At least we know how the US financed its trade deficit in April (and March too); Record central bank financing continues …
The US likely needs to attract a net capital inflow of roughly $65b a month to finance its current account deficit.
The increase in the Fed’s custodial holdings for foreign central banks between March 5 and April 2: $69.8b ($29.2 Treasuries, $40.6b Agencies)
The increase in the Fed’s custodial holdings from April 2 to April 30: $66.8b ($40.7b Treasuries, $26.1b Agencies)
Over the last week of April alone, central banks added $27.4b to their US custodial holdings, including $18.7b of Treasuries.
Pick how you want to do the math. $68.3b in average monthly purchases works out to around $820b a year. $17.1b in average weekly purchases (over the last 8 weeks) works out to more like $890b annually. Either way, it is more than enough to finance the (expected) US current account deficit if US investors don’t add to their foreign portfolios and existing foreign investors don’t abandon the US.
Incidentally, the $8.7b in average weekly purchases of Treasuries over the last 8 weeks would – if sustained — be enough to finance a $454b budget deficit without selling a single Treasury bond to private investors. Sometimes I think the US should drop the façade of auctioning off Treasuries and just negotiate private placements with the People’s Bank of China and the Saudi Monetary Agency.
What’s more, all this financing was provided more or less unconditionally, with the United States creditors taking on the risk of future dollar depreciation. Further dollar depreciation against the euro – and, perhaps more importantly, the risk of further dollar depreciation against their own currencies.
It goes without saying that this flow is far, far larger than the $30b or so sovereign funds committed to troubled US financial institutions in December and January ($40b if UBS is considered a US financial institution). Yet it has attracted far less attention.
For all the rhetoric that sovereigns are stable long-term investors able to take the long-view and buy beat down financial assts (super-senior tranches of CDOs based on mortgage-backed securities anyone), the enormous growth in central banks custodial holdings with the Fed suggest that central banks are buying the expensive, safe financial assets everyone else now wants – not taking a long-view and looking for value in the debt market.
The world of sovereign investors is now quite big. Almost unimaginably big – with China and the oil the exporters leading the way. Total sovereign asset growth likely topped $300b in the first quarter. It includes a lot of different institutions pursuing a lot of different strategies.
Some clearly have invested in risky assets than sovereigns have typically invested in – whether US financial institutions or European oil companies. But I would bet that if we had real time aggregate data on sovereign flows, the real story of the past six months has been a flight by sovereign investors away from risky assets. That certainly seems to be the story of the last two months, judging by the enormous growth of the Fed’s custodial accounts.
But if an informed reader has a different view, I am all ears …
Update: For the sake of comparison, I went back and looked at the growth in the Fed’s custodial holdings in the first six months of 2004, a period marked by unprecedented Japanese intervention in the foreign exchange market (at the end of 2003 and in early 2004) that fueled very large purchases of US Treasuries (in the first half of 2004). The average monthly growth in the Fed’s custodial holdings in the first six months of 2004 was just a bit under $28b — well under half the monthly growth in the the last two months.
There is a real story here.
I’m not your "informed reader" but with all the rhetoric lately, you’d think USD were a risky asset
"It has attracted far less attention"
It takes equity investment to root out the real paranoia underlying investment protectionism. The US is more concerned about and sensitive to the the inherent entrepreneurial shame of dependence on foreign equity investment than the harder to define economic consequences of dependence on foreign treasury purchases.
Brad, this official inflow stuff has reached a point where it looks so insane to me, that I start to doubt the whole of my understanding of the matter. So I’d like to ask you a dumb question: do those numbers look insane to you, too?
I am not sure if the numbers look insane but what these CBs are doing is insanely insane.
They run inflation of 7 to 9% but still cant stop going to US and buy worthless paper. Shortsightedness is the keyword here !
Dollar Reserve Status Is Tale of Fading Glory
http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_sesit&sid=asyzv2fq7NnA
May 2 (Bloomberg) — Reserve currency status is like your health: Abuse it, and you risk losing it. The dollar is the world’s reserve currency, and absent some unexpected exogenous shock, will probably remain so for some time. Nonetheless, the dollar’s premier status is under threat, especially as a store of wealth, by both foreign governments and private investors. Also, companies are using it less as a currency in which to invoice and settle international trade transactions.
