Brad Setser

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Stable capital? Or scared capital?

by Brad Setser
April 23, 2008

A host of banks have raised new capital over the past couple of weeks, in a whole variety of ways — rights issues, convertible bonds, preferred stock and the sale of new equity.

However, they haven’t tapped last year’s savior: the big sovereign funds. At least not directly. Some of the private equity firms that have invested in the banks may be flush with cash that they raised (at least in part) from sovereign investors. Still, the Gulf has largely sat out the most recent round of recapitalization, despite plenty of petrodollars.

What are sovereign investors doing with their funds instead?

That isn’t hard to decipher. Over the last six weeks, foreign central banks custodial holdings at the New York Fed have increased by an average of $17.8 billion a week.

A week. Let me try to put that in context. $17.8b a week, annualized, is OVER $900 billion a year. If oil averages $100 a barrel in 2008, $900 billion is large enough to cover the US oil import bill (net of petroleum exports) two times over. If oil stays at $115, $900 billion doesn’t quite cover the United States oil import bill two times over, but still provides a comfortable margin of extra financing.

The average increase over the past two weeks was even higher — $18.5b. That, annualized, is just short of a headline grabbing $1 trillion figure. It is real money.

All that money is going into safe Treasuries and almost-as-safe Agencies – not “risk” assets.

So much for the notion that sovereigns can ignore short-term market pressure because of their long investment horizons.

Right now it seems like no sovereign asset manager wants to take the blame for buying into a firm that performs as badly as Blackstone. Or, to be held responsible for a decision to recapitalize a banks that then fails, a la Bear. Or that buys something that performs as badly as the 2006 “vintage” subprime debt. Ask the Chinese state banks about their experience reaching for yield at the wrong time.

Sovereign investors may not be leveraged – but they face strong political pressure not to lose money. That can translate into risk aversion during times when the market is risk adverse.

That isn’t entirely a bad thing. Heavily reliance on sovereign funds to recapitalize the US financial system raised a host of risks. The big funds don’t seem to really have the capacity to evaluate the true state of the balance sheets of the big US financial firms. Imagining the political fallout had China — through CITIC — invested in Bear also gives me pause. Leveraged and illiquid financial firms can fail quite quickly. And I personally doubt that it makes sense to rely on the investment funds of non-democratic countries for a large share of the equity capital of the regulated financial sector in the major democracies. That effectively would make the non-democratic governments the de facto business partners of the US government – which insures that the financial sector, broker-dealers as well as banks, will have access to sufficient “liquidity” to be able to function as financial intermediaries in times of stress.

On the other hand, scared sovereign investors raise another set of problems.

Especially when they account for a large share of all cross-border flows.

UPDATE:  Even central banks occasionally take a week off.   The increase in central bank custodial holdings in the third week of April was quite modest — only a bit over $2 billion.

50 Comments

  • Posted by DC

    Anyone investing their hard-earned capital into the US market should be extremely cautious. Personally, I would runaway as fast as possible from owning any US dollar denominated financial paper due to currency devaluation and rising default rates on AAA-rated bonds. There remains an ongoing deterioration of US bank balance sheets just like happened in Japan.

    http://www.minyanville.com/articles/MER-GS-C-jpm-bac-Fed/index/a/16812

    When you add up all the Level II assets by just the eight largest holders in the U.S: JP Morgan (JPM), Citibank (C), Bank of America (BAC), Merrill Lynch (MER), Goldman Sachs (GS), Bear, Morgan Stanley (MS) and Lehman Brothers (LEH), it comes to a staggering $5 trillion – nearly half the size of the economy. Level III assets are nearly $600 billion. Is the Fed big enough to bail out all these assets? The Fed is slowly becoming the dumping ground for dealers and banks – members of the ‘Moral Hazard Club.’ It’s is running out of capital, and quickly. The problem assets (at least the ones we know about) are way too large for the Fed to completely absorb.

  • Posted by Duric Aljosa

    "Stable capital? Or scared capital?

    All that money is going into safe Treasuries and almost-as-safe Agencies – not “risk” assets."

    Hi Brad, here is the fundamental question:

    What is money, and what is capital?

    We both know that today’s money is not money.

    Take a look, this one is interesting: Monetary Revolution.

    Best regards, Duric Aljosa.

  • Posted by Twofish

    bsetser: Imagining the political fallout had China — through CITIC — invested in Bear also gives me pause.

    The distinction between private and public is blurry in China, but CITIC falls on the "more private" part of the spectrum in that state ownership control for CITIC is much, much looser than CIC or the big state banks.

    This might not be a good thing since it means that you can get a nationalistic backlash anyway, but it points out that the problem isn’t really sovereign wealth funds. At the end of the day, sovereign wealth funds don’t act that much differently than private wealth funds, which may or may not be a good thing.

  • Posted by SoCal Amateur

    I don’t see what is "safe" about treasuries… the interest doesn’t even cover inflation. Not to mention as the dollar devalues against the Dinar, or whatever currency, losses can start adding up quick.

