It is true there are no statutory limits on how many dollars the Fed can print, but bond vigilantes would punish our bond market severely if it was felt the Fed was out of control, and that is the ultimate check. The flows of money into our bond market every day swamp anything the Fed does, which is mostly at the short end anyway. They can buy in longer-dated Treasuries or auction fewer (quantitative easing) but this takes some time to work through the system.
The dollar was perhaps overvalued following WWII when the United States was the last intact industrial country and perhaps was artificially maintained by the gold standard (abandoned in the 1970s) and communism which kept half of our present competitors out of the game (China was going through the insanity of the Cultural Revolution and the largest man-made famine in human history the last time the world went through a similar slump).
But economics is not a zero sum game. The Chinese who were absent from the game before very much need our economy to thrive or theirs is dead in the water. They are rooting for our bond market only because they own so much of it, not quite as much as Americans, Japanese, or Europeans, but for the size of their economy, it's substantial. They have no desire to see the United States plunge into some kind of Weimar Republic type of crisis.
And that, by the way, is not what I see happening here. The dollar is trading in a band of 10-20% and is currently approaching the lower end of that wide, sloppy trading range. It is lower than it was 5 months ago, but higher than it was a year ago, and higher than it was in 2007. We have been here before and perhaps will revisit these levels again but it is not (yet) the end of the world or of American dominance of it. We still remain the world's largest economy by a long shot. We are the world's largest importer and exporter. Our currency for better or worse is the international standard for pricing gold and oil. Signs everywhere here (in Switzerland) advertise schools to learn "Wall Street English" and there are more Chinese learning English than there are Americans.
I do think there is something unique about the American culture that encourages innovation and also protects us from some of the insanity - revolutions and wars - that have gripped other places and held them back or ravaged them in some cases. Despite all the optimism about Africa a few years back, for example, the news out of the DRC or Somalia remains unremittingly negative and the per capita income of Kenya today is lower than it was when it gained independence, as the president pointed out last year.
China to me remains a work in progress; the euphoria of the last decade over the admittedly incredible strides China has taken to become the manufacturer of the world reminded me a bit of the euphoria people felt about Japan in the 1980s, but since the political system remains so repressive I do not know how a more liberal system will fare. Communism has to soften politically as it did economically or it will collapse. A third option is that the hardliners will decide to rein it all in; they saw what happened to the Soviets post-glasnost. Such a return to Maoist central planning would be economically stupid but did not prevent this unelected government from doing similar economically self-destructive things before 1989.
China to me remains a work in progress; the euphoria of the last decade over the admittedly incredible strides China has taken to become the manufacturer of the world reminded me a bit of the euphoria people felt about Japan in the 1980s, but since the political system remains so repressive I do not know how a more liberal system will fare. Communism has to soften politically as it did economically or it will collapse. A third option is that the hardliners will decide to rein it all in; they saw what happened to the Soviets post-glasnost. Such a return to Maoist central planning would be economically stupid but did not prevent this unelected government from doing similar economically self-destructive things before 1989.
We shall see. The one thing I do know is that we will all be surprised, to the upside and downside, and all scratching out heads about why we didn't see XXX or YYY coming whatever those things turn out to be. People will buy and sell currencies and take positions and hedge central bankers but in the end we will muddle along as we always have. Along the way, there will continue to be fantastic trading opportunities, as there have been in the recent past. One thing about volatility is it is not boring!
I have seen and exploited more trends - readable from a mile away - over the past couple years than during all the time I have been looking at markets. I think bull markets are dangerous and very difficult to play because to make money you have to do something ill-advised, jumping in with the herd to buy an asset your research should tell you is overvalued. Times like these when people are rightly scared and looking critically at all their assumptions are healthy.
I have seen and exploited more trends - readable from a mile away - over the past couple years than during all the time I have been looking at markets. I think bull markets are dangerous and very difficult to play because to make money you have to do something ill-advised, jumping in with the herd to buy an asset your research should tell you is overvalued. Times like these when people are rightly scared and looking critically at all their assumptions are healthy.
I do hope employers start hiring again and if history is any guide, they will. This overhang of bad paper will create a nasty hangover but the patient will survive. One thing I feel fairly confident of: 10 years from now people will be kicking themselves for not buying more stocks today.
I always used to tell people about the 29-44 period of economic stagnation and the 68-82 period and how it was remarkable that both lasted 14-15 years. If the market topped in 2000 then 2014 or 2015 should be the decisive breakout (I am not making a prediction, only pointing out that this long period of stagnation and up and down movement of the stock market has happened twice before in the last century).
I am glad the Fed can print money, by the way. There are worse things than temporarily devaluing your currency and - as the Japanese can attest - better things than having a strong one!
Public debt, as Alexander Hamilton had to argue in his day, is not always a bad thing, and the fact that our government can borrow at such ridiculously low rates - less than 3% for 30 years! - is testimony to their creditworthiness. History shows bond vigilantes who after all have trillions of their own money at stake are far more accurate at assessing the profligacy of our government than are political pundits who can attract more followers after all with dire predictions of imminent collapse than by writing that things are probably going to be OK.
Public debt, as Alexander Hamilton had to argue in his day, is not always a bad thing, and the fact that our government can borrow at such ridiculously low rates - less than 3% for 30 years! - is testimony to their creditworthiness. History shows bond vigilantes who after all have trillions of their own money at stake are far more accurate at assessing the profligacy of our government than are political pundits who can attract more followers after all with dire predictions of imminent collapse than by writing that things are probably going to be OK.
And that debt which drives this whole process is really not as horrible as the Tea Party would like you to believe. Much of it is reversible (eliminate the Bush tax cuts and a third would disappear; end the wars in Afghanistan and Iraq and most of the rest would go away) and much of it is in paper or stock that has value. Viewing public debt in isolation while ignoring any offsetting assets would be like looking only at your mortgage while ignoring your home value (and the fact you have to pay to live somewhere). The day I bought my first house, my debt went up several hundred per cent, but so what? It was too low to begin with. The profits from that first home (generated thanks to that debt) formed the down payment for the second which I have owned ever since. Despite the ups and downs of the housing market, this was one of the best financial decisions I ever made. My colleagues at the time who felt borrowing the astronomical sum of $72,000 was crazy ended up paying far more in rent and having nothing to show for it at the end.
So debt is a tool and like any tool can cut off the hand of a careless operator but can also make incredible things possible. I don't know the appropriate level of debt for the government behind the world's largest and most successful economy and either does anyone else, but if it gets excessive, the bond market will let us know (through plunging bond prices and surging interest rates)). The fact that bond yields are at record lows indicates to me that we are going to be OK at least for the near term.
And in the long term, as Keynes reminded us, we are all dead.
So debt is a tool and like any tool can cut off the hand of a careless operator but can also make incredible things possible. I don't know the appropriate level of debt for the government behind the world's largest and most successful economy and either does anyone else, but if it gets excessive, the bond market will let us know (through plunging bond prices and surging interest rates)). The fact that bond yields are at record lows indicates to me that we are going to be OK at least for the near term.
And in the long term, as Keynes reminded us, we are all dead.
