Is there a bubble in the value of the US dollar?

Only the Chinese currency is stronger versus the US$ than it was before the crisis, and it has started the journey south to join the yen, pound, and euro. It looks like the world wants to solve its problems on the back of the US economy. How long can this go on before US manufacturing, or what is left of it, shuts down completely?

Summers in today's FT expects direct effect of Chinese slowdown on US/Europe

And he doesn't think there is any effective monetary response.  So we shall just grin and bear it.

Emerging Market Debt: the 1980s Elephant in the Room

Between 2005 and mid-2015 emerging market corporate debt rose from $900 bn to $4.4 trillion. (Central bank easy money had to go somewhere.) Total debt of emerging market countries went from $5.4 trillion to $24.4 trillion during the same period. (This includes both local currency and foreign currency debt.) Total debt is now 90% of average GDP for these countries. (data from today's FT)

This debt is largely supported by the proceeds from the sale of commodities.

Latin America had a similar quadrupling of debt in the ten years before August 1982 when Mexico suspended all debt payments. The current situation is somewhat similar, except that the emerging countries have relatively more local currency debt today.

In the 1970s, the recycling of petrodollars fueled the debt boom. In recent times, it has been the search for yield and central bank liquidity.

In the case where there is not a dramatic increase in commodity prices from today's levels (e.g. a doubling) it is hard to see how a 1980-like third world debt crisis can be avoided in the near future. (The first world debt crisis looms, but is probably more distant.)

Unlike in 1982, the present crisis has been moving forward in slow motion for a number of years, so the adjustment in the 3rd world may be less brutal than in the 1980s. Local currency debt also provides a cushion of sorts.

Some sort of debt cancellation for both sovereign and corporate debt around the world in both developed and developing countries will likely solve the problem sooner or later, so there is some cause for optimism.

The Lady or the Tiger?

There was a long-ago time, in a land far away, when high school students without exception would one day be assigned to read and discuss Frank Stockton's short story The Lady or the Tiger.  In this story, a barbaric king puts a young man interested in his daughter of whom he does not approve in an arena where he must choose between two doors of egress.  Behind one was a lovely damsel while the other concealed a fearsome and ravenous tiger. The princess, who was seated by the king, knew which was which and was loath to let her suitor be torn apart by the beast, but she also resented the damsel.  She made a subtle sign to the suitor indicating which door he should choose.  What was behind this door?

This is, in effect the dilemma faced by the Obama administration in deciding how the US should react to the actions of Iran in the Middle East.  I recommend that you read Prof. Marvin Zonis' interesting essay on this subject, which defines the doors.  It is unclear whether Pres. Rouhani of Iran is the fearsome tiger or the fair damsel.

The PBOC announced on Dec. 11 that it had abandoned the Renminbi/US$ link

So why is everyone surprised? As of December 11th, the dollar went from 100% of the basket to 26.4%. (article below) The Yuan is behaving accordingly. Given the composition of the new basket, it would not be unreasonable to expect that the Chinese yuan would drop another 30%-40% against the dollar, ceteris paribus. The super-strong dollar is not beneficial to the US economy. I am inclined to believe that the US$ is in a speculative bubble.

Poem quoted in honor of the world's financial and monetary leaders

Home newspaper delivery and the fragility of efficient systems

In his book Antifragile Nassim Nicholas Taleb notes that the more efficient a system is, the more it is vulnerable to widespread disruption than is an inefficient one. (The efficient system is fragile and the inefficient one is antifragile or at least less fragile.)

We are living through an example here in the Boston area. Once upon a time, each newspaper had its own paper boys. Newspaper trucks dropped off bundles at designated locations where they were picked up by boys on bicycles or on foot (or their mothers if they had the flu) who would then deliver twenty or thirty papers each. (We didn't have newspaper delivery in the town I where I grew up (too rural) but in college I remember getting up at 4:30 each morning to deliver the Daily Dartmouth, which was an enjoyable way to get an early start on the day.)

Then, to make it more efficient, the newspapers dispensed with paper boys and used contract employees to deliver large numbers of papers.

To make it even more efficient, this was outsourced to third parties.

Seeking to achieve an even higher degree of efficiency, all the newspapers started using the same outsource provider.

The Boston Globe operates this way and its outsourced delivery operations deliver the Globe, the Wall Street Journal, the New York Times, the Financial Times, the Boston Herald, the Lynn Daily Item, MetroWest News, and some other papers.

To make the system even more efficient, the Globe switched from this outsource provider to another that promised "better delivery performance" and "substantial cost savings." To achieve the cost savings, the new outsourcee hired fewer people, and the system collapsed on December 28th when the new delivery system was put in place.

As a result of the Globe's single decision, the delivery of all newspapers in the Boston area descended into chaos on the 28th of December. We have not received the FT since then and the Globe is being delivered on an ad hoc basis, including by a Globe columnist who happens to live in town. (He wrote a humorous column (link) describing his delivery route.)

The problem with efficiency is that it ultimately destroys reliability and undermines quality.