    Is it ‘safe’ knowing you will slowly bleed to death (or at least to a significant loss).

    Are foreign central banks trying to stop the dollar slide?

  • Posted by Twofish

    bsetser: The big funds don’t seem to really have the capacity to evaluate the true state of the balance sheets of the big US financial firms.

    That’s actually the scary thought. If the Chinese government doesn’t have the resources and expertise to analyze the balance sheets of a big US financial firm, who does?

    bsetser: And I personally doubt that it makes sense to rely on the investment funds of non-democratic countries for a large share of the equity capital of the regulated financial sector in the major democracies.

    I don’t think that democratic/non-democratic makes that much difference. The Chinese blogosphere has been livid over CIC’s investment in Blackstone, and had CIC invested money in Bear-Stearns, you’d have people demonstrating in front of JPMorgan right now. Personally. I think that CIC is for more exposed to popular pressure than the Japanese Postal Savings system.

    bsetser: That effectively would make the non-democratic governments the de facto business partners of the US government

    You mean they aren’t already?

    bsetser: which insures that the financial sector, broker-dealers as well as banks, will have access to sufficient “liquidity” to be able to function as financial intermediaries in times of stress.

    I don’t think that is the big worry. First of all shareholders don’t provide liquidity, they provide solvency. The real scary scenario is this….

    Suppose six months ago, CIC or a major middle eastern SWF had invested in Bear-Stearns at $60/share for 10% of the holdings. Now in mid-March, the Federal Reserve basically forces JPMorgan to pay only $2/share, making this share worthless. Note that the Federal Reserve insisted on the low price per share specifically to punish Bear shareholders.

    If you did this, you’d have massive riots outside of the US embassy and at every branch of JPMorgan the next day.

  • Posted by DC

    Veteran Asia watcher James Fallows dissecting China’s foreign exchange reserve writes that, "it is basically a transfer of purchasing wealth power from the Chinese people to the US government and to the American people". It is true the US recieves the closest thing to an economic "free lunch" under dollar hegemony. But the primary reason the Chinese government must maintain capital controls is that if the RMB is worth twice as much, Chinese farmers who are generally much less productive than their counterparts abroad would be decimated. There are 1.3 billion people in China with the 800 million majority still living in rural regions. If the RMB were sharply revalued, just imagine the explosive geopolitical outcome of throwing 800 million people on the unemployment line.

  • Posted by DC

    US Dollar hegemony

    http://en.wikipedia.org/wiki/Dollar_hegemony

    The phenomenon is known as US dollar hegemony, which is created by the geopolitically constructed peculiarity that critical commodities, most notably oil, are denominated in dollars. Dollar hegemony prevents the exporting nations from spending domestically the dollars they earn from the U.S. trade deficit and forces them to finance the U.S. capital account surplus, thus shipping real wealth to the U.S. in exchange for the privilege of financing U.S. debt to further develop the U.S. economy. Everyone accepts dollars because dollars can buy oil. The recycling of petro-dollars is the price the US has extracted from oil-producing countries for US tolerance of the oil-exporting cartel since 1973.

  • Posted by DC

    The US has embarked on a strategy to use cheap Third/Fourth World labor and non-existent environmental regulation to compete with its former Cold War allies, now industrialized rivals in trade, taking advantage of traditional US anti-labor ideology to outsource low-paying jobs, playing against the strong pro-labor tradition of social welfare in Europe and Japan. In the meantime, the US pushed for global financial deregulation based on dollar hegemony and emerged as a 500-pound gorilla in the globalized financial market that left the Japanese and Europeans in the dust, playing catch-up in an unwinnable game. In the game of finance capitalism, those with capital in the form of fiat money they can print freely will win hands down.

    The tool of this US strategy is the privileged role of the dollar as the key reserve currency for world trade, otherwise known as dollar hegemony. Out of this emerges an international financial architecture that does real damage to the actual producer economies for the benefit of the financier economies. The dollar, instead of being a neutral agent of exchange, has become a weapon of massive economic destruction (WMED) more lethal than nuclear bombs and with more blackmail power, which is exercised ruthlessly by the International Monetary Fund (IMF) on behalf of the Washington Consensus. Trade wars are fought through volatile currency valuations. Dollar hegemony enables the United States to use its trade deficits as the bait for its capital account surplus.

    http://www.atimes.com/atimes/Global_Economy/GF24Dj01.html

  • Posted by Anonymous

    Sovereign funds aren’t any better, or worse, than anybody else in trying to pick the bottom. It’s very premature to assume that because their initial investment outlay is offside, they’ll give up and retreat forever after. They’ll be back. They have too much money for it to be otherwise. The amount invested so far is paltry relative to their treasury reserves, and their culture fits a long term, strategic, dollar cost averaging approach.

