Posts filed under 'US Trade Imbalance'
For almost a year now, Democratic pollsters have been pointing out how much the public hates the bank bailout and despises Wall Street. But there was no reason for Democratic leaders in Congress or the White House to pay much attention. After all, it was a Republican president and a Republican Congress that came up with the bank bailout plan to begin with. Some stalwart Republicans had grumbled about it, of course, but Republicans have always been on the side of Wall Street and big business and weren’t likely to call for strong measures to prevent the Street from getting into trouble again.
Larry Summers and Tim Geithner scuttled Paul Volcker’s plan to separate the banks’ commercial and investment functions, and didn’t want to limit the size of banks or the risks they could take on. Summers and Geithner have wanted to get the banks back to profitability as soon as possible. And Dems in Congress have had no stomach to take on Wall Street, a major source of campaign funding.
But suddenly the winds are blowing in a different direction over the Potomac. The 2010 midterms are getting closer, and the Dems are scared. Their polls are plummeting. The upsurge in mad-as-hell populism requires that Democrats become indignant on behalf of Americans, and indignation is meaningless without a target. They can’t target big government because Republicans do that one better, especially when they’re out of power. So what’s the alternative? Wall Street.
Perhaps I’m being too cynical. Maybe the Obama and congressional Democrats are now ready to give up Wall Street trickle-down economics and focus on Main Street trickle-up. “There are two ideas of government,” said William Jennings Bryan at the Democratic National Convention in Chicago in 1896. “There are those who believe that you just legislate to make the well-to-do prosperous, that their prosperity will leak through on those below. The Democratic idea has been that if you legislate to make the masses prosperous their prosperity will find its way up and through every class that rests upon it.” He couldn’t have said it better.
January 23rd, 2010
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| Flagging: a US sailor stands on the flight deck of the aircraft carrier USS George Washington |
If a week is a long time in politics, a decade is starting to look like an age in geopolitics. Comparing the America that began the 21st century with the America of today is to witness a country that has in some ways quite radically altered its view of itself and its relationship to the world.
In short, the metallic rust of decline has crept into the American soul. “You could argue that the first decade of the 21st century was the last decade of the American century,” says David Rothkopf, a former Clinton administration official and student of US foreign policy. “We are now entering the multipolar century.”
January 16th, 2010
| Comment
Mervyn King was in no doubt about the importance of global trade imbalances when giving evidence to the Treasury Select Committee in June.
“I am afraid we are doomed to repetitions of the problems that we have seen in which there will be, from time to time, quite significant crises in the world economy, precisely because the positions of the surplus and deficit countries are not co-ordinated, and the problems that result from that in financial markets lead to substantial recessions”.
“The ultimate cause of what we have been through in the last two years was the imbalances of the world economy and the inability to cope with the resulting capital flows, and I do not think it is a question simply of exchange rates, and it certainly is not a question of which currency we denominate trade flows in, it is much deeper-seated than that.”
“It is about ensuring that the policy frameworks of countries fit together, and at present, if you have countries which, on the one hand, believe in domestic monetary frameworks and floating exchange rates and other countries that believe in development strategies in which a large current account surplus is a key part of that strategy, these things will not fit together well.”
Why then has the governor with his “iron fist” allowed such a feeble article on global imbalances to be published in the Bank’s latest quarterly bulletin.
Continue reading “Timidity on imbalances”
September 21st, 2009
The expansion of international “supply chains” from Asian factories to American consumers has certainly created global trade imbalances and international currency flows that are not necessarily sustainable over the long run. A readjustment of the world economy, not a slackening demand for inexpensive consumer products, strikes me as the greatest threat to the Wal-Mart business model. And, for its part, the chain is already adapting to new circumstances. In recent years, Wal-Mart has expanded well beyond the borders of North America into Europe, Mexico and Asia. It imports factory goods from China and also operates its own retail stores there. But the stores look very different from their American counterparts. In Kunming, near the border with Myanmar, Wal-Mart rents space inside its store to independent vendors, who pay $1.20 per day to hawk Yunnan coffee, tobacco bongs filled with local rice wine and condiments made from eggplant, soybeans and ginger. The atmosphere is “festival-like, even chaotic,” as vendors shout out their wares, sometimes through loudspeakers or while pounding on drums, and customers crowd a stall to fish pears out of a solution of sugar, salt and licorice root–”a Wal-Mart store sans Wal-Martism,” according to sociologist Eileen Otis. Another Chinese employee explains his loyalty to the company by suggesting that Sam Walton was, in fact, a student of Chairman Mao who “adopted the revolutionary strategy of ‘the countryside encircling the city.’&nthinsp;” And so the revolution continues.
