Archive for July 14th, 2009
Returning from China last month, U.S. Congressman Mark Kirk had a bearish take on a high-level visit by American officials.
Treasury Secretary Timothy Geithner claimed the U.S.’s biggest creditor voiced great confidence in its debt. Kirk, an Illinois Republican, came back with the opposite impression.
“China is beginning to cancel Congress’s credit card,” he told Fox News on June 10. It “doesn’t want to lend much more money to the United States and especially is worried about the Fed’s policy of printing money to buy new debt.”
A month later, there’s no doubt about whose assessment was more accurate. Chinese leaders are clearly very concerned about the dollar. How they will react is a key question hanging over markets, and it’s time to take the discussion to the next level.
Everyone knows China wants to reduce its dollar holdings. Little is known about how that process may unfold and how much work and preparation needs to go into it. Lots, in fact.
Think of China and the U.S. in history’s most expensive divorce. The two economies total $17 trillion of output, and polls in China show little support for adding to almost $800 billion of U.S. Treasuries.
This argument can be broadened to the rest of Asia. The idea that China or Japan — with $686 billion of Treasuries — can just start selling massive blocks of dollars is ridiculous. It would devastate markets the world over and the fallout would boomerang back on Asia. If you think markets are shaky now, just wait until word of a central-bank fire sale gets around.
Copycat Selling
Sure, Singapore (with $40 billion of Treasuries), India ($39 billion) or South Korea ($35 billion) could try to dump dollars on the stealth. Good luck in this highly connected, around-the-clock world. News that a key economy seeks a first- mover advantage over peers would inspire copycat selling. Expect investors and traders to respond with massive sell orders.
Warren Buffett can discreetly trim Berkshire Hathaway Inc.’s interest in a company or a currency. How a central bank divests itself of tens or hundreds of billions of dollars on the sly is another matter.
Governments that may be concerned about getting stuck with their dollars for good have a point. And by curtailing investments in dollars today, Asia is ensuring that the U.S. currency will be worth less a year from now. Bernard Madoff can tell you a thing or two about how this process works.
Dollar Accord
What may be necessary is a global framework or pact to end the dollar’s dominance. A “Plaza Accord” of sorts may be needed to dismantle the so-called Bretton Woods II system of tying currencies to the dollar that emerged after the global crises of 1997 and 1998. A Dollar Accord, anyone?
Just as stocks take a hit when additional shares are issued, Asia faces a debt-dilution dynamic for which it never bargained. The Federal Reserve’s zero-interest-rate policies don’t help. And Asia can’t do a lot on its own here.
This process will require considerable cooperation, be it through the International Monetary Fund, the Group of 20, the Asia-Pacific Economic Cooperation forum, the Association of Southeast Asian Nations or a yet-to-be-created entity. Goals must be set, mechanics discussed and timing negotiated. If ever there were a time for a currency summit, it’s now.
Politics will be a stumbling block. It’s hard to envision the U.S. signing on to scrap the dollar as the reserve currency. Neither the euro nor the yen is ready to replace it. And China’s designs on currency domination are a decade away — or longer.
IMF Solution
The amount of scrutiny the dollar’s successor would face makes you wonder who would want to print the reserve currency. That explains why the most credible argument making the rounds involves the IMF’s so-called Special Drawing Rights, or SDRs.
They are really an account of exchange, rather than legal tender, and are calculated according to a basket of currencies consisting of the dollar, euro, yen and pound. Chinese central bank Governor Zhou Xiaochuan wants the IMF to move toward creating a “super-sovereign reserve currency.”
Or, here’s another suggestion: Brady bonds for less- troubled economies. The idea behind bonds created in the 1980s as part of Latin America’s debt restructuring was to let investors swap their claims on nations in turmoil for tradable instruments. A similar process may work with the dollar.
Rumors of the dollar’s demise are no longer exaggerated. What is being exaggerated, though, is how easy it will be for Asia to get out of the quandary it’s in. Cutting off the U.S. government’s credit card, for example, means American consumers can’t buy your goods. And any sudden divorce between the world’s two main economic powers won’t be pretty. Far from it.
It’s time to figure out what the next step is, and policy makers need to get serious. Complaining about our dollar-based system won’t get us there. Some brainstorming about where to go from here would be far more constructive.
(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)
Our $17 Trillion Chinese Split Won’t Be Pretty – William Pesek, Bloomberg
July 14th, 2009
Washington’s enormous expansion of the government’s spending share of GDP to over 40 percent — including Bailout Nation, TARP, and government takeovers in numerous industries — is eerily reminiscent of Old Europe’s old policies. In a twist of irony, Europe seems to be moving toward a lower-tax-and-spend-and-regulate, Ronald Reagan–type approach, while we in the U.S. are regressing to the failed socialist model of Old Europe. This makes no sense.
