Official purchases and the bond yield conundrum
Actually, the title really should be official purchases, data revisions and the bond yield conundrum. This is a rather wonky post.
The Economist View highlighted a paper by Tao Wu of the Federal Reserve Bank of Dallas (and a coauthor of Rudebusch, Swanson and Wu) that cast doubt on the impact of foreign official demand on Treasury yields.
Tao Wu’s Chart 3 in particular caught my eye. According to the data presented, official purchases (or Treasuries) fell sharply after 2004, but bond yields remained low. The conundrum out-lasted official demand.
That — together with some econometric work that failed to find the expected relationship between official demand and treasury yields (or rather only found the expected relationship after 2000) — casts a bit of doubt on my preferred explanation for low US rates over the past several years. It also is a conclusion at odds with Warnock and Warnock.
Perhaps as importantly, the sharp fall in official demand for Treasuries in graph 3 didn’t match my sense of what has been happening. That called for a bit more investigation. I also wanted to look at whether one key difference between Rudebusch and Wu and Warnock and Warnock (updated here)– namely that Warnock and Warnock look at official demand for Treasuries and Agencies not just official demand for Treasuries might explain the different conclusions. Some Agencies are fairly close substitutes for Treasuries.
My conclusions? To make a long story short, data revisions matter. The fall in official demand for Treasuries so apparent in Wu’s chart largely disappears if you look at the revised data (which is only available on a quarterly basis). Essentially, the shift in reserve growth from Japan, Korea and Taiwan to China, Brazil, India and the oil exporters reduced the share of official demand for Treasuries that appears in the monthly TIC data more than in reduced official demand for Treasuries.
The evidence?
The following chart shows foreign official demand for Treasuries and Agencies (looking at the rolling 12m sum) in the TIC data and the revised totals in the BEA capital account data. The revisions are made to reflect the outcome of the annual survey of foreign portfolio holdings. The revised total for Treasuries is in yellow, and the red dots show the sum of Treasury and Agency purchases after the revisions.
The unrevised data comes from the Treasury (via Bloomberg) and the revised data comes from the BEA (use the interactive tables. Wu’s chart 3 is scaled to GDP, while I kept everything in dollars. That doesn’t change all that much.
What does the chart show?
First, the fall off in overall demand for Agencies and Treasuries essentially disappears in the revised data. Total official purchases go from a bit over $300b in 2004 to $250b in 2005, and then rise to $400b or so in 2006. There is a bit of a fall off in demand for Treasuries. There also was a fall in new issuance, as the US started running smaller deficits. Total Treasuries in private hands actually didn’t rise much — but that is another story. More importantly, the fall in demand for Treasuries was offset by an increase in demand for Agencies.
Second, the size of the gap between the initial data and the revised data seems to be increasing over time. There is a fairly simple reason for this, which I already mentioned. Japanese purchases tend to show up in the data in real time (in the monthly TIC data), while Chinese purchases tend to show up with a lag (long-term Chinese purchases were revised up by around $90b after each of the last two surveys). Russian purchases also tend to be revised up. The Gulf’s purchases in general just don’t show up — so even the revised data likely undercounts total official purchases, or at least the purchase of dollar-denominated securities with government funds. The Gulf uses outside fund managers more than China or Russia.
The last revised data point is for December 2006 (the BEA tends to smooth the data, increasing purchases before and after the June survey rather than just having a big one-off jump). What has been happening since then?
To make an informed guess, I added two lines to the earlier chart — one that shows total foreign purchases of long-term Treasuries and Agencies, and one that shows my estimate for dollar reserve growth globally. The resulting chart is a bit confusing, but hopefully still comprehensible.
What does it show?
First, in 2006, official purchases accounted for nearly all total foreign purchases of Treasuries and Agencies. The red dots converge with the blue line. That only became apparent though after the post-survey data revisions.