How Wal-Mart’s Ruthlessness Led to Its Undoing – Jefferson Decker, Nation
September 18th, 2009
Stiglitz Says U.S. Economic Recovery May Not Be ‘Sustainable’
By Michael McKee
Sept. 4 (Bloomberg) — The U.S. economy faces a “significant chance” of contracting again after emerging from its worst recession since the 1930s, Nobel Prize-winning economist Joseph Stiglitz said.
“It’s not clear that the U.S. is recovering in a sustainable way,” Stiglitz, a Columbia University professor, told reporters yesterday in New York.
Economists and policy makers are expressing concern about the strength of a projected economic recovery, with Treasury Secretary Timothy Geithner saying two days ago that it’s too soon to remove government measures aimed at boosting growth.
Stiglitz said he sees two scenarios for the world’s largest economy in coming months. One is a period of “malaise,” in which consumption lags and private investment is slow to accelerate. The other is a rebound fueled by government stimulus that’s followed by an abrupt downturn — an occurrence that economists call a “W-shaped’ recovery.
“There’s a significant chance of a W, but I don’t think it’s inevitable,” he said. The economy “could just bounce along the bottom.”
Stiglitz said it’s difficult to predict the economy’s trajectory because “we really are in a different world.” He said the crisis of the past year was made worse by lax regulation that allowed some financial firms to grow so large that the system couldn’t handle a failure of any of them.
Big Banks
“These institutions are not only too big to fail, they are too big to be managed,” he said.
Finance ministers and central bankers from the Group of 20 nations meet in London Sept. 4-5 to lay the groundwork for a summit in Pittsburgh later this month, where leaders will consider measures to overhaul supervision of the financial system…
With so much excess capacity, the American economy faces a short-term threat of disinflation and possibly deflation, Stiglitz said. Wages may even decline, given recent high productivity and the likelihood of an extended period of high unemployment, he said.
Longer term, he said the Fed’s aggressive monetary policy will mean inflation becomes the greater threat. “With the magnitude of the deficits and the balance sheet of the Fed having been blown up, it’s understandable why there are anxieties about inflation,” he said.
While the Fed says it has the tools to deal with it, there are still concerns, Stiglitz said. Because monetary policy takes six to 18 months to have its full effect, the central bank will have to begin withdrawing monetary stimulus on the basis of forecasts.
The Fed’s record on its economic forecasts isn’t enough to reassure investors and, as a result, the U.S. currency may suffer, he said.
Dollar ‘Weakness’
“Whether or not they’re able to do it, the uncertainty today about whether they can do it can contribute to the weakness of the dollar,” Stiglitz said. “That’s one of the reasons there is increasing interest around the world in discussing alternatives to the dollar system.”
Stiglitz, who is a member of a United Nations commission that will study the global financial system and currency regimes, said “the logic is compelling” for a new global currency.
The current system creates instability, weakens global confidence, and is fundamentally unfair to developing countries that are in essence lending the U.S. trillions of dollars and bearing the risk, he said.
“In most quarters, there is a feeling we should move away from the dollar system. The question is do we do it in an orderly way, or a chaotic way,” Stiglitz said. “The size of the deficit and the size of the balance sheet of the Fed have just increased the anxiety and the desire that something be done.”
While some think it would hurt the U.S. to no longer be able to borrow cheaply in dollars, “that era is over,” he said. “We’re moving to a more multi-polar world.”
Between the fall of the Berlin Wall and the collapse of Lehman Brothers was “the short period of American triumphalism, where we dominated the global scene. That period is over,” Stiglitz said.
September 4th, 2009
As U.S. deficits increased, global investors edged away from the dollar into the German mark, the Japanese yen, the Swiss franc, the Euro, and more recently baskets of Asian currencies.
Which brings us to today. Only goodwill (defined both as an accounting term and as political deference to military might) now supports the U.S. dollar as a reserve currency, which is what allows the United States to issue dollar-denominated bonds in world money markets.
