Dollar Hegemony and the Rise of China
by ilene - July 15th, 2010 3:15 pm
Michael Hudson writes a letter.
Dollar Hegemony and the Rise of China
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Courtesy of Michael Hudson
Hudson to Premier Wen Jaibao, March 15, 2010
Dear Premier Wen Jiabao,
I write this letter to counteract some of the solutions that Western politicians are recommending for China to cope with its buildup of excess foreign-exchange reserves. Raising the renminbi’s exchange rate against the dollar will not cure the China-US payments imbalance. The dollar glut will continue, and so will the currency fluctuation among the dollar, euro and sterling, leaving no stable store of value. The cause of this instability is that each of these three currency areas has grown top-heavy with by debts in excess of the ability to pay.
What then should China should it do with its buildup of excess reserves, if not recycle its inflows into their bonds? Four possibilities have been suggested: (1) to revalue the renminbi, (2) to flood China’s economy with credit (as Japan did after the Plaza Accord of 1985), (3) to buy foreign resources and assets, and (4) to use excess dollars to buy back foreign investments in China, given US reluctance to permit Chinese investment in America’s own most promising economic sectors.
I explain below why China’s best course is to avoid accumulating further foreign exchange reserves. The most workable solution is to use its official reserves to buy back US and other foreign investments in China’s financial system and other key sectors. This policy will seem more natural as a response to an escalation of US protectionist moves to block Chinese imports or block China’s sovereign wealth funds from buying key US assets.
China’s excess reserves will impose a foreign-exchange loss (as valued in renminbi)
Every nation needs foreign currency reserves to ward off currency raids, as the Asia Crisis showed in 1997. The usual kind of raid forces currencies down. Speculators see a central bank with large foreign currency holdings, and seek to empty them out by borrowing even larger sums, selling the target currency short to drive down its price. This is the tactic that George Soros pioneered against the British pound when he broke the Bank of England.
Malaysia’s counter-tactic was not to let speculators cover their bets by buying the target currency. Its Malaysia’s success in resisting that crisis showed that currency controls prevent speculators from “cashing out” on their exchange-rate bets, blocking their attempt to…
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DiggThe capital tsunami is a bigger threat than the nuclear option
by ilene - July 14th, 2010 3:15 pm
The capital tsunami is a bigger threat than the nuclear option
Courtesy of Michael Pettis at China Financial Markets
Since this is another long posting, it might make sense to summarize briefly its two parts. In the first part, expanding on an OpEd piece of mine published by the Wall Street Journal on Monday, I argue that China’s “nuclear option”, which has generated a great deal of nervousness among investors and policy-making circles in the US, is a myth, and what the US should be much more concerned about is its diametric opposite — a tsunami of capital flooding into the country. I try to discuss the economic implications and perhaps the implications for asset prices.
In the second part of this posting I discuss the slowing of the Chinese economy within the context of what I believe to be its stop-go approach to economic policymaking. The one-minute take: I think policymakers will soon be stomping again on the accelerator, although there seems to be a real debate going on about whether this would be the proper policy response.
———
An awful lot of investors and policymakers are frightened by the thought of China’s so-called nuclear option. Beijing, according to this argument, can seriously disrupt the USG bond market by dumping Treasury bonds, and it may even do so, either in retaliation for US protectionist measures or in fear that US fiscal policies will undermine the value of their Treasury bond holdings. Policymakers and investors, in this view, need to be very prepared for just such an eventuality
So worried have many been that last week SAFE even had to come out and calm people down. According to an article in the Financial Times:
China has delivered a qualified vote of confidence in the dollar and US financial markets, ruling out the “nuclear option” of dumping its huge holdings of US government debt accumulated over the last decade.
But the State Administration of Foreign Exchange, which administers China’s $2450bn in reserves, the largest in the world, also called on Washington and other governments to pursue “responsible” economic policies. The statement on Wednesday, one of a series that Safe has issued in recent days in an apparent effort to address criticism about its lack of transparency, also played down the chances of China making major further investments in gold.
It’s good that SAFE is trying to soothe worried investors and policymakers, although, as I have pointed…
Irony: Our Huge Military Is What Made Us an Empire… But Our Huge Military is What Is Bankrupting Us, Thus DESTROYING Our Status as an Empire
by ilene - July 10th, 2010 4:47 am
Irony: Our Huge Military Is What Made Us an Empire … But Our Huge Military is What Is Bankrupting Us, Thus DESTROYING Our Status as an Empire
Courtesy of Washington’s Blog
As I’ve previously pointed out, America’s military-industrial complex is ruining our economy.