Second, overall reserve growth is far stronger now than in 2006, so one would expect more official demand for all official assets. The fall in total official purchases doesn’t make much sense. It likely will change with the data revisions.
Third, official demand has shifted toward Agencies and away from Treasuries. That basic trend is real and in my judgment won’t change with the data revisions. 2008 though may offer a different story. Agencies haven’t performed so well recently.
Fourth, total foreign purchases of Treasuries and Agencies (the blue line) hasn’t increased along with the increase in reserve growth. That tells us less than you might think. The US only tracks the sale of US debt from US residents to foreigners, not sales among non-residents. So if in 2007 the PBoC bought a Treasury bond purchased by a German pension fund in 2005 it wouldn’t show up in the US data for 2007 at all. Because of such transactions, the increase in official holdings could exceed total foreign purchases. But the absence of a strong correlation between overall purchases of Treasuries and Agencies and overall reserve growth still is interesting — it certainly is different from 2002-2004.
So where have the funds that haven’t gone into Treasuries and Agencies gone?
It doesn’t seem to have gone into the equity market. Foreign purchases of equities haven’t really increased that much — and, at around $200b a year, are still quite small relative to total bond purchases.
Some of it has gone into short-term deposits and bills — which aren’t included in the data here. The US data shows a $100b increase in short-term official claims.
Some of it may be in offshore dollar deposits, or the BIS.
Some may have gone into dollar debt issued by say European companies or emerging markets themselves (though I suspect this is small).
Some may have gone into other currencies, as central banks diversified — though the data from the emerging market central banks that report to the IMF doesn’t suggest much diversification. The (small) fall in the dollar’s overall share reflects the fact that the reserves of reporting emerging economies (which keep about 60% of their reserves in dollars) are growing faster than the reserves of the industrial economies, which have a big dollar share — not a shift in the portfolio composition of reporting emerging economies.
And the IMF data only tells us so much — the big Gulf central banks and China don’t report data on the currency composition of their reserves to the IMF.
The gap between overall Treasury and Agency purchases and overall reserve growth over the past year remains a bit of a mystery to me.
But one thing seems fairly certain. The gap between official purchases in the TIC data and actual official purchases that developed in 2005 and grew in 2006 almost certainly continued to rise in 2007. That suggests, at least to me, that any econometric work based off the unrevised TIC data also may need to be revised — or at least updated using the revised data.
That though is technically hard, since the TIC data is monthly and the revised data is quarterly. There are a lot fewer observations. But given how big the gap is between the unrevised data and the revised data, I suspect using unrevised data produces an equally misleading picture.
One final point: the Fed’s custodial holdings increased by around $30b in February. That is a bit off the torrid January pace, but it is still very strong. Sovereign wealth funds may still be buying banks not bills now, but demand for plain old Treasury and Agency bonds hasn’t gone away.
Quote of the Day:
“In the final analysis the Fed undershoots, overshoots, and blows serial bubbles from creating excessive liquidity. It matters not whether this is by accident or design. The end result is the same: wealth concentration in the hands of the banks and the wealthy, fear sponsored government fascism, and the impoverishment of the middle class. For these reasons the Fed should be abolished.”
- Mish Shedlock
on topic comments please
The bond yield conundrum from official government purchases is already past history. At very most, foreign government purchases contributed to perhaps a 1 percent reduction for longer term US bond rates. If you haven’t noticed, long bond rates for the past month are rising despite Helicopter Bernanke’s “cheap money” monetary policy. As the Fed lowers the discount rate accelerating inflationary pressures, the faster the US Dollar crumbles on foreign exchange markets. After burned on a $10 billion loss for AAA-rated MBS crap, even the state-owned Bank of China isn’t investing in US bond securities. No one wants the US Dollar anymore. In Vietnam and China, everyone is disposing of their dollars into Gold, Silver, Euros or the local currency.
Greenspan collects $100,000 for speech in Saudi Arabia where inflation is a huge problem and tells gulf producers to drop the US dollar peg, dump the dollar, and let their currency rise to ease their inflation problems. What say yee?