Although the composition of official central-bank foreign- exchange holdings receives the lion’s share of attention when people talk about reserves, it is the private sector’s trade in goods and services that plays a dominant role in determining a currency’s international status. “The dollar is the most important reserve currency in the world, but it is no longer the only reserve currency, nor even the overwhelmingly dominant choice as a reserve currency,” says Paul Donovan, a London-based economist at UBS.
On the official side, developing countries have been steadily inching away from the dollar. Their foreign-exchange reserves surged to $4.9 trillion in 2007 from $1.2 trillion in 2000. Emerging-market countries accounted for 76 percent of total global reserves in 2007, up from 56 percent in 1997, according to the International Monetary Fund. Yet during that period, their dollar holdings shrank to 61 percent from 73 percent.
The euro has been the beneficiary, rising to 28 percent of developing-country reserves in the fourth quarter from 19 percent when the decade began. Behind this dollar downgrade lies the U.S.’s rising debtor profile, an unpopular war in Iraq, the growing threat of trade protectionism, apprehension over the greenback’s decline and the subprime crisis.
Many countries — including China, Russia, Kuwait, Singapore and Norway — are transferring tens of billions of dollars to sovereign wealth funds. Long-term investors with mandates to maximize returns, these entities owe no allegiance to the U.S. currency and over time their investments will probably result in their governments’ holding fewer dollars.
The durability of the dollar’s reserve-currency status owes more to the absence of a challenger than sound U.S. policies. The euro is hobbled by the lack of a single, pan-European capital market and its being a hybrid currency used by a mix of countries yet owned by none.
Why doesn’t China and the Saudi Arabia just let their currencies float against the dollar?
China is paying a higher interest rate on its debt than its recieving on the money invested in US treasury bonds. China’s currency is undervalued against the dollar, so at some point this debt will probably be worth less in Renimbi than they are paying for it now.
Similiar rationals are probably true for the Saudi’s as well.
So why not let their currencies float?
What do the Saudi’s and the Chinese get out of the current policy?
Are they trying to effect the US elections or what?
What do they get from all of this?
"Why doesn’t China just let their currency float against the dollar?"
As the World’s Reserve Currency for global trade transactions, the US Dollar hegemony can’t simply be replaced overnight by a multi-currency regime without major economic disruption.
Also Read:
Blaming the Chinese Yuan for the US Trade Deficit with China
http://www.counterpunch.com/behzad05012008.html
How come that these purchases of agency bonds and treasuries, presented by Mr Setser, are so large, and the corresponding TICS data so tiny? The latter even indicating that China is a net seller of treasuries…
We can only dream that one day the China yuan will be the primary reserve currency across East Asia.
From Japan’s Yomiuri Shimbun Newspaper,
China tops Southeast Asian poll as "best" Economic partner nation for region:
http://www.yomiuri.co.jp/dy/national/20080503TDY04305.htm
On Thursday, the ministry released results of the survey it conducted on 300 people aged 18 or older in the six ASEAN countries. Surveys were conducted in: Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam. When asked which country they believed was an important partner for the regional bloc at present, 30 percent of respondents cited China, 23 percent selected the United States.
DC,
I read your link to the article in counterpunch. But I also read Brad’s link yesterday to a piece by Micheal Pettis.
Pettis argues that exports in China aren’t falling but instead shifting North.
"By the way, and to support the argument that it is not the rising RMB that is hurting Chinese exporters, Gene Ma of ISI-CEBM sent me an interesting piece today. In it his team argues that “he main driver behind China’s narrowing trade deficit is not slowing exports, but the changing terms of trade. In particular, prices of imports are rising much faster than exports.” They also note that China’s export engine is moving northward. “The share of the Pearl River Delta in total exports fell from 47% in 1995 to 30% today. The share of the Yangtze River delta rose from 20% to 40%.”
What this suggests to me, as I have discussed often on this blog, is not so much that China’s exports are getting clobbered. It suggests that China is evolving – very naturally I might add – so that its export performance is shifting as a consequence of development differentials across the country. China itself is not losing out to other countries as much as exporters in the Pearl River Delta think. China’s export competitiveness, instead, is shifting north. If you keep your eyes to firmly focused on the performance of the southern exporters, it would be easy – but of course very mistaken – to conclude that something awful is happening to China’s export capability. It isn’t. Not yet, anyway."
http://www.counterpunch.com/behzad05012008.html
So if exports aren’t falling, again the question is what is in it for China to spend all of this money investing in US treasuries? Why borrow at home to buy a depreciating asset that pays less interest than the domestic rates its borrowing at? Shouldn’t a country as poor as China be investing its money in the domestic economy and not be subidising US profligacy? If nothing else why not just pay down its own national debt with this money instead of subsidising the US debt?
