Thursday, May 29, 2014

Competitive currency devaluations a threat no one can win

If we have a stronger currency, then American companies have currency-translation losses. Their earnings in euro terms, through exports or operations within the eurozone, translate into fewer U.S. dollars.

The second effect is more subtle, and it really has to do with a string of competitive devaluations. When domestic economies are weak, the urge is to increase exports. You don’t have domestic demand, so let’s let foreigners fill the gap by demanding more of our exports. Well, how do you do that? How do you make exports cheaper? Because everybody wants to export, nobody wants to import.

There are various ways, though. For example in Greece they've had what’s called internal devaluation. Their labor costs are about a third what they were before the crisis started, they’ve simply fallen because their economy’s so weak. Because they’re a member of the eurozone, there's no Greek Drachma that they can depreciate anymore, so they've got to do it internally.

Another example is France. France put on a scheme, which the Germans invented, where they simply cut corporate taxes. The idea was to lower costs and therefore lower their export prices to get more exports. And, at the same time, they offset that with a higher value-added tax. Now with the value-added tax, you can add on to import costs, which raises the price of imports making them less attractive, and subtract it from exports, making them cheaper for foreigners. So they get a triple-whammy there.

Then there’s explicit currency devaluations, that's what we seen in Japan where the government of Prime Minister Abe is deliberately trashing the yen. We may see that in the ECB, now, we see that in South Korea. The Chinese, of course, are manipulating their currency. They’re trying to drive out speculators, but they're making it weaker in the process.

The risk is that if you get into this pattern of competitive devaluations, which means nobody really wins because it offsets. I think that most countries end up devaluing their currency against the dollar. But how can the dollar devalue? The greenback is the reserve currency, there’s nothing to devalue against.

This works to the disadvantage of U.S.-based companies in terms of the currency translation losses, but also with these competitive devaluations. They tend to offset, and the net effect is lower economic growth all the way around. It actually ends up reducing everybody's exports, because exports go down when your trading partners’ economies suffer. They don’t demand as much of everything, including your exports.

So I think that's the risk. It’s a little more subtle and down the road. But the translation losses are fairly direct.

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Wednesday, May 28, 2014

What ECB can do to avoid crisis.

One is they can further reduce their overnight reference rate, which is now 25 basis points. They could knock that down to zero.

The second thing is that they can charge member banks for leaving money at the European Central Bank (ECB). Right now, they pay zero, but they can reduce that to negative territory. In other words, they can say to banks “you have to pay 50 basis points to leave the money here,” which encourages banks to lend the money.

They can also get involved in so-called quantitative easing (QE), go out and simply buy various forms of securities, but it’s not as easy for them as it is for the Fed because there’s 18 member countries in the ECB. They don’t just go out and buy Treasuries, they have to think of 18 different issues of government papers.

They say they’re going to do something in early June unless things change dramatically, but they are clearly concerned about deflation.


Tuesday, May 27, 2014

ECB afraid of deflation

Mario Draghi, the head of The European Central Bank, came out and said what I was predicting, that they are going to trash the euro because they see it as a promoter of deflation, of which they are scared stiff. 


Wednesday, May 21, 2014

Gary Shilling: Deleveraging has another 4 years

Once private sector de-leveraging is completed in another four years or so, real GDP growth will probably return to its long-run trend of about 3.5 percent, and may be higher on a catch-up basis – a big jump from the 2.3 percent growth in the recovery so far.

The headwinds of de-leveraging will have calmed and more rapid productivity and labor force growth will likely return. And the slow-growth-forever crowd will need to find new theories to promote!

Monday, May 19, 2014

Gary Shilling on tech's future

To say that the Internet is fully exploited is like yelling ‘Get a horse!’ in the early 1900s at a Model T Ford driver whose car had broken down. 


Friday, May 16, 2014

Gary Shilling praises Draghi

Draghi gets a lot of credit for his July 2012 “whatever it takes” statement, but it was foreshadowed by the earlier lending program. 

In the last year-and-a-half, most of those ECB loans have been repaid. The ECB could probably reactivate this form of QE by “encouraging” its member banks to renew their borrowing. In any event, it will take much more than words to reduce the euro’s value significantly and head off deflation.

Wednesday, May 14, 2014

Gary Shilling says Time to short Euro

The European Central Bank is gearing up to depress the euro, which it blames for much of the deflation threat in the euro area, or at least the portion it can influence.

The ECB reduced its overnight reference interest rate from 0.5 percent to 0.25 percent in November. If it cut the rate again, the ECB would join the Federal Reserve and the Bank of Japan with rates of essentially zero. 

With all the central-bank-created liquidity sloshing around the world, these rates are largely symbolic. Yet another ECB reduction could make foreign investment in the euro area less attractive, to the detriment of the euro.

Currently, ECB member banks are paid nothing on their deposits. A negative rate -- charging banks to leave their money at the central bank -- would encourage them to lend and invest elsewhere. That would push down returns in the euro area and discourage foreign investors, also to the detriment of the euro. 

Looming deflation is pushing the ECB rapidly toward measures aimed at depressing the euro as well as stimulating euro-area economies. The time to be short the euro against the dollar may finally have arrived.

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