Chile Forum

Well we have beet this horse (no offense to horses) before in this forum:
topic2453.html

and related threads on the economic crisis. I just thought the recent slide in the dollar warranted a fresh look.

We are pushing 530 again, and I do not think it has much to do with anything Chile is doing in particular. Granted commodity prices have been been on a tear lately and Chile is definitely doing well on the Copper and even Gold front.

I think this dollar is going to end up in a free fall at some point that is going to require active intervention Globally. The Chinese are moving assets in to commodities and Gold. They are unwinding their U.S. debt position as quietly as possible as to not blow their own position. All of this in the big picture of things is likely good for Chile on a commodity front I believe, but overall bad for the World economy.

I don't personally believe in the idea of owning Gold directly, but I am starting to believe in owning Gold miners for investment / inflation hedge.

Hi Charles. I have so far not been a huge fan of the US Monetary policy under President Obama, but I think in the short term his team is being either very crafty or unbelievably lucky. I think crafty. While giving lip service to the strong dollar policy, they are meanwhile more than content to let the dollar slide to boost exports while US goods are cheap to other countries, aiding a recovery in the US. The EU is crying foul now just as the USA has cried foul in the past because China has kept their currency weak, creating a trade deficit to China and their comparatively cheap exports. Now the shoe is for the first time in a long time on the other foot. China is being hurt by this in 2 crucial ways. Fist, as you point out, they hold US debt instruments in the trillions, and the value is tanking. The US could begin retiring that debt (if such a notion as paying off debt as a national priority ever were to cross the minds of our insane politicians) with dollars worth over 10% less than when the debt was sold. The second way it hurts China is that their exports are looking more expensive as the dollar is weaker and oil prices (traded in dollars) rise, driving up shipping costs with them.

I think the main reason the dollar is being allowed to slide is that the Obama team and the Fed want interest rates low for the economic boost, and to aid the housing market recovery, so that as many foreclosed homes can be cleared out of the bank's toxic portfolios, and as many stable (and even marginal) homeowners can refinance their properties, putting more monthly disposable income into the economy. The collateral damage to America's trading partners mentioned above may very well be viewed with secret, unspoken glee by many.

But it won't last long, in my view. Eventually, the runaway spending by the Democrats, coupled with China's unwillingness to buy any more debt (who could blame them?) will cause the circulated money supply to increase as the treasury spews money from the printing presses to pay for governmental spending addictions. This will cause inflation like the 1970's under Jimmy Carter, and the dollar, while being devalued by rising prices at home, will also become a super currency abroad, because like last time, the only weapon against inflation is to raise interest rates. That makes T-Bills and T-Bonds the best investment in the world with returns of 15% - 25% annually. Foreign investors and central banks will flood to the dollar-denominated instruments and the dollar will hit 1000-1100 pesos.

The last time this happened, I was in the army living in northern Italy. This was pre-European Union, so Italy still had the Lira. Pre inflation exchange rates under Gerald Ford were about 750-850 lire/dollar. Jimmy Carter's inflationary adventure sent interest rates on T-Bills to 19% and mortgages were routinely 12% - 16% conventional. Being in the army living in Italy, the only effect I felt at the time was that my meager paycheck was suddenly worth a lot more as the dollar went to 1600-1900 lire/dollar. Expats in Europe living on Social Security or military pensions were very very happy.

How this all affects me is that a piece of land in Chiloé I was looking at will now cost me $17K USD more than just a few months ago. I will still travel down in February to look at some parcels and explore around, but with a lot less urgency, thanks to the Democrats in Congress and the fiscally insane final months of President Bush.

scrjnki wrote:. . . . the dollar will hit 1000-1100 pesos. . . .

I can agree with much of what you've written, "scrjnki", but this . . . not that I wouldn't like for it to happen!

The comparison to Italy pre-EU I don't think fits very well. Italy was basically a developing country with very few natural resources and a massive population. I don't see Chile getting on that economic yo-yo because of the natural resources and small population. Chile is on the copper / gold standard now. If copper tanks, then perhaps.

admin wrote:We are pushing 530 again, and I do not think it has much to do with anything Chile is doing in particular.

From what I've read it seems pretty clear that it's due to the carry trade coming home from Brazil. That's what had been holding the dollar up locally and now Chilean investors are pulling their cash out again to avoid the new tax there. My impression is that it has been a sustained flow out of the Chilean market over a few months, so I imagine it will have a medium-term effect in the other direction too (maybe until next year).

Of course the dollar has weakened somewhat against other currencies too (a couple of percent against the Euro in the past fortnight by the look of it), but only half as much as against the peso. I have been paying less attention to what's going on externally, but no doubt some of the other fundamentals you mention are having their longer-term impact.

Cheers,

James.

admin wrote:The comparison to Italy pre-EU I don't think fits very well. Italy was basically a developing country with very few natural resources and a massive population. I don't see Chile getting on that economic yo-yo because of the natural resources and small population. Chile is on the copper / gold standard now. If copper tanks, then perhaps.

True about Italy then, and partially true still today, although EU membership has forced Italy and other "minor" EU members to tighten their fiscal policies and deficits. Yet, during the hyper inflationary time in the US I was describing, the dollar saw similar gains against the Deutsch mark, Swiss franc, Pound Sterling (nearly 1 pound/dollar!) and Japanese Yen. It's not that those other currencies suddenly became weak. The dollar grew exponentially because of demand by currency fund investors and foreign central banks for high yield havens, and thus the dollar became strong against ALL global currencies for about three or four years before sliding back into some sort of rational equilibrium.

Chile is a net exporter, with the capacity to refine it's own fuel, and has fiscal policies in place that make it an incredibly stable economy, and its currency equally stable. Per capita GDP is impressive, even in a recession. Yet, if the dollar does a repeat of 1976 - 1980, the peso will not fare any better than the euro, swiss franc or Aussie dollar.

If it happens (about a 50-50 chance by many estimates), then those expats who receive income in dollars from the states will be very happy. Those who earn in pesos or other currencies will be ok locally, but would do well to put off those vacation plans to the US for awhile.

DYODD. Everything here is NIA. TINSTAAFL.

Good luck all. Protect yourselves because no one else can or will.

Re: USD. "Down goes Frazier! Down goes Frazier!" I guess you have to be of a certain age to get that reference.

I dunno about USD vs. CLP on Jan. 1st, not being in Chile I don't have a feel for it anymore. But once it breaks through that support at 72 on the Index, oh brother! Look out below. 'sOK though, I just bought more gold last week.

eeuunikkeiexpat wrote:DYODD. Everything here is NIA. TINSTAAFL.

Good luck all. Protect yourselves because no one else can or will.

NIA

DYOOD - Do Your Own Due Diligence

TANSTAAFL- There Ain't (or isn't) No Such Thing as a Free Lunch (Coined by Robert Heinlein)

NIA - Not Investment Advice

Chuck J 3.0 wrote:

eeuunikkeiexpat wrote:. . . . TINSTAAFL. . . .

. . . . TANSTAAFL- There Ain't (or isn't) No Such Thing as a Free Lunch (Coined by Robert Heinlein)

Or, "TINSTAAFL = There Is No Such Thing As A Free Lunch".

EE.UU. speaks proper English, Chuck!