Re: Is Bernanke Behind The Rallies? Query to Barkley

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

According to high sources in GE Asset Management, the current rally is
entirely liquidity pushed by Fed injecting funds into the economy.  It
is part of a shift from bonds in response to low interest rates.  Money
managers do not want to be caught with low return by the end of June for
2nd quater reports. It is a trader's market, not an investor's market,
meaning it cannot be sustained.  The prospect of the DOW hitting before
7000 again by October is very high.

Interest phenomenon is that it is now possible for the banking sector to
be healthy at the expense of the real eocnomy.  Bank stocks are up while
borrowers are going bankrupt, partly because of securitization of debt
which took the banks off the hook.

As for the correction of the dollar's exchange rate, below is what I
have to say in an article on Japan which will appear in Asia Times next
week, as excerpted:

 Japanese policy of keeping the yen’s exchange value lower than that
dictated by market pressure has now become an attempt to eliminate
domestic deflation.  But a below-market yen leads to a larger trade
surplus in dollars, causing a net shrinkage in the yen money supply,
thus shrinking the yen asset economy, leaving it with over-capacity and
making yen assets less valuable.  What Japan is doing is investing in
the dollar economy while dis-investing in the yen economy through its
trade surplus. This is the real cause of deflation in Japan.

To restore strong economic growth in Japan, deflation must be stopped.
Under a central banking regime, the most straightforward way to stop
domestic deflation is to force the yen to depreciate in foreign exchange
value.  But this would go against market forces generated by Japan’s
trade surplus.  Yet if Japan keeps the exchange value of the yen low
merely to sustain its export prowess, it will continue to feed domestic
deflation.  This is because the rate of shrinkage of the yen economy
from a huge trade surplus denominated in foreign currencies, mostly
dollars, is greater than the rise in yen money supply released by a
reluctant central bank.

Domestic deflation can be stopped if there are more yen chasing after
the same amount of yen assets.  But more yen in circulation will lower
the exchange value of the yen.  A low yen in turn will increase Japan’s
trade surplus, which, because it is denominated in foreign currencies,
mostly dollars, is a mechanism that transforms yen input into dollar
output, reducing the yen money supply.  This reduction of yen money
supply increases the amount of under- or non-performing yen assets,
reducing their market value.  Thus Japan’s trade surplus contributes to
increase in the dollar money supply.  Normally this will push down the
value of the dollar.  But dollar hegemony forces the Japanese and other
trade surplus nations, such as China, to finance their trade surplus
with a capital account deficit in favor of the dollar economy.  This
expands investment in the dollar economy and pushes up the price of
dollar assets and pushes down the price of yen and other non-dollar
assets.  Thus dollar hegemony keeps both the exchange value of the
dollar and the price of dollar assets high, while other non-dollar
economies must choose between a weak currency and domestic deflation.
China is insulated because the yuan is not fully convertible.  When the
US Treasury allows the dollar to fall against the yen, it is in fact
condemning Japan to more domestic deflation through yen appreciation, if
all else remains unchanged.   By allowing the dollar to fall, the US is
in fact exporting deflation.

To stop domestic deflation, Japan not only needs to inject more yen into
the yen economy but it must also keep the yen in the yen economy by
reducing its trade surplus without shrinking its economy.  This is
because the trade surplus coupled with a capital account deficit is
leaking yen into dollars faster than the Bank of Japan (BoJ), the
central bank, can inject more yen into the yen money supply because of
the so-called liquidity trap.  Thus Japan needs to shift its historical
national role by changing its investment policy from one of promoting
ever-increasing export for trade surplus in dollars that are of little
use to the Japanese yen economy.  Japan needs to adopt a new national
goal of developing and expanding the global economy, particularly the
Asian economy, from which the relatively overdeveloped Japanese yen
economy will derive sustainable expansion in tandem.  This is true with
all the G7 economies: they can only grow by making sure than the rest of
the world grows at a faster pace.  There was a period during the Cold
War when the more advanced US economy grew at a slower pace than those
of its Western allies, much to the benefit of the whole Western block.
The future of the world economy depends on more economic equality, not
by shrinking the size of the G7 economies, but by expanding the
economies outside of the G7 at a faster pace.  It is doubtful if this
can be achieved through neo-liberal globalized trade.  Development needs
to replace trade as the dominant driving force.  In the long run, Japan
will benefit from an Asian common currency not dominated by yen
hegemony.  And the world will benefit from a global currency not
dictated by dollar hegemony or by any other single national currency.


