Key News

- The strength of the New Zealand dollar is not sustainable but at current levels may hinder a further narrowing of the current account deficit and so economic recovery, the central bank said on Wednesday. (Reuters)
- Geithner Says Strong Dollar 'Very Important' to U.S. (Bloomberg)
Editor's Note: Yawn ...
- King Says BOE Still Has 'Open Mind' on Bond Purchases, Won't End Stimulus (Bloomberg)
- Gold - a six thousand year-old bubble (Financial Times)
In a world with multiple fiat moneys, the zero value of money equilibrium lurks for each of the fiat currencies, including gold. Admittedly, as regards gold, so far so good. Gold has positive value. It has had positive value for nigh-on 6000 years. That must make it the longest-lasting bubble in human history.

I don't want to argue with a 6000-year old bubble. It may well be good for another 6000 years. Its value may go from $1,100 per fine ounce to $1,500 or $5,000 for all I know. But I would not invest more than a sliver of my wealth into something without intrinsic value, something whose positive value is based on nothing more than a set of self-confirming beliefs.
Willem Buiter

And let me include two amusing comments from anonymous readers in reaction to Mr. Buiter's article from which I pulled the above quote:

1) Not a bad article, but you miss a very important point that ties all your article together--and refutes your argument. The reason that the paper money is not at the fundamental equilibrium of zero value is simply because of government decree. Because the governments have legal tender laws, because they will accept only their currencies as taxes, and because they care and do a lot to keep their currency alive, this prevents the currency from going to the zero fundamental value its worthless paper deserves. So the natural value of worthless paper is zero, unless someone puts a gun to your head and tells you otherwise. Gold is the opposite: its natural value is high, because it will always have some worth, unless someone puts a gun to your head and tells you otherwise. Gold can never go to the zero value of monetary equilibrium because whatever happens in the world, it will have value. At the very least, it's a pretty handy metal to have

around. It looks great, it doesn't rust, doesn't spoil, and can't evaporate. You could, at the very least, make some real cool chairs, cutlery, or electronic devices with it. This means it will always have some value. And since everyone knows it will always have some value, then the fundamental equilibrium price will never hit zero. And, as you mention, since it cannot be printed and can only be produced at a very high cost, it happens to be an excellent store of value. So everyone wants it not just because you can make nice furniture, but because you can store your value in it very reliably. This raises its price further. And this is exactly why it is a 6,000-year bubble that has busted countless fiat and paper moneys through history and remains triumphant. And this is why it will soon defeat all the current crop of fiat paper money around. Maybe you shouldn't put all your money in gold, but enough people around the world are putting enough money in it that its price will continue to rise.

And ...

2) Usually you are accurate. In this article I think you lost your mind. Gold is one thing Benny Boy and the rest of the idiot CB's can't counterfeit. They can't turn lead into gold. Gold is a currency, you can take it to the currency window at the bank and convert it into funny money. Gold will reflect a $4,000.00 price per troy ounce for every 1 trillion they create visa-vi Q-Easing. And for the record, I hate gold, I'm not a gold bug, but I have faith in the 4 G's: God, Gold, Guns and the Governments will screw it up making it better.

FX Trading - Smooth-Talkers in the Far-East

For several years now most analysts have understood the way in which China reports their economic data. China says what its people, and often times the rest of the world, need to hear.

It can be argued, though, that a lot of the numbers spewed out in China are manipulated for the better, for the sake of social contentment. An older, third-party article on this topic can be found here.

But even when we're talking about less concrete items, general comments on the action being taken to restore China's growth, it seems as though officials are just trying to schmooze over whoever is listening.

For example, official comments warning of potential over-investment ask lenders to lend less freely so the economy will not overheat. But at the same time government makes it clear that it will maintain accommodative policy.

I'm pretty sure there's a fairly popular Chinese character for the word balance.

Okay, okay, Chinese officials are in no way the only smooth-talkers trying to keep their economy stable by taking the feel good approach. I suppose we just notice it more with China because of the ability for China-related news to move markets. Everyone watches China closely now.

Recently, most every new piece of data coming out of China have given reporters and analysts reason to affirm the worst is definitely behind China and the country is returning to the level of growth it's capable of producing.

The latest, from earlier today ...

BEIJING, Nov 11 (Reuters) - Chinese factory output growth surged to a 19-month high in October, showing the world's third-largest economy has firmly put the worst of the global financial crisis behind it.

To the reporter's credit, there was mention of a dip in the pace of investment and loan growth and the fact that exports and imports also undershot market forecasts, falling from year-earlier levels for the 12th month in a row.

Also from that article:

Factory output is a crucial gauge because industry generates about 43 percent of Chinese gross domestic product

Right. And that's all well and good for Chinese industry - they're doing what they need to do to keep the lights on.

But we revert to our ongoing concerns. I asked in Monday's Currency Currents:

How many people are currently wondering whether or not policies being implemented around the globe are just rebuilding another house of cards on the same faulty foundation that allowed the global financial structure to come crashing down in the first place?

I have a similar question today - how sustainable is China's resurgence in industry and export-oriented growth when the number one customer is still holding back and disposable incomes are falling?

I turn to Professor Michael Pettis for a very succinct explanation this relationship and his expectations for them:

Why am I so negative about the good consumption numbers coming out of the US? Because the rise in personal consumption was accompanied by a 3.4% decline in household disposable income. If US household income declines, and this is likely to continue as unemployment rises even further, it is hard to imagine that US households are really going to splurge on new consumption. Consumption and household income must move in the same direction over any reasonable time period to be sustainable.


So in spite of temporarily good consumption numbers, there probably has been no sustainable increase in US consumption, just in government financed spending. Both China and the US are dealing with their imbalances either by slowing down the rebalancing or by exacerbating the very things that caused the imbalances in the first place. Slowing down the adjustment makes good political and social sense, of course, but it shouldn't blind us to the fact that US households cannot continue leveraging up to absorb the excess production that Chinese companies are leveraging up to produce. We will rebalance, one way or the other.

That's been our belief too: We will rebalance, one way or the other.

And wait ... hold the phone ... does China concede to this essential rebalancing?

We learned today that they are considering changing the way the yuan is valued. From the central bank's monetary policy report:

Following the principles of initiative, controllability and gradualism, with reference to international capital flows and changes in major currencies, we will improve the yuan exchange rate formation mechanism.

If your jaw dropped, thinking an end to the yuan-manipulation war is in sight, pick your jaw up off your desk and consider who we're talking about here.

John Ross Crooks III

Black Swan Capital LLC