And U.S. military and intelligence leaders say that the economic crisis is the biggest national security threat to the United States. See this, this and this.
As RT points out, it is ironic that America’s huge military spending is what made us an empire … but our huge military is what is bankrupting us … thus destroying our status as an empire:
No wonder people from opposite ends of the political spectrum like Barney Frank and Ron Paul are calling for a reduction in military spending.
Social Unrest Spreads to Slovenia and Spain; Images Around the Globe; US Not Immune to Protests
by ilene - May 20th, 2010 4:08 pm
Social Unrest Spreads to Slovenia and Spain; Images Around the Globe; US Not Immune to Protests
Courtesy of Mish
The wave of social unrest is spreading. A new round of protests has hit Spain with a public sector strike set for June 8. In Slovenia, students are protesting new rules that limit their work hours and pay.
"Luka Gubo" an economist from Slovenia writes:
Hi Mish!
First I must say that I love your blog. Great job!
I just wanted you to know that Slovenian students are protesting too.
The main reason for organizing protests is changes in law regarding student jobs. Current tax law makes average workers uncompetitive because businesses pay about 15% income tax for students and more then 35% income tax for average worker (average net income is 930€).
Bear in mind that the average time for a student to complete his higher education here is 6 years and that more then 20% of "students" do not to school at all. Instead, they just enjoy student benefits like lower income taxes, food stamps, etc.
I think that everyone would agree a new law is needed in Slovenia. However, the new will limit the maximum hours worked by students to one third of full work time, and put a limit on maximum hourly wage at 8€ per hour.
That one *ing great free-market solution, wouldn’t you agree?
Here is the Slovenian parliament building after 2 hours:
The protests went smooth for a while, but it did not last long. You can find a series of 39 images at http://www.finance.si/galerije/2139/3/
Luka Gubo
More Images
Greece, Spain hit by strikes over cuts
CNN Reports Greece, Spain hit by strikes over cuts
Public sector union ADEDY and private sector union GSEE called the strikes against the government’s austerity measures, in particular the pension reforms announced last week. The reforms include raising the retirement age, which varies in different professions.
It is the first major strike since May 5, when violent protests against the austerity measures resulted in the deaths of three people in the capital, Athens.
Spanish government workers were set to protest at 6 p.m. (noon ET) outside the Ministry of the Treasury in Madrid and outside the central government offices in their respective towns. Spanish government workers were set to protest at 6
…
Americans Have Been Bailing Out Foreign Banks for Years … And We’re Getting Ready To Do It Again
by ilene - May 9th, 2010 1:26 am
Americans Have Been Bailing Out Foreign Banks for Years … And We’re Getting Ready To Do It Again
Courtesy of Washington’s Blog
As the Wall Street Journal points out, the Federal Reserve might open up its "swap lines" again to bail out the Europeans:
The Fed is considering whether to reopen a lending program put in place during the financial crisis in which it shipped dollars overseas through foreign central banks like the European Central Bank, Swiss National Bank and Bank of England. The central banks, in turn, lent the dollars out to banks in their home countries in need of dollar funding. It was aimed at preventing further financial contagion.
The Fed has felt that it is premature to reopen this program — which was shut down in February as the financial crisis appeared to wane — because it wasn’t clear that foreign banks were in need of dollar funds. Still, trading floors on Wall Street are abuzz with anticipation today that the Fed might use the program again as Europe’s problems take on a more global dimension.
***
The international lending lines are known among central bankers as swaps.
Fed officials believe the swap program was one of its most successful interventions aimed at stemming a global crisis, when many banks overseas became strained for dollar funding. In their normal course of business, they borrowed dollars in short-term lending markets and used those dollars to finance holdings of long-term U.S. dollar assets, like Treasury or mortgage bonds. When those markets dried up, the swap lines helped to prevent overseas bank funding crises in 2008.
Fed officials see the swaps as a low-risk program, because its counterparties in these loans are foreign central banks, and not private banks. At a crescendo in the crisis in December 2008, the Fed had shipped $583 billion overseas in the form of these swaps.
As the BBC’s Robert Peston writes:
There is talk of the ECB providing some kind of one year repo facility (where government bonds are swapped for 12-month loans) in collaboration with the US Federal Reserve.
See this for more information on swap lines.
Indeed, the Federal Reserve has been helping to bail out foreign central banks and private banks for years.
For example, $40 billion in bailout money given to AIG went to…
Here Kitty-Kitty (CAT)
by ilene - April 26th, 2010 3:22 pm
Here Kitty-Kitty (CAT)
Courtesy of Karl Denninger at The Market Ticker
You have to have a rather odd view of "improving" to deal with the report given here as "reflecting economic improvement":
Caterpillar Inc. reported a profit in the first quarter, citing improved economic conditions, particularly in emerging markets, as the heavy machinery maker also raised its forecast for the year.
