Two coordination problems likely to arise inside Bretton woods 2
Last week, I argued that the emerging world’s governments have been provided the US with an enormous credit line – one large enough to prop the dollar up – even in the absence of any formal institutions to help coordinate their actions. This credit line has even been increased as the United States financing need increased – largely because falls in private financing to the US translated into increased intervention by central banks unwilling to allow appreciation against the dollar. A desire not to appreciate (by too much) against the RMB, together with policy inertia in the Gulf, substituted for formal coordination.
But that doesn’t mean that the existing system hasn’t given rise to some coordination failures. I want to highlight two –
A lack of coordination between central banks and sovereign wealth funds inside a de facto currency union. This coordination failure effectively shifts unwanted dollar exposure – as the core issue facing the global financial system is who holds the unwanted exposure to a depreciating dollar and the resulting losses (see Barry Eichengreen's 2004 paper) – from a country’s sovereign wealth fund to its central bank.
And a lack of coordination across countries that may have allowed some Gulf countries with sovereign wealth funds to shift exposure to the dollar to emerging Asian economies reluctant to allow their currencies to appreciate against the RMB.
Both arguments are a bit speculative. Absent detailed information about the portfolios of the GCC investment funds and emerging Asian central banks, I cannot prove either argument. I still suspect both are potentially real issues.
First, the lack of coordination between a region’s sovereign wealth fund and its central bank.
Suppose that the GCC’s various wealth funds have been reducing the dollar share of the (rapidly growing) portfolios. This doesn’t mean selling dollar assets – but it does mean using the (dollar-denominated) oil revenue stream to buy European, Asian and even Latin assets rather than US assets. Both Kuwait and Qatar have indicated that they have reduced the dollar’s share of their portfolio. Abu Dhabi has a bigger investment fund than Kuwait, but roughly the same flow from its oil revenues. It isn’t clear whether ADIA has reduced the dollar share of its holdings recently or simply moved away from the dollar (and toward emerging economies) earlier than the other funds. No matter, it is likely that less than 60% of the oil revenue stream that the big GCC investment funds are managing is going toward US assets.
Now suppose that the Gulf investment funds portfolio shift has put downward pressure on the dollar. The smaller Gulf countries have a current account surplus of over $100b (see talbe 15/ p. 58), and are likely adding at least $80b to their investment funds (the IMF estimates the sum of official outflows and reserve growth from the Middle East in 2007 will top $200b).
That is a meaningful flow in a global sense: It is between 15 and 20% of the emerging world’s surplus. In a paper that became an instant classic, my friend Ramin Toloui of Pimco calculated that if less than 60% of global oil revenue flows into dollar assets, a rise in the price of oil is dollar negative.
A fall in the dollar pushes the Gulf’s currencies down v. their major trading partners. They still peg to the dollar after all. And the fall, in turn, creates expectations that the Gulf will eventually allow their currencies to appreciate. Pegging to a falling dollar as oil rises massively in real terms doesn’t make much economic sense. That pulls in speculative flows.
The net result: the GCC countries central banks are intervening in the currency market, and adding to their reserves. The $15b increase in the Emirates fx reserves in the first half of the year didn’t come from Abu Dhabi’s oil revenue. And almost all of it seems to be in dollars.
GCC investment funds end up with fewer dollars and more European and Asian assets, but GCC central banks end up with more dollars. The region’s total holdings of dollars continue to rise. And the US still gets the financing it needs ….
This story has broader relevance. SAFE – together with Huijin – used to manage almost of China’s foreign assets. And both SAFE and Huijin reported to the PBoC. Now though a broader range of state institutions – whether the China investment corporation, Citic, CDB or the state oil companies/ other state firms holding cash offshore – are managing China’s foreign assets. Each can potentially maximize its performance by minimizing its dollar holdings. But if all try to do this, they are likely to put more pressure on the RMB’s dollar peg – and force the central bank to intervene more.
The second coordination failure occurs across borders, not within them. And it likely has the character of shifting dollar exposure from oil exporting economies to oil importing economies that produce goods that compete with China.
Suppose the Gulf investment funds decide to increase their investments in emerging Asia. They cannot easily invest in China. China has capital controls. And China doesn’t need their money. It has an even bigger surplus than the Gulf, even with oil at $85-90 a barrel. But they can invest in other Asian economies with more open capital accounts – whether Pakistan, India, Thailand, Malaysia or even Korea. I wouldn’t be surprised if Gulf flows have contributed to the performance of the KOPSI, for example. But all these countries are already attracting more inflows from the rest of the world than they want. They are all already intervening in the foreign exchange market to keep their currencies from appreciating against the RMB.
More flows from the Gulf then just lead to more to intervention. And, in effect, the dollars that the Gulf doesn’t want get passed to central banks in Asia.
That isn’t a good outcome for those central banks. Many of these Asian economies pay more on their sterilization bills than they get on their dollars and euros – and they also are stuck with depreciating dollars. They would rather the Gulf just keep its dollars, or that it buy more euros. But unless they wall off their capital accounts, they don’t have much choice …
And they are likely dreading a wave of investment from China’s investment fund. They are already intervening to keep their currencies from appreciating against the RMB. The last thing they want to do is intervene even more to allow China to diversify away from the dollar. They could quite reasonably argue that if China wants to maintain a de facto crawling peg v the dollar – all the econometrics suggest that China doesn’t really have a basket peg – it ought to keep all the dollars the PBoC ends up buying.
But absent a bit of coordination, emerging Asia has no way to require than China hold its dollars.
What conclusions do I draw from this analysis?
Well, I suspect that the rise of sovereign wealth funds will pose something of a challenge to the basic dynamics of the Bretton Woods 2 system – and not just because the emerging world is starting to demand US equities in exchange for financing the US trade deficit. Central banks basically just hold dollars, euros and pounds. Sovereign wealth funds have more freedom – which means that they can try to sluff some of their dollars onto other emerging economies. Or, if they are not careful, onto their own central bank.
Moreover, the shift toward SWFs coincides with a period when US growth is subpar, the United States' comparative advantage at creating complicated securities no longer looks like much of an advantage. That suggests – at least to me – that the coordination problems associated with the Bretton Woods system could become much more serious.
I totally agree that sub par consumption within the U.S. is highly debilitating to the U.S. economy and the world.
The dollar situation is reducing the trade deficit but is surely bringing in significant inflation.
The FED should not move at all and stay fixed and let the recession unravel. In my opinion that is the only sound course of action.
Hi Brad,
Some worries too…
Hong Kong looks troubling to me. Currency is pegged to USD. Stocks is skyhigh.