Simply a brilliant piece of financial illustration. “The red dots converge with the blue line.” In other words, all our bonds are bought by our generous partners in global governance. Nice, very nice.
If I can make one request for an extended dance remix, I think it would be interesting to see these numbers on a cumulative rather than a periodic basis – ie, total reserve purchases rather than annual statistics. If nothing else, it would be more dramatic.
Of course the fascinating question, the lede really, is the gap between the green dots and the red dots. “So where have the funds that haven’t gone into Treasuries and Agencies gone?” Well, not into mold, I’m sure. Or am I sure? Well, no, I’m not sure. But I still doubt it.
The basic shape of this game, as far as I can tell, is that we know pretty exactly how many dollars the BWII CBs bought (in exchange for their own freshly-minted domestic coin). What we don’t know very well at all is what they exchanged these dollars for.
Also, DC actually raises an interesting issue, which is the quantity of dollars in small private hands outside the US that are being used as a medium of saving. This is an unfamiliar practice to most Americans, but one well known to residents of our generous partners in global governance, as anyone who’s read his Bulgakov knows. Don’t let those mice in grandma’s attic get at your foreign currency!
These parasites, kulaks and hoarders are pleasant for armchair economists to contemplate, because their motivations are so simple. They are concerned with one thing: future appreciation. Of course, from that standpoint, you and I know that anyone in China who is hoarding dollar notes as insurance against a collapse in the RMB is extremely misinformed. But old habits die hard. This kind of a kulak may not even have a subscription to the Financial Times, let alone to RGE.
This is on-topic, because if dollars have somehow passed out of the hands of the CBs and into the hands of the kulaks, looking for them in any kind of international flow statistics will be quite fruitless. I suspect this number does not explain much of the gap, but it is one of many complete unknowables.
Dr. S!
When you refer to the TIC data do you include the figures for short-term treasuries shown under bank liabilities?
Here is Roubini’s answer to Wolf’s “calming (as I termed it)” article in the FT. He thinks Wolf has much underestimated the costs.
http://www.rgemonitor.com/blog/roubini/246724
Moldbug,
On a side note, across Asia it is relatively easy to exchange Gold at numerous coin and metals dealers. Even in Vietnam and China, the buy and sell spread for Gold is very narrow, similar to the buy and sell spread for General Electric or Microsoft in the US. I have never understood why the buy and sell spread for pure 24K Gold coins is so large in the US.
In China, where I stayed on my last trip, even the Beijing Polyplaza hotel sells Gold, Silver coins and bars in the lobby. There are so many Gold and Silver coin retailers on every major shopping district across Guangzhou. The China PBoC government mint produces an unbelievable array of precious metal coins. The US mint may produce 3 or 4 Gold coin issues every year, but the China mint produces lierally dozens of pure Gold, Silver, Platnium coins for every occasion. Official Distributor Panda America sells these Chinese coins in the US, but they also charge too high of a premium.
http://www.pandaamerica.com/index002c.asp
But my Gold Panda coin collection that I have been collecting for the past decade has done very well recently.
Well, I had hoped for an explanation of the antics of the dollar, but in any case you have fed me well, Master Setser. Thanks for this cautionary tale on the fragility of official statistics.
Brad,
The creditworthness of agencies as GSEs are now in doubt. What will happen if GSEs default or go bankcrupt?
Jin,
Putting AAA-ratings on sugar-coated turds doesn’t turn them into delicacies. So the GSEs will slowly die from the toxic poison they have ingested.
DC,
Do you even know what this means?
Jin,
Since the GSEs are “de facto” guaranteed by the US Treasury with a direct line of credit, it means a federal taxpayer bailout. Fannie Mae has a $100 billion in subprime debt on its books. If the subprime debt were really marked-to-market, it would be worth perhaps 20-30 cent on the dollar. Fannie Mae’s books are full of worthless accounting as Enron. Wishin’ and Hopin’ and Pretendin’ will not turn a cow dung chip into a gold eagle.
