Book that I picked up to better understand the macroeconomic situation, especially with all the talk about impending dollar collapse.
Argues that the US dollar will crash very soon. Very good explanatory graphs and charts, good reference for what to look at for macroeconomic predictions. Good book to own.
- The Gold Standard (before 1942) and Bretton Woods (1942 – 1973) worked well to prevent crazy crashes, the current system doesn't.
- Balance of Payements: Current account balance = Net capital and financial account + reserve asset transactions
- Cited example of Japan. Major exporting power by late 1960s. Huge trade surpluses deposited into the banking system, resulted in increase in high-powered money + international reserves and set off an explosion of credit creation (money supply), leading to asset price inflation. Asset price inflation creates positive wealth effect that spurs consumption and causes the rate of economic expansion to accelerate. That leads to over-investment and overcapacity. Purchasing power of the public (wages) does not increase quickly enough to absorb the surge in production. Hence downward pressure on prices and profits, debtors find they are no longer able to pay interest on their debts, bankruptcies follow, credit contracts, asset prices plunge, economy enters into recession.
- US will suffer the same fate as the US dollars from the foreign countries get re-invested back into US. Shows data on US, that foreign investors are buying less and less treasuries but more US corporate bonds + agency (fannie/freddie) debt + equities.
- Countries with balance of payements surpluses will be forced to convert their dollar surpluses into their own currencies, causing a sharp appreciation in their currencies and a sharp decline in the value of the dollar. This will help restore equilibrium but will throw the major exporting nations into recession as their exports to the US collapse.
- The international monetary system generates deflation. When excessive credit expansion leads to excess capacity and falling product prices. There is also downward pressure on prices brought about by relocation of the world's manufacturing to very low wage countries.
- Makes the argument that the only safe place for foreign investors to invest their US dollars is in US treasuries. doesn't have a good use for the extra cash.
- Makes the argument that the US dollar will crash when the US property market pops. The American shopping spree is financed by the bubble in the US property market, fueled by low mortgage rates and ample financing from Freddie/Fannie. How much longer can property bubble last depends on 1) how much longer low mortgage rates, 2) how much longer can americans finance home prices that are rising at a considerably faster rate than the increase in their wages (shows data that Home Affordability Index is dropping).
- Makes the argument that when the dollar crashes, China bad, Japan bad, Asian bad, Mexico bad, Europe Good.
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