Wonder where all these money come from? Could it be the hot money flows from GCC or even Chinese?
Nicolas, subpar consumption growth, and more savings, is EXACTLY what the US needs.
Adiemuso, QDII flows from China and peg-break speculation have helped fuel HKD strength, while QDII flows from China and a hot ipo season have helped propel equities higher.
It may not be clear when this ends, but it is fairly obvious how it will end…not with a whimper but a bang.
Hi Macro Man,
Imagine, if HK is an recipient of such hot money. replicate this model and you get a whole lot of problem popping up around like fungus after a downpour.
you get a whole lot of problem popping up around like fungus after a downpour.
That sems like a not-unreasonable description of the global financial system at the moment!
Interesting report by ING Finacial indicating the housing decline projected to last until 2010. The prospect for a turn around of consumer confidence is unlikely anytime soon. Funny how Robert Rubin ( ex Goldman Sachs )does not adhere to the current dollar policy.( Bloomberg today)
“China’s worst fuel crisis in two years spread to the capital and other inland areas by Wednesday, and one man was killed in a brawl at a petrol station queue… Diesel costs about 64 cents a liter at the pump in Beijing, versus around $1 in Singapore and $2 in Britain. But a recent rally in global crude prices to above $90 a barrel has deepened large firms’ losses and made them ever more reluctant to keep markets supplied… “…you see the remaining contradictions of the state sector in the market economy… On the one hand they understand that they have to assume certain political responsibilities, but at the same time they have to look after their own company interests.”…” http://www.washingtonpost.com/wp-dyn/content/article/2007/10/31/AR2007103100456.html
Scott Fitzgerald - the author of the novel “The Great Gatsby” - Once commented, “When someone didn’t do something, he usually had a lot of reasons. When someone did something, he usually had only one reason - He had to.”
And his comment fits well for our discussion about global imbalances. While everyone says the current situation is unsustainable, I don’t agree. Why? The US is having it so good… tax cut, huge military expense, none-existent fiscal discipline and now,… interest rate cut while all the rest central banks are fighting inflation ….
Even the constant talk about “net outflow of wealth” from the US isn’t true either. Currently, the total US wealth is slightly over 80 trillions (excluding residential real estate). Foreigners hold abot 12 trillions US financial asset. Compare to 25 years ago, the total US wealth around 25 trillions, this isn’t too bad.
From the outset, the dollar policy centered around 2 themes:
1. Rebalancing thru exchange rate adjustment;
2. The US renegades its international debt obligation thru intentional devaluation.
For the above, Brad, 1. is your favorite subject, I know, and I enjoy your blog (mostly silently), but you are also providing ammunitions and smoke screen for the most miserable China bashers and morally-challenged geopolitical thinkers whose real motif is actually 2. (Actions speak louder than words.)
Brad, can you kindly respond to my questions below, regarding trade balancing via exchange rate?
1. Germany is eternally in trade surplus while Italy is eternally in trade deficit, should Euro go up or down?
2. Japanese Yen had appreciated 450% within 2.5 years span (1985 - 1987, from 360 to 80 at the highest), why it was still trade surplus before and after? In the process, the Japanese economy was pathetically whacked out of sync by this exchange rate shock.
3. In the 1990s, Russian devalued more than 5500%, it didn’t turn into trade surplus. The same for a lot Latin American and Asian countries. As a matter of fact, we don’t have a single case in history for any country which turned from trade deficit into an export power house via currency depreciation. What’s your theorectical explanation?
Up until 1999, the US was quite hostile to the Japanese monetary intiative about Asian montary fund, “Miyazawa plan”, etc., with the unintended consequence now the Chinese took the Asian center stage. Now the intensity of hostility from certain US quarters is several times more toward China than it was toward Japan. (Yet, remember, according to Goldman Sachs or IMF or Wrold Bank, China will be the largest economy in the world by 2050 - or maybe 2075 - or maybe 2100 - WITHOUT FIRING A SINGLE SHOT?)
I agree with you that China is paying a hefty price for RMB policy. The decision makers are grown-ups, so be it. But if the international order gets more confrontational and abusive, I am concerned about the world our sons and daughters will be living in.
Peter: 1. Germany is eternally in trade surplus while Italy is eternally in trade deficit, should Euro go up or down?
For your info, Italy has run a large surplus for almost ten years, and has fallen into a (small) deficit only recently. Nothing compared to other euro-zone countries’ CA deficits i any case.
Peter: As a matter of fact, we don’t have a single case in history for any country which turned from trade deficit into an export power house via currency depreciation. What’s your theorectical explanation?
Look at that, Italy in 1992 which swang from a (not too large) deficit to a (large) surplus, after the lira depreciated some 15-30% versus the dollar and the mark
Peter, it is also plain wrong what you write about Russia. Their trade and current account improved big time after the 1998 devaluation (which by the way was huge, but not 5500 Percent).
Bureaucrat
Aren’t Chinese capital controls somewhat asymmetrical in being less averse to inflows than outflows of capital a la the “roach motel” effect?
I concur with the notion that economic distress can result in bellicose military consequences as government seek to channel the internal frustrations of the society into warmongering. This is another reason why I’m deeply concerned about the U.S. economy and the dollar.
Peter — I agree with bureaucrat’s point re: Russia after 98. The devaluation (along with a bit of a recovery in the oil price) had a major impact on its BoP. Fabio’s point applies to italy. the dollar’s fall from its 84-85 highs also helped bring the size of the us deficit down in the late 80s/ early 90s.
The yen’s appreciation did bring down japan’s surplus in the late 80s as well, tho japan’s subsequent slowdown after the bubble burst undid the effect.
the european region (today’s EU) region ran a surplus in the early 80s with the $ was strong and a defict in the late 80s when the $ was weak. the move in the XR had an impact. the eurozone’s overall level will be determined by its overall CA balance (spain is now the big deficit country) and capital flows in and out.
incidentally, Korea’s BoP surplus seems to have fallen with the appreciation of the won over the past few years — which suggests XRs do matter.