It is this borrowing capacity that allows the Obama administration to bailout the banking industry, offer to pay for universal health care, fight colonial wars in the Middle East, stimulate the economy, send billions to Egypt and Israel, buy out General Motors, and subsidize every windmill start-up company in Nancy Pelosi’s home district. (Madoff’s problem was that he failed to set himself up as a country. He otherwise understood deficit spending.) But the shell game requires full faith in the dollar.
For those riding out financial storms by “sitting on cash,” here is what’s under your seat: in recent months U.S. federal debt has grown to $11.3 trillion, almost equivalent to gross domestic production. About one quarter of this indebtedness, or $2.8 trillion, is held abroad, and China and Japan hold just under half of those assets (liabilities to Uncle Sam).
Elsewhere on the American balance sheet is another $11.4 trillion in household debt, an annual trade deficit of about $725 billion, and a federal budget deficit that is estimated in 2009 to be approaching $1.8 trillion. That’s if the economy grows at 3 percent.
Off-balance sheet risks, what accountants call contingent liabilities, include about $10 trillion in new bailout guarantees (Fannie Mae, Bear Stearns, Countrywide, and whatever the administration launches as its New Deal of the Day). None of the above includes the unfunded liabilities of Social Security ($41 trillion), which, by comparison, make the shares of Lehman Brothers and AIG look like Scottish bonds held for widows and orphans.
The geese laying the golden eggs of U.S. financial stability are the printing presses of the U.S. Treasury, and, for now, those collecting them in their Easter baskets include a number of countries and regions perhaps tiring of American arrogance, if not of the drop in the dollar’s value. Who would blame such popular targets of moral abuse as China, Russia, Switzerland, Arabia, or Latin America for dumping their dollar-denominated assets?
All that lies between the U.S. dollar and a financial Armageddon is the Faustian house of credit cards under which Asian economies invest their trade surpluses in U.S. Treasury instruments — to keep the dollar strong, their own currencies weak, and purchases brisk between the likes of Wal-Mart and the Asian Greater Co-Prosperity Sphere.
Sooner than we think, China and Japan, like all nervous creditors, may send the United States a letter, suggesting that, henceforward, if Washington needs to borrow money, the bonds be issued in renmimbi, yen, or a basket of Asian currencies (a Pacific Euro).
Wall Street bankers did the same to the farm interests in the late nineteenth century, when they insisted that debt be based on a gold standard, as opposed to “free silver.” President Obama may be as eloquent as William Jennings Bryan. But at that point he will need to use all his oratory for the business of selling junk bonds.
The Dollar: Running On Reserve – Matthew Stevenson, newgeography
August 2nd, 2009
Curiously, as Treasuries were rallying, equities on both sides of the Atlantic were capering to almost their highest levels this year. After moves this week, when bond and equity prices fell together, it has led some to ask whether the traditional relationship between equities and bonds — where bond prices fall as equities rise — has broken down. If true, that might point to the scary conclusion that investors are losing their appetite for risk across the board. More likely, though, is that falls in Treasuries this week simply reflected the market’s struggle to digest the huge issuance.
The rally in equities, meanwhile, has been caused by better-than-expected company results. Apart from Royal Dutch Shell, UK blue-chips BT, BAT, AstraZeneca, BSkyB and Rolls-Royce all offered encouragement yesterday, as did Cadbury and Reckitt Benckiser earlier this week. It was a similar tale on Wall Street, with decent figures yesterday from the likes of Tyco, Motorola and MasterCard.
But investors should not be carried away. Many of these good results were simply due to cost cuts, running-down of stocks or, in the case of AstraZeneca, an unexpected absence of competition.
Equity markets now look to be fully up with events. The FTSE 100 looks set to finish July about 9 per cent higher — its biggest monthly rise since September 1992. It would be surprising if it did not tread water for the rest of the Ashes series.
A Tougher Market for U.S. Treasury Issues – Ian King, Times of London
July 31st, 2009
Is there a clandestine understanding between the world’s two most powerful central banks, the Federal Reserve and the People’s Bank of China?
Naturally, no one can talk about it, let alone confirm or deny anything. But it’s not too difficult to make out the broad outlines of how Chinese-American monetary cooperation may be working.
People’s Bank governor Zhou Xiaochuan and other figures in the Chinese leadership seem to use every opportunity to broadcast finely calibrated skepticism over the dollar’s future. Such Jeremiahs feed on and — in turn — feed doubts about potential American inflation caused by the Fed’s quantitative easing and exploding budget deficits.
