by Elliott R. Morss, Ph.D.

Introduction

I am struck by how the investment pundits can generate new recommendations on a daily/weekly basis. Except at times of panic like the collapse of Western banks in late-2008, economic conditions change slowly. And good economic thinking is rare. For example, in a recent posting, the best economic advice I could think of for what governments should do in today’s global recession was contained in a letter from John Maynard Keynes to FDR in 1938.

Where is the world now? There are two answers to this question. Western nations remain mired in the recession – for example, the US is still losing jobs net – in February, 35,000 jobs were lost and over the last 3 months, 171,000 jobs have been lost. And Western government debt is growing rapidly as deficit finance is being applied to stimulate economic activity.

In developing countries, things are quite different: after temporary setbacks caused by a reduction in Western demand for their exports, developing countries are growing again, with the growth fueled primarily by their own middle classes. 

Past Investment Suggestions

Three quarters ago (June 2009), I recommended betting against the dollar by investing in developing country stocks and commodities. My stock picks are summarized in Table 1, with the S&P 500 included as a frame of reference.

Table 1. – Stock Market Performance

* ETF – Exchange Traded Fund, M – Mutual Fund

Stock Market Correlation

After all my arguments for betting against the dollar, investing in emerging nations, etc., my stock picks since June 11, 2009 have performed only marginally better than the S&P 500 (23.7% vs. 21.3%). Many would argue this is because global stock market movements are so highly correlated. Certainly in the past, this has been true at least for emerging stock markets. Why? Because a very significant portion of investors came from Western countries. Anytime, they got scared, like when the Western banks collapsed in late 2008, they liquidated all their stock holdings, both in their home countries and in emerging markets.

My argument is that while this correlation has held in the past, it will break down in coming years for the following reasons:

• The fundamental economic conditions of developed and emerging market countries are so different;
• A growing awareness of these differences in both Western and Emerging Market countries.Fundamental Economic Conditions

Here, I will be very specific. Because of fundamental economic conditions, my investments are in Brazil, China, India, South Korea, South Africa, and a Latin American mutual fund. Table 2 provides in summary form the differences in both projected growth rates and debt between Western nations and emerging markets.

Table 2. – Economic Conditions

Source: IMF, World Bank

 Advanced economies are projected to grow at a 1.1% rate in 2010 and at 2.4% the following year. Emerging economies are projected to grow at 5.0% in 2010 and 6.3% in 2011. Differences in debt levels are similarly striking.

The US Dollar

The US trade deficit is now running just over $500 billion annually, down from over $600 billion in earlier years. As indicated in earlier postings, much of this has been absorbed by China and Japan purchases of US government debt. We hear that neither country is eager to continue purchases as past rates.

But there is another point of significance here – foreigners purchases of US equities and Americans purchases of foreign stocks. Foreign purchases of US equities are like a US exports: it reduces the global supply of dollars and makes it stronger. US purchases of foreign equities are just the opposite: it increases the global supply of dollars and makes it weaker.

In both 2006 and 2007, foreigners purchased $1.6 trillion in US stocks and bonds. In those same years, Americans bought $1.3 trillion and $1.5 trillion in foreign stocks and bonds, respectively. In light of the different economic conditions in the US and emerging market countries, do you think foreigners will be as eager to buy US equities as they have in the past? And equally important, won’t Americans want to buy more emerging market securities. Both actions should weaken the dollar.    

Investments

In light of the above considerations, my portfolio holdings are listed in Table 3. I am betting against the dollar with investments in countries with good growth prospects and little debt. How sure am I that my arguments will prove correct? Not very – a random walk….

Table 3. – Morss Portfolio

 I am not an investment adviser and nothing I say should be taken as a recommendation to buy or sell an asset.

 by Elliott R. Morss, Ph.D.

 Introduction

I recently interviewed George Ball, the Chairman of Burpee Gardening, about the economics of the mail order/nursery plant/seed business (I will post that interview shortly). He said the vegetable seed business is growing rapidly, partly because in tough times, people want to take advantage of the cost savings resulting from growing vegetables from seed.

 That got me thinking: at 10 cents a tomato seed, there is definitely a cost savings if you can just rough up the soil, drop in a seed, and get a healthy tomato plant to grow. But living in New England, it is not quite that simple. In what follows, I will take you through what I do and what it costs.