Emmanuel — I think China’s capital controls now have a bias in the opposite way. It is getting easy to take money out (esp. for SOEs)/ do portfolio outflows, while bringing money in is hard …
“…Brad Setser, director of research at Roubini Global Economics LLC…” ???? http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_pesek&sid=aTWAzjdpBOcQ
Adiemuso,
The Hong Kong monetary authority (HKMA)recent expenditure of around $1 billion to defend the HK dollar currency peg won’t break the bank. A billion dollars for the HKMA is really pocket change. Hong Kong Chief Executive Donald Tsang is on official record that the HKMA with the implicit backing of the China PBoC is committed to the 24 year old US Dollar peg. The Hong Kong dollar, allowed to trade 5 cents either side of HK$7.8, was little changed at HK$7.7501 per U.S. dollar yesterday. Does any Wall Street Hedge Fund Currency speculator really care to do battle with the HKMA and the China PBoC? In the last round, when Wall Street Hedge Funds battled the HKMA during the late 1990’s Asian Economic crisis, massive financial losses at Long Term Capital and the Tiger Fund required a Federal Reserve taxpayer bailout. The economic warfare attempt to destabilize the monetary regime of Hong Kong represented the equilvalent of a “de facto” declaration of war by the US Treasury Department under Robert Rubin against the Chinese government.
Hong Kong Sells HK$7.8 Billion ( USD$1 bln) to Defend Dollar Peg
http://www.bloomberg.com/apps/news?pid=20601089&sid=aDjXkpwbs.bI&refer=china
With all due respect it strikes me the desperate effort to find analogous periods of the past in order to try to predict the future. Today is a situation totally unprecedented and cannot be compared to the past.
In my opinion the outcome of today’s scenario with respect to the currency devaluation and economic conditions are history pages yet to be written.
We have an insane system.
We allow for freewheeling deregulated financial markets where everyone is free to take risks as they choose.
However, at the same time, the government provides a safety net to bail out everyone when the risk-taking turns out badly.
This is the government subsidization of risk. The more you subsidize risk, the more risk you will get.
This is INSANE. Such a system can only self-destruct.
The Ghosts of Halloween Haunt the US Dollar
http://www.safehaven.com/article-8725.htm
As Halloween 2007 approaches, traders in the global money markets are betting that Federal Reserve chief Ben “B-52″ Bernanke will sacrifice the US dollar with another rate cut, in order to cast a magic spell over Wall Street. But if “B-52″ Ben delivers another big-bang, a half-point rate cut to 4.25%, it might unleash a cadre of evil spirits, ghosts, and demons that would haunt the US dollar to its graveyard.
Since the Fed halted its rate hike campaign in August 2006, the annual growth rate of MZ has tripled from 4% to 11.8% last week. To finance its external deficits, the US must attract $2.1 billion per day, or watch the dollar fall under its own weight.
The Bernanke Fed’s addiction to monetizing the stock market and cheapening the US dollar has some interesting side effects. Each Fed rate cut has translated into higher gold and oil prices, which fuels inflationary psychology worldwide. Yet the Bernanke Fed escapes criticism from the mainstream media for destroying the purchasing power of the greenback. Instead, the mainstream media accepts doctored-up inflation statistics, fashioned by government apparatchniks as gospel.
It enables the Bernanke Fed to argue that inflation is under control, while it turns up the money printing presses at full speed. However, Gold bugs and crude oil traders are not easily duped by the government’s propaganda, making life difficult for the Fed.
Question:
As I understand one of your arguments, a surplus nation with an SWF or investment fund that is relatively independent of its central bank may end up with more of a tendency to diversify dollar surpluses into other currencies. This is in comparison to the same surplus nation absent those additional investment outlets, when considering the flexibility for recycling of dollar surpluses. The SWF and investment funds essentially become vehicles for currency diversification.
A surplus nation that intervenes to buy dollars undervalues its currency relative to the dollar. The same nation, using additional investment institutions, may diversify into a range of other target currencies. This has the effect of additionally undervaluing its currency to some degree against those other currencies.
I don’t see how this second step changes the fair value of the local currency relative to the dollar. So why would this result in more speculative dollar inflows and lead to more central bank dollar intervention?
It seems more natural, if anything, there would be additional speculative non-dollar inflows. This would mean additional capital inflows that essentially want to sell those new target currencies because they are overvalued relative to the local currency. But why should that affect the level of dollar reserves being accumulated by the central bank?
It seems to me that dollar intervention affects the valuation relationship between the dollar and the host currency. Further diversification of dollars into other currencies should affect the value relationship of this pair to the rest of the world, but not the value relationship within the pair per se.
?
India, China Face Fallout as U.S. Cuts Interest Rates
http://www.bloomberg.com/apps/news?pid=20601091&sid=a4cbp_a.X0uw&refer=india
“If the U.S. cuts rates, it will have Asia’s blood on its hands,” said Marc Faber, managing director of Hong Kong-based Marc Faber Ltd. and publisher of the Gloom, Boom & Doom Report. “The Fed is pursuing an easy monetary policy that is creating massive bubbles outside the U.S.”
The Fed’s actions threaten to spur inflation in India and China, where stocks have soared to records as a stampede of foreign money stokes share and property prices. Chinese and Indian shares have added $882 billion since the U.S. reduced rates on Sept. 18, almost a third of the $3 trillion gain in their combined market capitalization this year.
Second Question:
Your second argument suggests that currency diversification by dollar surplus nations (via central banks, SWFs, or investment funds) tends to create further intervention requirements for the central banks of certain target currencies.
As per my point above, and/or your first argument, it also exacerbates capital inflows for the diversifier with possible further intervention requirements for its central bank.
Is there some sort of insidious reserve multiplier effect going on here - for the central banks of diversifiers as well as the central banks of the target currencies?
Interesting post, Brad. But I think the game of hot potato can go on for quite a bit longer. What is going to stop it?
From Bloomberg, US Treasury Policy to Trash the US Dollar
http://www.bloomberg.com/apps/news?pid=20601039&sid=ahcvx7iJ4tXM
It hasn’t escaped Asians that Treasury Secretary Henry Paulson is talking out of both sides of his mouth. He supports a strong dollar while the U.S. stands to gain from its decline through more-competitive exports and repayment of international debts with cheaper dollars. That’s the problem with beggar-thy- neighbor policies — the neighbors realize what’s going on.
Investors such as Jim Rogers, too. “It’s the official policy of the central bank and the U.S. to debase the currency,” Rogers, a former partner of George Soros and chairman of Beeland Interests Inc., said in Amsterdam last week.
For years now, Joseph Quinlan, chief market strategist at Bank of America Corp. in New York, has been warning that the U.S.’s image as a “rogue nation” is a key force behind the dollar’s decline.
The subprime crisis doesn’t help, and neither does the perception that U.S. officials — who recently helped negotiate a bailout fund to calm credit markets — are protecting reckless investors from losses.
“Bubbles are easier to inflate than to sustain,” says Richard Duncan, a partner at Blackhorse Asset Management in Singapore, and author of the 2005 book “The Dollar Crisis: Causes, Consequences, Cures.”