But both Washington and Beijing appear to recognize — whatever the saber-rattling — that large-scale shifts in the currency composition of Chinese currency reserves are more or less impossible. Roughly two-thirds of Chinese reserves of more than $2 trillion are thought to be held in the greenback.
Heavy Chinese sales, or even a deliberate policy of diverting export proceeds into Euro or yen by re-dominating sales contracts, would depress the U.S. currency and lower the value of Chinese reserves. It’s the well-known Beijing dollar trap. And it has to be said: the Chinese have maneuvered themselves into it of their own volition, and in full knowledge of the potential problem.
So Governor Zhou’s strictures are, to a certain extent, shadow boxing. However, in return for a tacit standstill agreement on the currency composition of reserves, the Americans have to acknowledge that the renminbi’s value will rise only moderately.
If the Chinese continue taking in dollars, logic tells us the Chinese currency can hardly revalue strongly. A signal of the U.S. authorities’ acceptance of this state of affairs is that the word “manipulation” for Chinese currency management now clearly is banned.
There is another, still more intriguing, side to Chinese currency pronouncements. The doubts voiced from Beijing on the dollar’s stability, far from unsettling the U.S. monetary authorities, are actually manna from heaven for the Federal Reserve. The Obama administration hardly can go in for years of reckless deficit spending when the country’s largest creditor is emitting so many warning signals.
More importantly, the Fed is getting a certain amount of cover from Beijing for its eventual “exit strategy” — a reversal of quantitative easing and a rise in interest rates as soon as economic recovery gets under way.
The Chinese even are giving a strong tailwind to Fed Chairman Ben Bernanke’s bid for re-nomination after his initial four-year term ends in January. The reason? With the Chinese appearing to turn the knife through gloom-laden dollar prognostications, President Obama knows that appointing a heavily political successor to Bernanke would be fraught with great risks.
Any Fed chairman who looks less than squeaky-clean on currency stability is likely to send dollar holders heading for the exits — and could spark the full-scale currency collapse that Wall Street bears have been growling about for months.
So, if Obama wishes to replace Bernanke, he can do so only by bringing in a full-scale monetary hawk — a step that he must rule out on domestic political grounds. The conclusion is that the Chinese maneuverings leave Obama with no choice but to re-appoint Bernanke, whatever the doubts about his stewardship that have arisen in recent months.
When Bernanke a little later this year eventually is confirmed in a second term of office, what’s the betting that a laconic red-rimmed telegram from Governor Zhou will turn up in his in-tray?
The missive and its contents, of course, will remain secret. We can only guess at the possibility that the two men, just for a moment, will share the opportunity for a modicum of discreet self-congratulation.
David Marsh is chairman of London and Oxford Capital Markets. The Marsh on Monday column appears in German in the newspaper Handelsblatt.
A Deal Between the Fed and Bank of China? – David Marsh, MarketWatch
July 20th, 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
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
By Kathleen M. Howley
June 29 (Bloomberg) — Driving through Riverside, California, Bruce Norris pointed to a half-dozen empty houses with “For Sale” signs stuck in untended lawns that he said investors might buy if banks would just extend some credit.
“People today look at us as the enemy,” said Norris, 57, head of Riverside-based Norris Group, which purchases and renovates homes to rent or sell. “That’s a big problem for housing because if we can’t get the financing we need, a lot of these properties are going to sit vacant.”
Four months after President Barack Obama pledged $275 billion to shore up home sales, the engine that powered every U.S. recovery since 1960 is stalled. Bankers’ reluctance to finance buyers who won’t live in properties is one barrier to a turnaround. Stricter qualifying rules and a rise in the cost of residential loans to 5.42 percent have impeded new mortgage lending, which is at a 13-year low. An inventory of 2.1 million unoccupied houses on the market, created by the fastest foreclosure pace in history, may be a drag on a revival.
The $8,000 first-time homebuyer tax credit in the U.S. economic stimulus package and a government program to subsidize some mortgage payments have had little effect, according to Eric Belsky, executive director of Harvard University’s Joint Center for Housing Studies in Cambridge, Massachusetts.
“It hasn’t been much more than a see-sawing of data,” Belsky said in an interview. “Housing has led the U.S. economy out of every recession for at least 50 years, and for that to happen again more stimulus is going to be needed.”
Leading Indicator
The residential real estate market improved ahead of the end of the past seven contractions, with home construction starts beginning to climb an average of seven months before gross domestic product picked up and sales gaining about four months in advance, according to data compiled by David Berson, chief economist of PMI Group, a mortgage insurer in Walnut Creek, California.
