Comments on: Capital freedom, not exchange rate freedom …

By: Hen Gao Xing Yu Xian Ni

Hen Gao Xing Yu Xian Ni — Thu, 01 Feb 2007 01:19:56 +0000

China very need to make market more open and remove control, BUT I don’t think they will Float exchange very soon. Economy will not Heat and inflate, because there has many worker from the country who is moving to city and looking for job.

By: Guest

Guest — Wed, 31 Jan 2007 02:49:51 +0000

“…The problem is that Chinese citizens’ propensity to save is not matched by investment options. Capital controls stop money going abroad; bank deposits are unattractive because of low interest rates. The government, meanwhile, still owns a large slice of the economy, leaving China’s savings only one place to go: the stock market. When it starts to go up, everybody piles in… The fundamental problem - an undervalued real exchange rate that leads to excessive investment and not enough consumption…” http://www.ft.com/cms/s/8a39fddc-b0a6-11db-8a62-0000779e2340.html

By: Indonesia

Indonesia — Tue, 30 Jan 2007 19:27:20 +0000

Concerning the yen carry trade, here is an interesting article:

http://www.ftd.de/boersen_maerkte/analysten/156642.html

The theoretical German DM today is 40% above its historical average for the last 25 years versus the yen. The German car and machine makers are complaining as this puts them in a difficult position competing with their Japanese counterparts.

The paper expresses astonishment that there is still enthusiastic yen carry trade which must be based on the assumption that the yen stays low despite this obvious misalignment (as seen from a German perspective) and that complaints by the relevant industries go completely unheard by the financial markets.

The paper also comments that both UBS and Merrill Lynch recently issued “buy” recommendations for Siemens, and that everyone seems to eagerly follow up on these recommendation in droves. Neither analysis even bothers to discuss the yen and its potential impact. Not like the future of Siemens would in any way depend on the yen…

The paper argues that this is not only a German, but an EU issue: Other “theoretical” currencies did not appreciate as much against the yen due to higher real inflation, but they had to absorb higher cost of labor increases compared to Germany, so they are facing the same challenges.

By: bsetser

bsetser — Tue, 30 Jan 2007 16:08:13 +0000

HK — thanks for the reinforcement. for some reason, i needed it today.

By: moldbug

moldbug — Tue, 30 Jan 2007 13:41:48 +0000

“Essentially no” - well, these are strong words. Probably too strong.

But your point about the leverage is well taken. When cheap money creates a class of borrowers whose only purpose is asset price speculation it is fair to say that the original mercantilist purpose of the policy is no longer remembered. When these parasites are concentrated in a small town in Connecticut they can be neutralized with one or two low-yield tactical devices. When they are spread across your electoral base and “home equity extraction” is a substantial fraction of your “economy,” look out.

And I indeed neglected to observe that the demand from leverage borrowers in an asset price inflation scenario will pull rates up. Although not, by definition, to market rates (otherwise there would be no asset price inflation). Of course enough liquidity will counter this, if the rivermasters so see fit - and we are back to the political variable.

By: Guest

Guest — Tue, 30 Jan 2007 13:24:29 +0000

“…Cheng Siwei, vice-chairman of the National People’s Congress and an influential figure in Beijing financial circles, warned the mainland stock market could be overheating… “…Every investor thinks they can win. But many will end up losing. But that is their risk and their choice. You can’t take administrative measures to change people’s behaviour. The market is based on people’s behaviour. Investors will have to learn their own lessons.”…” http://www.ft.com/cms/s/5415cad8-b0a1-11db-8a62-0000779e2340.html

By: Cassandra

Cassandra — Tue, 30 Jan 2007 11:56:12 +0000

Moldbug said
“In the world of the kinds of prices you describe there are essentially no private, market buyers of bonds.” In contemplating what might be the impact upon asset prices of unleashing Asian savings, these were mere wild stabs in the dark. But the real rub in such a scenario is not that there are few (and I am precise in my word choice since some policy investors such as “Dead Pet Trusts” will continue their purchases) private buyers of bonds at prevailing yields, but that as inflation runs ahead of rates, so too does the demand for leverage by those who’ve “figured it out” (errr I you say, Private Equity?), in a feedback loop that can only be severed by a rather traumatic and bloody exorcism that would even exhaust Father Damien Karrras.

By: Guest

Guest — Tue, 30 Jan 2007 10:59:11 +0000

Moldbug— Outstanding comments!!! Keep up the strong work.

By: Guest

Guest — Tue, 30 Jan 2007 10:17:39 +0000

and also from that link provided by Guest on 2007-01-30 13:40:33

“…Andrew Crockett, president of JP Morgan international, said: “These new instruments ought to make markets more complete. But there is a lack of transparency … we don’t know how much leverage there is in hedge funds, for example.”

By: Guest

Guest — Tue, 30 Jan 2007 09:40:33 +0000

if central bankers are having trouble assessing risk levels and are concerned, this demonstrates that they also have little ability to control risk.

http://www.ft.com/cms/s/1a94c8be-af15-11db-a446-0000779e2340.html