  • Posted by Twofish

    DC: But the primary reason the Chinese government must maintain capital controls is that if the RMB is worth twice as much

    That’s a bit confused. If you keep capital controls then you can put the currency at something other than the market value. The PRC generally *isn’t* fixing the value of the RMB via capital controls, but rather by using market operations.

    DC: Chinese farmers who are generally much less productive than their counterparts abroad would be decimated.

    Not clear that this would be the situation. One thing that higher energy prices have down is to divert corn to ethanol production which could boost grain prices, and that would be good for farmers.

    DC: If the RMB were sharply revalued, just imagine the explosive geopolitical outcome of throwing 800 million people on the unemployment line.

    Again, it’s far from clear that this would be outcome. Chinese manufacturing advantage comes from an educated workforce and infrastructure advantages, and it’s possible that a rise in the RMB wouldn’t reduce the trade deficit that much. The thing about inflows into China is that a very large fraction of it isn’t coming from trade.

    DC: In the meantime, the US pushed for global financial deregulation based on dollar hegemony and emerged as a 500-pound gorilla in the globalized financial market that left the Japanese and Europeans in the dust, playing catch-up in an unwinnable game. In the game of finance capitalism, those with capital in the form of fiat money they can print freely will win hands down.

    More or less accurate, which is why I think the US is going to remain the dominant world power for quite some time. The question then becomes what should China do about this, and I think it would not make any sense for China to fight the United States on this issue because it would lose.

  • Posted by Twofish

    DC: Everyone accepts dollars because dollars can buy oil.

    So can yen and euro.

  • Posted by DC

    Twofish,

    Saudi Arabia and the Gulf Arab states only accept US Dollars for their Oil. Iran accepts the Euros with frequent threats from Washington, but in the Gulf Arab states with a large US military deployment, only US dollars are accepted. Until the China PLA can deploy a battlegroup to the Persian Gulf, the Chinese yuan won’t ever be accepted in the Middle East. Saddam Hussein accepted the Euro, and we all know what happened to him. Iraq now only accepts US Dollars for oil.

  • Posted by Guest

    Saddam was executed for accepting Euros. And that’s the only reason. It’s a criminal offense.

  • Posted by DC

    "The PRC generally *isn’t* fixing the value of the RMB via capital controls, but rather by using market operations." – Twofish

    The market operation exchange rate derives from the current account (ie. trade). Although there are blackmarket inflows, the official capital account remains China PBoC controlled and regulated.

    "I think it would not make any sense for China to fight the United States on this issue because it would lose." – Twofish

    The BRIC nations including China and Russia should fight for a more equitable world order. Did you know tiny Holland has more IMF and World Bank voting representation than big China? The Beijing government is better suited to represent the interests of the 80 million Chinese diasporia in Southeast Asia than the US Treasury controlled IMF, don’t you think? China will never attempt to establish global hegemony like the US, but China will certainly regain its historic role as the dominant Asian economic power. A multi-polar world order is already reality.

  • Posted by bsetser

    "bsetser: That effectively would make the non-democratic governments the de facto business partners of the US government."

    Twofish: You mean they aren’t already?

    Hard for me to counter that, but i do think there is a difference between financing the treasury and owning a financial institution. But to be consistent, i should also worry about the scale of us dependence on non-democratic governments to finance the us treasury.

    I think sovereign funds will be back — but I also suspect that they may end up investing more like typically risk adverse public money than seemed to be the case for a while.

  • Posted by Howard Richman

    Less than a year ago (September 2007), Bernanke gave a speech in Germany which claimed (incorrectly) that less than half of the US trade deficit was being financed by official capital flows. I wouldn’t be surprised if the whole trade deficit, and more, is now being financed by official flows!

    By the way, I’d like to invite your readers to read our new piece in this morning’s edition of World Net Daily entitled "How to stop China from stealing our jobs":

    http://www.wnd.com/index.php?fa=PAGE.view&pageId=62298

    Howard Richman

    http://www.trade-wars.blogspot.com

  • Posted by Twofish

    DC: Saudi Arabia and the Gulf Arab states only accept US Dollars for their Oil

    This is totally false. Oil is denominated in dollars, but Saudi Arabia and the Gulf Arab states will gladly take euros and yen. The reason oil is denominated in dollars is that you have to denominate it in something, if you try to mark the value of oil in two currencies, you end up with all sorts of arbitrage opportunities.

    DC: Iraq now only accepts US Dollars for oil.

    That’s completely false too. People are mistaking the quotation of oil prices for the transaction.

    DC: The market operation exchange rate derives from the current account (ie. trade). Although there are blackmarket inflows, the official capital account remains China PBoC controlled and regulated.

    But once you have an open current account, then you get a market price which also affects the capital account. The whole point of currency reforms in the early 1990′s was to be able to get a market price without opening the capital account.

    In practice, I don’t think that Chinese capital controls are that effective anymore.

    DC: The BRIC nations including China and Russia should fight for a more equitable world order.

    How?

    DC: Did you know tiny Holland has more IMF and World Bank voting representation than big China?