Correction
The passage I quoted came from this Micheal Pettis link, not the counterpunch article I sited.
http://www.piaohaoreport.sampasite.com/blog/Exporters-are-complaining-loudly.htm
Could somebody (Brad, DC or anyone) explain where one can find these figures in the H.41 data ?
I don’t see such big numbers in "securities held in custody…"
Thanks
Jimbo,
The Northern Cities in China actually have always retained more heavy industry and engineering technology than Southern China. For instance, most of the Chinese semiconductor industry is centered around the Greater Shanghai region. There is little Chinese defense production in the Southern Guangdong province. Most state-owned Aerospace manufacturing is around Xian, Shanghai, Chengdu, and Shenyang. By contrast, the labor-intensive factories around the Pearl River Delta are financed mostly by freewheeling Hong Kong businessmen that are poorly capitalized and relatively low technology. Their primary comparative advantage was always cheap labor costs. The Chinese Central government actually neglected Guangdong for state-investment over decades. The prosperity in the Pearl River Delta region has almost entirely been generated by private capitalism. As the Chinese yuan revalues, the Greater Shanghai region with stronger intellectual capital and engineering resources stands to benefit more. Still the demands from the US to the Chinese to massively revalue their yuan currency are unreasonable.
Brad:
"The US likely needs to attract a net capital inflow of roughly $65b a month to finance its current account deficit."
"Needs?" The deficit is not exogenous. I submit that it is questionnable that we ‘need’ the current account deficit and the attendant bleeding of demand for domestic output. (For those who may be puzzled by these statements, net capital inflows are equal to net imports of goods and services by the balance of payments constraint. An increase in net imports of goods and services reduces growth of U.S. GDP. Central Bank dollar purchases contribute to net capital imports.) Maybe some borrowing is in order to ease the effects of the recent oil price increase, but I question that we should be borrowing to support export growth in Asia.
lili,
Eg. The fed’s h.4.1, custodial holdings ($MM) were:
2,214,586 on April 2
2,281,398 on April 30
That’s a $66,812MM increase which is going to give you an annual increase in the $800 billion range if sustained.
Thanks Estragon !
BTW i love your name
lili — there is line under the main fed balance sheet called:
Memo (off-balance-sheet items):
Marketable securities held in custody for foreign official and international accounts (2,7)
There are two numbers presented there. I use the end of the reporting week numbers (reporting week ends on wed) rather than the weekly averages. the end of week numbers are in the last column.
Alessandro — yes, the numbers look insane to me. And I agree with Indian banker, the fact that so many CBs have played along is even more insane. This has all looked really insane to me since q1 07, when the quarterly growth in global reserves first edged toward $300b. and almost all of that comes from the emerging world.
I went back at looked at the growth in the fed’s custodial accounts in the first half of 04 — back when Japanese (really all of ASia, but Japan was the biggest player) purchases were considered a really big deal — the increase in custodial holdings in the first 6 months of 04 averaged $28b (with almost all — $23.8b a month on average — going to treasuries). Recent monthly growth has been more than twice as large.
From Asia Times:
Abandoning the USS Dollar Titanic
http://www.atimes.com/atimes/Global_Economy/JE03Dj03.html
The problem with the US is that of excessive borrowing that has fed a consumption boom. Almost three-quarters of the US economy is consumption, compared with the more usual 50-50 mix considered "normal" in Economics 101 textbooks. This excess of consumption creates the massive borrowing needs of the US, which are immediately supplied by a bunch of supplicants, be they Middle Eastern dictators or imagination-free Asian central banks. What many of us at Asia Times have been writing about is that this edifice is cracking and quite likely to fall over. The final consequence of the decline of US power is global in nature, namely a search for an absolute value reserve. That would be physical commodities including oil, copper and whatever have you.
Brad:
"I went back at looked at the growth in the fed’s custodial accounts in the first half of 04 — back when Japanese (really all of ASia, but Japan was the biggest player) purchases were considered a really big deal — the increase in custodial holdings in the first 6 months of 04 averaged $28b (with almost all — $23.8b a month on average — going to treasuries). Recent monthly growth has been more than twice as large."
