very good analysis of the macroeconomic situation. In times like this, very important to educate yourself on these topics.
- brettproctor 7y agoReally useful twitter as well: https://twitter.com/LynAldenContact https://twitter.com/LynAldenContact
- oh_sigh 7y agoHonest question...If you aren't educated on the topic, how can you tell if there is good analysis or not? (Versus just reading and believing random cranks). Is there any way to test her hypotheses against reality?
- empath75 7y agoThere’s nothing in her linked in that would lead me to believe she has any idea of what she’s talking about. She was an engineer until a year ago.
- chrisco255 7y agoAnd Elon Musk was a software engineer before he started rocket ship and electric car companies. Intelligent people are fully capable of making jumps between disciplines and excelling in several of them. Sorry, but looking at someone's credentials rather than looking at their reasoning skills alone will lead you astray. You've got to reason. You've got to engage your critical thinking skills. No one is saying Lyn is the oracle of our times. She's got very good analysis, but there are many others and a lot of them are on Twitter. I recommend to engage with that crowd. I've seen Lyn debate with them on Twitter, and it's always an interesting conversation. Other thinkers in this space I'd recommend: Raoul Pal: https://twitter.com/RaoulGMI https://twitter.com/RaoulGMI Danielle DiMartino Booth: https://twitter.com/DiMartinoBooth https://twitter.com/DiMartinoBooth Luke Gromen: https://twitter.com/LukeGromen https://twitter.com/LukeGromen Brent Johnson: https://twitter.com/SantiagoAuFund https://twitter.com/SantiagoAuFund Ray Dalio: https://twitter.com/RayDalio https://twitter.com/RayDalio ...etc. Search around. Educate yourself!
- 12yrprogrammer 7y agoMaybe the libertarian party is awful at campaigning but they are absolutely correct on economic policy. Or rather predicting the outcome of current economic policy. Buy Bitcoin
- blazespin 7y agoWhat I really disliked about this analysis was its lack of discussion around core PCE, something the fed watches very carefully when it comes to managing its monetary policy. It talks about "dovish", but really perhaps the fed isn't being dovish at all and is just desperately trying to maintain its 2% price inflation rates.
- aazaa 7y agoLyn's entire blog is worth reading. Very in-depth analysis and actionable conclusions. She builds mental models using data. I've never seen economics content like that anywhere. For just one example, and a great backgrounder to the currency wars article, check out: https://www.lynalden.com/global-dollar-short-squeeze/ https://www.lynalden.com/global-dollar-short-squeeze/
- jariel 7y agoA few problems - ok, so the there are more problems in the USD but: a) What is the alternative? This is a relative game. Is the US going to fall harder than the EU? Probably not. b) In an uncertain world ... people want greebacks even more for the structural reasons implied. c) This trade deficit thinking is odd because it doesn't include surpluses. If sells something for 50 cents that would otherwise cost $100 in the US, and there is no other trade, then it still makes sense for everyone to buy said things for a long time. So China has to get something back for it, maybe it ends up meaning those XMen movies are going to cost them a lot more than they thought. Or the iPhones, or the US companies they buy or whatever else.
- nine_zeros 7y agoLooks like everyone has figured out the game or illusion. There are 5 tiers of the world: 1. US 2. US allies 3. Developing non allies 4. Enemies 5. Underdeveloped countries. One of the major reasons developing countries aren't rising faster is because they are not in the ring of US allies. Thus, they don't receive the first bite in newly printed US dollars. Since the US is not the majority importer, I wonder what happens if a significant majority of the importing developing non allied world runs out of dollars.