Notes From Underground: Hu's Out First, Li's Out Second, and Xi, I don't Know

There is a great deal of political noise reverberating out of the Chinese political system as President Xi has asserted his Mao-like vice grip over China’s political, social and military reins of power. The rule of the DENG XIAO PING — HIDE AND BIDE — is officially closed. China, through XI, has revealed it will no longer HIDE its wealth/power or bide its time. The newest threat to the Bretton Woods HEGEMON has stepped to the fore to directly compete with the US Empire. The outcomes of Xi’s newest maneuvers will not be revealed for a time period but be assured that changes are afoot in the Pacific Region. How the wealth outcomes are determined will take a long time but if the competition is violent the destruction will be vast. Hopefully, the world — including the US — will engage in firm but friendly competition rising the standards of construction to new and enhanced levels for the entire globe.

Professor Graham Allison has posited his Thucydides trap theory for many years in which a recognized HEGEMON makes room for a rising POWER (think Athens and Sparta). There are many theorists posing as soothsayers but no model can be sure of a prescribed outcome. The GLOBAL ECONOMY is very fragile because of the uncertainty created by the Covid pandemic and the central bank policies that helped smoothed the way for a transition from a global slowdown that pushed the world to a near depression. Ultra-cheap money from the FED, ECB, BOE, BOJ and others led to huge debt overhangs that create great uncertainty for DOLLAR DEBTORS. In Asia, the two major economic powerhouses, China and Japan, are taking a go-slow monetary approach, keeping loose policies in place even as incipient inflation is causing their currencies to weaken.

The YEN the lowest levels in two-and-a-half years versus the DOLLAR and three-decade lows against the Chinese yuan. How long can the world tolerate a weak YEN with a rapidly slowing global economy?The Japanese manufacturing juggernaut using a weakened YEN is a threat to China and Germany, although a weak YEN does keep Chinese imports of Japanese machine tools and high engineered goods down. The issue of the strong DOLLAR is one of the pillars of US attractiveness but when does an overly strong dollar become an exorbitant burden to the competitive designs of the US foreign policy designs.

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There have been many views on the KING DOLLAR being a positive for U.S. anti-inflation policies but my sense is that the advantage received by the US is minimus. Unless the weight of an ultra-strong DOLLAR on the world’s DEBT holders leads to major fissures in the international financial edifice. Many articles have recently appeared casting doubt on the FED‘s continued fight against inflation as it is leading to other nations to race the central bank to ever higher interest or absorb the pain of a continuing weakening currency.

Former FED economist Claudia Sahm wrote a piece in July titled, “A Fed-Induced Recession is a Medicine Worse Than the Disease.” Sahm advised, “Even so, a recession is worse than inflation. A lost pay cheque or even lost hours would far exceed the extra monthly costs due to inflation. And the chance of losing one’s pay cheque is not the same for everyone.”

Following this up on Bloomberg Television last Friday Sahm warned that the aggressive action by Powell in chasing the flawed inflation of the Phillips Curve model was causing all central banks to raise rates all over the world. This is resulting in the US exporting inflation because the cost of services become higher as it takes more domestic currencies to purchase the needed dollars, driving inflation higher for the rest of the world.

The amount of US goods imports with somewhat lower prices is has minimal effect of goods price inflation but acts to place a severe burden on those having to earn enough DOLLARS to meet debt obligations. The weakening EURO is a prime example of how a weakened currency drives the DOLLAR-priced imports even higher.

The US Treasury, under the leadership of Secretary Janet Yellen, has begun raising alarms about the need for Treasury to purchase US NOTES and BONDS in an effort to calm the market. It seems Japan and others have begun selling Treasuries in an effort to raise needed DOLLARS putting ever more pressure on US bonds. Remember, the FED is not buying but rather letting its Treasuries roll off as QE has ended and QT is well underway. The question remains: Who wants to buy a 10-YEAR TREASURY at 4.2% with stated inflation at 6.2%, especially as broker-dealer/bank balance sheets are restricted by regulation.

Many sellers, few buyers. No wonder the 5/30 curve has moved so dramatically following on the heels of the British pension boondoggle. Secretary YELLEN has certainly had some recent concerns about increased volatility in the debt markets, raising the issue of whether or not the Treasury will foam the runway.

In addition to Yellen, Barry Eichengren, the most renowned economist on the DOLLAR since Robert Aliber, had a Foreign Affairs article warning of the “Dangers of a Strong Dollar,” suggesting that central banks “diversify their reserves and for countries to diversify their transactions away from the DOLLAR and towards the currencies of the eurozone, China and smaller economies. Doing so would leave countries less exposed to one bank.” Dollar debt sustainability is a great problem, something the FED/TREASURY needs to be very aware of as it will create the greatest financial breakage.

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