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Michael Hudson on a devalued dollar
#1
From an interview.

Confused Confused There is more money to be made by dismantling the US economy, than in anything else.

Michael Hudson:  "Interest rates are historically low, and they have been kept low in order to try to keep providing cheap money for speculators to buy stocks and bonds to make arbitrage gains. Speculators can borrow at a low rate of interest to buy a stock yielding dividends (and also making capital gains) at a higher rate of return, or by buying a bond such as corporate junk bonds that pay higher interest rates, and keep the difference. In short, low interest rates are a form of financial engineering.

Trump wants interest rates to be low in order to inflate the housing market and the stock market even more, as if that is an index of the real economy, not just the financial sector that is wrapped around the economy of production and consumption. Beyond this domestic concern, Trump imagines that if you keep interest rates lower than those of Europe, the dollar’s exchange rate will decline. He thinks that this will make U.S. exports more competitive with foreign products.

Trump is criticizing the Federal Reserve for not keeping interest rates even lower than those of Europe. He he thinks that if interest rates are low, there will be an outflow of capital from this country to buy foreign stocks and bonds that pay a higher interest rate. This financial outflow will lower the dollar’s exchange rate. He believes that this will increase the chance of rebuilding America’s manufacturing exports.

This is the great neoliberal miscalculation. It also is the basis for IMF models.

How low interest rates lower the dollar’s exchange rate, raising import prices
Trump’s guiding idea is that lowering the dollar’s value will lower the cost of labor to employers. That’s what happens when a currency is devalued. Depreciation doesn’t lower costs that have a common worldwide price. There’s a common price for oil in the world, a common price of raw materials, and pretty much a common price for capital and credit. So the main thing that’s devalued when you push a currency down is the price of labor and its working conditions.

Workers are squeezed when a currency’s exchange rate falls, because they have to pay more for goods they import. If the dollar goes down against the Chinese yen or European currency, Chinese imports are going to cost more in dollars. So will European imports. That is the logic behind “beggar my neighbor” devaluations.

How much more foreign imports will cost depends on how far the dollar goes down. But even if it plunges by 50 percent, even if the dollar were to become a junk currency like the Argentinian or other Latin American currencies, that cannot really increase American manufacturing exports, because not much American labor works in factories anymore. Workers drive cabs and work in the service industry or for medical insurance companies. Even if you give American workers in manufacturing companies all their clothing and food for nothing, they still can’t compete with foreign countries, because their housing costs are so high, their medical insurance is so high and their taxes are so high that they’re priced out of world markets. So it won’t help much if the dollar goes down by 1 percent, 10 percent or even 20 percent. If you don’t have factories going and if you don’t have a transportation system, a power supply, and if our public utilities and infrastructure are being run down, there’s nothing that currency manipulation can do to enable America to quickly rebuild its manufacturing export industries.

American parent companies have already moved their factories abroad. They have given up on America. As long as Trump or his successors refrain from changing that system – as long as he gives tax advantages for companies to move abroad – there’s nothing he can do that will restore industry here. But he’s picked up International Monetary Fund’s junk economics, the neoliberal patter talk that it’s given to Latin America pretending that if a country just lowers its exchange rate more, it will be able to lower its wages and living standards, paying labor less in hard-currency terms until at some point, when its poverty and austerity get deep enough, it will become more competitive.

That hasn’t worked for fifty years in Latin America. It hasn’t worked for other countries either, and it never worked in the United States. The 19th-century American School of Political Economy developed the Economy of High Wages doctrine. (I review this in my book on America’s Protectionist Takeoff: 1815-1914.) They recognized that if you pay labor more, it’s more productive, it can afford a better education and it works better. That’s why high-wage labor can undersell low-wage “pauper” labor. Trump is therefore a century behind the times in picking up the IMF austerity idea that you can just devalue the currency and reduce labor’s wages and living standards in international terms to make the economy more profitable and somehow “work your way out of debt.”

What currency depreciation does do when the dollar is devalued is to enable Wall Street firms to borrow 1% and to buy European currencies and bonds yielding 3 percent or 4 percent or 5 percent, or stocks yielding even more. The guiding idea is to do what Japan did in 1990: have very low interest rates to increase what’s called the carry trade.  The carry trade is borrowing at a low interest rate and buying bonds yielding a higher rate, making an arbitrage gain on the interest-rate differential. So Trump is creating an arbitrage opportunity for Wall Street investors. He pretends that this is pro-labor and can rebuild manufacturing. But it only helps hollow out the U.S. economy, sending money to other countries to build themup instead of investing in ourselves. So the effect of what Trump’s doing is the opposite of what he says he’s doing.

Bonnie Faulkner:  Exactly. What is the point of driving investment into foreign countries, away from the United States?

Michael Hudson:  If you’re an investor, you can make more money by dismantling the U.S. economy. You can borrow at 1 percent and buy a bond or a stock that yields 3 or 4 percent. That’s called arbitrage. It’s a financial free lunch. The effect of this free lunch, as you say, is to build up foreign economies or at least their financial markets while undercutting your own. Finance is cosmopolitan, not patriotic. It doesn’t really care where it makes money. Finance goes wherever the rate of return is highest. That’s the dynamic that has been de-industrializing the United States over the past forty years.

Bonnie Faulkner:  From what you’re saying, it sounds like Donald Trump’s policies are leading to doing to the United States what the IMF and World Bank have traditionally done to foreign economies.