Another factually incorrect off-topic posting from our resident loony! The consequences of China’s decision to maintain super-negative real interest rates and a massively undervalued currency is the Fed’s fault? Riiiggghhhhtttttt
… Take a vote guys,
Which one is more negative real interest rate,
1. The RMB at 2.75% annually,
2. The USD at 4.5% annually,
???
I sort of agree with Guest, no one has forced China/ others to manage their currencies against the dollar and adopt us monetary policy. that is their own policy choice.
“India, China Face Fallout as U.S. Cuts Interest Rates
http://www.bloomberg.com/apps/news?pid=20601091&sid=a4cbp_a.X0uw&refer=india
“If the U.S. cuts rates, it will have Asia’s blood on its hands,” said Marc Faber, managing director of Hong Kong-based Marc Faber Ltd. and publisher of the Gloom, Boom & Doom Report. “The Fed is pursuing an easy monetary policy that is creating massive bubbles outside the U.S.”
The fed’s job is to manage the us economy. the fed isn’t blowing bubbles outside the US. it is the central banks that are pegging to the $ and choosing to import US monetary policy (which is more likely to be right for the US than for them) that are blowing bubbles.
Anonymous –
my argument, which is speculative and potentially wrong, is as follows:
a) the SWF diversifies
b) for some countries, this ends up having an effect on the $ v other currencies.
c) the country in question pegs v the $, so it reduces the value of its own currency v non-dollar currencies (say the euro, pound, etc)
d) the market starts to expect a revaluation against the dollar to correct for the dollar’s slide — i.e. to keep the lcoal currency’s value v the euro constant.
e) $ and non-dollar investors have an incentive to bet on the revaluation, which would be a revaluation against a range of currencies (the dollar included)
At this stage, it is just a theory –
but do look at the h1 increase in the reserves of the UAE, and perhaps the Sept/ Oct increase in Saudi reserves …
If we like, we can define a “Core Dollar Block”, as those countries which will not (for certain reasons) exit USD-denominated asset. These countries are: Japan, China, Saudi Arab, Hong Kong, Taiwan, Singapore. - Yes, money makes strange bed fellows -.
Since the “Core Dollar Block” - plus the US - has enough combined strength - at least for quite a while - the talk about the death of the greenbacks is exagerated.
Which one is more negative real interest rate,
1. The RMB at 2.75% annually,
2. The USD at 4.5% annually,
Reply, the U.S. has more negative “real” interest rates simply because “real” productivity growth is much faster in China. New industrial production facilities built in China by Intel, Motorola, Honda, Toyota, General Motors, Bombardier, and other multinational corporations are state-of-the-art. And Chinese state-owned companies are heavily investing as well. The China Boshan Steel mill outside Shanghai is among the world’s most technologically advanced with the latest Germany and Austrian equipment. Plus engineering wages are small fraction of US wages. For the salary of 1 US Engineer, one can hire 7-8 engineers in China.
Productivity dictates unit labor costs, not real interest rates. Inflation is about the rate of change rather than absolute level of prices, Dave. Perhaps you should plagiarize an economics textbook next time.
I sort of agree with Guest, no one has forced China/ others to manage their currencies against the dollar and adopt us monetary policy. that is their own policy choice. - Brad
Why won’t the US government permit oil sales to be denominated in Euro, yen, or yuan. Iraq previously switched to Euro, and we all know what happened to former President Saddam Hussein. Immediately after the US military forces entered Baghdad, President Bush ordered that Iraqi oil sales be denominated in US Dollars only. The Chinese and other nations are forced to support the US monetary regime simply because of the US miltary protection racket controlling strategic Middle East energy reserves. Everyone needs oil and only US Dollars can be used for the purchase of oil so everyone accepts US dollars. The basis for US Dollar hegemony is the US military backed energy reserves of the Gulf Arab states.
The US won’t permit non-dollar sales of oil? Where is your proof other than the witterings of some PLA stooge?
Guest,
The prices of Chinese products have a deflationary impact, that means in simple economic terms that “real” prices for Chinese exports are declining, translating into low overall inflation in China. That’s why we have DVD players that once sold for $600 now selling at Walmart for $60. Due to imports from China, the purchasing power of US Consumers shopping at Walmart has increased dramatically. Due to increasing Chinese industrial productivity and technology advancement, there will hopefully soon be a similar deflationary economic impact in advanced high-value products around the globe.
I would also add that most Western Economic pundits of the Washington Consensus consciously would rather like to see China as a backward, 3rd world undeveloped nation that can be exploited like the poor, bombed Iraqi people. Sorry to ruin the game plans of US Neo-liberalism imperialists, but the Chinese won’t be playing along.
The US won’t permit non-dollar sales of oil? Where is your proof other than the witterings of some PLA stooge?
Reply, perhaps you don’t read the newspapers, but there are really 160,000 US military troops physically occupying Iraqi oil field with VP Cheney’s Halliburton pumping the black gold. For the record, the Chinese PLA doesn’t invade, occupy, and steal the oil reserves of other sovereign nations in the Middle East. Nor does the China PBoC dictate the monetary policies of other sovereign nations. Nor does the Chinese President dictate to anyone what currency they should export their oil in.
real rates are usually defined relative to a measure of inflation, and by that measure, china and S. Arabia both have lower real rates than the USA
OK, its off-topic, but it is topical.
I wonder if it is possible for the Fed to be excluded from international central bank meetings (eg at the BIS) on the grounds that they can no longer qualify as a serious central bank?
Brad,
If talking about Chinese real inflation number, and if taking out “food & energy”, just like the US “core inflation index”, the Chinese inflation rate would be very low, something like 0.9%.
Once again, Dave, you add one and one and get sixteen. That the US has a heavy military presence in Iraq is incontrevertible; that that means no one else can sell oil in non-dollar currencies displays a logic as dubious as your grasp of Econ 101.
If they ever decide toi re-make the Wizard of Oz, I nominate you to play the Straw Man.
i think dave chiang is a plant. his china v. the u s scenario acts as a smokescreen, and must serve to drive the american contributors / readers / lurkers into the arms of their own government, which is not actually acting in their interest, unless they are members of the oligarchy / elite.
china and america are close allies with similar ruthless attitudes to their own citizens. it is a distraction to get hooked up on ‘china v. america’ as though global finance was a game for two players.
dave chiang exhibits the style of the propagandist - he meets opposition not by addressing their arguments, but by repetition of his own.
the most obvious exponent of this style is george bush, or perhaps it is really one of the techniques understood and mastered by karl rove.
by a ‘plant’ i mean someone sent in to put the opposition argument in such an irritating and inflexible way that all readers lose patience with it.
if dave chiang is not a plant - then i am mistaken, sorry, but he should try harder not to sound / read like one.