Expenditures by homeowners — first on transaction fees, then on necessities and luxuries including furniture, gardening tools, kitchen renovations, basic upkeep and property taxes — kept the momentum going, Belsky said.
Existing U.S. home sales in May rose 2.4 percent to an annual rate of 4.77 million, lower than forecast, and the median price was down 16.8 percent from the same month in 2008, according to the Chicago-based National Realtors Association.
There’s little chance the turnover will increase enough this year to end the housing recession, said Andres Carbacho- Burgos, an economist with Moody’s Economy.com in West Chester, Pennsylvania.
‘Lousy Job Market’
“We have a lousy job market and an excess of around 1 million extra homes that has to be worked off,” he said in an interview. “The housing market is not going to hit bottom before mid-2010.”
Housing starts are at their lowest level since 1945, even with a 17 percent increase in May that pushed the annual rate to 532,000 from a 454,000 pace the prior month. So many properties are for sale — 3.8 million as of last month — that it would take 9.6 months to unload them at the current sales pace, according to the Realtors group. The inventory averaged 4.5 months in the six years from 2000 to 2005.
While there is pent-up demand that would eat away at the stock, “people are scared to spend the money because they’re worried about losing their jobs,” said Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Massachusetts, in an interview.
6 Million Jobs
The unemployment rate, which reached a 26-year high of 9.4 percent in May, will probably exceed 10 percent this year, Obama said at a June 23 White House news conference.
“The American people have a right to feel like this is a tough time right now,” Obama said, calling it “pretty clear” payrolls will continue to shrink. About 6 million jobs have disappeared since January 2008, marking the biggest employment loss of any retrenchment since the Great Depression.
Personal bankruptcies rose 37 percent in May from a year earlier, according to the American Bankruptcy Institute, based in Alexandria, Virginia. Credit card defaults in the first quarter went to 7.79 percent from 4.83 percent a year ago, Federal Deposit Insurance Corp. data show. While the share of loans entering foreclosure moved to 1.37 percent, the highest ever, the first-quarter mortgage delinquency rate climbed to a record 9.12 percent, the Washington-based Mortgage Bankers Association said.
Housing in Peril as Financing Breakthrough Fails – Bloomberg
July 1st, 2009
Last Tuesday, Brazil, Russia, India, and China–the so-called BRIC nations–met in Yekaterinburg, Russia, for what was supposed to be an anti-American gabfest. The main agenda item for the first formal meeting of the four largest developing economies was the future of the dollar. In recent months, Beijing and Moscow have led a global charge against the greenback, and Brasilia has been a willing co-conspirator in the effort. The BRIC post-summit communiqué referred to the world’s currency problems but, to the surprise of observers, did not attack the dollar head on.
What happened? Beijing, apparently, stopped the other nations cold. The Chinese called the tune at the Moscow meeting–their economy is almost as large as the other three combined–and so the surprisingly nonconfrontational tone of the BRIC official statement mirrored Beijing’s recent climbdown on the currency issue.
The Chinese government in the last few weeks seems to have radically changed its tune on this issue. In March, Zhou Xiaochuan, the head of China’s central bank, called for the replacement of the dollar as the world’s reserve currency in a widely reported text released to the public. In May, however, Beijing officials took a different tack, going out of their way to talk about the dollar’s unique status.
Beijing: The Dollar’s New Best Friend – Gordon Chang, Weekly Standard
UPDATE: 1:28 PM EDT
China Reiterates Call for New World Reserve Currency
FROM BLOOMBERG:
June 26 (Bloomberg) — China’s central bank renewed its call for a new global currency and said the International Monetary Fund should manage more of members’ foreign-exchange reserves, triggering a decline in the U.S. dollar.
“To avoid the inherent deficiencies of using sovereign currencies for reserves, there’s a need to create an international reserve currency that’s delinked from sovereign nations,” the People’s Bank of China said in its 2008 review released today. The IMF should expand the functions of its unit of account, Special Drawing Rights, the report said.
The restatement of Governor Zhou Xiaochuan’s proposal in March added to speculation that China will diversify its currency reserves, the world’s largest at more than $1.95 trillion. Chinese investors, the biggest foreign owners of U.S. Treasuries, reduced holdings by $4.4 billion in April to $763.5 billion after Premier Wen Jiabao expressed concern about the value of dollar assets. That reduction came a month after China boosted its holdings by $23.7 billion to a record.
