EC The Simple Equation

My entire premise was to make this mockingly simple. Econometrics demands mathematical precision yet always comes up empty because its calculations, no matter how elegantly complex, proceed from the falsest of subjective assumptions. It won’t matter how awesome the computing power if the thing you’re trying to compute doesn’t work or act the way you believe (because everyone says so rather than the evidence).

When any currency falls especially against the dollar even today the mainstream convention attributes it to some kind of central banker intent (“devaluation” or its fancier cousin “competitive devaluation”). The mythology behind the Greenspan version of the central bank just won’t die; that if something happens it’s because the all-powerful monetary agency theoretically at the center of every monetary universe wants the thing to happen.

No. The central bankers and the formulas they come up with are along for the ride just like everyone else. Thus, the sarcastically derived: CNY DOWN = BAD.

To begin with, even though CNY is China’s currency it’s not only bad for China but, eventually, it ends up being bad for the entire global economy. If it ends up being more than short-run market fluctuations, like 2014 and 2018, then whatever or however “robust” the global economy is being spun at that time you can be assured that even the media cheerleaders won’t be able to keep up the sunny pretense for very long thereafter.

And it has little to do with Chinese authorities insofar as monetary policy – effect, however, is another matter (see: below). In other words, a falling yuan exchange value isn’t really about the PBOC, nor even China’s yuan. Instead, CNY DOWN is all about what must be on the other side driving it in that direction – eurodollar.

If CNY is going down, then eurodollar (and US$ exchange value) is going up and that’s the real wrecking ball; the global dollar shortage which never really leaves the global dollar system is rewarming itself up to some degree. If it’s got enough degrees of illiquid heat to the point that CNY’s being moved in some noticeable fashion, then the simplicity of our own equation only offends the pseudo-precision of econometrics.


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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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William K. 3 weeks ago Member's comment

hat is certain is that without an accurate math model the simulations will not be correct. Luck might result in an occasional bit that matched what actually happened, but correlation does not prove causation. And the big challenge is that to build an accurate model one needs an adequate understanding. AND BECAUSE ECONOMICS IS NOT REALLY a precise field, unlike accounting, prejudices and fears as well as happy guesses ro prevail.

Harry Goldstein 3 weeks ago Member's comment

Great read, thanks.