Barkley Rosser wrote:
> Chris,
>      I was not aware that the most recent runup in the
> U.S. stock market was due to foreign inflows.  Is that
> the case?  It certainly would not make sense.  They
> would have been doing much better staying in their
> home markets in recent months, which was the point
> of my remark.
>      From all I've read it has been excited Americans
> goofy over our "victory" in Iraq, along with the steady
> decline of interest rates.  Certainly the decline of the
> dollar does increase the possibility of profits by some
> American companies, which could ironically partly offset
> the exchange rate issue for foreigners.  However, it is
> well known that most investors, and certainly American
> ones, suffer from the "home-equity premium," which
> ultimately boils down to people simply not paying any
> attention at all to what is going on abroad.  So, most
> American investors are simply unaware of the
> opportunity cost they have been paying by dumping
> their money into the U.S. stock market.
> Barkley Rosser
> ----- Original Message -----
> From: "Niggle, Christopher" <Christopher_Niggle@xxxxxxxxxxxx>
> To: "'Barkley Rosser '" <rosserjb@xxxxxxx>; "'Gary Santos '"
> <evs@xxxxxxxxxxxx>; <TheNewForum@xxxxxxxxxxxxxxx>; <pkt@xxxxxxxxxxxxxxxx>
> Sent: Thursday, June 19, 2003 1:23 PM
> Subject: RE: Is Bernanke Behind The Rallies? Query to Barkley
>
>
>
> > Barkley: Is your point that the cheaper dollar makes investing in US
>
> stocks
>
> > attractive?  I notice that most of the inflows into stocks and stock funds
> > seem to be foreign. But wouldn't foreign investors worry that the dollar
> > will continue to fall, reducing the expected return on US stocks in their
> > own currencies?  I'm not sure how this works.
> >
> > chris
> >
> > -----Original Message-----
> > From: Barkley Rosser
> > To: Gary Santos; TheNewForum@xxxxxxxxxxxxxxx; pkt@xxxxxxxxxxxxxxxx
> > Sent: 6/18/03 1:39 PM
> > Subject: Re: Is Bernanke Behind The Rallies?
> > Importance: Low
> >
> >    It should be kept in mind that the rise of the
> > stock markets in the US has barely kept pace
> > with the decline of the value of the dollar against
> > the euro.
> > Barkley Rosser
> > ----- Original Message -----
> > From: "Gary Santos" <evs@xxxxxxxxxxxx>
> > To: <TheNewForum@xxxxxxxxxxxxxxx>; <pkt@xxxxxxxxxxxxxxxx>
> > Sent: Tuesday, June 17, 2003 3:26 AM
> > Subject: Is Bernanke Behind The Rallies?
> >
> >
> >
> > > I've been watching all the markets rally. I wonder if Bernanke's hint
> >
> > of
> >
> > > extraordinary measures to liquefy the markets (in this case the stock
> > > market) in his November, 2002 speech is behind these rallies. I don't
> >
> > see
> >
> > > any fundamentals to justify the size of this rally.
> > >
> > > In my market, money is being placed back in the hands of consumers.
> >
> > Foreign
> >
> > > funds account for 3/4 of the volume. Certainly, this is money to spend
> >
> > ...
> >
> > > or to save. The central bank is offering a 10% tax free 5 year bond --
> >
> > about
> >
> > > 70% above the short term rate. I wonder.