How to Win a Currency War | Hacker News Reader

How to Win a Currency War

lynalden.com

Looks like everyone has figured out the game or illusion.

There are 5 tiers of the world: 1. US 2. US allies 3. Developing non allies 4. Enemies 5. Underdeveloped countries.

One of the major reasons developing countries aren't rising faster is because they are not in the ring of US allies. Thus, they don't receive the first bite in newly printed US dollars.

Since the US is not the majority importer, I wonder what happens if a significant majority of the importing developing non allied world runs out of dollars.

Lyn's entire blog is worth reading. Very in-depth analysis and actionable conclusions. She builds mental models using data. I've never seen economics content like that anywhere.

For just one example, and a great backgrounder to the currency wars article, check out:

https://www.lynalden.com/global-dollar-short-squeeze/

I love that Lyn's articles are getting top billing on HN. She's got very good analysis of the macroeconomic situation. In times like this, very important to educate yourself on these topics.

Really useful twitter as well: https://twitter.com/LynAldenContact

Honest question...If you aren't educated on the topic, how can you tell if there is good analysis or not? (Versus just reading and believing random cranks). Is there any way to test her hypotheses against reality?

There’s nothing in her linked in that would lead me to believe she has any idea of what she’s talking about. She was an engineer until a year ago.

And Elon Musk was a software engineer before he started rocket ship and electric car companies. Intelligent people are fully capable of making jumps between disciplines and excelling in several of them. Sorry, but looking at someone's credentials rather than looking at their reasoning skills alone will lead you astray. You've got to reason. You've got to engage your critical thinking skills. No one is saying Lyn is the oracle of our times. She's got very good analysis, but there are many others and a lot of them are on Twitter. I recommend to engage with that crowd. I've seen Lyn debate with them on Twitter, and it's always an interesting conversation.

Other thinkers in this space I'd recommend: Raoul Pal: https://twitter.com/RaoulGMI Danielle DiMartino Booth: https://twitter.com/DiMartinoBooth Luke Gromen: https://twitter.com/LukeGromen Brent Johnson: https://twitter.com/SantiagoAuFund Ray Dalio: https://twitter.com/RayDalio

...etc. Search around. Educate yourself!

Of course he invested in, rather than founding, those companies.

He runs both of those companies. He's not a passive investor. He's CEO. He's highly involved at every level of both of them.

That seems true, at least for the car company, but the specific statement was that he had founded them.

You're bikeshedding now. Could Elon Musk hold his own in a conversation with any aerospace engineer? Absolutely. Could he hold his own in a conversation with a process engineer? Absolutely. The guy is super smart, reads voraciously, and has self taught himself many different disciplines. Its not a superpower by the way, you can too. We live in the information age. Study any subject well enough and you can hold your own, too.

Elon isn't personally engineering the cars and rockets himself. He's running a business, which he does have experience in.

Running PayPal vs Space X vs Tesla requires a ton of different skills and competencies. Tesla is a huge engineering effort and assembly line engineering effort. They've pioneered a number of innovative technologies and approaches. Likewise, Space X has pioneered incredible technology and you can't simply be a passive CEO to achieve those things. It's not like running a laundromat. Musk is a central figure in both of those companies. If you watch his interviews, he has a deep understanding of every level of engineering in both of those companies.

And yet every time they/he gets in trouble is when he veers out of his lane into micromanaging things he has no business in. If his deep knowledge of engineering is critical to their success, that's actually a massive failure of leadership. It's not how you build sustainable things that outlast yourself.

No, it's not a massive failure. There are many different styles of leadership. There is not one single formula that works for all companies and all circumstances. To look at a historical example, Thomas Edison was a profound engineer and a very capable inventor as well as CEO. Obviously, there's a difference between Musk and say, Richard Branson. There's a difference between Bill Gates and Steve Jobs. They found success with different models of leadership.

The guy from The Big Short was an MD.

I have no idea who the OP is but a lot of the stuff is not accurate (I saw the previous post that was linked here). It is a slightly less factual ZeroHedge.

For all it's faults, ZeroHedge actually gets the mechanics roughly correct (although often doesn't get the interpretation right leading to odd conclusions).

But a lot of the OP is just...not correct (as an example, the OP says that countries were on the gold standard in the 1920/30s and devalued as a response to the crisis...wrong, they were on the gold exchange standard and devaluation wasn't the response, it was suspension of convertibility) and vague (all these posts are very wordy, poorly written, and seem intended to reach a conclusion that was arrived at before any evidence was examined).