Jim Rogers says US monetary policy ‘out of control’
http://business.timesonline.co.uk/tol/business/economics/article3451136.ece
In a blistering attack on US monetary policy and the “helicopter cash drop” responses of the Federal Reserve, Mr Rogers described the American dollar as a “terribly flawed currency”.
He said that the plan by Ben Bernanke, the Fed Chairman, to “crank up the money-printing machines and run them until we run out of trees” had exposed America’s weakest point to her rivals and enemies.
The dollar may have declined recently, he added, “but you ain’t seen nothing yet”.
Well since the US collectively won’t take any action to straighten out its economic mess, the only solution is for the dollar to drop sufficiently to rectify things. It will have to drop a lot to do this; more than people have any idea. If people won’t save and stop spending, take their purchasing power away from them, via dollar devaluation and inflation. It’s all in the cards and it won’t be pretty.
Another way of going about this, it seems to me, is to esimate net official foreign exchange purchases of each country. This should not be hard, using balance of payments data. This would tell us who is exporting unemployment. As for who is importing the unemployment (which seems to be your goal), we would need to know the makeup of the official purchases.
To refine Guest’s comment, to get the ‘unemployment exporting’, you should have net official purchases of assets of any kind for each country. This should be the balance on goods and services less private net capital flows. This gives you the amount that the country is extracting from aggregate demand through deliberate government policies. I would be interested to see such a presentation, although I realize that it may miss some things, such as the effect of credible threats to intervene.
Don Simkin — this data does NOT include the short-term Treasuries or Agencies (other short-term securities and non-negogtiatable deposits, which seem to be agencies for the most part) in the banking data. it only covers long-term purchases. I don’t have a time series (a monthly one) for the banking data back to 95 for one. and for another i covered the short-term flows in a recent post.
Jin — a default by a GSE would now be a major international issue, given the extent foreign central banks now hold Agencies as part of their reserves. it might well be viewed as an attempt by the US to reduce the value of their investments in the US. Central banks don’t seem to have believed the US warnings that the agencies aren’t backed by the full faith and credit of the uS (most of them in any case) but only by the Agency itself and thus their capital matters. One of the things that worries me about ongoing sovereign participation in the big banks and broker dealers is that they could eventually be viewed in a similar light — as too Chinese to fail without causing a political crisis, or so on.
Moldbug– getting the cumulative data to work out takes a bit of work, but i’ll give it a try. one fun “stocks” chart is treasuries (marketable treasuries) in private hands (as a % of US GDP). total private holdings (ex fed/ ex CBs) has actually fallen over time. One set of charts that I already have shows the holdings of the bRICs (US holdings) over time. Official holdings v global reserves would be fairly easy to do if I get it all set up, at least on quarterly basis.
you are right that the gap between red and the green dots is
one interesting question. part of the answer is short-term stuff, whether on shore or offshore. on shore s-term CB claims increased by over $100b in 07. for the offshore total, I am awaiting some data for the BIS. when the offshore data is added in (with adjustments to avoid double counting) the green line and indentified purchases converge for most of 03 and 04 and again in 06 but interesting not in 05 (and obviously not yet in 07). the gap in 05 could represent more diversification out of the $, it could represent purchases of $ securities issued offshore or it could represent a failure to account for say SAMA, which really added a large sum to its reserves in 05 yet very little saudi (or gulf) flow appears in even the revised data.
the other interesting question is the gap between the green dots (estimated $ reserves) and the blue line (total treasury and agency purchases). it is getting kind of big –
now there is no theoretical reasons why the official sector couldn’t have bought more bonds than the US sold to the world in net. private offshore holders of bonds could have sold to the official sector. so that is part of the answer.
part of it is the short-term stuff. particularly the offshore component. my guess is that such growth was large in q4. and finally, some may be going to equities (tho there isn’t much evidence of surge in foreign demand for equities this year)/ there may be more diversification across currencies than I had thought based on the COFER data.
http://www.goldmau.com/content/contributors/lee_john/08-02-29.php
Asian savers are among the most risk averse bunch of people, and when the monetary rules are muddied, they will opt out. This is how a run on the US dollar starts.