    So what? It’s not as if the IMF and World Bank can do very much.

    DC: The Beijing government is better suited to represent the interests of the 80 million Chinese diasporia in Southeast Asia than the US Treasury controlled IMF, don’t you think?

    That’s not clear. If the interests of the Chinese diaspora conflict with the interests of homeland Chinese, then Beijing will listen to homeland Chinese first. In particular, I don’t think it is good for the PRC either for itself or for overseas Chinese to present itself as the protector of overseas Chinese since this could cause a backlash.

    Anyway it is *NOT* a good idea from my self-interest for present *ANY* economic issue as US versus Chinese, because if I do that, someone is going to think of me as a traitor.

    DC: China will never attempt to establish global hegemony like the US, but China will certainly regain its historic role as the dominant Asian economic power.

    I don’t think it ever will be the dominant Asian economic power. China is going to have to share power with India, Japan, Russia, and United States. Also it has to behave in a way that does not alarm Indonesia, Vietnam, Thailand and the other ASEAN states.

    This is an example of how the interests of homeland Chinese and diaspora Chinese may conflict. Beijing really has no interest in asserting any sort of political or economic influence over Malaysia for exmaple, and has no interest in displacing the United States or India as a power in southeast Asia. This may conflict with the wishes of ethnic in Chinese in southeast Asia who want China to take a much more active role.

    Also the interests in diaspora Chinese conflict with each other. I personally would be in *DEEP* trouble if the US and China got into any sort of economic or political conflict, and so I’m going to do everything that I can to keep that from happening, and I think that view is shared by most Chinese-Americans. Also since I live in the United States and have US citizenship, I’m hardly in a position where I can argue that the US should be less powerful. Wiser in the use of its power, yes. But less powerful, no. Also, having lived in the US, I have a sense of how powerful the US really us, and how very, very, very stupid it would be to fight it. People that think that the US is going to collapse in the next 10 or the next 50 years are really kidding themselves. Yes you can point to the 100 stupid things that the US is doing, but the point is that the US can do 100 stupid things and still be a superpower whereas if China does two stupid things, it’s finished.

    This means that I get into constant internet arguments with ethnic Chinese from Malaysia who have different goals and want China to have a more Asia-centered policy, and I think sharply underestimate how powerful the US is.

    This does have an impact on "homeland politics" since the finance and commerce ministries of the PRC are staffed with returnees from Wall Street, and I don’t think that a lot of the anti-globalist sentiments that I’ve found among Malaysian Chinese really hold that much currency among them.

  • Posted by Guest

    China is more inward looking nation in most aspects. So do most east asians. East asians are developed nations because of generous technology transfer from west. They are great mimicking people but less of innovators. They possess great reverse engineering skills but not enough engineering skills. Innovation comes only but questioning but confucian ethics never seems to allow that. You cannot challenge authority in east asia. They are at the mercy of west for breakthrough concepts. Without renaissance there would have been no progess. Its the rigorous questioning of the authority creates progress. In a stable situation anybody can progress because stability created by rigorous questioning in the past masks thinkers. We should see what happens if west stiffles in innovation like what happened in dark ages after the fall of roman empire. Progess is made by challengers of authority rather than by submission.

  • Posted by DC

    Twofish,

    From the Australian Newspaper

    http://www.theage.com.au/news/business/behind-dalai-lamas-holy-cloak/2007/05/22/1179601410290.html

    The Dalai Lama himself was on the CIA’s payroll, reportedly receiving $US15,000 a month ($US180,000 a year). The government set up in exile in India received $US1.7 million a year from the CIA. The money was to pay for guerilla operations against the Chinese, notwithstanding the Dalai Lama’s public stance in support of non-violence, for which he was awarded the Nobel Peace Prize in 1989.

    From Canada’s Global Research

    http://www.globalresearch.ca/index.php?context=va&aid=8673

    The human rights issue has become the centerfold of media disinformation. There are deep-seated geopolitical objectives behind the campaign against the Chinese leadership. With the exception of its Northern frontier which borders on the Russian Federation, Mongolia and Kazakhstan, China is surrounded by US military bases. Weakening China from within: Covert Support to Secessionist Movements

    Twofish, these are hardly friendly state to state relations between the US and China. If not for China’s minimal nuclear arsenal, Taiwan would have formally declared independence under US military protection, and China divided into multiple states similar to the process in Iraq.

  • Posted by DC

    "ministries of the PRC are staffed with returnees from Wall Street,"

    I bet you won’t find too many pro-Washington returnees from Wall Street in the China PLA and Ministry of State Security. My personal opinion is that many returnees are actually more nationalistic and disgusted with "glass-ceiling" discrimination in the West.