Ok, so we should have seen a beat on both revenue and earnings, right? Remember, the first quarter of 2009 was the depth of the recession – the bottom – if you believe the headlines.
So what did we get?
For the first quarter, Caterpillar reported a profit of $233 million, or 36 cents a share, compared with a prior-year loss of $112 million, or 19 cents. Excluding items such as tax charges related to new health-care legislation and prior-year restructuring impacts, per-share earnings rose to 50 cents from 39 cents.
That’s good! A profit .vs. a loss; exactly what one would expect. How were revenues?
Revenue dropped 11% to $8.24 billion.
Analysts polled by Thomson Reuters had forecast earnings of 39 cents a share on $8.84 billion in revenue.
Uhhhhhhhh….. wait a second.
Economic recovery eh?
Machinery sales were down 1% from a year ago – but I thought a year ago was the depths of the recession and we have been recovering since? So how do we get a negative year-over-year comparison?
Worse, in North America (that’s here!) machinery sales were down 15% with dealer inventories half of year ago levels. That is, not only is heavy equipment not selling, dealers don’t think it will be in the near future either. So how did we get big increases? Asia, up 40%. Yep, that matters, and it’s what drove the results.
Engine sales were even worse, off 28%, and even in Asia they were down, in that case 15%.
The street is cheering this report on the back of everyone and their brother pumping the company (most especially the fools on CNBS) but the facts are what they are. With no revenue increases you can argue for improving profit due to firing huge numbers of people all you want, but the top-line, particularly in America, is horribly bad and does not point to any sort of turn-around in construction equipment sales of any sort, nor any improvement in over-the-road trucks and other engine markets (such as marine.)
Disclosure: No position
Why Economic Forecasts Often Fail
by ilene - April 14th, 2010 11:22 am
Why Economic Forecasts Often Fail
Linear thinking often utterly misses the mark in financial forecasting.
Courtesy of Elliott Wave International
Let’s begin with a paradox: The one constant in our society is dramatic change. This is the main reason why projecting present conditions into the future often fails.
"If someone had asked you in 1972 to project the future of China, would anyone have said, in a single generation, they will be more productive than the United States and be a highly capitalist country?
"Project the U.S. space program in 1969, in fact many people did — there are plenty of papers you can read from 1969 to 1970 saying, well, it’s obvious at this pace we’ll both have colonies on the Moon very soon and we’ll have men on Mars…
"One could just as well ask someone to project, say, the Roman stock market in 100 A.D. I doubt if you’d have found anyone who said, well, it’s essentially going to go to zero."
-- Robert Prechter at the London School of Economics, lecture "Toward a New Science of Social Prediction."
Examples of linear thinking may be well-known like the ones above, or they may happen in our individual spheres. Mom sees Johnny eating animal crackers Monday, Tuesday and Wednesday. The box is now empty. She buys more — but the box remains unopened for days. Johnny wants a break from animal crackers. It’s an elementary example, but a demonstration of linear thinking nonetheless.
The socially awkward classmate you knew in high school is now the boss of the former class president who was dubbed "most likely to succeed." Projections for both of their futures would have widely missed the mark.
SUVs are selling like snow cones on an August afternoon in Luckenbach, Texas… "let’s make more," says Detroit. "Dramatic change" takes over in the form of sky-high gas prices followed by a recession and a social distaste for excess — and SUV sales sink.
Point is: When it comes to your money, pay attention to the pitfalls of linear thinking.
The markets of today may not resemble the markets of tomorrow.
Keep in mind the concept of dramatic change. This cannot be over-emphasized and bears repeating: Major change is not an occasional occurrence throughout history; paradoxically, it’s the only constant.
Even with the benefit of reviewing the above examples, it can be difficult to imagine, ahead of time,…
Battle in EU Erupts Between Germany and France Over the “Club Med” Nations and Germany’s Export Policy
by ilene - March 19th, 2010 1:44 pm
Battle in EU Erupts Between Germany and France Over the "Club Med" Nations and Germany’s Export Policy
Courtesy of Mish
The Club Med nations (Spain, Greece, Portugal), are in a horrible economic bind. France, hoping to be a white knight, hopped into the fray. France is upset that Germany’s export policies will force deflation on the Club Med group. Germany essentially says tough luck.
With that backdrop please consider Angela Merkel defies IMF and France as anger rises over German export surplus.
German Chancellor Angela Merkel has defied France and the IMF, refusing to modify Germany’s strategy of export reliance or boost growth to help alleviate the deep crisis sweeping Southern Europe.