This is an aspect of China’s export-led growth that is bothersome. For exports to lead China to faster growth than its trade partners, the foreign trade partner’s borrowing must grow faster than their economies. Bush sold Detroit out for 300 Japanese non-combat troops in Iraq. Ben is doing his best to enable the Asian lending to U.S. borrowers to continue. When will the U.S. call such practices to a halt?
I think you could argue that by cutting rates as inflation increases in China, Ben is doing his best to encourage to move off its dollar link, without noticeable success … Or, i guess, by cutting rates in the face of a big deficit, Ben has implicitly assumed that central banks will make up for a shortage of private demand for us assets. I don’t think the fed thinks it is doing anything to support foreign inflows right now, but rather thinks it is doing what it can to stabilize us economic activity and not prioritizing the dollar.
I agree the reduction in U.S. interest rates should reduce the inflows for market economies with convertible, freely floating currencies. Corresponding to this reduction in inflows, the convertible currencies should appreciate and their owners’ trade surpluses with the U.S. should shrink (or their deficits grow). But to the extent the cuts keep up U.S. demand, I think Asian CB’s see them as a green light to continue to siphon off part of that demand through currency interventions so as to keep up Asian growth. (I also think that oil markets see this mechanism as holding up global demand for oil. I see this as the main mechanism tying Ben’s cuts to oil prices, rather than Hamilton’s mechanism of storage costs.)
I agree that Ben’s cuts make it more expensive to accumulate U.S. dollar-denominated assets, but I honestly don’t think that cost plays much of a role in the Asian currency-market interventions, except perhaps to cause them to push the euro way out of purchasing-power parity. They seem to be ignoring opportunities in the undervalued yen, though, which I find somewhat puzzling. The only explanation that offers itself to me is that they are afraid Japan would object.
Question:
Has money ever been printed on the scale that it is today by the central banks in Asia and the Middle East?
2nd Question:
How do you think this will all end?
badly
Why would treasuries be seen as non-risky assets still, considering the debt load of the U.S. and clearly weakening dollar?
From all aspects the USD is such a precarious currency underlying such an enormous amount of assets. The effort to shore up the currency slightly in line with the FED lowering interest rates seems to have worked for now.
But has the FED stopped printing? Can we see real dollar appreciation? Like maybe $1.25 to the €uro.
Or will we see a new currency replacement as has occurred in Europe ? China, Japan, Europe sure do know what it means if the U.S. consumer is tapped out.
Brad,
Do you sincerely believe that Bernanke is unaware of the impact of the exploding line item in the Fed’s own weekly H41 report that says:
"Marketable securities held in custody for foreign official and international accounts"
Everything in the world economy and financial markets are being driven right now by that one line item. You think Bernanke is unaware of this?
That one line item is the gigantic elephant in the room that the financial media is ignoring when they discuss the economy/markets (so they can keep repeating the "worst is over" happytalk mantra).
Let’s face the reality here:
If not for all this foreign central bank money printing, the financial system would have crashed several months ago already.
Do you really think Bernanke is unaware of this?
Would be interested in your analysis of this, particularly on the balance sheet effect for the banking system:
Saudi … Central Bank Raises Reserve Requirements
May 3 (Bloomberg) — Saudi Arabian shares fell for a second day, led by banks after the Saudi Arabian Monetary Agency raised reserve requirements.
… the central bank left its benchmark repo rate unchanged and ordered banks to set aside more funds with the aim of slowing credit growth, said John Sfakianakis, chief economist at Saudi British Bank. The Saudi Arabian Monetary Agency, the central bank, doesn’t communicate rate decisions directly to the media.
“Increasing the reserves requirements for banks means that they have to keep more money in their vaults,” Sfakianakis said by telephone from Riyadh today. “So banks have less money to lend, which is an attempt to curb inflation.”
… The central bank is taking measures to curtail inflation after the U.S. currency, to which the Saudi riyal is pegged, lost 12 percent of its value against the euro in the last 12 months.
How are we going to pay for ALL of this? Oh, my!
"Why doesn’t China just let their currency float against the dollar?"
