Salient to Investors:

A. Gary Shilling at A. Gary Shilling & Co writes:

  • In periods of prolonged economic pain, international cooperation gives way to an every-nation-for-itself attitude, including competitive devaluations. Decreasing the value of a currency, by creating and selling unlimited quantities, is much easier than supporting it, by selling limited quantities of other currencies it holds, or borrowing from other central banks. The IMF says global central-bank foreign-exchange reserves increased to $10.53 trillion in mid-2012 versus $6.7 trillion in 2007.
  • Currency interventions seldom have lasting effects, viz unsuccessful Japan, and ultimately work against the US dollar, adding to its attraction  as the only haven in an uncertain world. All countries lose in competitive devaluations because of the disruption to foreign trade when one currency, specifically the US dollar, dominates.
  • Central-bank policy, especially quantitative easing, depresses a currency by hyping the supply of liquidity. Central bankers, who congenitally hate inflation, want it to return as they value their jobs.
  • The yield on Japanese government bonds will be much higher long-term as leaping interest rates will add so much to the deficits and debt that an uncontrollable spiral will unfold.
  • China has succumbed to immense foreign pressure to allow the yuan to appreciate only in good times, but holds its currency flat when times are tough.
  • Brazil’s economy is commodity-oriented and therefore at the mercy of subdued Chinese manufacturing.
  • The dollar is likely to meet at least 5 of the 6 criteria of a dominant global currency for many years:
    1. Rapid growth in GDP per capita. US emphasis on entrepreneurial activity and superiority in new technologies will maintain this lead.
    2. A large, usually the biggest, economy. Rapid productivity growth and relatively open immigration, the falling population in Japan spreading to other developing nations including China, will assure the US lead.
    3. Deep, broad financial markets. The US stock-market cap is 4 times that of China, Japan or the U.K. and more than 3 times that of the euro zone. Almost 50 percent of Treasuries are held by foreigners versus 8.7 percent of Japan’s government net debt.
    4. Free and open financial markets and economies. Fragile conditions in Europe, and China continuing to control its financial markets and currency, assures the US lead.
    5. Lack of substitutes. The rigidly controlled Chinese economy and financial markets eliminate the yuan for the foreseeable future. Japan does not want the yen to be a primary global currency. The European crisis eliminated the euro for at least a number of years.
    6. The dollar’s credibility is still substantial. The US current-account deficit will shrink as retrenching consumers moderate imports, US production becomes increasingly competitive, and the US becomes more self-sufficient in energy.

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