"Where we are strong, we will not give up our strengths just because our exports are perhaps preferred to those of other countries," she told the German Bundestag.
"The problem has to be solved from the Greek side, and everything has to be oriented in that direction rather than thinking of hasty help that does not achieve anything in the long run and merely weakens the euro even more," she said.
Instead she called for EU treaty changes so that serial violators of EMU rules could be expelled from the euro, and insisted Germany would stick to its own path of hairshirt austerity.
The tough words came as the IMF’s chief Dominique Strauss-Kahn said it was time for Berlin to rethink its single-minded pursuit of exports, warning that both Germany and China need to play their part in rebalancing the global system rather than relying on huge structural surpluses. "This must change. Internal demand must be strengthened with more consumption," he told the European Parliament.
French finance minister Christine Lagarde infuriated Berlin earlier this week by suggesting that Germany’s relentlesss wage squeeze was making it impossible for Club Med states to claw back lost competitiveness within monetary union, forcing them into a deflation policy that must ultimately rebound against everybody.
Charles Dumas from Lombard Street Research said the Club Med states and Ireland cannot deflate wages below German levels without causing havoc to their economies, so the EU policy creates a profound bias towards a deflationary slump for the whole system.
"The Germans are not very good at arithmetic. If they want to run surpluses near $200bn (£130bn), others must run deficits near $200bn. It is not appropriate that Germany’s
…
“Take out the baseball bat on Paul Krugman”
by ilene - March 19th, 2010 12:27 pm
"Take out the baseball bat on Paul Krugman"
Courtesy of Tim Iacono at The Mess That Greenspan Made
Economist Steven Roach of Morgan Stanley Asia has some not-so-kind words for economist Paul Krugman and his view that the Chinese currency should be allowed to strengthen considerably from its current level.
Says Roach: "America doesn’t have a China problem, it has a savings problem… We should take out the baseball bat on Paul Krugman. I mean I think that the advice is completely wrong …. We’re lashing out at China rather than tending to our own business".
According to this report, Krugman replied, "I’m a little surprised at Steve for saying that. What I said is actually based on pretty careful economic analysis. We have a world economy which is depressed by China artificially keeping its currency undervalued."
*****
Support to Steve Roach via Zero Hedge:
Hey Paul, what about the fact that the world would have been below a "depression" state, had China not been the defibrilator that kept the heart of the catatonic global economy beating for the past two years. Is there a chapter in the "Pretty Careful Economic Analysis" textbook on selective fact cherry-picking? Right, we figured. In the meantime the NYT’s potential "paywall" content is rapidly amortizing to the point where people will soon have absolutely no desire to pay for the NYT’s "expert" paid-for opinions. Which means Goldman is about to put the NYT on the conviction buy list.
IS CONGRESS ABOUT TO DERAIL THE ECONOMY?
by ilene - March 18th, 2010 4:46 pm
Here’s an excellent discussion on the economy and China. We present many views here, and Pragcap’s are some of the most thoughtful and balanced. And if you haven’t yet, check out Op-Toon’s Review (fun images and satirical commentary). – Ilene
IS CONGRESS ABOUT TO DERAIL THE ECONOMY?
Courtesy of The Pragmatic Capitalist
The United States government has made a curious series of interventionist moves over the course of the last 18 months. Some have been beneficial, but not surprisingly, few of these policies are actually helping the economy recover from the Great Recession.
As I’ve previously mentioned, Keynesianism can work. There is good government spending and bad government spending, despite the constant shrieking from Austrian economists with regards to all spending being bad. Giving money (on a silver platter) to banks who are not reserve constrained is exhibit A of bad spending. Spending money on a healthcare plan in the middle of a recession is a close runner-up. The banking bailouts not only set a terrible social precedent, but were also implemented with the belief that banks are reserve constrained – something that is entirely false.
The great recession was never a banking sector problem despite it being labeled as a “credit crisis”. In reality, this was a consumer driven crisis. The results prove this. The banks have recovered, but lending hasn’t improved. Why? Because this is a consumer driven recession. Banks aren’t reserve constrained. Finding willing borrowers, on the other hand, is a whole other matter….
The healthcare debate is a bit more messy. While the social aspects of healthcare spending are likely positive, you just have to wonder about the motives of the men pushing this plan when we are mired in the worst recession in 75 years. Is healthcare really our top priority when unemployment remains near 10%? More importantly, is this an efficient form of government spending when we could easily target job creation or other productive investments in the long-term growth of America (China’s high speed rail system comes to mind here). Meanwhile, we have an antiquated infrastructure. Where are the priorities?…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
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