I don't know why people are so fascinated with the idea that their currency is worthless. In the US, I assume it is related to the fact that much of America has German roots...where this "currency crash literature" is also a fetish. But if you are worried about inflation, own gold, own inflation linkers, and own good businesses. That is it.

Also, maybe the dollar will fall in value but if you are in the US and have USD liabilities, it makes no difference to you. Stuff that cost $1 will still cost $1.

> maybe the dollar will fall in value but if you are in the US and have USD liabilities

Are you proposing that the value of USD rises and falls in a geopolitical and macroeconomic vacuum?

...no. You are overthinking this significantly. If the USD falls 20% against the GBP or JPY or whatever...why do you care? It doesn't affect you...unless you have liabilities priced in terms of that other currency.

The fall and the rise of the USD is very important outside the US. It makes no difference to 95% of people within the US.

> The fall and the rise of the USD is very important outside the US. It makes no difference to 95% of people within the US.

Except that their lawn mowers and phones are manufactured overseas. So they are implicitly, if loosely, exposed to forex.

If the swing of the dollar makes French cheese or wine too expensive people will switch. If they need a new refrigerator they have less choice.

Yep, it doesn't work that way. First, the US isn't a big trader relative to the size of the economy. Second, depreciation doesn't passthrough to inflation 1-to-1. Three, because of the relative size of the US economy and the international use of USD, US imports are generally not sensitive to exchange rates in the way that you see in other countries.

Btw, I live somewhere where the currency has depreciated significantly, and we import almost double what the US does...prices go up a little but not much. And for most people, the difference is just zero (the difference for companies is often not zero...companies are often constrained in how they change prices, which is the reason for a lot of the point above, so they end up taking a lot of cost changes to their profit).

> But a lot of the OP is just...not correct (as an example, the OP says that countries were on the gold standard in the 1920/30s and devalued as a response to the crisis...wrong, they were on the gold exchange standard and devaluation wasn't the response, it was suspension of convertibility)

I believe that you are incorrect. The US, for example, suspended convertibility at $20/oz, confiscated holdings of gold (!), then changed the price to $35/oz, and resumed convertibility. That's not just suspension of convertibility, it's also devaluation.

I would read what I said more carefully. I did not say that countries did not devalue.

Well, OK, then you said that in response to the crisis, they suspended convertibility. But the US suspended convertibility, devalued, and resumed convertibility, long before the crisis was over. That means that the point had to be the devaluation, not the suspension of convertibility. (Or else they were incredibly stupid in how they did it.)

Right, and I said "in response" to the crisis not "before the crisis was over"...again, you are continuing well after the point of logic. Read. Carefully.

And the key point was most certainly not the devaluation. I can only suggest you read more about the Great Depression to understand why (there was the small matter of most banks in the country failing, devaluing your currency does not help with that, suspending convertibility does). Basic. Basic. Basic.

You might try speaking more clearly. And you might actually give some data instead of just dripping condescension. So far, all you've said is "I know, and I'm right", which is a really worthless conversation.

Oh, yeah, you said "read up on the Great Depression". Well, there's rather a lot that could be read on that. You might be a bit more specific, if you wanted to be helpful rather than just smugly condescending.

And so far, you haven't said anything to make it possible to tell whether you're a really knowledgeable guy I should listen to, or whether you're just a loudmouth crackpot who's sure that he's right and everyone else is wrong.

Most people's ancestors of German heritage came over before the hyperinflation of the interwar period. I don't think there's much there.

Yep, it started well before hyperinflation (and is in countries that are adjacent to Germany).

> If you aren't educated on the topic, how can you tell if there is good analysis or not?

Even people who are educated are systematically unable to determine if a macroeconomic analysis is actually good, which is why you have multiple groups of extremely smart economists who completely disagree on what represents a sound basis for macroeconomic theory.

Economics as a field is generally unable to test these theories against reality, probably because any predictive failure can be, and is, written off as “there were confounding variables, but the fundamentals of the theory are still good”.

That's because there's a million places you can be wrong.

Her position seems to be that medium term, the dollar is the major currency with the most room to fall. And so over the next few years, it probably will fall the most.

The argument is based on the US having the largest twin deficit -- a huge trade deficit and a huge fiscal deficit.

Medium term, different countries are going to see their trade & fiscal deficits change dramatically.

If your economy runs on oil exports, good luck maintaining a huge trade surplus. Ditto that for almost any commodity for the next couple years. If your economy runs on auto manufacturing, good luck with that -- similarly anything with complex supply chains. This is most emerging countries.

Japan, for example, might not need much stimulus. And the EU might need much more than the US. Who knows right now?