Banks create dollars out of thin air and loan them to people. Even though money is created out of thin air, once the borrower pays back the loan, the transaction is complete and those borrowed dollars perish in bank’s books. In this scenario, the dollar’s purchasing power is preserved through non-dilution.
However, as we have witnessed through the recent subprime fiasco, many parties are getting away without fulfilling their obligation to repay a loan. Wall Street Institutions are bailed out as the Fed bought their subprime mortgage positions at face value with new money.
Such compromises erode confidence in the US system. If one person can get dollars through borrowing without paying back, and yet another had to work to obtain and save dollars, it is surely not an incentive to earn and keep US dollars.
DC:
“However, as we have witnessed through the recent subprime fiasco, many parties are getting away without fulfilling their obligation to repay a loan. Wall Street Institutions are bailed out as the Fed bought their subprime mortgage positions at face value with new money.”
Could you point me to the data which shows that the Fed has bought sub-prime paper from wall street at par. I missed this.
Also upthread you posited that about 100 billion dollars of GSE subprime paper if marked to market it would be worth 20 – 30 cents on the dollar. I am guessing you are refering to some pile of lower tranche MBS’s that these institutions own. Are these securities broken out on 10q’s or something?
I say this because of course if they had just plain vanilla first lien mortgages at ballpark LTV of say 80 percent, then the underlying collateral would have to be at say 16 cents on the dollar to produce a loss of 80%. I am not aware of any REO property selling at 16cents on the dollar but perhaps I am just missing it.
Hi Brad,
Do you know of any foreign cb’s that do not leave their UST and GSE paper on account with the Fed? If there are is there any way to get a handle on how much this is and whether it changes a great deal. I ask because the H41 data must be accurate because certain the Fed knows how much paper it is holding in its accounts.
As an aside, thanks for the blog. It is one of the very few places where the info rises above the sound bites.
the fed’s custodial holdings are a subset of total foreign official holdings of treasuries and agencies. there are clearly some big accounts that do not make use of the fed’s services. An easy test (which i should do at some point) is to compare total FRBNY holdings on june 30 2006 with the total official holdings reported in the end june survey. that should give some idea of the magnitudes.
one last point — the tic data and the frbny custodial holdings data do NOT match up. the Treasury explains why on the web site (bonds purchases in london from an existing private holder can be handed over to the fed for safekeeping, and no transaction is registered in the tic data beyond the initial sale to a private investor in london). in q1 and q2 of 07, the increase in the FRBNY’s custodial holdings was much larger than recorded official purchases in the TIC data.
just b/c the data comes from the us government doesn’t mean it necessarily adds up.
“…Mr Bébéar said the introduction of accounting rules that required companies to state assets at the latest market prices had helped contribute to global financial market volatility… His comments were echoed by Henri de Castries… who branded mark-to-market… as a “conceptual mistake”…” http://www.ft.com/cms/s/0/b71c32a4-e668-11dc-8398-0000779fd2ac.html
“…The US subprime crisis, Mr Bébéar believes, is “artificial”…” http://www.ft.com/cms/s/0/cb3ad294-e623-11dc-8398-0000779fd2ac.html
There’s no such thing as GSE subprime paper. GSE’s don’t deal with subprime at all.
As far as getting rid of the Fed, the question is “and then replace it with what?” Boom bust cycles, concentrations of wealth, power to the banks are all an inherent part of market economics, and you can see this because China started having these sorts of problems with it moved from socialistic central planning to a market economy. You *didn’t* have economic boom-bust cycles in China in the 1950’s. You had slow predictable non-growth. You didn’t have vast differences in income you have now. Everyone was poor.
