Last Updated: 29 January 2023
Paul—we look at all these macro issues from sort of an abstract investor perspective. But what’s going on underneath it is very real.
You had some nice links there, and reflecting on history can always lend a sobering perspective to the current outlook. As I’ve mentioned, I find currencies endlessly fascinating, because their shifting rates are reflective of a whole range of issues, including macroeconomic fundamentals, currency flows and market psychology.
One of the most interesting recent phenomena has been the relative continued strength of the dollar and of U.S. Treasuries through an absurdly woeful set of fundamentals for the currency, including enormous current account and trade deficits. Partly (especially since October) that has had to do with deleveraging bets and buying back dollars to pay back loans made in that currency, as well as a retreat toward quality (forgive me the snicker). But above all, the dollar’s strength has been about China agreeing to fund the enormous U.S. deficit.
China has quietly built a massive economy on the back of this “18 months NO MONEY DOWN” financing. The shrewdness of that is only magnified by the fact that as a side benefit, China OWNS the U.S. now. How much screeching have you been hearing from the U.S. government about human rights and the like of late?
That’s because when the U.S. government asks itself the question, “Who’s your daddy?” the answer is China.