  • Posted by JB

    My question cuts to the chase…Where are the petrodollars going next? Obviously the entire market would like to have this foresight, but it is clear that Sovereign Wealth Funds trade according to certain risk classes. After the credit rating assault on asset backed securities, I think the rage on t-bills makes perfect sense. I wonder if the recent gold boom and bust was related? The onus is now on wall street. I think the only financial regulation that should be put in place, is a public demand that our wall street mavericks figure out a way to get the petrodollars back to main street.

    http://www.econdynamism.blogspot.com/

  • Posted by Twofish

    DC: Twofish, these are hardly friendly state to state relations between the US and China.

    Diserali once said that states have no friends or enemies only interests. In any case, the Dalai Lama can take his thousands, I think in terms of billions.

    DC: If not for China’s minimal nuclear arsenal, Taiwan would have formally declared independence under US military protection,

    That’s not true otherwise the PRC would not have declared "no first use" with respect to nuclear weapons. The main reason that the US does not recognize Taiwan independence today is that it would destroy the world economy, the nuclear deterrent has always been more directed at Russia than the US.

    DC: China divided into multiple states similar to the process in Iraq.

    Again. Think of the world economy. Multiple feuding states is bad for Walmart’s profits. By embedding itself in the world economy, any drastic action against China is going to shred the US economy.

    DC: I bet you won’t find too many pro-Washington returnees from Wall Street in the China PLA and Ministry of State Security.

    That’s likely to change with the PLA starting something similar to ROTC. The PLA knows that the future is in military technology, and returnees have the technology skills.

    In any case, China has figured out that economic power is more fundamental then military power since you can’t have a strong military without a strong economy.

    DC: My personal opinion is that many returnees are actually more nationalistic and disgusted with "glass-ceiling" discrimination in the West.

    You are just wrong about this…..

    There’s nationalism and anti-Westernism, and the two are different. If the world is run by multi-national corporations and bankers (which actually it is), it’s in China’s interest to have large number of Chinese working in MNC’s and banks.

    As far as this nonsense about a "glass ceiling" you do realize that the head of Citigroup was born in India? Which is one reason the US is going to stay very powerful for a very, very long time.

    The US goes through the world looking for the brightest, most talented people it can find, and turns them into Americans.

  • Posted by Guest

    "And I personally doubt that it makes sense to rely on the investment funds of non-democratic countries for a large share of the equity capital of the regulated financial sector in the major democracies. That effectively would make the non-democratic governments the de facto business partners of the US government – which insures that the financial sector, broker-dealers as well as banks, will have access to sufficient “liquidity” to be able to function as financial intermediaries in times of stress."

    Are there no existing foreign ownership limits for the US banks?

  • Posted by bsetser

    JB — if i knew where the petrodollars were going next, i should be trading not writing a blog. Nothing like frontrunning a group of countries with what, $750b or so to play with if oil stays at $120b … alas, i am better at figuring out what people have been doing than figuring out what they will do next.

  • Posted by HZ

    "But to be consistent, i should also worry about the scale of us dependence on non-democratic governments to finance the us treasury."

    Brad,

    It is certainly a lot easier to rely on the non-democratic governments than the democratic ones. The democratic ones will have to explain to their populace why they invest in negative (real) return instruments when there are other pressing domestic needs.

  • Posted by flipper

    So what is the point?

    If foreigners are ok to buy paper which yiled 3.74% for ten years, than the rational thing to do for most domestic investors would be selling it and moving

    into risky assets.

    No if they do not want to move there means the prices are still not right.

  • Posted by MMcC

    I’d have thought the RBS rights issue might prove a useful barometer here: it’s a relatively safe, relatively cheap, relatively high-div mega-bank which already has some China/EM ties and is domiciled in the one country most welcoming to SWFs. Would it surprise anyone to see either BoC or CIC salting a few GBPbn away in Edinburgh?

  • Posted by a

    "If the Chinese government doesn’t have the resources and expertise to analyze the balance sheets of a big US financial firm, who does?"

    I fell off my chair on reading this one. How about: just about everyone else? I wouldn’t think the Chinese government has much expertise reading the balance sheets of a big US financial firm. That’s why they almost invested in BS, right?

  • Posted by DC

    Twofish,

    The US military intelligence, National Security Agency, and Central Intelligence agency doesn’t necessary operate on the same wavelength as the US Treasury (ie. Wall Street ). Otherwise, the CIA and NSA wouldn’t have concluded that Iraq falsely retained nuclear and chemical weapons, that has led the US into a disasterous war. Just earlier this month, the US Joint Chief of Staff labelled China’s modernization as "Non-transparent and threatening to the security of the Pacific". As former Defense Secretary Donald Rumsfeld openly stated at a NATO military conference, "China represents a National Security Threat to the US and the world".

    For the record, Saudi oil exports are only denominated in US Dollars and only US Dollars. Asked if the Saudi’s would consider selling oil in Euros, the Saudi Energy Minister stated that it would not be possible to sell oil in Euros due to the current setup of the Saudi banking system. The petro-dollar recycling of US Dollars is the foundation of US Dollar hegemony. The close family business relationship between the Bush family, Saudi Royal family, and Robert Rubin’s Citicorp is well documented in public media.

