You were correct when you wrote:

“I think the dollar needs to weaken, but the ball is not in our court on that one. It would be difficult for the US to force it unilaterally by any means other than heading closer to bankruptcy (although I like Buffet’s trade voucher idea)….”

I, too, think that Buffett’s plan is the best answer at present. In fact we recommended it as one of the alternatives in our 2008 book, “Trading Away Our Future.”

You might be interested in my recent blog posting about the Levy Economic Institute of Bard College’s recent analysis of Buffett’s plan.

Ultimately, guaranteed contributions, independent policy formation, and enforceable rules will be the new name of the game.

I just get this feeling that we have done this so often that it is like a one trick pony ready for the glue factory. And this go-around is now the biggest one in all of history. It has surpassed the Greenspan 1% and Bush tax cuts/deficits by an order of magnitude, and calling the last 8 years a success is too charitable in my view. Also that would mean that Obama screwed everything up on January 21st, 2009.

The reason it may not work is we have a huge consumer credit bubble. We have interest rates which have been manipulated to artificially low levels by every trick in the book. Likewise we have done everything to inflate housing prices with cheap money and lax lending standards. The “fix” is do more of the same, but lots more of it.

I just heard TG say today that the big risk is the USG putting the brakes on too fast ! Another instance of him trying to convince us that he just arrived on the planet and it wasn’t him running the NY Fed, he didn’t know anything about CDO/CDS even tho he eats lunch at Goldman Sachs, and he never new anyone by the name of Greenspan and wasn’t paying attention when Greenspan slipped that 2 year long interest rate hike past everyone while denying the housing bubble the whole time.

I’m not really sure how to get out of the mess, but I’m not the only one. But if we try and inflate out of it I think we could get the Great Recession Act 2 when inflation busts the government debt bubble, and brand new mortgage asset bubble, resulting in Housing Crisis Act 2.

Then don’t forget we need a sizable tax hike, and that’s bad for the economy.

Also, central banks can go bankrupt. Just ask Zimbabwe, England, Iceland, or Argentina. Brazil has been doing Bankruptcy Lite by issuing a new currency at least every 10 years for as long as I can remember.

Can’t happen here? Never say never.

Two problems.

1) Underdeveloped nations have tiny economies. The Fed’s balance sheet is about $4 trillion. The GDP of Mexico is $800 billion.

2) Just because you want to buy, doesn’t mean that anyone would want to sell.

Also there are political problems. You just aren’t going to be able to politically sell a program to give Mexicans and Chinese hundreds of billions of dollars. You might argue that giving Mexicans and Chinese hundreds of billions of dollars would stimulate the US economy as they buy US goods, except that there is no reason for them to take the money and buy US goods.

What you can sell (and what is going on now) is a program to give American’s hundreds of billions of dollars to buy Mexican and Chinese goods.

Richman: The result would be higher U.S. interest rates, weaker dollar, and improving trade deficit creating more aggregate demand for U.S. products.

Except that no one wants higher US interest rates right now.

Cedric: Sounds OK, until we remind ourselves the Fed is broke.

Fed can print money. It’s never going to be broke.

Cedric: The real problem is creditors believe there is a shortage of credit worthy borrowers.

The real problem is that creditors don’t care if there you are credit worthy or not. If the economy is going to hell, then the creditors are going to look out for themselves, and they aren’t going to lend you any money.

Cedric: Ergo the current “fix” is for the Treasury and the Fed to stick their thumbs in their mouth, squint their eyes shut, and blow real hard in the hope of re-flating first the banks, then housing prices and prices in general, credit growth, and then finally the real economy.

And this won’t work because?????

The basic problem is that because the banking system is a mess, when the Fed pumps money into the system, it goes into this leaky fire hose and just disappears before it gets out the other side. The Fed’s solution is to pump harder.

Anyone got any better ideas?

I did think about that too, but the Fed already sold their inventory of marketable treasuries(it got replaced by “colaterall”). They also have non-marketable notes they swap with the Fed member banks to manage base money supply, but these are short term in nature and foreign central banks are not considered to be Fed member banks, at least officially(Japan will deny it if asked). So they would need to have the Treasury give them real marketable bonds to sell and that would add to the national debt. We don’t need more of that.

But the Fed did do a little of what you are suggesting last year. They did currency swaps with a number of countries which, if I remember correctly, came to close around 200-300 billion. This was when the Libor spiked and they tried to get international interbank lending going again.

I think the dollar needs to weaken, but the ball is not in our court on that one. It would be difficult for the US to force it unilaterally by any means other than heading closer to bankruptcy(although I like Buffet’s trade voucher idea). US exports were doing pretty well when the dollar index was in the low 70s(it’s 86 today). The dollar index is heavily euro and yen weighted and most economists think the fair value gap with the RMB is something more like 40%. So what needs to happen is for the world to stop treating the USG like a bank account, and the USG needs to stop acting like a bank.

Ironically, the Chinese proposed a solution to this. Perhaps unwittingly, but they did say they would like to lend thru the IMF. So if they curtailed T-bill and bond purchases, and maybe even sold some, they could raise cash to fund the IMF, and the IMF could be China’s bank. They would of course want more voting rights and the US would have to give up some. They also lose their power to peg the currency. But that is the simplest most direct way I can think of towards re-balancing the global economy and also fund the IMF to do it’s thing.

The caveats are that the US doesn’t want to give up it’s control of the IMF, especially to a “communist” country, the US likes it’s source of cheap deficit funding, and China and the ROW don’t really want a cheaper dollar and a more competitive US.

In that case we are back to the status quo until something really big breaks.

1.) Those 103 comprise just 17.7% of global GDP, and 6.7% if China and India are left out.
2.) Their growth will slow from 7.4% in 2008 to 4.8% this year (5.6% to 2.9% absent China and India)
3.) The remaining 79 economies, accounting for 82.3% of global GDP, will contract by 3.7%, down from +1.2% in 2008.

Loved your post. But I disagree that you have hit the reason why I am wrong.

The Fed is not too broke to do this so long as American interest rates are low. The Fed just needs to borrow (i.e. sell bonds) in US markets and use the the dollars borrowed to buy foreign currencies.

The result would be higher U.S. interest rates, weaker dollar, and improving trade deficit creating more aggregate demand for U.S. products.

Howard