Things like the Fed reduce the boom/bust nature of market economies.
One problem is that if you don’t mark to market, then it isn’t clear what you mark to. I have a piece of paper that I claim is worth $1000. How do you show that I’m wrong? Of course there is the converse problem. I have this bar of gold, but I’m stuck in the middle of the Sahara desert, how much is that bar of gold worth, given that no one is able to buy it from me.
jin: The creditworthness of agencies as GSEs are now in doubt. What will happen if GSEs default or go bankcrupt?
You have to be very, very careful here. Freddie Mac and Fannie Mae issue two very different types of securities. One involves them creating pass-through mortgage backed securities. The second involves them issuing standard corporate bonds. The two are related in that Freddie and Fannie guarantee the MBS’s they issue, but they will run into problems if they don’t have enough money to satisfy the guarantee.
What happens will depend on the particular scenario.
Also Fannie and Freddie own some subprime securities, but the agency MBS’s they issue don’t contain subprimes.
with wheat and potable water instead, you might suddenly find you have a lucrative market
“…About 120,000 wells in Hebei and Shanxi provinces are now unable, or nearly unable, to pump water… The government has embarked on a £29bn canal project to bring water from the Yangtze river in central China to the north, but it will not be completed until 2050…” http://www.guardian.co.uk/world/2008/feb/26/china
me: There’s no such thing as GSE subprime paper. GSE’s don’t deal with subprime at all.
Just to clarify here. I meant that they don’t deal with subprime when they issue MBS’s. What Freddie and Fannie do is to package mortgages. These mortgages are then insured by Freddie and Fannie, and these MBS do not contain subprime. Now to make good on their guarantees and provide a profit to their investors, Freddie and Fannie issue corporate debt and put their insurance reserves in other securities, which include subprime securities. Personally, I think this is an awful idea, but still the insurance reserve investments of Freddie/Fannie are different from the MBS debt it issues.
DC: Asian savers are among the most risk averse bunch of people, and when the monetary rules are muddied, they will opt out. This is how a run on the US dollar starts.
No. Asian savers are not particularly risk averse, as you can see from the Shanghai and Hong Kong stock markets. The only reason that Asian savers are risk averse, is that they often have no choice in the matter.
moldbug: These parasites, kulaks and hoarders are pleasant for armchair economists to contemplate, because their motivations are so simple. They are concerned with one thing: future appreciation.
No. They are concerned with avoiding future depreciation. These aren’t the same thing.
moldbug: This is on-topic, because if dollars have somehow passed out of the hands of the CBs and into the hands of the kulaks, looking for them in any kind of international flow statistics will be quite fruitless.
The Fed does keep track of paper dollars issued, and the total volume of paper money in the world is just under $1 trillion dollars. The thing about paper money is that its unlikely to contribute much to the flow of currency, since paper is just hard to move.
About GSE’s, there are two scenarios
1) Mortgage defaults on GSE paper increases to the point that the GSE’s insurance reserves run out.
2) It turns out that the GSE’s did something really stupid with their reserves that cause them to vanish in the absence of 1)
2) is a much bigger worry, since we are likely to get a lot of advanced notice if 1) was about to happen, and for 1) to happen things would have to get a lot worse than they are.
The two things that I’m worried about are
3) People don’t read the fine print and get things confused. This happened with ratings of CDO’s when people just didn’t read what those ratings mean. The thing that worries me is that as the GSE’s do more and more complex things, people will get confused between a MBS issued by a GSE and a corporate bond issued by a GSE.
4) I’m not worried about the GSE’s as they exist now, but I do worry that in responding to the mortgage situation, that people will do something that they regret five years later.
Twofish,
Asian savers like my elderly parents are risk adverse, and they don’t play the stock market casino. Neither does my brother in law in Guangzhou who works at the Minshing bank play the stock market. His savings goes to pay off the mortgage for his condo flat. Only a small percentage of the average Chinese plays the markets. Most average Chinese still are highly reluctant to take on debt.
