You are viewing an obsolete version of the DU website which is no longer supported by the Administrators. Visit The New DU.
Democratic Underground Latest Greatest Lobby Journals Search Options Help Login

Reply #21: Too much like 1929 [View All]

Printer-friendly format Printer-friendly format
Printer-friendly format Email this thread to a friend
Printer-friendly format Bookmark this thread
This topic is archived.
Home » Discuss » Latest Breaking News Donate to DU
54anickel Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Apr-25-07 09:10 AM
Response to Original message
21. Too much like 1929

The following commentary will describe the final sequence of events that will lead to the implosion of the global economy.

As US real estate prices fall and depress US economic growth, private foreign investors begin to withdraw their capital from the US financial markets. This capital flow would by itself act to elevate the currency value of the country that it is returning to. However, the governments of developing foreign countries have policies in place to fix the exchange rate of their currencies. In order to maintain this fixed exchange rate, foreign central banks will print their own currency and exchange it for US dollars (which are then invested into US government debt). The amount of money printed and exchanged into US dollars by the foreign central bank will necessarily equate to the amount of private capital returning to the country. These central bank policies will act to artificially keep the value of the US dollar elevated and artificially keep US interest rates low.

The fixed exchange rate regime is put under great stress when private investment capital begins to leave the US, because it necessitates that the foreign central bank print much greater amounts of their own currency. This will act to boost their domestic money supply and cause their own economy and stock market to overheat. Additionally, in the process of exchanging increasing amounts of their own currency for US dollars, the foreign central bank rapidly builds up the amount of foreign exchange reserves that they own. The increasingly large holdings of foreign exchange reserves represent a corresponding increasingly large risk of foreign exchange losses to the central bank (should the US dollar fall in value in the future).

When the central bank fixes the exchange rate, it effectively cedes control over the domestic money supply, as they are obligated to print whatever amount of currency is required in order to offset the amount of foreign currency being brought back to the country. The only tool that the central bank has left at its disposal is to change the level of the domestic short term interest rate. However, even there its hands are tied, because if they decide to increase the interest rate (should the economy overheat), then this will only serve to worsen the situation. This will cause even more investment capital to return to the country from the US because the interest rate differential between the two countries is made more favourable, drawing in capital in search of higher interest yield.

In the face of increasing private investment inflows (caused by a deteriorating US economy), the foreign central bank is faced with a tremendous dilemma. Its economy begins to overheat and yet increasing interest rates will only serve to worsen the situation. The only way to stop the rapid acceleration in domestic money supply growth is to finally abandon the fixed exchange rate regime altogether. This will negate the necessity of printing new currency with no control.

When the fixed exchange rate regime is terminated, then newly minted funds from the foreign central bank no longer act to support the value of the US dollar and maintain low US interest rates. In effect, there is nothing left to support the US consumer anymore. The value of the US dollar collapses and US interest rates skyrocket. The skyrocketing interest rates cause a real estate crash. The collapsing value of the US dollar causes the price of gold to skyrocket. And needless to say, the stock market collapses.

At this time, the key foreign central bank that is artificially supporting the US economy at present is the central bank of China. Their current foreign exchange reserves now stand at $1.2 trillion. The latest statistics indicate that their foreign exchange reserves grew by about $135 billion in the first quarter of 2007, which equates to an annualized growth rate of $540 billion. They are not alone in propping up the US economy, as total worldwide central bank reserve growth is running at an annualized rate of $1 trillion (with current total reserves of $5 trillion). Some people look at the data with puzzlement, but what it clearly reveals is that a great deal of private investment capital is being repatriated from the US. Economic growth in the US began to decelerate significantly in the fourth quarter of 2006. I dont see that as a coincidence.

