I feel like we are in a re-run of scenarios we have seen before be can't quite recognize what they are. One thing that we might think about is that there has been an awful lot of cheap money floating around for an awfully long time and as usually happens, trying to put all of that liquidity to proper use becomes a problem; people get sloppy. Oh, just not lenders but borrowers as well. An example: Trouble and Strife and I are downsizing. Our real estate agent just advised us to get a mortgage on our new house because, "interest rates are so low...it's almost free money." I'm trying to figure out why two people our age should take on debt and can't really come up with a good reason. There are a lot of companies out there who have taken on debt "because it's almost free" to do non-productive things like buy back stock, or over-expand or...in the classic case...invest in real estate because it never goes down in value.
Now it's one thing when you do that in the currency of your residency but it's quite another thing to borrow--say, dollars--when you live in, say Thailand. And then, seemingly without warning things begin to change; the Baht gets hammered by a devaluation of the Yuan that today reached over 4%. We old guys used to refer to that as a currency risk. Oh, not against the Yuan, but against the dollar because it's dollars you have been borrowing and suddenly the dollar is going up because the Yuan is going down and you know that the Baht is going to have to devalue competitively as well, which means it takes a hell of a lot more Baht to buy dollars to pay off your dollar debt, but the economy is slowing because of all the currency turmoil, and...
Somehow, I think something like that happened before. Now I'm not saying it's going to happen again but it might be wise for the talking heads to keep their eye on the ball and understand that the actions of the Chinese may have consequences far removed from at the IMF or the happiness among academics that the Chinese are finally "opening their economy and financial system" to the modern world.
This world economy has a lot more players involved that count as opposed to past years. In 1980 the Admirable Volker decided to kill inflation in the U.S. (which was his job) and killed Latin America for ten years. If pressed, he will today admit he didn't see that coming, and he was as good as there had been up to that point...and probably up to today as well. Despite attempts to declare that the Chinese leadership has this under control, the better bet is that there is a lot of flailing around occurring in a political environment that can result in the reward of a bullet if somebody has to be blamed for a major screw-up. Despite the promises to "open the economy" by end-2015, I wouldn't hold my breath for that to happen. Allowing the free-flow of capital into a country totally unaccustomed to a free society as we know it? Nah. Not if I'm one of the guys on the Politburo. Right now I'm trying to hold this thing together knowing full well that there are entire cities of empty apartment buildings out there--actually see-throughs--that somebody financed, probably connected to the PLA. They live in interesting times and while it couldn't happen to a nicer bunch, every day in every way we are all in this together.
Off for a long week-end tomorrow. See you on Monday
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