“Zhou Xiaochuan sees the current international financial system is flawed, putting too much emphasis on the dollar as a reserve currency,” said Kevin Lai, an economist with Daiwa Institute of Research in Hong Kong.
President Barack Obama needs the support of China as the U.S. tries to spend its way out of recession. The Dollar Index that measures the currency’s performance against six trading partners fell as much as 0.8 percent to 79.779 at 1:11 p.m. in London. U.S. Treasuries were little changed with the 10-year yield at 3.53 percent.
‘Unlikely’ Shift
“It’s extremely unlikely the dollar will be replaced as the reserve currency,” said Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong. “A currency needs to be internationalized and that requires a fully convertible capital account, which China doesn’t have. The second is that it needs to be adopted.”
At the end of 2008 the dollar accounted for 64 percent of global central bank reserves, down from 73 percent in 2001, according to the IMF in Washington.
On June 13, Russian Finance Minister Alexei Kudrin reassured investors of the country’s confidence in the greenback by saying it was “still early to speak of other reserve currencies.” Brazilian Finance Minister Guido Mantega said on June 10 the government’s decision to switch some reserves into IMF bonds wasn’t aimed at weakening the dollar.
Federal Reserve holdings of Treasuries on behalf of central banks and institutions rose by $68.8 billion, or 3.3 percent, in May, the third most on record, Bloomberg data show.
Diversifying Holdings
China has started to pare its holdings, trimming them by $4.4 billion to $763.5 billion in April, the first monthly reduction since February 2008, according to U.S. Treasury Department data. Figures for May have yet to be released.
“There may be signs here of tensions mounting between the PBOC’s economic concerns over China’s holdings of dollars and the Chinese government’s diplomatic reasons for doing so,” Stephen Gallo, head of market analysis at Schneider Foreign Exchange in London, wrote in an e-mail.
Russian President Dmitry Medvedev, Chinese President Hu Jintao, Indian Prime Minister Manmohan Singh and Brazilian President Luiz Inacio Lula da Silva called for a “more diversified” monetary system to reduce dependency on the greenback at a June 16 meeting in the Russian city of Yekaterinburg. In May, China and Brazil began studying a proposal to move away from the dollar and use yuan and reais to settle trade instead.
Group of 20
Group of 20 leaders on April 2 gave approval for the IMF to raise $250 billion by issuing Special Drawing Rights, or SDRs, the artificial currency that the agency uses to settle accounts among its member nations. It also agreed to put another $500 billion into the IMF’s war chest. This month, Russia and Brazil announced plans to buy $20 billion IMF bonds, while China said it is considering purchasing $50 billion.
“Special drawing rights of the IMF should be given full play, and the international body should manage part of its members’ reserves,” the central bank report said.
IMF First Deputy Managing Director John Lipsky said on June 6 it’s possible to take the “revolutionary” step of making SDRs a reserve currency over time.
SDRs were created by the IMF in 1969 to support the Bretton Woods exchange-rate system that collapsed in 1971. They act as a unit of account rather than a currency. The cash is disbursed in proportion to the money each member nation pays into the fund.
Widening the Basket
The value of SDRs are based on a basket of currencies, shielding them from swings in a single currency. One SDR is valued at $1.54. China is proposing the basket be broadened. The current weighting is: 44 percent for the dollar, 34 percent for the euro and 11 percent each for the yen and the pound. It doesn’t include the yuan.
The dollar’s dominance of global finance buffeted developing nations last year. Investors abandoned emerging markets after the September bankruptcy of Lehman Brothers Holdings Inc. eliminated demand for all but the safest, most easily traded assets, such as Treasuries and the dollar. A shortage of the U.S. currency forced central banks to pump reserves into their economies.
“The excessive reliance on the credit of several sovereign currencies have added to the extent of risks and crises,” the central bank report said. “A currency with stable value in the long term is required.”
Last Updated: June 26, 2009 08:35 EDT
June 26th, 2009
This week Timothy Geithner completed his first trip to Beijing as U.S. Treasury secretary, and from his account the three-day visit was a great success. The Chinese, he said, backed the Obama administration’s stimulus program, understood the temporary need for enlarged federal budget deficits and supported the dollar’s dominant role in the global economy. Summing up his short stay, Geithner said he received Beijing’s full backing for his plans: “I’ve actually found a lot of confidence here in China, justifiable confidence, in the strength and resilience and dynamism of the American economy.”