Seed Costs

 Certainly seed costs are low enough to warrant growing from scratch, if that were all there was to it. The following seed prices are taken from my recent article comparing gardening catalogues.

 Vegetable Seed Prices

If we could only live on lettuce, basil, and beans! 

Starting Seeds Indoors

 Living in New England requires that I start growing seeds indoors if I want vegetables before fall. What do I grow the seeds in? In essence, there are two possibilities: buy an all-in-one seed-growing package, or buy separate pieces and put them together. A good example of the former is the APS system that has been offered by Gardener’s Supply for many years. In essence, you get a water-holding tray, a capillary mat, soil holders and a plastic cover at a cost of $19.95 for one that holds 24 plants. You can get 2 with soil for $49.94. A. M. Leonard’s Gardeners Edge offers essentially the same product. Burpee offers something similar – its “ultimate growing system” has a reservoir, a mat, soil and 72 soil holders (the holders are smaller than the other two) for $19.95. The attraction of these systems? In addition to being all-in-one packages, they are self-watering: you can go away for a few days without losing your seedlings. The systems can be reused but new soil will be needed (more on soil costs below).

 All-In-One Sytems

 I turn now to the separate pieces. “Pot-Makers” allow you to make your own holders. In essence, you wind newspaper around the pot-maker to make a soil holder. Pinetree charges $14.95 for one, Burpee charges $19.95.

 Johnny’s offers “hand-held soil block makers”. You press down using a block maker and you get a block of soil that stands on its own. One that presses out 2 square inch soil blocks 4 at a time costs $29.95.

 And then there are the pellets – held together by a biodegradable netting ( that I do not find all that biodegradable the next spring):

• The Jiffy-7 peat pellets;
• Coir pellets.

So how do all of these products compare? To answer this question, we need comparable soil prices. Most catalogues offer seed growing soil, quoted either in quarts or cubic feet. So I asked, how many 2-inch square blocks (8 cubic inches) of soil can one get from each seller’s soil? You need to know there are 1728 cubic inches in each cubic foot and 67.2 cubic inches in each quart to make the conversion from bags of soil quoted in cubic feet or quarts in the catalogues to square inches. And that, coupled with the catalogue prices, allows me to the price per square two-inch (8 cubic inch) block shown in the following table.

Price per 2- Inch Block of Seed Starting Soil

 According to this Table, Jiffy’s seed starting mix (not pellets) sold by Harris is the lowest priced soil. And Harris’ shipping fees are based on shipping value, not weight. How do these soil prices compare with the price of the Jiffy pellets (a peat growing medium held together by a biodegradable netting)? I use the “extra-depth” Jiffy-7. I pay Harris $56.95 for 500 pellets, or 11 cents per pellet. Park offers 200 coir pellets for $19.95 or 10 cents a disk). Clearly, the Jiffy soil is cheaper than the Jiffy pellets. But pellets don’t need a holder. If you buy the soil, you will need to use a pot-maker, a soil block press, or just buy trays with built-in cells.

 Lighting

 To grow a significant number of seeds indoors, you need lighting. I use a 3-level fluorescent stand with 12 growing trays of 10’ x 21.5” for a total growing area of 2,580 square inches. I have been using the extra-deep Jiffy-7 pellets. I can fit 40 pellets comfortably in each tray, or 480 seeds in all. I don’t transplant.

 This lighting apparatus in available from A.M. Leonard’s “Gardeners Edge” for $600 or from Harris for $720. I believe this lighting system bought from Leonard will be as good or better in price per square inch of growing area than any other lighting system on the market.

 My tomato plants get special treatment. I use a now discontinued Gardener’s Supply APS system where each cell is 4” inches square. When the plants get too large for the fluorescent stand, I stake them and take them to the basement where I have a halide light hanging from a beam. They don’t go outside until the Memorial Day weekend.

Heating mats are simply too expensive for me, and my vegetables grow without them.

 Outdoors

 There is really no limit on what you can spend once it is time to move your plants outdoors.

 I believe the following table constitutes pretty close to the bare minimum of what is needed. You really need a small seed dispenser, but maybe you could do without the soil-testing machine. The catalogues convince us we need fertilizer and fertilizer sprayer. But how about the need for the bean innoculant and tomato blossom set spray? I don’t know, but I get them.