  • Posted by DC

    PS. The real powerbroker at Citicorp remains Robert Rubin. Why isn’t Pandit chatting on the telephone with Hank Paulson and Bernanke on a daily basis. In the US, the Wall Street banksters run the show. In other nation including the continental European bloc, Russia, Brazil, and China, banksters don’t run the entire show. For instance, Russia’s Putin is former KGB secret police.

  • Posted by Judy Yeo

    Brad, for all the talk about political pressures on sovereign wealth funds; have been wondering if that doesn’t quite apply to gulf funds ; after all, it seems to be a small minority that actually have governments not related or controlled by members of the local royalty? Mebbe it’s the irresistible call of self-interest; rich people hate to lose money at least as much as common people like…me.

    And if you do have ideas where those petrodollars are going , do share ;)

    Twofish- If Americans do seek the smartest and ablest and make them Americans, maybe they should reconsider the recent hardline policies towards immigrants, ok, ok, illegal immigrants. Just think, all those immigrants from the neighbouring southern countries might just produce the next gates or buffett; hey you don’t need many just a Carlos Slim Helu!

  • Posted by Anonymous

    Dearth of Consistency:

    ….the primary reason the Chinese government must maintain capital controls is that if the RMB is worth twice as much…

    Until the China PLA can deploy a battlegroup to the Persian Gulf, the Chinese yuan won’t ever be accepted in the Middle East.

  • Posted by DC

    by,

    The China PLA won’t ever deploy a carrier battlegroup to the Middle East period. I was only making a rhetorical statement that the Chinese yuan won’t ever be accepted for Oil given the US sphere of influence in the Gulf Arab states. For all of the constant US media disinformation, the China PLA Navy doesn’t even have 1 operational aircraft carrier for global power projection; the US Navy has 11 Nuclear Aircraft carriers. The China PLA Navy is only a regional power with the potential to blockade Taiwan and strategic trade routes through Southeast Asia with the recently completed unsinkable Naval Airbase in the South Pacific Spratley Islands.

  • Posted by Twofish

    DC: Otherwise, the CIA and NSA wouldn’t have concluded that Iraq falsely retained nuclear and chemical weapons…..

    Actually it seems that most people in the CIA concluded that Iraq didn’t have nuclear and chemical weapons.

    In any event, yes there are people in the US government that see China as a threat and want to destabilize relations. The question then is to figure out how to keep these people out of power, and these people just can’t start a war or do anything particularly nasty without popular support or support from the President and Congress, and as long as it’s in the interest of the financial people to have a booming Chinese economy, it will be hard (though not impossible) to start a war.

    Also you can’t paint agencies with broad brush strokes otherwise you start lumping in your friends with your enemies and that’s a bad thing to do, which is why I think your Rubin-bashing is at best politically unwise.

    DC: For the record, Saudi oil exports are only denominated in US Dollars and only US Dollars. Asked if the Saudi’s would consider selling oil in Euros, the Saudi Energy Minister stated that it would not be possible to sell oil in Euros due to the current setup of the Saudi banking system.

    Citation? Again there is a difference between denomination and sales. There are very good banking reasons to denominate oil in only one currency.

    The basic problem is that if you denominate oil in multiple currencies, then you have to have an infrastructure to keep the prices consistent with each other. Suppose I agree to sell you oil at US$120 barrel in three weeks and Euro 100. What happens if the exchange rate isn’t 1:1.2. So the contracts are written so that the oil is sold at US$120, but it can be payable in Euros at the spot market value.

  • Posted by DC

    "Actually it seems that most people in the CIA concluded that Iraq didn’t have nuclear and chemical weapons". – Twofish

    At the United Nations Security Council, then Secretary of State Colin Powell stated that US Intelligence Agencies had proof "beyond any reasonable doubt" that Iraq retained Weapons of Mass Destruction. The same US Intelligence Agencies continue to feed "China Threat" BS to the Washington Times and other Neo-con news outlets. Just read Bill Gertz weekly articles on China with leaked secret US Intelligence infomation.

    Here is one reference to official Saudi government support for US Dollar hegemony. From Bloomberg,

    "Saudi officials rejected a suggestion by Iran and Venezuela to stop pricing crude in dollars at a meeting of the Organization of Petroleum Exporting Countries in Riyadh on Nov. 19. Saudi Arabia doesn’t want the U.S. currency to “collapse,” Foreign Minister Prince Saud Al-Faisal said." “If OPEC made a definitive statement that it was going to be paid in other currencies, you could get a run on the dollar.”

    http://www.bloomberg.com/apps/news?pid=20601109&sid=a7zTpsL44WNI&refer=news

  • Posted by Twofish

    Colin Powell is an ally. Bill Gertz is an adversary. If you everyone becomes your enemy, then you can’t win.

    DC: The same US Intelligence Agencies continue to feed "China Threat" BS to the Washington Times and other Neo-con news outlets

    Actually, I think that Bill Gertz just listens to what he whats to listen to. The problem is Gertz and not the US Intelligence agency. A CIA analyst that thinks that China is not a threat is not going to be quoted in the Washington Times.