Printer Friendly | Permalink |  | Top
  -STOCK MARKET WATCH, Wednesday April 25 ozymandius  Apr-25-07 06:41 AM   #0 
  - Today's Market WrapUp  ozymandius   Apr-25-07 06:47 AM   #1 
  - Folks really owe it to themselves to read this in its entirety.  ozymandius   Apr-25-07 01:37 PM   #62 
  - Today's Reports  ozymandius   Apr-25-07 06:50 AM   #2 
  - durable goods report - must be buying lots of airplanes! Wheee!  UpInArms   Apr-25-07 07:32 AM   #9 
  - Durable goods orders up, investment strong  54anickel   Apr-25-07 09:06 AM   #19 
  - March New Home Sales DOWN 23.5%  UpInArms   Apr-25-07 09:09 AM   #20 
  - Maybe we should all start producing airplanes.  ozymandius   Apr-25-07 01:39 PM   #63 
  - Crude Inventories  UpInArms   Apr-25-07 09:38 AM   #27 
  - Oil prices rally on inventory report  ozymandius   Apr-25-07 02:07 PM   #66 
  - Up by  AnneD   Apr-25-07 04:05 PM   #75 
  - Fed's Beige Book - Everything is stable except energy and raw goods  UpInArms   Apr-25-07 02:34 PM   #69 
  - Oil prices inch up in Asian trading  ozymandius   Apr-25-07 06:52 AM   #3 
  - Egypt targets 800,000 bpd oil output in 2008  ozymandius   Apr-25-07 06:55 AM   #4 
  - dollar watch  UpInArms   Apr-25-07 07:15 AM   #5 
  - viz:  Ghost Dog   Apr-25-07 07:45 AM   #13 
  - Dollar collapse? Nuttin' to worry bout - It's how the system works!!!  54anickel   Apr-25-07 08:33 AM   #16 
  - US dollar jitters refuse to go away  54anickel   Apr-25-07 09:02 AM   #18 
  - This last sentence....  loudsue   Apr-25-07 02:37 PM   #70 
  - What do you think that SCOTUS ruling ...  AnneD   Apr-25-07 04:03 PM   #74 
     - Good point!  loudsue   Apr-25-07 05:55 PM   #77 
  - Why did the dollar remain as the reserve currency after 1971?  roamer65   Apr-25-07 04:03 PM   #73 
  - Dollar Matches Record Low as New Home Sales Trail Forecast  Ghost Dog   Apr-25-07 09:42 AM   #29 
  - C$ At New 7-Mo Highs In Favorable Environment  Ghost Dog   Apr-25-07 09:47 AM   #30 
  - Hey UIA, check out this site I just stumbled across  54anickel   Apr-25-07 10:32 AM   #39 
     - HOT dog.....  AnneD   Apr-25-07 11:02 AM   #47 
     - This image has quite a bit to say.  ozymandius   Apr-25-07 01:46 PM   #64 
     - thanks, ozy!  UpInArms   Apr-25-07 06:01 PM   #79 
     - oh thank you 54anickel! I looooove pictures!  UpInArms   Apr-25-07 05:59 PM   #78 
  - Sales of Previously Owned Homes Plunge to 1989 Level  UpInArms   Apr-25-07 07:19 AM   #6 
  - Morning Marketeers.....  AnneD   Apr-25-07 09:14 AM   #22 
  - Subprime `Liar Loans' Fuel Housing Bust With $1 Billion Fraud  54anickel   Apr-25-07 09:36 AM   #26 
  - *gasp* "Such fraud robbed lenders of an estimated $1 billion last year"  Prag   Apr-25-07 09:54 AM   #32 
  - Mortgage insurer's earnings down 31%  54anickel   Apr-25-07 11:40 AM   #55 
  - Japan's Trade Surplus Widens to Record on Exports  Ghost Dog   Apr-25-07 07:31 AM   #7 
  - Tokyo stocks fall on growing worries over U.S. economy  Ghost Dog   Apr-25-07 07:32 AM   #8 
  - Hitachi Construction profit up 51 pct, sees growth  Ghost Dog   Apr-25-07 10:04 AM   # 
  - Asian Stocks Drop on U.S. Demand Concern; Toyota, Samsung Fall  Ghost Dog   Apr-25-07 07:33 AM   #10 
  - China's new-old inflation paradigm  Ghost Dog   Apr-25-07 07:42 AM   #12 
     - China Humbles U.S., Japan in Asian Charm Game  54anickel   Apr-25-07 09:55 AM   #33 
     - Whats Behind the Euphoria in Shanghai Red-Chips?  Ghost Dog   Apr-25-07 10:14 AM   #37 
     - I was just reading that earlier over at The Market Oracle. Must be that  54anickel   Apr-25-07 10:53 AM   #45 
     - The Chinese realize one simple thing.  roamer65   Apr-25-07 04:12 PM   #76 
     - Is China Too Hot?  54anickel   Apr-25-07 11:04 AM   #49 
  - German business confidence surges  Ghost Dog   Apr-25-07 07:35 AM   #11 
  - UK economy expands in first quarter  Ghost Dog   Apr-25-07 07:48 AM   #14 
  - European equities buoyed by bid activity  Ghost Dog   Apr-25-07 07:49 AM   #15 