 Every year, I buy a few bags of manure/compost. I don’t buy red mulch any more for my tomatoes. They do fine without it. I do need tomato, bean, and cucumber supports (I use the metal cages. Soil is tough on skin and nails, so gloves are needed. A weeding instrument for gardeners is like a good knife for a chef – they come in many different forms but are essential. Rabbits ate all my green peppers and beans last year and it will not happen again. I will start with sprays (Liquid Fence). If that does not work, I will have to buy fencing.

 There are many different ways to water your garden. But whatever method you use, you will at least need a hose with a nozzle. I use a combination of sprinklers and soaker hoses on a timer. You really don’t need a mechanical tiller, but you do need clippers and to be politically correct, a composter.  

On all of these products, I recommend that you first check with Pinetree and Gardeners Edge on price. Gardeners Edge seems to be mimicking Gardener’s Supply but with lower prices.

But I should say: I will always have an allegiance to Gardener’s Supply – so many original great ideas! What does that mean? I will always buy their new ideas from them – but I will not buy upside down plants from them or anyone.

 I have left out a lot. For example, water and electricity costs. And I have to get my trees trimmed back every other summer at a cost of $1,500 a trim.

 I now want to return to George Ball’s claim that there are great savings in growing vegetables from seed. In the following table, I have two columns for costs: the middle one is for annual costs and the right one is for investment costs. I arbitrarily assume the investments will last six years.

Growing Vegetables from Seed: Summary Cost Table

 This assumption is reflected in line 27 where I take the total investment cost ($1,431) and divide it by 6. In line 28, I get the costs per seed planted. For the annual costs, I divide the total ($199.80) by 300 seeds. For the investment costs, I divide $238.50 by 300. That results in a total cost per seed of $1.46.

 What does it all mean? George Ball was right: at $1.46 for a vegetable plant, you are doing a lot better growing than buying your vegetables in the market.

 by Elliott R. Morss, Ph.D.

 I never believe the first weather forecast I hear. I look for trends. So if the first one predicted rain, the second predicted showers, I conclude that the weather will be better than the first prediction – after all, the predictions should get better, the closer you get to the day that interests you.

 Let’s apply this methodology to economic predictions. Last November, the IMF made GDP predictions. And they have just updated them. In Table 1 below, I give their current predictions along with how they differed from their predictions last November. There is no good news: there is not a single country or region where the growth estimate has not been reduced for 2010. 

Table 1. – GDP Projections

Source: IMF, World Economic Outlook Projections

 Even so, it is somewhat instructive and heartening to see that while advanced economies are projected to grow 1.1% in 2010, emerging/developing economies are projected to grow 5% this year. But I warn you, follow the trends. We know how bad things are in continental Europe, the UK, and the US, and they could get worse.

Let me elaborate on something I said in my prior piece. The fiscal deficits in most Euro countries are in excess of the 3% (fiscal deficit/GDP) Euro rule. For example, Greece has a deficit ratio of 13% with 10.6% unemployment while Spain has a budget deficit of 11.4% with a 19.5% unemployment rate. So they will be forced to reduce their deficits just at the time they should be increasing their deficits to reduce unemployment! 

The IMF has made similar projections for world trade, and they are presented in Table 2 below. So far, they have reduced this year’s projection for world trade by 2.5%. And it could get worse.

 The differences between the advanced and emerging/developing countries remain astounding: imports are projected by 5.8% in the latter and by only 1.9% in advanced economies. The same pattern holds for exports: up 5.4% in emerging countries and only up 2.11% in advanced economies.

Table 2. – World Trade Projections

Source: IMF, World Economic Outlook Projections

 These factors, coupled with the deleveraging piece by the McKinsey Global Institute, provide adequate reason to be quite pessimistic. For the investor, the road ahead will probably be quite rocky with many ups and downs.

 Growth and debt considerations favor emerging market investments.

by Elliott R. Morss, Ph.D.

 Introduction

 National governments are running up large deficits as they attempt to use Keynesian-inspired stimulus packages to get their economies going again. These packages, along with the excessive spending leading up to the Western banking collapse and global recession, has re-written global debt map.

 There are several types of debt worth examining. A country’s total debt includes the debt of households, firms, and governments, and for certain purposes, it is useful to consider each of these separately. There should be less concern if a country’s debt is self-contained – the government selling most of its debt to its own citizens and firms with households and governments borrowing from one another. External debt can be far more burdensome and problematic. We are now hearing a lot about government debt and projected deficits. Below, we look at each of these debts for regions and major countries.