Geithner’s hosts seemed equally upbeat and, according to the Treasury chief, did not raise concerns about American deficits or interest rates. Moreover, the Chinese appeared especially hopeful about the plans of the two nations to build a new framework for consultations. “Through the dialogue, we will send a message that China and the United States are cooperating substantively to get over the difficult times, which will help boost the confidence, promote global financial stability and world economic recovery,” said Vice Premier Wang Qishan, Beijing’s economic troubleshooter.
The two nations plan to meet in Washington in late July to kick off the “Strategic and Economic Dialogue,” which will replace the “Strategic Economic Dialogue” maintained by Geithner’s predecessor, Henry Paulson. Paulson ultimately got nowhere with the Chinese on crucial issues, and the question is whether Geithner will make any headway with a China that is now more confident, assertive and stronger than it was just a few months ago.
The answer, in short, is no, for two fundamental reasons. First, Obama’s Washington thinks the U.S. has little or no leverage, economic or otherwise, with China. The new administration is wrong for many reasons. For instance, it grossly underestimates Beijing’s dependence on the American market. In 2007, 97.7% of China’s overall trade surplus related to sales to the U.S., and in 2008 the figure was 90%.
Moreover, American policymakers do not understand that, given the current structure of the Chinese economy, Beijing has little choice but to continue to buy American debt.
Finally, Washington overestimates the Communist Party’s ability to take corrective action and move away from Chinese reliance on exports to the U.S. Until the Obama team substantially changes its perceptions of China, Washington will not use its power to influence the policies of Beijing’s leaders.
The U.S. Has All the Leverage With China – Gordon Chang, Forbes
June 10th, 2009
ILLITERACY IN HIGH PLACES
by Paul Craig Roberts
If a person lives long enough, he can watch everyone forget everything they learned.
Everyone includes Federal Reserve Chairmen, economists, Bank of America “strategists,” and even Bloomberg.com.
Federal Reserve Chairman Ben Bernanke thinks he can hold down US long-term interest rates by purchasing mortgage bonds and US Treasuries. Sixty years ago the Federal Reserve understood that this was an impossible feat. After an acrimonious public dispute with the US Treasury, in 1951 the Federal Reserve forced an “Accord” on the government that eliminated the Fed’s obligation to monetize Treasury debt in order to hold down long term interest rates.
President Truman and Treasury Secretary John Snyder wanted to protect World War II bond purchasers by preventing any rise in interest rates, which would mean a decline in the price of the bonds.
The Fed understood that monetizing the debt to hold down interest rates meant loss of control over the money supply. The policy of suppressing interest rates could only work until the financial markets anticipated rising inflation and bid down the bond prices. If the Fed responded by buying more Treasuries, the money supply and inflation would rise faster.
Since Fed Chairman Bernanke announced his plan to purchase $1 trillion in mortgage and Treasury bonds in order to help the housing market with low interest rates, interest rates have risen. When will the Fed remember that printing money does not lower long-term interest rates?
According to Bloomberg (June 3), Bank of America strategists are recommending that investors buy Fannie Mae bonds because the rise in interest rates means the Fed will ramp up its purchases in order to prevent rising interest rates from adversely impacting the struggling housing market. When will financial gurus remember that printing money does not lower interest rates?
Treasury Secretary Geithner is another economic incompetent. He told China that he stood for a “strong dollar,” but that China should let its currency appreciate relative to the dollar, which, of course, would mean a weaker dollar. He simultaneously told China that their investments in US Treasury bonds were safe.
His Chinese university audience, being economically literate, laughed at Geithner. It apparently did not dawn on the US Treasury Secretary that if Chinese money is rising in value relative to the US dollar, the value of Chinese investments in dollar-denominated US Treasury bonds is falling.
Congressional Democrats are proving themselves to be as stupid as the Republicans. According to the Associated Press, the Democrats have reached agreement to appropriate another $100 billion to continue the wars in Iraq and Afghanistan through the end of the year. What are the Democrats thinking? The federal budget for this year is already 50% in the red. Why add another $100 billion to the red ink, which has to be monetized, thus causing inflation, higher interest rates, and a weaker dollar.
The red ink that Washington is generating is a far greater threat to Americans than any foreign “enemies.”