  - Why are equity markets soaring as the economy falters?  54anickel   Apr-25-07 08:53 AM   #17 
  - Too much like 1929  54anickel   Apr-25-07 09:10 AM   #21 
  - Dollar-peg to GCC Currency can be Costly (a good example of the above):  Ghost Dog   Apr-25-07 10:49 AM   #42 
  - Bulls off and running, Dow over 13,000  54anickel   Apr-25-07 09:14 AM   #23 
  - 10:15 - not so fast....  54anickel   Apr-25-07 09:17 AM   #24 
  - I'm wondering how much of the Dow bubble is funded with investments from the Credit bubble?  Prag   Apr-25-07 09:49 AM   #31 
     - Well, you could check out the weekly Credit Bubble Bulletin for a clue....  54anickel   Apr-25-07 10:04 AM   #35 
        - Voodoo economics replaced with Amway economics?  Roland99   Apr-25-07 10:14 AM   #36 
        - Thank you for your very thorough reply to my question....  Prag   Apr-25-07 10:24 AM   #38 
           - Heh, sorry about that detour to the often times long-winded Noland.  54anickel   Apr-25-07 10:49 AM   #43 
              - Oh, no way was it long winded...  Prag   Apr-25-07 11:02 AM   #48 
  - Fed up with tortilla costs -  54anickel   Apr-25-07 09:31 AM   #25 
  - Thanks for posting ...  AnneD   Apr-25-07 10:51 AM   #44 
  - US credit derivatives index nears launch  54anickel   Apr-25-07 09:40 AM   #28 
  - Step right up boys and girls!! See the best Magic Show on Earth!! Watch the  VegasWolf   Apr-25-07 09:56 AM   #34 
  - Daily Pfennig 4/25/07: Existing Home Sales Plummet...  mojavekid   Apr-25-07 10:34 AM   #40 
  - Love that quote  AnneD   Apr-25-07 11:47 AM   #56 
  - Fleckenstein: Danger! Market partying like it's March 2000  mojavekid   Apr-25-07 10:41 AM   #41 
  - Markets love a nooner! Everyone gets a pony today!  Roland99   Apr-25-07 10:58 AM   #46 
  - Can I have the one with an attitude? Time to "pony-up"  54anickel   Apr-25-07 11:11 AM   #50 
     - You got it!  Roland99   Apr-25-07 11:15 AM   #51 
        - I appreciate good horse flesh...  AnneD   Apr-25-07 12:01 PM   #58 
  - The Bond Bear  54anickel   Apr-25-07 11:17 AM   #52 
  - OT - From an Angry Soldier (Strong Language)  54anickel   Apr-25-07 11:34 AM   #53 
  - Works for me...  AnneD   Apr-25-07 12:05 PM   #59 
     - What would John McCain say?  ramapo   Apr-25-07 02:41 PM   #71 
  - Today's quote over at 321gold....  54anickel   Apr-25-07 11:36 AM   #54 
  - Speaking of David Walker. Here's the latest from The Concord Coalition  Roland99   Apr-25-07 12:52 PM   #60 
  - Gotta run...wanna get my errands done so I can catch Moyers tonight!  54anickel   Apr-25-07 11:59 AM   #57 
  - I am headed out to a meeting too.  AnneD   Apr-25-07 01:00 PM   #61 
  - If not for washers, dryers and fridges - we would really be screwed.  ozymandius   Apr-25-07 02:03 PM   #65 
  - 50 shit jobs  ozymandius   Apr-25-07 02:12 PM   #67 
  - Criminal charges possible in student-loan scandal  ozymandius   Apr-25-07 02:18 PM   #68 
  - six minutes before the close  ozymandius   Apr-25-07 02:55 PM   #72 
  - closing the door and sweeping the floor  UpInArms   Apr-25-07 06:04 PM   #80 
     - Let me get this straight....analysts lower expectations, companies  54anickel   Apr-25-07 07:16 PM   #81 
        - So close to hell  AnneD   Apr-25-07 07:54 PM   #82 
           - good night, Mary Ellen  UpInArms   Apr-25-07 08:33 PM   #83 

Home » Discuss » Latest Breaking News Donate to DU

Powered by DCForum+ Version 1.1 Copyright 1997-2002
Software has been extensively modified by the DU administrators

Important Notices: By participating on this discussion board, visitors agree to abide by the rules outlined on our Rules page. Messages posted on the Democratic Underground Discussion Forums are the opinions of the individuals who post them, and do not necessarily represent the opinions of Democratic Underground, LLC.

Home  |  Discussion Forums  |  Journals |  Store  |  Donate

About DU  |  Contact Us  |  Privacy Policy

Got a message for Democratic Underground? Click here to send us a message.

© 2001 - 2011 Democratic Underground, LLC