 Government Debt

 In Table 1, information on government debt is presented. As can be seen in the middle numerical column, Asia has the lowest government debt as a percent of GDP ratio followed closely by Latin America. With a debt ratio of .728, the government debt ratio of the Europe, US, and Japan region is twice as large as Asia, and almost 1.8 times greater than Latin America. The final column in Table 1 indicates what the interest payments on these debts would be if the borrowing rate were 5%. At 5% interest, Greece, Italy and Japan are paying out more than 5% of GDP in interest on the public debt. 

Table 1. – Government Debt to GDP Ratios,  Selected Countries, 2009

Source: CIA Factbook

 In Japan, local citizens own more than 90% of the government debt and interest rates are lower than 5%, so this debt burden is not as significant as it is for other countries.

 Government Deficits

 Table 2 presents actual and estimated government deficits for advanced and emerging nations.

Table 2 – Government Deficits

Source: IMF

 Note the growing disparity between emerging and advanced country deficits. The situation in Europe is particularly sticky. Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, and Spain use the Euro. And according to the Euro agreements, government deficits should be limited to 3% of GDP. As Table 3 shows, Greece, Ireland, Malta, and Portugal have deficits in excess of 3% (the UK is not a member but also has a high deficit). Pressure is being applied to Greece, Ireland, Malta and Portugal to reduce their deficits just at the time that stimulatory policies are needed to reduce unemployment. Spain, with an unemployment rate of 19.5%, is right at the limit.

 Table 3. – European Deficits as % GDP

Source: Eurostat

 External Debt

 Consider next external debt – the total public and private debt owed to nonresidents repayable in foreign currency, or goods, or services. Table 4 provides these data.

Table 4. – External Debt to Export Ratios, Selected Countries, 2009

Source: CIA Factbook

 External debt is somewhat more problematic than government debt in that it must be repaid in a convertible currency. For most countries, exports are their only source of convertible countries, so we examine external debt as a percent of exports. Again Asia and Latin America are in far better shape than the developed countries. The final column on the right indicates what percent of exports would be required to service the debt if the interest rate on it was 5%. It is shocking to think that at 5%, the interest paid by Ireland, the UK, and Greece would exceed their total export revenues.

 The US has an interesting debt situation. China, Japan, and more recently, Brazil, have been buying US debt as a way to keep the dollar strong. Table 5 provides data on countries holding more that $10 billion in US government debt.

 Table 5. – Countries Holding More Than $100 Billion of US Government Debt

Source: US Treasury

Overall, the US Treasury has borrowed $3.6 trillion from foreigners. At 5%, this debt is costing the US government $181 billion in interest annually. Of significance inasmuch as this must be added to the US trade deficit of $650 billion annually as net new dollars being supplied to the global markets.

 The McKinsey Global Institute recently completed a study in which they estimated total debt by country. This includes the debt of households, business (with the financial sector broken out), and governments. Their findings on total debt for the countries they cover are presented in Table 6.

 Table 6 – Total Debt, Selected Countries, 2008

Source: McKinsey Global Institute, Debt and Deleveraging: The Global Credit Bubble and Its Consequences

 Again, we see a similar pattern: debt burdens are much higher in the developed nations than they are in either Latin America or Asia.

 It is important to remember that the debt situation of the developed nations will worsen for the next few years as their governments apply stimulus packages to get them out of the global recession. As I have indicated in earlier postings, the global recession was far less severe in Asia and Latin America than in the West so the governments in these latter regions have not had to such large deficits.

 Further Breakdowns

 The McKinsey goes further in breaking down what were the sources of the major debt buildup in recent years. They find that in the Spain, the UK and the US, households, commercial real estate, and financial institutions were the primary sources of the debt buildup.

Does Debt Really Matter?

 Do such debt burdens really matter? After all, as long as there is someone to buy new debt…. But, after the debt bubble burst, people lost their jobs and homes, how likely is it that people will ramp up debt and spending again? Many writers are doubtful. For example, John Mauldin has been writing for some time about the new normal. 

The McKinsey study went further. It reviewed case studies of earlier collapses as a guide to what might happen next. Their overall finding:

…aggregate measures of leverage, such as the ratio of total debt to GDP, are in and of themselves not a reliable guide to the sustainability of debt or the likely speed or extent of deleveraging….To assess the likelihood of deleveraging going forward, one needs to…look at sectors…. within sectors, one must… assess the sustainability of debt, including the rate of growth of leverage, debt servicing capacity, and the borrowers’ vulnerability to income interruptions or sharp increases in interest rates. 