Guest,
The first Baghdad government installation secured by the US military was the Iraqi Ministry of Energy. Never mind that Iraqi Army arsenals were looted of bombs and explosives, museums stolen of ancient artifacts, the only priority was economic control over the Iraqi energy sector by the Bush Administration. By literally the point of a M-1 tank cannon, under direct Presidental order, export revenue from Iraqi energy exports was converted from Euros to only US dollars. Signed energy development contracts between the Iraq Energy Ministry and China Sinopec were unilaterally abrogated. Do you get the point when someone holds a loaded gun to your head?
It is always laughable when the US mainstream media describes the China PLA as a global threat to US National Security. In reality, the only Chinese troops deployed in foreign nations are part of United Nations Peacekeeping operations around the world. In fact, the largest UN peacekeeping forces along the Israeli-Lebanon border, the Africa Congo, Haiti, and Darfur Sudan are China PLA soldiers.
Guest,
The first Baghdad government installation secured by the US military was the Iraqi Ministry of Energy. Never mind that Iraqi Army arsenals were looted of bombs and explosives, museums stolen of ancient artifacts, the only priority was economic control over the Iraqi energy sector by the Bush Administration. By literally the point of a M-1 tank cannon, under direct Presidental order, export revenue from Iraqi energy exports was converted from Euros to only US dollars. Signed energy development contracts between the Iraq Energy Ministry and China Sinopec were unilaterally abrogated. Do you get the point when someone holds a loaded gun to your head?
It is always laughable when the US mainstream media describes the China PLA as a global threat to US National Security. In reality, the only Chinese troops deployed in foreign nations are part of United Nations Peacekeeping operations around the world. In fact, the largest UN peacekeeping forces along the Israeli-Lebanon border, the Africa Congo, Haiti, and Darfur Sudan are China PLA soldiers.
If talking about Chinese real inflation number, and if taking out “food & energy”, just like the US “core inflation index”, the Chinese inflation rate would be very low, something like 0.9%. - Peter,
Pork prices soared in China due to a one time disease epidemic that required slaughtering over 240,000 pigs. Temporary price controls have been imposed on food and other products due to the special situation. Productivity is still rising at a rapid rate so that inflation will gradually adjust downwards. Further monetary tightening will also dampen inflation expectations. The high international oil prices won’t have a tremendous impact on the Chinese economy since 60-70% of oil and natural gas is still domestically produced.
Once again, gillies gets it right: “china and america are close allies with similar ruthless attitudes to their own citizens. it is a distraction to get hooked up on ‘china v. america’ as though global finance was a game for two players.”
That’s why I think this game with the USD won’t be over any time soon. It very much serves the interests of the people at the top for both parties.
Superb insight in this post, Brad. I would suggest to take the issue even further: The coordination problems you mention might be derived from the Bretton Woods II currency ’system’ and the old “external equilibrium vs. internal equilibrium” dilemma (usually represented in the Salter-Swan diagram) facing the US since 2001, with a complicated external interdependency twist.
In light of this, I found suprising that you mentioned in one of your comments that “the Fed’s job is to manage the US economy”. It might be the real unofficial goal (and sound somewhat chillingly akin to central planning), but officially the Fed is more restrained: only price stability, and maximum employment (for the US, understood). Furthermore, the problem is that monetary policy in the main international reserve and payments currency has strong spillovers across borders. (Also US fiscal policy and of course financial regulatory policy, by the way).
I am reading the fantastic 2002 book by Michael Pettis that you recommended (”The Volatility Machine”), and one of the main theses of the book as I understood it is that developments in financial centres of the developed economies, particularly the US, are the main drivers of crises in the emerging world. This fact should recommend some sort of attention to US external disequilibrium by US policy makers, particularly monetary authorities. It seems to be absent in the Fed.
In almost every mainstream model of current account and exchange rates that I have seen (e.g. Polak, Harry Johnson, Dornbusch), monetary factors -domestic credit particularly- are essential in both determining domestic absorption (and therefore the current account) and the exchange rate. Is the Fed riskily neglecting external equilibrium and spillovers of its policies and privileging short-term internal fine-tuning? The same question could of course be asked to the remaining monetary players in the increasingly exciting Bretton Woods 2 drama.
Brad Setser wrote:
“And, in effect, the dollars that the Gulf doesn’t want get passed to central banks in Asia. That isn’t a good outcome for those central banks. … They would rather the Gulf just keep its dollars … And they are likely dreading a wave of investment from China’s investment fund. … The last thing they want to do is intervene even more to allow China to diversify away from the dollar.”
A brilliant way to say that the dollar has become a hot potato.
“The fed’s job is to manage the us economy. the fed isn’t blowing bubbles outside the US. it is the central banks that are pegging to the $ and choosing to import US monetary policy (which is more likely to be right for the US than for them) that are blowing bubbles.”
So true. Now, what if those central banks realize (at long last!) their folly, stop buying dollars and let their currencies appreciate against the dollar? Won’t the ensuing fall in the dollar trigger a chain reaction of more dollar holders selling their dollars, the dollar falling further, and so on (Krugman’s “Wily E. Coyote moment”)? And if so, will commodity exporters keep pricing their resources (which in the case of oil and natural gas come from a finite, absolutely exhaustible endowment) in fast depreciating dollars? Isn’t it more reasonable to assume that they will switch to pricing them in their own currencies, or in gold? And seeing that the value of their huge dollar reserves (again, unwisely accumulated out of their OWN folly) is plummeting when measured in critical physical resources, is it too far-fetched to assume that exporters will also stop accepting dollars as means of payment?
Sure they would still need dollars to pay for their imports from the US, but the key point is, if paying for US exports becomes the only reason to hold dollars - as it should have always been in a fair international monetary system, BTW, i.e. one in which the dollar was not “special” - then there are way, way too many dollars (and US-issued dollar-denominated debt) outside the US. So many that their holders will be able to pay for US exports for a very, very long time without needing to sell anything to the US.
Clearly, if the US becomes the only country accepting dollars as payment for its exports, US imports will drop brutally - conceivably to zero - while its exports will soar. Taking into account that the US imports 59 % of its consumption of oil + petroleum products, the impact on US life will be brutal too.
So, yes, the Fed’s job is to manage the US economy. But they’d better take into account the extent to which life as Americans know it depends on the dollar’s “special” status abroad.