DC: Since the GSEs are “de facto” guaranteed by the US Treasury with a direct line of credit, it means a federal taxpayer bailout.
The agency MBS’s that the GSE’s packages have a federal line of credit behind them. The corporate bond that the GSE’s issue, don’t.
DC: Fannie Mae has a $100 billion in subprime debt on its books.
It’s actually $32 billion in subprime and $32 billion in Alt-A.
DC: If the subprime debt were really marked-to-market, it would be worth perhaps 20-30 cent on the dollar.
Worst cause 60-70 cents. This is easy to calculate. What fraction of the sub-primes default, and what is the recovery rate? Right now we are seeing default rates of about 10% and recovery at about 80%. Run through those numbers and you get a loss of $600 million, which is what they have been reporting.
Also, if Fannie were to go under for something other than a general crash in the mortgage market, it wouldn’t affect much the value of the MBS debt that it packages. One way of thinking about it is that your Chrysler car doesn’t stop working if Chrysler defaults. The agency debt that Fannie Mae securitizes is legally separate from Fannie Mae itself, and it would still pay even if Fannie defaulted on its corporate obligations.
DC: Asian savers like my elderly parents are risk adverse
And I have an uncle that likes to play the stock market. Different people like to do different things, and generalization is very, very dangerous.
DC: Only a small percentage of the average Chinese plays the markets. Most average Chinese still are highly reluctant to take on debt.
There’s no such thing as an average Chinese.
General behavior is likely to be a generational thing. Most Americans in the 1930’s didn’t like to take on debt. Taiwanese and South Korean born in the 1960’s have been taking on consumer debt. I don’t see any particular reason that the little emperor generation is going to be different.
Also, most Chinese haven’t taken on debt because they didn’t have to. Until 1995, housing was provided by the state.
The mistake people make is to assert that differences in behavior are due to deep cultural traits, when the reality seems to be quite different.
2fish,
No. They are concerned with avoiding future depreciation. These aren’t the same thing.
Appreciation and depreciation are a continuum. To be more precise, “kulaks” hold foreign currency because of their predictions of the future exchange rate between foreign and domestic currency.
The Fed does keep track of paper dollars issued, and the total volume of paper money in the world is just under $1 trillion dollars. The thing about paper money is that its unlikely to contribute much to the flow of currency, since paper is just hard to move.
Definitely, which is why I said the effect is probably small.
the other interesting question is the gap between the green dots (estimated $ reserves) and the blue line (total treasury and agency purchases). it is getting kind of big –
Indeed.
I’d like to think the Maltese falcon at the end of all this fascinating financial detective work is an estimated reconstruction of the BWII CBs’ positions…
the goal is to get their aggregate positions. the UK and eurozone data do not provide much insight into the composition of their non-dollar holdings.
One topic I would like to see Brad turn his attention to is the waste of US resources on war and empire. For instance, if the US were to get out of Iraq and Afghanistan and cut the Pentagon budget by at least 50% what would be the effects on the US balance of payments, and our financial soundness? Say we spent a half of the savings on domestic infrastructure and social spending and simply saved the other half. How would that work out?
Would it reduce our need for dollars from China? For dollars from other surplus countries? And by how much?
Those are the questions that really matter I think, since it is within our power to do them, without having to nag China or some other nation to do things they don’t want to do.
Twofish,
“It’s actually $32 billion in subprime and $32 billion in Alt-A.” – Twofish
Wall Street Journal friday’s editorial bashing the GSEs says its over $100 billion of subprime on Fannie Mae’s balance sheet. Well, who the hell knows what crap is on Fannie Mae or former Enron’s balance sheet?
“There’s no such thing as an average Chinese.” – Twofish
Ok, the average savings rate for Chinese is about 30% of household income while the average savings rate for Americans last year was negative 1 percent. Is it really an overgeneralization to state that thrifty Chinese have taken saving to excess, while profligate Americans have overspent their way into debt? The average Chinese is more thrifty, right or wrong?