 From their review of case studies of debt collapses, they find 3 common patterns: default, belt-tightening, and growing out of debt. They expect deleveraging (belt-tightening) to take place in households, commercial real estate and financial institutions in Spain, the UK, and the US in coming years.

 History shows that “belt-tightening deleveraging episodes have lasted an average of six to seven years and reduced debt to GDP ratios by about 25%.

 Their advice to policymakers:

• …government policymakers must be careful not to cut back on monetary or fiscal stimulus measures too soon, lest they snuff out a nascent recovery, as occurred in 1938;
• the right government policies are also critical to maintaining public confidence so that deflation will not occur. If households and businesses think deflation is a real possibility they will hold off on spending and investment, possibly causing deflation to take hold and economic activity to fall off, which causes debt-to-GDP ratios to soar.

 My thoughts? Look for regions and countries not burdened by debt for your investments. 

How the Treasury and Fed Should Move From Stimulus to Sustained Growth

by Elliott R. Morss, Ph.D.

 In my last article, I detailed the efforts taken by the US government to end the credit freeze and recession. I concluded that as long as these problems remain, the Treasury should run a large deficit and the Fed should print money, make loans, guarantee loans, buy Treasury debt, etc. Have you heard this before? Maybe John Meynard Keynes’ letter to Roosevelt back in the ‘thirties:

 Broadly speaking, therefore, an increase of output cannot occur unless by the operation of one or other of three factors. Individuals must be induced to spend more out o their existing incomes; or the business world must be induced, either by increased confidence in the prospects or by a lower rate of interest, to create additional current incomes in the hands of their employees, which is what happens when either the working or the fixed capital of the country is being increased; or public authority must be called in aid to create additional current incomes through the expenditure of borrowed or printed money. In bad times the first factor cannot be expected to work on a sufficient scale. The second factor will come in as the second wave of attack on the slump after the tide has been turned by the expenditures of public authority. It is, therefore, only from the third factor that we can expect the initial major impulse.

But what happens when the economy starts to show some life and starts a rebound? How should the US change its monetary and fiscal policies? What should the transition strategy be? To answer this question, domestic and international elements must be considered.

 Domestic Considerations

 First, a brief primer on the Federal Reserve, the US central bank. Unlike other parts of the central government, the Fed does not need Congressional approval for its actions. What can it do? It can buy assets by issuing debt. Its debt is non-interest bearing – US dollars. Paulson went to the Fed to arrange the AIG (Goldman) bailout because at that time, Congress had not yet approved TARP. And since the start of the credit freeze and global recession, Bernanke has had the printing presses running. As I detailed in my last article, the balance sheet of the Fed has grown by an unprecedented 152% since the beginning of 2008. A good part of that growth resulted from the purchase of bad assets owned by US banks and Federal housing agencies. It also purchased $238 billion in Treasury notes and bonds. In short, a very significant part of the US stimulus has resulted from actions of the Fed.

 Now, let us go back to the equation I set forth in my prior article:

 MV = PY = GDP

 In this equation, M stands for the money supply (M2 in the numerical work that follows), V stands for the velocity of money (how many times is it used to buy goods and services in a given time period); P is a price index; Y is real gross domestic product; and GDP stands for gross domestic product in current dollars. Here, we will focus on MV = GDP since we are not worried about inflation. Table 1 derives velocity data by dividing GDP by M2. 

 Table 1. – US: GDP, Money, Money Velocity of Circulation

Source: US Bureau of Economic Analysis and Federal Reserve

 V has fallen by almost 13% since 2006. That slowdown in the pace of spending is the cause of the global recession. Now, the government has attempted to counter this by expanding M2 25% over this period via deficit finance and other Fed actions. It has not been enough.

 Perhaps we should listen again to Keynes: in a serious downturn, expanding the money supply by making more money available to banks is not enough:  The government must get money to citizens and firms via expenditures and hope they, in turn, spend it. How? Increase government expenditures and get the Fed to print money to cover it. I would add that it will help a bit if the Fed also:

• Buys more assets;
• Makes more loans and guarantees more loans; and
• Coordinates with the Treasury to get the right level of stimulus.