So, yes, her argument is sound if everything stays as it is, and the only thing that changes is how much federal governments print and spend.

But everything is likely to change. A lot. So unless you can predict how these deficits will change, it's not that helpful.

Meh. People have been making fuss about the "twin deficit" since the Reagan years, but the USD has been mostly fine vs other currencies.

Evaluate the argument. Does the reasoning make sense, and is it supported by the evidence introduced? Think of counter-possibilities — what could or would falsify the author's supposition? Find out who disagrees. Does their reasoning make sense, and is it supported by the evidence they proffer? Etc.

This is known as "critical thinking."

It's important to know the limits of your knowledge and reasoning capabilities and defer to relevant experts, which is known as epistemic learned helplessness[1]. This is also much faster, as a lot of bullshit sounds like truth if you're unfamiliar with the field.

[1]: https://web.archive.org/web/20180416171148/http://squid314.l...

Better to just account for expert opinions rather than defer to them; experts typically don't have a magical ability to see through uncertainty. And it is possible to find experts who support a very wide range of opinions. This can be compounded - eg, government officials have fair incentive not to report bad news unless they are completely certain that things have gone wrong. So it would be a mistake to do your recession planning while deferring to the experts at the US Fed.

Another topical example is the WHO in this COVID-19 crisis. The WHO was pretty consistently reporting on what had certainly gone wrong rather than what had likely gone wrong so it was preempted by a bunch of countries closing their borders against the WHO's advice.

Ex Wall St options trader here. Just read through her top posts and was left with an impression that she's very "green". Her content comes off as "content marketing" and not someone who's managed and traded any sizable money. I wouldn't trade off her ideas, b/c it's heavy on philosophy and not grounded in the realities of trading.

Agreed!

I spent several hours reading through her posts yesterday and came away with a much better understanding of fiscal and monetary policies. I did not understand how many levers countries have to modify their currencies.

I also enjoyed her breakdown of contrarian investing[0] and how it can be applied.

0: https://www.lynalden.com/contrarian-investing/

Most of her calls in contrarian-investing got absolutely demolished this year, check out the EM vs DM equities performance for example.

What I really disliked about this analysis was its lack of discussion around core PCE, something the fed watches very carefully when it comes to managing its monetary policy. It talks about "dovish", but really perhaps the fed isn't being dovish at all and is just desperately trying to maintain its 2% price inflation rates.

A few problems - ok, so the there are more problems in the USD but:

a) What is the alternative? This is a relative game. Is the US going to fall harder than the EU? Probably not.

b) In an uncertain world ... people want greebacks even more for the structural reasons implied.

c) This trade deficit thinking is odd because it doesn't include surpluses. If sells something for 50 cents that would otherwise cost $100 in the US, and there is no other trade, then it still makes sense for everyone to buy said things for a long time. So China has to get something back for it, maybe it ends up meaning those XMen movies are going to cost them a lot more than they thought. Or the iPhones, or the US companies they buy or whatever else.

Ok so sell USD to buy what?

EUR? How about after they figure out Italy

JPY? More debt than US and lower rates.

CNH? Ha

Gold? Sure, but it’s not a currency

KRW (Korean) is interesting, although I'm hardly an expert in currency trading.

Most gold proponents would say gold being money and not a "currency" is the whole point.

That argument is literally called out as "the biggest push-back I receive" and the largest section of the article is devoted to addressing it.

But she misses the demographics. The US has some of the best demographics of the G20. Germany, Japan, and China all have much worse demographics, and will change into net spenders (i.e. retirees) instead of net savers.

Within about 4-10 years (depending on the country), they will be producing less and less for export to the US.

Heck, Germany’s GDP is roughly 50% exports. That’s unsustainable.

US policies are turning more inward, and countries that rely on exports to us will suffer.

The dollar will be strong for the foreseeable future. It may go up and down a bit, but overall it will be very high. The dynamic driving currencies is very different from even 5 years ago.

As production moves out of China, they will get weaker. We have already seen peak China (and US voters will insist that drugs and PPE are produced in the US so we don’t run into a supply chain issue like we’ve seen over the past two months.)

The EU banks (well, certainly the German ones) are basically insolvent. They were never recapitalized after 2008, and have limited power.

So there is nobody around to challenge the US. As well capitalized consumers, the US controls their future.

Why are you set on holding currencies? I think Dalio is a clown, but I do like his pithy “Cash is Trash”. There’s not really any compelling reason to hold a modern fiat currency except to satisfy liquidity requirements. Gold, Bitcoin, plain old equities, whatever, all provide some measure of relief from the inflationary treadmill.