Michael Hudson:  That’s what happens when you devalue. The financial sector will see that interest rates are going down, so the dollar’s exchange rate also will decline. Investors will move their money (or will borrow) into euros, gold or Japanese yen or Swiss francs whose exchange rate is expected to rise. So you’re offering a financial arbitrage and capital gain for investors who speculate in foreign currencies. You’re also hollowing out the economy here, and squeezing real wage levels and living standards. ..."

https://www.nakedcapitalism.com/2019/07/...mpire.html
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#2
Quote:https://en.wikipedia.org/wiki/Michael_Hu...economist)

Hudson identifies himself as a Marxist economist[/url]
[url=https://en.wikipedia.org/wiki/Marxist_economist]


nuff said
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#3
(07-13-2019, 12:40 PM)DaveGillie Wrote:
Quote:https://en.wikipedia.org/wiki/Michael_Hu...economist)

Hudson identifies himself as a Marxist economist[/url]
[url=https://en.wikipedia.org/wiki/Marxist_economist]


nuff said

But you're OK with MMT as long as Trump likes it ?
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#4
(07-13-2019, 03:10 PM)aqua Wrote: But you're OK with MMT as long as Trump likes it ?

of course I never said that,

and answering a rhetorical question is sorta worthless, but ..........


I can think they're BOTH wrong and that Government should get OUT of the Money business
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#5
(07-13-2019, 03:28 PM)DaveGillie Wrote:
(07-13-2019, 03:10 PM)aqua Wrote: But you're OK with MMT as long as Trump likes it ?

of course I never said that,


Tis possible I confused you with someone else, maybe Ollie ?

I think he sees MMT as a way to bail out his Illinois pension plan.
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#6
(07-13-2019, 03:28 PM)DaveGillie Wrote:
(07-13-2019, 03:10 PM)aqua Wrote: But you're OK with MMT as long as Trump likes it ?

of course I never said that,

and answering a rhetorical question is sorta worthless, but ..........


I can think they're BOTH wrong and that Government should get OUT of the Money business

Yup, classic non-sequitur ...

Him: "The Dems and CNN both agree that one plus one equals purple, so it must be true. Here's a 'toon to prove my point...".

[Image: 2kmqeu.jpg]

You: "Uhhhm, no it doesn't"
Him: "So then you agree with Trump that all illegals should immediately have their organs removed and sold on the black market."

You didn't support Trump or the Democrats. You pointed out a highly salient fact (the fact that an argument was made by an economist who identifies as a Marxist is a very important point).

There has unarguably been a huge polarization in politics. That's bad enough, but it is being accompanied by a mind numbing lack of logic, the bulk of which can be summarized as "if you don't agree with all our points, then you must agree with the Nazis/fascists/Trump/alt-right/racists/white supremacists/1%'ers (pick one at random, any will work)". Pointing out a flaw in logic, or questioning a single principle is suddenly proof that you are a horrible person.

Just in case there exists a single person on the planet who has not seen the Jordan Peterson/Cathy Newman interview, here are some of the highlights:





The full interview is well worth a watch if you haven't seen it.
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#7
Wow.  Talk about trying to change the subject.
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#8
(07-14-2019, 02:13 PM)aqua Wrote: Wow.  Talk about trying to change the subject.

Are there any bonds other than very low quality junk bonds anywhere in Euros or any other major currency that are paying 4%? Certainly no government bonds pay that much.  If you know of one, there are lots of people who would be takers.  The argument above is completely fallacious IMO. Using Japan as an example of a "carry trade" might have worked ten years ago, but not anymore.  The BOJ is  so crapped out it's buying its own bonds and equities now.

The USA currently is paying more interest on its government bonds than any other  major country that I know of.  Maybe Turkey pays more ( don't know) but their currency is in the shitter.  A lot of European bonds like Germany's are paying negative rates.  How crazy is that?  That makes the dollar relatively stronger and for good or ill is what Trump is upset about. 

I agree with Dave, all this currency and interest rate manipulation is terrible on very many fronts.  It is creating a world wide financial house of cards that is destined to collapse.  Look out below when it does.  We are living during the mother of all financial bubbles.

I also see all of this as a desperate attempt to keep things afloat by the Trump adm until after the 2020 election.  Things are so out of whack that's as good a reason as any.  So....go Trump go!  Tomorrow we all die anyway.
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#9
(07-14-2019, 04:49 PM)doubletroublejim Wrote:
(07-14-2019, 02:13 PM)aqua Wrote: Wow.  Talk about trying to change the subject.

Are there any bonds other than very low quality junk bonds anywhere in Euros or any other major currency that are paying 4%? Certainly no government bonds pay that much.  If you know of one, there are lots of people who would be takers.

Whole bunch of governments paying more than 4%.

A bunch of them are listed here: https://nomadcapitalist.com/2018/08/30/h...est-rates/

Bahrain

Government Bond Interest Rate: 6.4% (Two years)
More promising is the Gulf nation of Bahrain. Bahrain has the distinction not only of being an oil-producing nation, but of having its national currency – the Bahrain dinar – pegged to the US dollar at a rate of 0.376:1. (Yes, the dinar is one of a handful of currencies stronger than the US dollar.)
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#10
(07-15-2019, 12:20 PM)aqua Wrote: Bahrain dinar – pegged to the US dollar at a rate of 0.376:1. (Yes, the dinar is one of a handful of currencies stronger than the US dollar.)


I'm sorry, but that is one of stupidest things I've read all day!!!!!!!!!!!!


"pegged to"  YET "stronger" ?!?!?!?!!!!!!!!!!!!!


LOL
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