Global Trade Imbalances

http://www.pimco.com/LeftNav/Viewpoints/2007/Renegade+Economics+-+Executive+Summary.htm

A friend brought this to my attention (thanks Nathan). The link above is to the executive summary. The full report is 36 pages and can be accessed through this link as well. I cannot give it a strong enough recommendation for those who will take the time to read it. This combined with another paper over the weekend echoes several thoughts I have had for a little over a year now though definitely not as well developed or researched as these respected papers. I probably should not be reading these things because it makes me more bearish than I already am and though I think it is an inevitable, who knows when it finally happens. Like I said I have been thinking along those lines for over a year but my guess is we are several years before the system really breaks down. (yet it could be a month) There is just no way to predict the timing.

All these papers have a unique twist or suggestion to help solve the problem. This paper argues that raising interest rates to keep capital in the East Asia countries just prior to Asian Currency Crises was the wrong move and what they should have done (and suggesting to the U.S.) is move interest rates close to zero and dramatically raise taxes while tightening spending dramatically. This is a fairy tale as I cannot imagine a political environment that would allow this to happen but understanding the solution to the ailment can potentially give you a better understanding how to preserve capital and even benefit from the upheaval.

One thing is for sure. Asian currencies are dramatically undervalued compared to the U.S. dollar (have been for years) and the longer this persists, the worse the outcomes, the worse we will be hurt, and more we lose global dominance (if you want to argue we have it now), both economically and militarily we will end up losing. The precursor of what happened leading up to 1929 with the Great Depression and Great Britain losing their position as the worlds superpower to the United States is happening again where the United States could lose it to our Asian neighbors. Asian countries will be hurt when this thing finally blows up but the the debtor nation, the U.S., will be hurt far more.