The bottom line is that the US current account WILL eventually be balanced, but, depending on the Fed’s chosen monetary path, it will happen in either of two ways: a brutal way as described above, which they seem to be pursuing, or a smooth way, if the Fed adopts a tight monetary policy aimed at checking money supply growth. The latter path would certainly cause a recession in the US (whereby causing a substantial drop in non-essential imports) which, at least IMV, still seems a much more desirable outcome than its alternative.
Petert on 2007-10-31 10:18:11 asked:
“… Take a vote guys,
Which one is more negative real interest rate,
1. The RMB at 2.75% annually,
2. The USD at 4.5% annually,
???”
It’s not a matter for voting, just as a physics problem wouldn’t be. You need to know the respective inflation rates and then compare.
If you don’t believe in official inflation numbers, then you can calculate them yourself from the growth rates in money supply and in real net national income.
I came across a post from DC in the previous, now inactive, thread, that I feel is worth replying to in this, since it has a lot to do with my 2007-10-31 17:01:06 post.
“The US wants only the Chinese yuan to revalue so an across the board devaluation of US Dollar hegemony can be avoided.”
Wrong. If the PBoC revalues the RMB (=stops buying USDs) the USD will also fall against the other currencies. The other countries cannot (and wouldn’t want to) compensate for the missing PBoC USD demand.
“Why should the Chinese agree to castrate their own domestic economy and unemploy millions of workers?”
Shouldn’t it be better expressed in this terms?
Why should the Chinese keep burning (and breathing) their coal just to amass an even bigger stack of dollars that, if the “brutal” global rebalancing scenario comes into play, will become increasingly less valuable when measured in critical physical commodities that China imports?
And exporting less and therefore producing less does not necessarily mean unemployment for millions. Just have people work less hours, spend more time with their families, and BTW have a better sex life too as a result.
“If the Chinese were to revalue, US government would certainly not permit global oil sales to be denominated in Chinese yuan.”
If the Chinese were to revalue, oil and natural gas exporters would certainly not WANT to price their products in RMB, or in yen, or in the currency of any oil importing country. They would want to price them in THEIR currencies or, at most, in gold. (The might have to accept using the currency of a food exporting country, since food is more critical than oil. And China and Japan do not export either. As I said in my previous post, this would not save the USD since there are already too many USDs outside the US.)
“Under US Dollar hegemony, the Chinese economy has already been taxed enough by exporting “real” economic wealth in exchange for fiat US Dollar paper printed in unlimited quantities by the Federal Reserve.”
Yes, but it was the Chinese Government/PBoC who made the decision to pay that tax! Brad is so right regarding this point.
Mick Rolland –
Thanks for your comment. Right now, i would pose the dilemma facing the fed a bit differently. in the short-run, internal equilibrium would probably be most easily achieved through a weaker dollar (stronger exports, net exports contribute positively to growth) given limited pass through (changes in the dollar don’t have a huge impact on import prices, let alone overall prices). but if the $ slides too far, the “privileges” the US has long enjoyed (borrowing in $, at low fixed rates) may start to disappear.
and for the rest of the world, the dilemma is as follows: if the global economy decouples from the us, those countries that have coupled their currencies and monetary policies from the us will be importing the wrong policy.
that hurts them (in my view) and retards adjustment, but it tends to reinforce the dollar’s international role.
Hi All,
Some how Im getting these thoughts, conspiracies to some i supposed.
Think we all agree that the USD is a hot potato or to certain extent near toxic levels. And we mostly agree that the Central Banks are imperfect and inefficient to certain extent. And we mostly agree that these SWFs are likely to serve as a USD diversification tool for their respective masters.
Recent events seem to suggest a trend. Irregardless of their nationalities, I am seeing huge USD holders(direct or indirectly linked to sovereigns) buying foreign assets in Developing or Emerging economies and paying them in USD. Skeptic, I am, the prices published are somewhat high and mildly inflated (to be kind).
And if HK, together with the other similar models, is true. What we have got here is a dumping of hot money into an open and USD pegged economy. Defend the currency, she will (as claimed), but how about those hapless ones without the budging reserves and might of the PBOC? And remember if the QDII is true, these hot flows originate from China and so in relativity it is a small issue than if the flows were from non-Chinese.
It appears to me that the trend has one similarity, and that is, being a skeptic again, that common adage of Big Fish Eat Small Fish holds. It doesn’t matters (to paraphase Mao Zedong) what colour or specie of fish you are, as long you are Big enough to eat up smaller fishes and am able dump the buckets of hot toxic to the depleted hosts you are a good Fish.
Regarding the Fed’s role.
From what I gather, Miskin’s speeches the most recent one, in it he mentions
“The Congress has given the Federal Reserve a dual mandate to achieve both price stability and maximum sustainable employment. The Federal Reserve’s role as a provider of liquidity to cope with episodes of financial instability has been, and will continue to be, critical to its success in achieving this mandate.”
He also stresses
“the Federal Reserve vigorously promotes financial stability because of the intimate connection between a stable financial system and solid macroeconomic performance. The financial system, comprising financial markets and institutions, channels funds to those individuals or firms that have productive investment opportunities.”
And the extra emphasis
“Therefore, a stable financial system is of vital importance for the Federal Reserve if it is to pursue its statutory goals of maximum sustainable employment and stable prices.”
My conclusion is, the Fed has in nodoubt a dual mandate, however it will not allow the market to crash irregardless of the macro and/or long term implication/repercussions that may arise from their interventions. It appears to be a sound arguement, one which arise from realism. What’s good of Long Term goals when you have problems crossing the next step.
Brad, I completely agree in your appreciations of the dollar and of pegged currencies, as I think you have given good support for this judgment in your research.
Still, I believe that there is a deeper coordination failure in the absence of mutually consistent monetary policies in the “greater dollar area”. My point: Usually the countries respecting a fixed exchange rate agreement (especially a dollar peg) were considered ‘innocent’ of currency manipulation, as they simply follow an easily trackable monetary rule in relation to an established anchor. Not only that, prior to 1971-73, it was even considered the only currency regime compatible with international monetary cooperation (for a member country of the Bretton Woods-era IMF).
However, today the vast surpluses and explosive accumulation of reserves by certain countries pegged to the dollar might qualify them as “currency manipulators” following the Articles of Agreement of the IMF (art. IV) and the 1977 and 2007 Exchange Rate Surveillance decisions of the IMF. Most of them publicly declare that they use the currency purchases as a way to keep exports going (that is, a balance of payments purpose), their forex interventions are in only one direction and (least convincing) are judged to have a misaligned exchange rate in most econometric models. This is unusual, as ‘currency manipulators’ had always been those who devalued their currency (competitive devaluations), not those who were able to keep their pegs.