Also, gold is expensive like hell right now. As COVID winds down, I would expect markets react vigorously and gold in free fall. It's also important to know that long term holding of gold has fairly lower relative returns compared to S&P and also no dividends. So only suckers would get in to gold right now.

Unless you are a very long term gold trader with very deep expertise, I would almost guarantee that the market knows a lot more about the correct price of gold than you do. It's not "expensive as hell" but likely fairly priced.

This view that market knows the best is actually quite misguided. Market does prices assets correctly after long enough period of time but it oscillates and bounces a lot before that happens. It's wrong to say that any point in time market knows the best and current price are exactly the fair price. If this was true, asset prices simply don't keep swinging 10% for days on. Gold isn't worth $100 at 9 AM and suddenly becomes worth $70 at noon.

Japan has the opposite problem of the United States. Where as we spend with reckless abandon, like an alcoholic chugging shots, they have the opposite problem of literally hoarding cash and having massive savings.

Japan has $1.2 Trillion worth of U.S. treasury bonds. I wonder what will be their next move if the U.S. dollar weakens.

There is no other move. The reason they own that much is because USTs are deep and liquid. There is virtually no other market in the world where you can deploy $1trn (certainly no market outside the US).

Sometimes the only winning move is not to play :-)

At some point it becomes irrational to keep holding USTs. I'm well aware it seems right now there aren't any other good options, but that can definitely change quickly.

They're in a good position as a net creditor nation. While they have a large national debt and have been undergoing QE, they have a steady income stream from treasury bills.

The income stream is unlikely to be steady; the real value of the fixed stream of dollars is (probably) going to drop.

It isn't really conceivable at this point that the US reduces their debt:GDP load without a currency crisis. Their period of service as the reserve currency is probably also drawing to a close; based on the poor fundamentals that the article mentions.

I don't think you understand.

I am not saying there are no other good options, there are literally no options.

You understand that having $1trn isn't like your TD Ameritrade account. Thought experiment: they put the money into Japanese banks. First, the JPY starts trading at 50 against the USD. Japanese industry is over. Second, Japanese banks literally cannot pay the interest on these deposits because they can't find enough people to lend to.

There aren't enough European govt bonds. They aren't enough corporate bonds (and they aren't liquid enough). Literally, there is no asset class in the world large enough for them. The only other asset class that was large enough was MBS...which some people feel skittish about since 2008 (but which Japan and China do own large amounts of...again, because there is nothing else).

Just as an example: in the 1970s the oil crisis caused a huge boom in earnings for Middle Eastern nations. Most govts there weren't financially sophisticated, they had no idea what to do with all this money so they started depositing it in US banks. These banks had no idea what to do with it either. They couldn't find enough borrowers (rates were pretty high then) so they started lending to govts in emerging markets. This trigged a decade-and-a-half long financial crisis from 1980 when these borrowers started defaulting (in 1980, Citibank was effectively bankrupt because of these loans). Again, this isn't like your Ameritrade account...when you have a lot of money, you start changing how financial markets fundamentally work. So you have to be very very careful.

Hopefully that makes it clear.

When you say it like that, it makes U.S. Treasuries sound like the S3 of the financial world. Simple, reliable, and comparatively inexhaustible. malloc() for the financial web.

Also very opaque to the average person.

I'm aware of the impracticability of everyone divesting out of USTs right now. Your points are entirely valid and are the reason the system is still being held together.

My point is there exists some set of circumstances in which that assumption changes.

As an example, at some fed balance sheet level + inflation level, your options are either: 1) Do nothing and end up with nothing 2) Do something and end up with more than nothing

I've lost count of total fed pledges at this point, something on the order of $8T? Say things drag on and that goes to $12T+? And say inflation takes off, is the fed really going to fight inflation? It can't.

You start seeing high double digit inflation while the fed is printing money and keeping rates at zero, and at some point you have to move your USTs into something. If you don't, you'll be left with nothing.

I realize this is incredibly hard to imagine given the current system, but things that can't go on forever wont'.

The level is when we switch to a food, guns, and ammo economy. USTs are so deeply interwoven into the very fabric of the world economic systems the only way to get out of it is for the whole system to fall apart.

Well, that’s simple. If the dollar weakens and there is inflation, interest rates will rise. You don’t want to hold onto bonds when the interest rate rises. The price of a bond is inversely correlated with the interest rate.

Maybe the libertarian party is awful at campaigning but they are absolutely correct on economic policy.

Or rather predicting the outcome of current economic policy.

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