    DC: Saudi officials rejected a suggestion by Iran and Venezuela to stop pricing crude in dollars at a meeting of the Organization of Petroleum Exporting Countries in Riyadh on Nov. 19.

    Oil is priced in dollars. It doesn’t mean that it is all sold in dollars.

    The Neo-Cons basically make up most of their "intelligence."

  • Posted by DC

    Twofish,

    Oil is priced in dollars and only sold in US Dollars by the Gulf Arab states. The rogue OPEC states, Iran and Venezuela sell a portion of their oil exports in Euros. That is why they remain on the Bush Neo-con "hit list" for regime change. Russia is also now selling oil in Euros, and not surprisingly Russia-US relations are also on the rocks. Saddam Hussein sold oil denominated in Euros and we all know what happened to him. Geo-politics cannot be separated from economics. This is what Republican Congressman Ron Paul has to say over the US Dollar hegemony issue:

    http://www.house.gov/paul/congrec/congrec2006/cr021506.htm

    " In the short run, the issuer of a fiat reserve currency can accrue great economic benefits. In this case that’s the United States. As long as foreign countries take our dollars in return for real goods, we come out ahead. In this case that’s the United States. As long as foreign countries take our dollars in return for real goods, we come out ahead. The agreement with OPEC in the 1970s to price oil in dollars has provided tremendous artificial strength to the dollar as the preeminent reserve currency. This has created a universal demand for the dollar, and soaks up the huge number of new dollars generated each year. Last year alone M3 increased over $700 billion. The artificial demand for our dollar, along with our military might, places us in the unique position to “rule” the world without productive work or savings, and without limits on consumer spending or deficits. "

  • Posted by DC

    Republican Congressman Ron Paul on US Dollar hegemony and the demise of Saddam Hussein,

    " Most importantly, the dollar/oil relationship has to be maintained to keep the dollar as a preeminent currency. Any attack on this relationship will be forcefully challenged—as it already has been.

    In November 2000 Saddam Hussein demanded Euros for his oil. His arrogance was a threat to the dollar; his lack of any military might was never a threat. At the first cabinet meeting with the new administration in 2001, as reported by Treasury Secretary Paul O’Neill, the major topic was how we would get rid of Saddam Hussein– though there was no evidence whatsoever he posed a threat to us. This deep concern for Saddam Hussein surprised and shocked O’Neill.

    It now is common knowledge that the immediate reaction of the administration after 9/11 revolved around how they could connect Saddam Hussein to the attacks, to justify an invasion and overthrow of his government. Even with no evidence of any connection to 9/11, or evidence of weapons of mass destruction, public and congressional support was generated through distortions and flat out misrepresentation of the facts to justify overthrowing Saddam Hussein.

    There was no public talk of removing Saddam Hussein because of his attack on the integrity of the dollar as a reserve currency by selling oil in Euros. Many believe this was the real reason for our obsession with Iraq. I doubt it was the only reason, but it may well have played a significant role in our motivation to wage war. Within a very short period after the military victory, all Iraqi oil sales were carried out in dollars. The Euro was abandoned. "

    http://www.house.gov/paul/congrec/congrec2006/cr021506.htm

  • Posted by bsetser

    HZ — I agree with your point (easier to get funds from non-democratic governments) but the ease is one of the reasons i worry. it feels like an easy way for the us political system to avoid some hard decisions. need cash w/o congressional approval? call the saudis …. it has been done before (see reagan administration).

    MMcC — presumably existing shareholders get first dibs on the rights issue. but tis also true that we don’t know who exactly has participated in the recent deals. They haven’t though been structured as direct placements with a few SWFs.

    DC — you are going over old ground that in my view isn’t worth going over again.

  • Posted by DC

    Brad,

    Old ground? The Iraq War isn’t even over and between $3-5 trillion will be wasted before its all finished. Already 4000 US soldier and 30,000 serious injuries in the Iraqi meat grinder. No one in the Washington Elite or US media asks any questions. But China’s internal monetary policies and the Tibet issue gets everyones blood boiling. The US will be withdrawing from the Iraqi cesspool in the not too distant future because the nation can’t afford anymore stupidity.

  • Posted by Guest

    Mr David Rockefeller, published in 2002

    For more than a century ideological extremists [sic] at either end of the political spectrum have seized upon well-publicised incidents such as my encounter with Castro, to attack the Rockefeller family for the inordinate influence they claim we wield over American political and over economic institutions. Some even believe we are part of a secret cabal working against the best interests of the United States, characterizing my family and me as "internationalists" and of conspiring with others around the world to build a new global political and economic world order? one world, if you will. If that’s the charge, I stand guilty, and I am proud of it’

  • Posted by JB

    Brad,

    Do you think that Sovereign Wealth Funds participate in the hybrid debt / equity raisings by Citi, Merrill, etc? I’ve heard Bill Gross (the titan of fixed income) comment that T-bills are the most overvalued fixed income instrument on the market. I think petrodollars are ready to dump t-bills big time if a low risk, high yield investment becomes apparent in the market. They have to be losing big by being in dollar denominated bills. Why not hold reserves in Australia, Switzerland, etc. Inflation concerns have to be equally alarming to these big fund managers. I think the Petrodollars are also partially responsible for driving ABX indices through the floor. Agree?