Why this situation is upside down? An exceptionally high productivity growth and spending restraint in China and some other countries could explain their tremendous savings (the ’savings glut’ thesis), coupled with their exchange rate regime, and therefore their financing of the US. But to me, it seems insufficient to explain that other unlikely countries (such as most of Latin America regardless of their policies) have also accumulated reserves big time. Commodities prices could not only be being brought up by real increases in production, but by nominal demand induced by credit creation. And the more I read into Michael Pettis’ book, the more I see this happened before in other liquidity expansions linked to financial conditions and monetary policies in other financial centres (what I would call the ‘Kindleberger thesis’)…
All in all, we shouldn’t exclusively point the fingers at exchange rate regimes in developing countries -although it is perfectly right, as you say, because they are importing US monetary policy at their peril-: I believe that short-termism and neglect of coordination in monetary policy by central countries (US and Japan particularly) should also be in the spotlight of the causes of global imbalances.
And to me it is particularly puzzling that in analysis of the low US savings rate, negative real interest rates in the US for three years are quickly dismissed as a factor by Fed analysts and management (and the IMF Research).
Hi Adiemuso,
You point to the dilemma now facing the Fed… What is more important, a short term rescue of the financial system and further spending stimulus, or the preservation of the purchasing power of the dollar and avoidance of risky (in the long-term) accumulation of global imbalances, at the risk of a certain short-term recession and very likely financial crisis? It is clear they have opted for the first option and hoped for the best, concurring in the framing of the question in the terms that you have made.
The problem is that in monetary policy “sustainability” of maximum employment (as Mishkin carefully chooses his words) and financial stability is more elusive than it seems, and will be even more if China and the Middle East keep on increasing their already massive leverage on US monetary policy -a variation of Larry Summers’ theme in the previous post by Brad. I would rather think of 50 years of debate on the Phillips curve… And of the unpleasant lessons of ‘dynamic inconsistency’.
There is no dillema with the fed. As long as the rest of the world continues to support the current trading system the US will continue to dominate everything. There is no problem with the middle east or china because they arent powerful or confident enough to make a stand.
It strikes me that the Fed lower the rate by a a quarter percent with the caveat that this is it for now.
Strange , the economy is doing well so why not devalue the dollar even further with a 2 percent cut. In the grand scheme of things all the geniuses out there would profit greatly as surmised here.
This is proof that the U.S. dollar is down because the U.S. finances are a mess and not by some grand design.
” My argument …is as follows … $ and non-dollar investors have an incentive to bet on the revaluation, which would be a revaluation against a range of currencies (the dollar included) ”
I agree, and would tweak the argument as follows, using China as an example:
China’s core reserve balance sheet position is $/RMB (long dollar, short RMB)
The result is an overvalued dollar against RMB
China diversifies into Euros by selling dollars for Euros
I.e., for a portion of China’s reserves, $/RMB x Euro/$ = Euro/RMB
At the margin, the result is:
- Overvalued Euro against the dollar
- Dollar remains overvalued against RMB
- Overvalued Euro against the RMB
What capital flows would this attract?
Logically three different routes:
- Euros into dollars
- Dollars into RMB
- Euros into RMB
It seems like the sale of dollars for Euros should have no effect on the $/RMB overvaluation “gap”. The same $/RMB overvaluation now applies to a smaller level of dollar reserves than would have been the case without diversification. The original $/RMB overvaluation has been replaced by a combination of $/RMB and Euro/RMB overvaluations, but over the same total level of reserves as before. So the total currency weighted “overvaluation of reserves” is the same in both cases, at least at the point of diversification. With that, it seems like the propensity for speculative capital inflows should be somewhat proportionate to the resulting currency mix of reserves - i.e. dollar capital inflows into the RMB should not necessarily expect to be rewarded for the new overvaluation of the Euro against the dollar or the RMB. But Euro capital inflows into RMB can expect this.
NET PURCHASES OF U.S. TREASURY BONDS & NOTES BY MAJOR FOREIGN SECTOR:
FOREIGN OFFICIAL INSTITUTIONS, OTHER FOREIGNERS, AND
INTERNATIONAL & REGIONAL ORGANIZATIONS
(IN MILLIONS OF DOLLARS)
(NEGATIVE FIGURES INDICATE NET SALES BY FOREIGNERS TO U.S. RESIDENTS
OR A NET OUTFLOW OF CAPITAL FROM THE UNITED STATES)
TOTAL INTERNATIONAL
NET FOREIGN AND
FOREIGN OFFICIAL OTHER REGIONAL
MONTH PURCHASES INSTITUTIONS FOREIGNERS ORGANIZATIONS
——- ————— ———— ———— —————
2007-08 -2,588 -29,685 27,272 -175
2007-07 -9,367 -6,925 -2,518 76
2007-06 24,682 6,433 20,110 -1,861
2007-05 22,658 -4,590 26,975
I would happy to see the dollar at 1.32 to the Euro.
I really can’t see that happening anytime soon.
Brad writes:
“the core issue facing the global financial system is who holds the unwanted exposure to a depreciating dollar and the resulting losses”
(1) Americans.
(2) American banks.
(3) American corporations.
(4) Rich Americans.
(5) American homeowners.
(6) American pensions.
(7) Other Americans.
(8) Minor foreign actors, in aggregate a small fraction of all outstanding dollar assets.
Think Quick Bernanke, Stock Market Dow Average has plunged 193 points at the opening today.
Cramer is pounding the table at CNBC for another 0.5% immediate rate cut.
Wall Street demands an IMMEDIATE Fed bailout. Additional $70 billion in high power liquidity added this morning as demanded by Goldman Sachs. No reckless Hedge Fund should ever be allowed to go bankrupt.
To hell with soaring real inflation and the monetary value of the US Dollars. Moral Hazard be damned. What Cramer and CNBC want, the Fed lackeys will deliver free.
Helicopter Bernanke to the rescue for another government bailout with more cheap, debased money! The only solution to every Economic problem is always printing more money and issuing more credit. Interest rates will soon be slashed to zero.
great post.
Bernanke got the job too late and reacted too late. Everybody is going to witness how powerless the CB he runs now is …
I mean if only he had launched the helicopters a year ago and dropped cash, real cashed backed on the governments power to tax and on its weaponry … But now he only put rates lower and encourages more debt, more debt adding to the already unheard off amount of debt world wide.