Here’s the clincher: Year-to-date, Dow Jones stocks are off 7 percent, while China stocks are up 71 percent. The world index is up 4 percent. Emerging markets are up 25 percent. They’re all beating us. None of this is good.
We’re going the wrong way. That’s why stock markets are not voting for the United States anymore.
Washington Is Going the Wrong Way – Larry Kudlow, CNBC
July 14th, 2009
Under the management of the flamboyant Austrian body builder / therapist, California began a rapid descent that ultimately ended in death. Some faulted Schwarzenegger’s unconventional therapeutic methods and prescription spending pills, including state pension steroids that some say were powerful enough to kill a Scandinavian industrial power. Schwarzenegger denied culpability, saying that his spending pills “help build de upper financial torso and lats, and deese other sings and so on.”
Despite the last minute financial maneuvers analysts say the state died penniless, owing creditors as much as $100 billion. Amid the swirling recriminations between California camp factions, fans chose to mark it’s passing quietly. Longtime California fan club president Iowa said that despite being the constant butt of the Golden State’s insults and jokes, it will remember the late superstar fondly.
“Let’s not remember California as a bloated, rotting freakshow corpse hanging above a filthy public pension toilet,” it said. “Let’s remember the good times. Like my six-day bender at the ‘91 Rose Bowl.”
“California’s pain is finally over, and I like to think that the whole state is going to a better place,” Iowa added. “Just look at all those U-Hauls headed to Oklahoma.”
Fans Flock to Mourn California, 1849-2009 – Iowahawk, Big Hollywood
July 14th, 2009
Most of them did not see the crisis coming; many were deep in denial about the recession long after it started. They missed the housing boom and bust, the credit crisis. They continued to see phantom bottoms and false recoveries again and again.
In general, they were institutionally biased, preternaturally accepting of questionable data, and wed to outmoded belief systems of efficient markets. Oh, and if you listened to their advice, you lost shitloads of money.
Now, I don’t wish to paint with too broad a brush. There were plenty of individual economists who have done an outstanding job in terms of 1) seeing the coming crisis; 2) making reality-based observations about the present situation; and 3) provided helpful insight to investors and traders. Not to name names, but you frequently see their superior work highlighted here.
It reminds me of an grad school classmate, a fellow cum laude — an amusing asshole who obnoxiously said at graduation “those of us in the top 10% want to thank the rest of you for making all this possible.” Rude, but with an element of truthiness in it: You can’t have outstanding anything without a vast bulk of mediocrities.
Which brings me back to the original question: Why should anyone listen to these folks as a group? Do we want to get it wrong yet again, or do you still have some remaining cash to lose . . . ?
Why Should You Care If Economists Raise U.S. Outlook? – The Big Picture
July 14th, 2009
In a recent Wall Street Journal/NBC poll, 49% of Americans said they were concerned a great deal about federal deficits and government involvement in the economy.
America’s gross government debt is expected to climb from 62% of national income to 106% by 2015 — a level not seen since the aftermath of World War II. Meanwhile, gas price volatility is in full swing.
Wondering Why The Chinese Laughed at Geithner? – Michael Lynch, IBD
Yuan Small Step: Faith in the Greenback is Waning – The Economist
Western Awe & Domestic Anxiety: Tale of Two Chinas – Philip Stephens, FT
July 14th, 2009
William White predicted the approaching financial crisis years before 2007’s subprime meltdown. But central bankers preferred to listen to his great rival Alan Greenspan instead, with devastating consequences for the global economy.
William White had a pretty clear idea of what he wanted to do with his life after shedding his pinstriped suit and entering retirement.
White, a Canadian, worked for various central banks for 39 years, most recently serving as chief economist for the central bank for all central bankers, the Bank for International Settlements (BIS), headquartered in Basel, Switzerland.
Then, after 15 years in the world’s most secretive gentlemen’s club, White decided it was time to step down. The 66-year-old approached retirement in his adopted country the way a true Swiss national would. He took his money to the local bank, bought a piece of property in the Bernese Highlands and began building a chalet. There, in the mountains between cow pastures and ski resorts, he and his wife planned to relax and enjoy their retirement, and to live a peaceful existence punctuated only by the occasional vacation trip. That was the plan in June 2008.
And now this.
The Economist Who Predicted the Crisis – Balzli & Schiessl, Der Spiegel
July 14th, 2009