  • Posted by bsetser

    DC — the argument that the US invaded iraq to preserve dollar hegemony is "old ground"; the ongoing US presence is Iraq is a live issue, but it isn’t really on topic. And I think we are all aware of your views on the Tibet issue.

  • Posted by Twofish

    JB: ‘ve heard Bill Gross (the titan of fixed income) comment that T-bills are the most overvalued fixed income instrument on the market.

    The trouble is that everything else is based on the value of T-bills on the theory (which seems correct) that if T-bills go belly up, so will everything else.

    JB: They have to be losing big by being in dollar denominated bills. Why not hold reserves in Australia, Switzerland, etc.

    Because the Australian and Swiss economies are just not big enough to hold all these reserves.

    The Euro is the only thing that could possibly compete against the dollar as a reserve currency, and switching a trillion dollars is not something you can do easily. One problem is that to be a seller you have to have a buyer, and there aren’t that many people out there wanting to buy another trillion dollars.

    It’s again the foundational problem. Even if you think that the US economy is run badly and the dollar should tumble, the value of everything else is built on top of the dollar. So if there is a total collapse of the dollar, it’s going to take everything else with it.

  • Posted by bsetser

    JB — I don’t know. I don’t have any clear data on the SWF participation in the recent hybrid deals. My guess is that they played a modest role — these deals are clearly different from the deals directly with the swfs in dec/ jan. i would be a bit surprised if the SWFs were buying the ABX, but that is based more on a sense that the Gulf likes equity market risk more than debt market risk. In general my sense is that the funds are more worried about buying in too early than buying in too late, but i really don’t know.

    what i do know is that someone is still buying a lot treasuries and agencies, and that the "diversification" process hasn’t really started for a lot of big players.

  • Posted by JB

    Twofish,I’m not a doomsday predictor that thinks the dollar will stop being the primary reserve currrency. My understanding is that it composes 2/3 of the currency reserves globally. My only argument is that $1 Trillion dollars is not going to be poorly managed. The market changes over the past year, coupled with currency devaluation…doesn’t indicate a stellar fund performance. After all change is the only constant.

    Brad, I am surprised that the US Dollar demand by these enormous funds hasn’t done more to buoy its valuation. I think this means that SWFs are not only a macroeconomic mover but also subject to macroeconomic moves. A casino dealer if you will. I think this one has had a recent run of bad hands.

  • Posted by DC

    Brad,

    Off-topic but since you are aware of my views on the Tibet issue, do you think the US news media should be held accountable for disinformation and libel.

    Western Media Fabrications regarding the Tibet Riots – Fake Videotape used by CNN http://www.globalresearch.ca/index.php?context=va&aid=8697

    On the day of the Lhasa Riots (March 14, 2008), there is evidence of media fabrication by CNN. The videotape presented by CNN in its News Report on the 14th of March (1.00pm EST) was manipulated.

  • Posted by bsetser

    JB — most of the big gulf SWFs have a pretty balanced portfolio, while CBs are on average more like 65 $ (depending on where you think the non-reporting EMs are). so the SWFs aren’t obviously a $ positive. The CBs are buying $ b/c no one else wants too – -and they are trying to keep their currencies from rising. strong reserve growth in my view is a sign of dollar weakness, not the cause …

  • Posted by Twofish

    JB: My only argument is that $1 Trillion dollars is not going to be poorly managed.

    The thing about a trillion is that it is very hard to do mattress artbtrage. If you have $10 million, you aren’t going to have negative interest rates, since you’d go to the bank, withdraw all your money and put into your mattress. You can’t do this with a trillion, and it may well be that taking a 10-20% loss is the best that you can do.

    One problem with diversifying out of the dollar, is where do you go? If you have dollars, then you can buy US treasuries, whereas there isn’t an equivalent liquid store of value for the euro.

    JB: Brad, I am surprised that the US Dollar demand by these enormous funds hasn’t done more to buoy its valuation

    They are exchanging dollar denominated debt for other dollar denominated debt which means that there is no change in the demand.

    What’s happened over the last few months is your classic bank run, and the only reason you don’t seem panicking people standing in line like you do in the movies is that everything is done over the internet now.

  • Posted by observer

    DC – Off-topic but since you are aware of my views on the Tibet issue, do you think the US news media should be held accountable for disinformation and libel.

    Do you think the Chinese government should be held accountable for preventing media coverage in Tibet (not to mention human-rights violations)?

    Jingoistic opinions from any country is really stupid.