So the future is pretty clear : deflation for all through a major havoc in the financial system, bankrupcies etc.
And there is not much Bernanke can do, because even 0% rates would not encourage consumers and home owners to borrow more, they d only swap their existing amount of debts and then would try to repay them, since their houses will soon have lost 50% of their value.
So everybody will be suddenly saving more in all the world, therefore the money emission through credit will stop and money will even be destroyed …
Too bad no body s taken the punch bowl… But tell me has anything changed since Buddha ? Attachment leads to pain. You think you have a right to be repaid, you think you can borrow your present life on future expectations of revenues and repayment … Then you suffer. And there will never be anybody to take away the punch bowl in an orgy.
All the blame is on those who deregulated the finance industry, not on those who were unable to manage what had been made unmanageable.
to better stress my points, all the debates around rates, balances, be them interest rates, growth rates, inflation rates, balance of payments, trade balance … all this is fine and well. And good economists should indeed care about negative real interest rate, purchasing power parity, enforcing a long term neutral balance of trade in all countries etc… BUT and that is a BIG but (and possibly a big butt presented to economy as a discipline) all this is just small change relative to the major issues. And the major issues remain the legal ones, the regulation of the finance industry,on international trade and capital flows for exemple.
If controls on capital flows and regulation of the financial industry etc. had been kept, we would not be in the mess we are now. And also, once they deregulation had been adopted, we would have need Gods on earth, or perfect heroes (semigods) to properly manage the system. By this I mean all the incentives were there to lead to “regulating” institutions who don t want to harm those they regulate, be they the central banks or noting institutions … The last 25 years have seen the biggest credit bubble ever and I don t believe this is related to the interest policy. At least this is just part of the picture.
If you want to see the scheme from very far it can be summed up in one sentence :
Back in 1945 the USA chose to have the dollar replace the pound as the international currency instead of creating a new currency emitted by the IMF.
Of course at first the dollar was back by gold, just as the sterling had been, and then after the vietnam war it stopped being backed by gold, just as the sterling had stopped (more or less) after the first world war …
So now what do we have ?
a country who s happy to get financed and can t really protest, and a bunch of coutrnies happy to adopt export led growth… (And for the oil exporters I don t understand.)
To me this is the initial error that led us to where we are, the scheme created was such that the US grow accustomed to deficits. And here we are. And deregulation only made things worse. In fact back in 1971-85 many bad choices were made.
bsetser: SAFE - together with Huijin - used to manage almost of China’s foreign assets. And both SAFE and Huijin reported to the PBoC. Now though a broader range of state institutions - whether the China investment corporation, Citic, CDB or the state oil companies/ other state firms holding cash offshore - are managing China’s foreign assets.
This isn’t true. SAFE administrates PRC currency policy, but it has never had authority over Citic, CDB, or the state oil companies or their offshore dollar holdings. SAFE reports to the PBC, but Huijin reported to the Ministry of Finance.
DC: Why won’t the US government permit oil sales to be denominated in Euro, yen, or yuan.
It’s not a matter of the US permitting anything. Prices on all major commodities (oil, gold, platinum, palladium) are denominated in dollars. The fact that something is denominated in dollars doesn’t mean that someone will take only dollars. If you want to pay euros for oil, there are lots of people that would be happy to sell it to you.
ethan — in some deep sense you are right. no one is more exposed to the $ than the US or us citizens with assets in $. fortunately, they also spend mostly in $, so there is no asset/liability mismatch.
2fish — your point rings true, but the relative scale of foreign assets held outside of safe will change with the cic.
One other bit of data is that I was at the Chinese Financial Association conference over the weekend in which Chinese mutual managers were actively trying to recruit Wall Street professionals to come back home and manage portfolios. In the short run, there is a huge demand for all sorts of people to manage QDII transactions. In the long run, one fund mentioned that they were looking for people with experience investing in emerging markets.
The other thing that I got from the conference was how close the cooperation is between Hong Kong and mainland markets. One of the medium term goals of the PRC government seems to be to have Hong Kong displace Tokyo as the center for finance in the “third time zone” as well as to tap into the financial expertise that exists there. One interesting part of this is that one of the goals of Hong Kong appears to be to become a center for Islamic finance which ties into a lot of the themes in this post.
About currency revaluation….. There was a mid-level official from the PRC who gave a talk. He didn’t answer any questions about currency valuation directly, but he did say to read Hu Jintao’s remarks at the party congress in the original Chinese, and that “interesting things are about to happen.”
It was also curious to hear a talk from someone that worked in the Treasury during the mid-1990’s and to hear first hand what they said happened and the relevance to China. Far from trying to destroy East Asian economies, that person said that Treasury and the IMF were trying hard to pump money into the southeast Asia during the crisis, but they were just overwhelmed by the scale of the capital flows.
The final thing about the conference was that it would have been a playground for conspiracy theorists. You had people from the Council of Foreign Relations, Wall Street bankers, ex-officials from the US Treasury Department, officials from the Chinese government, and the heads of some of the Chinese mutual funds all in one room. One point that the PRC official made was that he travelled all the way from China to give a twenty minute talk because the people in the audience, who were a sample of Chinese people who work in Wall Street finance were the precisely people who are going to be making the big decisions in the future.
Yes there is a vast conspiracy. I’ve seen it. I’m actually part of it. Care to join in?
CIC is going to be just the tip of the iceberg. The big mass of money is going to move once QDII starts going. QDII is going to move about US$90 billion out before the end of next year, and I think that this is just the beginning of some truly massive capital flows.
I do think that exchange rates are going to be signficantly liberalized in the next year or so, because I don’t see how any of these flows are going to work in a system of pegged or even semi-pegged exchange rates.
Twofish,
Get yourself a real job
guest — the last insult was uncalled for. 2fish is a valued contributor here
“I was at the Chinese Financial Association conference over the weekend in which Chinese mutual managers were actively trying to recruit Wall Street professionals to come back home and manage portfolios.”
where interests coincide - conspiracy is totally redundant. will there be a conspiracy between wall street and the chinese sovereign wealth investment managers ? no, because they won’t need one.
.
Gillies — A very perceptive comment from an Irish farmer … you are very right. the entire street has jumped on the SWF bandwagon.
Twofish - i wonder how this comes of any surprise? (Chineese looking for EM fund managers)
The only rational strategy for China would have been buying as much Brazil and Russia as their goverments would
have allowed, to hedge their commodity exposure instead of pouring money into US debt.
Me thinks they are a bit to late now with the equity bull market in EM going on for many years, but still it’s
a better investment that gt10 at 4.3%…