“The mistake people make is to assert that differences in behavior are due to deep cultural traits, when the reality seems to be quite different. ” – Twofish
It is politically correct in the US to state that cultural values make no difference, but cultural values really make the entire world of difference. Why are some ethnic groups in America doing better than other ethnic groups? The best educated ethic group in America isn’t white or chinese, it’s the Indian-American immigrants from India followed Japanese-Americans who have lived in the the US for multiple generation. Japanese Americans have faced state-led discrimination like being thrown into concentration camps during World War II by the US government.
“…Mr Bébéar said the introduction of accounting rules that required companies to state assets at the latest market prices had helped contribute to global financial market volatility… His comments were echoed by Henri de Castries… who branded mark-to-market… as a “conceptual mistake”…”
http://www.ft.com/cms/s/0/b71c32a4-e668-11dc-8398-0000779fd2ac.html
If you don’t book the losses then you can’t book the gains.
Many corporations revalue assets annually and issue securities based on the increased value.
This is then available for further asset acquisition or dividends or if you are going through a rough patch, expenses.
What happens to this model when assets are not booked to market value?
This model is vulnerable to asset depreciation like the real estate market but changing this rule would ruin the model completely.
if we can assume ‘other’ european currencies account for at least some part (increasing or decreasing?) of the ‘non-dollar’ holdings – swiss francs, serbian dinars, bulgarian leva, polish zlotys:
“…with 49 million bank accounts for 7.5 million inhabitants, Poland has reportedly been the target of Italian and American mafia who use multiple bank transfers between Polish banks and financial institutions in the Caribbean and Liechtenstein…” – Financial Havens, Banking Secrecy and Money Laundering, UN Office for Drug Control and Crime Prevention, June 1998, Jack A. Blum, Prof. Michael Levi, Prof. Thomas Naylor, Prof. Phil Williams
“…Clearly, there is great uncertainty about the evolution of SWFs and forex reserves relative to total global assets. Our assumption… is that forex reserves have risen to a level such that they stop growing faster than global financial assets. Current account surplus countries now channel new investments overwhelmingly into SWFs…” http://www.morganstanley.com/views/gef/archive/2007/20070601-Fri.html
“…SWFs typically seek to diversify foreign exchange assets and earn a higher return by investing in a broader range of asset classes, including… corporate bonds… commodities, real estate, derivatives, and foreign direct investment…” http://www.frbsf.org/publications/economics/letter/2007/el2007-38.html
re: “This model is vulnerable to asset depreciation”
some might argue a bit too much attention has focused on the assets which have depreciated
“…Why, then, are so many experts describing the present credit crunch as the worst financial crisis in living memory? …to create any financial crisis… there has to be a widespread belief that things are much worse than ever before…” http://www.theaustralian.news.com.au/story/0,25197,23286731-643,00.html
anonymous — whoah. on what basis would you think that the Bulgarian lev and the Serbian dinar have joined the Swiss franc as a reserve currency?
Guest — a cut in military spending could be modeled as a reduction in the fiscal deficit, and thus a rise in government saving. The overall impact of such a change hinges on whether or not private savers and investors end up saving less (and consuming more) as the government save more, and/ or investing more. And that to some extent hinges on the policies adopted outside the US — i.e. does a reduction in government borrowing lead to lower rates and thus induce more private borrowing, whether for consumption or investment.
Such a policy also is a restraint on us dmeand and thus on other countries export revenues, so their is some effect their, and some potential fall in their savings as a result.
all in all, I think Menzie Chinn’s work would suggest that a percentage point fall in the fiscal deficit produces half a percentage point fall in the current account deficit; others have gotten a smaller number. I was a bit surprised frankly that the 04-06 improvement in the fiscal balance (mostly from rising corp tax revenues) didn’t have a bigger impact on the current account.