The hubris is extraordinary. A bankrupt government that has to send its Treasury Secretary begging to China thinks it can spend limitless amounts in a futile effort to control the culture, mores, and political system of distant Afghanistan.
June 6th, 2009
Keith Bradsher’s New York Times story on the recent evolution of China’s foreign portfolio gets — at least in my view — the story right. Of course, that may be because I was — rather obviously — a source for the story. Check out the charts that accompany the article!
The basic story of China’s foreign portfolio is simple: it is trying to reduce the amount of (credit) risk in its fixed income portfolio while simultaneously taking on more commodity risk.
China’s purchases of Treasuries (especially short-term bills) have gone up even as China’s reserve growth has slowed, as China shifted money out of Agencies and — in all probability — out of money market funds that are taking credit risk and other privately managed accounts. The failure of Reserve Primary had a big impact on China. Bradsher:
“Financial statistics released by both countries in recent days show that China paradoxically stepped up its lending to the American government over the winter even as it virtually stopped putting fresh money into dollars. This combination is possible because China has been exchanging one dollar-denominated asset for another — selling the debt of government-sponsored enterprises like Fannie Mae and Freddie Mac in a hurry to buy Treasuries. ….
China was the world’s biggest buyer of [securities issued by government-sponsored enterprises] a year ago, splashing out more than $10 billion a month. But in the 12 months through March, it actually had net sales of $7 billion, and ramped up purchases of Treasuries instead. China has also changed which Treasuries it buys. It has done so in ways calculated to reduce its exposure to inflation or other problems in the United States. As recently as a year ago, China actively bought long-dated bonds, seeking the extra yield they could bring compared to Treasury securities with short maturities, of which China bought virtually none. But in each month since November, China has been buying more Treasury bills, with a maturity of a year or less, than Treasuries with longer maturities. This gives China the option of cashing out its positions in a hurry, by not rolling over its investments into new Treasury bills as they come due should inflation in the United States start rising and make Treasury securities less attractive.
At the same time, China has sought to ramp up its exposure to commodities. China’s government clearly is adding to its strategic stockpiles — and perhaps encouraging state firms to build up inventory as well. China’s government is encouraging Chinese state firms to invest more abroad, especially in the mining sector. And China’s government is providing financing to cash-strapped commodity exporters (Russia, Kazakhstan, Brazil and no doubt others) to help tide them through a rough patch and, China hopes, to secure future supplies. Bradsher:
“This spring China has also been stepping up its purchases of commodities, which are usually bought in dollars. Iron ore has been piling up on Chinese docks, government stockpiles of crude oil and grain are being expanded and stockpiles are being started for products like gasoline, diesel and sugar.”
The basic story of China’s foreign portfolio is simple: it is trying to reduce the amount of (credit) risk in its fixed income portfolio while simultaneously taking on more commodity risk.” (Brad Setser)
May 28th, 2009
This recession is now the worst since at least 1958, which is as far back as the index of coincident indicators stretches back.
The Conference Board reported today that the index, which is intended to measure how the economy is doing on an overall basis, slipped a little in April. The decline was smaller than in previous months, and two of the four indicators edged up, which could be taken as a sign that the economy is at least getting worse at a slower pace.
As I noted last month, the index was nearing the 5.6 percent decline that it experienced in the 1973-1975 recession. Now it is down 5.7 percent.
One way to put that into perspective is that the decline so far in this recession is more than the maximum falls combined in the two previous recessions, in the early 1990s and then in 2001.
“..the decline so far in this recession is more than the maximum falls combined in the two previous receptions, in the early 1990s and then in 2001.” (Floyd Norris)
May 27th, 2009
Global trade is collapsing at an unprecedented rate, but not evenly across the globe. This column argues that ‘vertical specialisation’ – the internationalisation of manufacturing supply chains – accounts for the amplification of Japan’s drop in trade. The good news is that once OECD countries start to recover, the amplification should work in reverse, boosting Japanese exports and imports at an accelerating rate.
The US subprime mortgage crisis inflicted high capital losses for domestic and foreign financial firms that had invested in securities backed with US real estate loans. This triggered a severe credit crunch in the US, which grew into a full-blown financial crisis of global proportions and later ended up affecting the entire global economy. The prime characteristics of the current global economic crisis have so far been plummeting stock and equity prices, skyrocketing bank failures, and a sudden collapse in international trade.
http://www.voxeu.org/index.php?q=node/3537
May 7th, 2009