 As V grows, as manifested in higher consumption, investment, overall aggregate demand, and employments starts increasing, the government should take steps to gradually reduce its stimulatory effort – higher interest rates, less expansionary action by the Fed, less new loans, etc.

 At some point, it will become clear the economy is recovering. My indicator for this? Monthly job gains of 75,000 net for three months running. I will deal further with this issue in a coming article but not here. But for those interested in this issue, and on how large a recovery will occur and how long it will take, a sobering must-read article has just been written by the McKinsey Global Institute. 

 When it gets to a point that it is clear the economy is recovering, the Fed and Treasury have to work together to get the US back to objective of Employment Act of 1946 – full employment with reasonable price stability. The Fed can slow down the growth in aggregate demand by starting to sell some of the assets it has purchased in the last 15 months:

• $970 billion in asset backed securities;
• $165 billion in Federal agency securities, and
• $90 billion in AIG securities.

 The Treasury does not have the flexibility of the Fed because almost everything it does requires Congressional approval and a Presidential signature. But even without Congressional approval, it can start working to liquidate TARP. Of course, the President and Congress will have to find ways to reduce the projected unsustainable US government deficit.

 International Considerations

 I start with two key observations:

 1. Any country that exports now or would like to export to the US does not want the dollar to weaken.

 2. The loss of US manufacturing jobs has less to do with cheap labor overseas and more to do with China and Japan efforts to keep the dollar articifically strong. That strength means the US runs large trade deficits and has lost most of its manufacturing. But companies like to produce in the US – there is more foreign direct investment in the US than in any other nation.

 A question: does it really matter if foreigners buy US government debt? What if all US debt was sold to the Fed and US citizens: – the more to the Fed if stimulus is needed, the more to citizens if the goal is to reign in demand.

 To answer this question, it is important to understand US international transactions, as presented in Table 2. The US imports considerably more goods and services than it exports. This is manifested in the Current Account net item in the Table (the Current Account is dominated by the Trade Balance). That trade deficit, if not offset, would flood the world with dollars, forcing a dramatic weakening of the dollar. But there is an offset – the Capital Account net in the Table. 

 Table 2. – US International Transactions (bil. US$)

Source: US Bureau of Economic Analysis

 As can be seen, the Capital Account net has offset the deficits in the Current Account net over the last few years. The remainder of Table 2 is a summary of the major items in the Capital Account. For purposes here, I direct your attention to the Memorandum items at the bottom of the Table. These items are net figures from the inflow and outflow items above.

 Even though there is more foreign direct investment in the US annually than any other nation, the US has been investing large amounts overseas such that in the last 5 years, there has been a net direct investment outflow from the US.

 Now look at the Securities item. For many years, foreign private investors have purchased US securities (stocks and bonds), and this inflow has been a major offset to our Current Account deficit. But note that in recent years, Americans have started to invest heavily in foreign stocks and bonds: foreign securities purchases of $170 billion, $251 billion,  $365 billion, and $367 billion in the years 2004 – 2007, respectively.

 The Foreign Official Purchase Item documents primarily Chinese and Japanese government purchases of US government securities over the last few years to prop up the dollar.

 Okay – with this information in mind, I return to the question posed above: does it really matter if foreigners buy US government debt? It does, only insofar as it serves as an offset to the US trade deficit – foreigners use dollar holdings to buy US securities.

 I finish this article by looking into the future on what will happen to the US dollar.

 Alternative Scenarios

 One obvious scenario is to assume foreigners (both government and private) buy enough US financial paper to continue to offset the US current account deficit. If so, things will go on as they have – the dollar remains artificially strong, and US manufacturing continues to suffer.

 But consider the other extreme – the governments of China, Japan and other foreign nations give up on trying to prop up the dollar, and private investors, fearing a weaker dollar, stop buying US securities. If this happened the dollar would fall in value relative to other currencies. The result would be a spike US exports and foreign direct investment in the US.

 What do I think is likely to happen? Just guesses:

 1. At least the Chinese government has lost its enthusiasm for propping up the dollar. It has learned from the global recession that it can get on with lower levels of exports to the US.

 2. Foreigners will think a lot harder about buying securities in the debt burdened US, UK, Japan, and EUR countries.

 3. Citizens of the US, UK, Japan, and EUR countries will gradually increase purchases of securities in the low debt countries of Asia and Latin America.

If I am right, consider the implications for the capital account offsets to the US current account deficit discussed above. Without these offsets, the dollar will weaken significantly in world markets.