Will The Dollar Become A Worthless Currency?

      People worry the rising deficit will make the dollar drop in value. The annual federal deficit is 5% of GDP, about $1Trillion a year. The long run average federal tax revenue is 18% of GDP. Assuming a 2% CPI adjustment is applied to the deficit then the deficit is growing by 3% of GDP a year in real terms. For example, a debt of $21Trillion if it increases by 2% a year when inflation is also 2% is basically not an increase in real terms. Eliminating the Federal Budget Deficit Could Help Raising taxes by 3% from 18% of GDP to 21% would be enough to fix the problem. A compromise is to raise taxes by 1.5% of GDP

2019-01-11T17:33:10+00:00January 11th, 2019|mayflowercapital blog|0 Comments

Debt Hysteria Confuses Investors

      The US dollar is best, cleanest dirty shirt in the world’s dirty clothes hamper. Our capitalism makes the tax base stronger than that of other countries and this taxable income can be used to service government debt. If domestic debt increases too much, possibly the outcome of excessive debt will be a situation where the government gets all of its needs met first, crowding out most of the private sector, so excess debt might not be a problem for government which pays interest-only. The risk is that private sector would undergo a wave of bankruptcies that would clear out debt and ironically induce more desire to own safe government debt, resulting in a further increase in spread between government

2019-01-10T12:45:13+00:00January 10th, 2019|mayflowercapital blog|0 Comments

Dollar Flash Crash: What Next?

The dollar crashed last night against the Yen in a Flash Crash, dropping 3% (a very significant figure), before settling in to a 1% decline to 107.5 Yen to a dollar. This demonstrates a potential risk that the Yen could appreciate roughly 10% or even 20% to reach fair value. Its price is held down by Japan so that they can encourage exports through devaluation. If global investors get burned by a US stock crash they may decide to withdraw funds from the US, thus making the dollar go down and the Yen to go up. This would force Japan to have even deeper negative interest rates, thus pulling down global interest rates.    If Japan devalues that can cause

2019-01-03T13:54:46+00:00January 3rd, 2019|mayflowercapital blog|Comments Off on Dollar Flash Crash: What Next?

The Case for a Strong Dollar

   A popular myth is that the US deficits and recent tax cuts are so huge and out of control that the global investment community will dislike the US economy and sell off their dollar-based assets, making the dollar collapse. Assuming the recent tax cuts aren’t as effective as thought and start to reduce the cuts due to pre-set changes in the law (the whole thing reverts back in less than a decade due to Byrd amendment) then deficits may not get that much bigger. The tax law of December, 2017 actually raised taxes on corporations with offshore operations and closed loopholes such as large personal state income tax deductions, causing some personal form 1040 taxpayers to pay more. The

2018-11-12T15:16:14+00:00November 12th, 2018|mayflowercapital blog|Comments Off on The Case for a Strong Dollar

Dollar’s Decline: What Next?

The dollar has declined from 103 points in December, 2016 to 89 points. This implies that interest rates need to rise to encourage an inflow of foreign capital, even though our rates are the highest in the Developed world, except for Australia. The global markets may be concerned that the U.S. deficit is growing and so they want to avoid the U.S.    The dollar index has fluctuated between 70 to 130 since the gold window was closed in 1971. If one excludes the one-time effects of ending the gold standard in 1971, the extreme high interest rates of 15% in 1981, and the extreme tech stock bubble of 2000 then typically the dollar’s value fluctuates gradually in a trading

2018-01-24T15:08:30+00:00January 24th, 2018|mayflowercapital blog|Comments Off on Dollar’s Decline: What Next?

20th Anniversary Of Asian Currency Crash

Yesterday was the 20th anniversary of the great East Asian financial crash. It started in Thailand then spread to much of Asia over several months. The crash resulted in a huge drop in U.S. interest rates because of the potential disinflation caused by the deep global crash. In the U.S. the economy was running at a very hot pace which implies a significant increase in inflation and interest rates would occur. Yet inflation remained at low levels and interest rates declined. The lesson to learn was that massive money printing in Asia created a fake economic boom there that was killed off by excessive debt. The excess money was related to a significant increase in dollar denominated debt owed to

2017-07-03T10:22:06+00:00July 3rd, 2017|mayflowercapital blog|Comments Off on 20th Anniversary Of Asian Currency Crash

Japan’s Failure To Cure Deflation: Should You Buy Yen?

The Yen is now about 100 to the dollar. Yesterday the central bank of Japan announced new policies and the market’s reaction was to make the Yen go up. Usually when a central bank is trying to stimulate the economy that creates cheap and easy money conditions. These actions should cause foreigners to flee because they would then fear devaluation and inflation. This should have made the Yen go down. It rose from a May, 2015 price of 125 to the dollar despite Japan’s central bank trying massive Quantitative Easing and negative rates to devalue the currency. Many other nations worried the attempted devaluation would be in violation of agreements to avoid big devaluations. Thus it is quite a surprise

2017-01-10T23:32:52+00:00September 22nd, 2016|mayflowercapital blog|Comments Off on Japan’s Failure To Cure Deflation: Should You Buy Yen?

Why Did The Yen Go Up When The Nikkei Declined?

The Yen went up against the dollar in the past 12 months from 125 to 108. Meanwhile the Nikkei stock index went down from 20,800 in June, 2015 to 14,900 in February, 2016 and is now 15,928. Based on the Purchasing Power Parity theory (that consumer goods should cost the same everywhere when adjusted for foreign exchange) the Yen was too cheap, possibly as much as 33% too cheap, so it needed to go up to about where it is now. A massive new amount of Quantitative Easing since Abe became Prime Minister in late 2012 caused it to be indirectly devalued. It is tempting for investors to leap to the conclusion that because Japan’s stock market has been low

2016-04-12T14:10:39+00:00April 12th, 2016|mayflowercapital blog|Comments Off on Why Did The Yen Go Up When The Nikkei Declined?

Will China Devalue The Yuan?

Many people wonder if China will devalue its currency, the Yuan, by a huge percentage dramatically as they did by 50% in 1994. The reason this is unlikely to happen is because the countries with the big three currencies (the U.S., EU and Japan) don’t want that to happen and will be willing help China to prop up the Yuan if it needs that. Basically the world is dependent on having the major EM currencies avoid devaluation because that might drive the dollar higher and thus make it even more difficult for EM debtors to repay loans to Developed country banks. If another Lehman-style crisis happened because of this, the world’s central banks would find that the zero bound problem

2017-01-10T23:33:02+00:00March 23rd, 2016|mayflowercapital blog|Comments Off on Will China Devalue The Yuan?

Why Yen Went Up When Interest Rates Went Down

Japan’s central bank started a policy of negative interest rates on January 29, 2016 and promptly saw the Nikkei stock market decline from 17,500 to 14,900. The Yen actually went up value even though lower interest rates are supposed to make a currency drop in value. The reason why the Yen went up is because it is under priced compared to China’s currency so the Yen needed to rise at least 10% from the lows of 125 in May, 2015. It has now done so. The other reason for the Yen’s rise was because China needs to have a competitive devaluation to improve exports. China is in worse shape because they have a massive debt bubble and a far lower

2017-01-10T23:33:03+00:00February 12th, 2016|mayflowercapital blog|Comments Off on Why Yen Went Up When Interest Rates Went Down