Written by Jimbo on 2008-05-02 13:13:43
Actually, the Chinese did unpeg the RMB from the USD almost three years ago… well, sort of. It’s now pegged to a basket of currencies (mostly made up of USD, EUR, KRW and JPY) and allowed to float 0.5% from this peg. Since then, it has gained 18.5% against the dollar, from 8.11 RMB per USD in July, 2005 to ~6.98 RMB per USD about a week or two ago.
Guest — most analysts who have looked at China’s basket have concluded it isn’t really a basket. China basically decides how much it wants it currency to move against the dollar rather than targeting a basket per se. I haven’t seen any recent studies, but that was the clear conclusion of the work done on the moves in 05 and 06. It functions more like a crawling peg v the $, with a variable rate of crawl decided by someone high up in beijing.
The Saudi reserve requirement is a tax on the banks, like the Chinese reserve requirement. But i think the saudis are now also holding down deposit rates (to discourage inflows) relative to lending rates, which tends to help the banks (very much like China). I haven’t looked at this in detail.
This ends with a real appreciation in the emerging world and a real depreciation of the dollar and euro v the emerging world. whether than happens through inflation in the emerging world, through nominal appreciation in the emerging world or through a mix depends on the choices policy makers make. In my peterson institute policy brief, i argued that real appreciation through inflation is far riskier, b/c
a) it likely produces asset bubbles along with way due to negative real rates
b) prices adjust in a sticky way, so they adjust slowly on the upside and on the downside. If the Gulf adjusts its price levels to reflect $70 oil and oil falls to $50, the resulting deflationary pressures could produce a nasty shock.
all this is very long term though … in the short-term there are policy steps (slamming on the brakes hard with lending curbs and fiscal tightening) that could reduce the pressure for inflationary real appreciation by in effect pushing up savings in the surplus countries.
You know, I would be curious to know if Bernanke looks at the custodial holdings data/ has someone on the Fed staff in DC tracking reserve growth closely (obviously the folks in NY who manage the custodial accounts pay lots of attention to those accounts). If I had to guess, i would guess now –
my general sense is that the Fed (and to a lesser degree the Treasury) thinks people like me pay more attention to the reserves data than is warranted, as the reserves data isn’t a "fundamental" driver of market prices or the global economy.
that view comes out when the fed discusses the sources of low us bond yields in 04, 05 and 06. They tended to emphasize things other than central bank demand — notably a declining term premium and less expected volatility in the fed’s interest rate path associated with the great moderation (something that they linked to the fed’s credibility as an inflation fighter). It also shows up in their interpretation of the impact of say a chinese shift from dollars to euros on the market. they would argue that this is just like sterilized intervention by the fed/ ecb, and like sterilized intervention by the fed/ ecb, it doesn’t have much of an impact b/c it doesn’t change the fundamentals (fundamentals being expected growth paths, expected fiscal deficits, expected policy rates and the like). flows in this model don’t matter — what matters are deeper factors. So if chine shifted from US dollar denomianted government bonds to European government bonds and its sale of us bonds pushed us rates up by more than the fundamentals justified, US and European private investors in europe would recognize immediately that us bonds are now mispriced and happily sell their european government bonds to China and buy US bonds. Flows in this view — especially official flows — don’t matter.
I found it interesting for example that Bernanke’s description of the savings glut abstracted away from the vector (official purchases of US assets) that carries the emerging world’s savings to the us, as well as the set of policy choices in the emerging world that pushed up savings — the rise in savings is presented as exogenous, and the fact that private investors are buying EM asset and thus moving money into the glut countries rather than moving funds out of the glut countries (forcing the official sector to intervene heavily to sustain the "glut" equilibrium isn’t really addressed.
so if I had to guess, i would guess that the fed board doesn’t pay as much attention to the growth in the fed’s custodial holdings as i do. I also would bet that I now have better data on global reserve growth than they do — though I hope i am wrong on this. I just am not sure anyone at the board in DC really has built up a big spreadsheet to track reserve flows on a high frequency basis.
"…Central bankers in Asia could be excused for feeling a bit, well, fed up by sliding U.S. rates…" http://www.bloomberg.com/apps/news?pid=20601039&sid=acrUvNUAIYX4
"…Good news follow good policies, and Brazil has been on the right track — they have become a net creditor, unlike the US. Hey, maybe the Real should be a reserve currency…" http://alephblog.com/2008/05/02/is-this-what-you-wanted/
It isn’t Bernanke’s job to make Asian central bankers life easier. Moreover, the US has plenty of reason to by equally fed up with many Asian government’s unwillingness to allow exchange rate adjustment and the associated distortions their record reserve growth induced in US financial markets. That said, the growing difficulties US policy is creating for Asian central bankers shouldn’t be ignored; they are one sign the system may not be perfectly stable. Neither side seems happy with the system, but neither quite knows how to extricate itself.
