Lost the Battles But Win the War: On What Washington Really Wants

 
“Phew, what a big relief,” I said when I was informed an agreement had been reached in Washington, meaning that America would be able to meet its immediate obligations. I wish I didn't take a close look on so-called fiscal clashes in the United States.

The deal came at 11^th hour and I was feeling the rush of adrenalin even after I heard the news. World was totally on the brink of a collapse. China is busy with both all-time high inflation and property bubbles; Japan has yet to recover from a devastating earthquake and Europe is still living with confidence crisis. Everyone is tired. What if America fails?

My friends on Facebook said it was good news. I’m not sure if you guys are Americans, I asked.  Nope, they replied. I said you guys didn’t have reasons to be cheerful then.  It was good news from America but not necessarily the rest of the world. Why not? , One may ask. If one takes the close look, the big picture will be revealed.

Dollar will be weak for  a long time.

America has been losing competitive edges to Asia for such a long time, contributing to employment, debts and deficits. She is fighting back. In my latest article, I said the United States was trying to inject more and more money into the economy. I was partially wrong. However, I was right to say that US is trying to devalue its currency.

The clashes between Democrats and Republicans were of serious consequences, people would like to say.  Credit rating agencies are putting US’s AAA status under review.  If the status was downgraded, it would endanger the confidence of investors and eventually push up the interest rates, they went on. Credit rating agencies might not as reliable as one though.  They were the people involved in causing 2008 meltdown.

The concessions were made and the compromise was reached. The bottom lines are: 1. 1.2 trillion dollars in spending cut over the next decade. 2. Tax increases.  Economically speaking, the United States of America is not the United States of Europe. Austerity measures may be working in Europe. But I don’t think it will work in America.[1]

Why United Sates did it? Easy money policy of the Fed has been pushing up the inflation in the United States and of course in the world. Spending cut will reduce the purchasing power of its people. The inflation will be down. The people will be happy and Obama will stand a high chance of being reelected.  However, I don’t think spending cut will stand the test of time. The spend cut will die after Obama gets reelected at longest.[2]

As I mentioned above, US was trying to inject more money into the economy. Congratulations, you did it. It was not conducted via QE3 but by something similar to that one. I would rather call one “Intoxication Campaign.” Again, the deal was reached at 11^th hour.  Countries were fearful that the talk would collapse and the dollars would be very much undervalued.

They were in a rush to sell dollars and buy back the gold. Wall Street Journal reported yesterday that South Korea bought an unusually large amount of gold. Thailand just replaced Singapore as 25^th largest holder of gold. Every country is buying gold. What is happening? Dollar is becoming cheaper and cheaper.

I have written extensively about the advantages of a weaker dollar in previous articles. So, I’m skeptical that they were fighting in jest. What they really want is a weak Dollar. Most analysts failed to see the Big Picture. So, they concluded US politicians are misleading the economy. Phew, I said it again. I finished writing the article. What a big relief….. Go to bed for a nap. Please post your comment. :D 

 

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[1] I will write an article detailing on that issue.

[2] Thanks Mr. Andrew Peng for this useful comment.