No to revaluing the CNY

The US is trying to get the Chinese to up the CNY or RMB so that the Chinese will import more from the US (box 8).  This suggetion would not fly as it would put the Chinese into an unacceptably risky position. They have been unambiguously clear that China's contribution is to keep China stable and maintain its growth against their export markets shrinking.

Boxes 1, 2 and 3 is the story of fiscal stimuls taking over from exports. The longer term future is to shift more toward domestic consumption (box 4). If the CNY goes up (box 6) as per US wish and the Chinese chagrined no, going by recent history, money will rush into China worsening the asset bubbles already inflating there. The US hopes to get the Chinese hooked on their consumption habit? See the link between Box 5 and Box 4. In this scenario, the Chinese will find it affordable with super cheap money to buy more from the US and everyone. However the longer term consequences to China would be extremely negative. Kudos to the Chinese leaders astute leadership of their country.

USD carry trade

Box 1, 2 and 3 describe the US attempts to inflate its debt away. Since there are so many foreign holders of US assets, they especially China and Japan are forced to help pay the huge pile of US debt. Indeed we are living that attitude: The USD is my currency but your problem.

USD depreciation (box 3) opens up a massive opportunity for borrowing USD at near zero, even negative cost to buy non-US assets. This is driving up asset markets world wide (box 5). There is a reinforcing loop between Box 4 and Box 5. Massive assets bubbles are being inflated all over the world. They are unsustainable and will burst. As usual, too few people know when it will happen. Go bet the markets at your own risk.

As long as the USD is the reserve currency. The US will succeed at getting the rest of the world to help pay its humongous debt. US fiscal policies and consumer habits must change or she would just at the end of the road become utterly bankrupt and completely uncreditworthy.

Combining Nov 7 and Nov 9 NaviMaps

The NaviMap of November 7, "The Economic Recovery Process" is linked to today's, "Making Sense of Rising Gold Prices" via November 7 Box 9, "> USD weakness" to November 9 Box 3, "> selling USD".

The "The Economic Recovery Process" is the driving force behind "Making Sense of Rising Gold Prices" transmitting its influence via the USD price signal.

Making sense of rising Gold prices

Central banks have too much USD. As they diversify from it, USD weakens. The USD will find hopefully a high bottom because nobody is going to zero on the Dollar. The Americans will decide and the rest of the world will react accordingly. The more tough minded they are, the stronger the Dollar.

The Economic Recovery Process

You would have to double click on the NaviMap above to see a larger picture.

A few interesting features here.

Box 1 and Box 8
No free hand for the Americans to print money. It is difficult trying to strike a balance. If they could have push even more money into the economy, they can quickly reverse the rising rate of unemployment. This is too risky as foreigners might give up on the dollar. Krugman seems to have ignored this point.

Box 9, 10 and 12
This reinforcing loop on first look does not make sense. USD should in theory strengthen (box 9). The USD doesn't behave according to theory because it is a currency of safety. The USD is the worst reserve currency except for the rest as Soros pointed out.

Hopefully with more of Box 3 and Box 5 at a critical point, when the expected returns from USD assets become attractive again, the USD will strengthen (box 12)