@Guest on 2008-05-03 07:08:55
"If not for all this foreign central bank money printing, the financial system would have crashed several months ago already.!"
IMV there are two linked events here:
1. If not for all the Fed (and possibly to a lesser extent ECB and BoE) money printing, the US (and possibly to a lesser extent the European and British) financial system would have crashed several months ago already.
2. If not for all the Chinese and GCC money printing, the RMB and GCC currencies would have appreciated very strongly against the USD, EUR and GBP in view of the aforementioned US, etc. money printing.
And I’d like to add some specifics to Brad’s correct statement that event 2) "likely produces asset bubbles along (the) way due to negative real rates": it is exactly what it did in critical commodities such as grains. It was obviously not the only cause of the recent explosive food price rise, as can be easily shown by the fact that the 2001 loosening of monetary policy did not cause anything like, the reason being that the fundamental picture today is very different from that of 7 years ago, due to:
- population increase
- changes in diet due to greater affluence (it takes much more vegetable food to produce a kilogram of meat than if eaten directly for the same - and probably healthier - nutritional content)
- increased biofuel production.
So, loose monetary policy in the face of already tight fundamentals encouraged speculative funds to flow into the agricultural commodities sector and be the straw that broke the camel’s back.
This is definitely not an original idea of mine, tracing back to Jeffrey Frankel’s March posts here (although he missed the changes in the fundamental picture) and having been more recently expressed by:
Max Keiser
http://www.huffingtonpost.com/max-keiser/my-appearance-on-al-jazee_b_99422.html
Martin Hutchinson (IMV the best articulated of the four posts)
http://www.moneymorning.com/2008/04/29/the-feds-dilemma-rescue-the-housing-market-or-feed-the-poor/
Mike Whitney
http://www.marketoracle.co.uk/Article4486.html
Otto Spengler
http://www.atimes.com/atimes/Global_Economy/JD22Dj01.html
@Brad
"Moreover, the US has plenty of reason to by equally fed up with many Asian government’s unwillingness to allow exchange rate adjustment and the associated distortions their record reserve growth induced in US financial markets."
Brad, IF you extend that statement to GCC countries (and I know the Gulf is geographically in Asia, but "Asian" conventionally means from India Eastward) then there’s room for some "interesting" reasoning here. Because the wisest way for GCC countries to avoid their record reserve growth would be just to cut down their oil production so as to bring their current accounts to balance. Which, in view of the low elasticity of oil demand, would require quite a meaningful drop in oil production. Morevorer, that approach would exactly be "taking a long-view and looking for value", as it would take into account the facts that oil is a finite, absolutely exhaustible resource, and critical to modern society at that, and that there’s no financial investment that provides better value than leaving it in the ground.
As this looks like a dangerous line of reasoning, I wouldn’t dare articulate it if, in response to this news:
"Saudi Arabia’s King Abdullah said he had ordered some new oil discoveries left untapped to preserve oil wealth in the world’s top exporter for future generations…
"When there were some new finds, I told them, ‘no, leave it in the ground, with grace from god, our children need it’," King Abdullah said…"
Matthew Simmons had not said:
“This statement by the Supreme Ruler of Saudi Arabia has far-reaching implications. That King Addullah would now instruct his servants to conserve the oil they pump and save some for the kids and grandkids of today’s Saudi citizens is most profound.
King Abdullah has exhibited a sense of wisdom not seen since his brother, King Faisal ruled the Kingdom until his tragic assassination. Assuming his health continues, he might lead Saudi Arabia successfully into a post-peak world and create sustainable middle class wealth for the 90% of Saudi Arabia who had accidentally been left behind.
The world should bless this intelligent pronouncement. It is a reflection that Twilight set in on the oilfields of Arabia a few years ago.”
http://www.aspo-usa.com/index.php?option=com_content&task=view&id=358&Itemid=91
Hi Brad,
Thank you for you patience, your politeness and your kind answers.
And mostly, for your free classes:
"So if I had to guess, i would guess that the fed board doesn’t pay as much attention to the growth in the fed’s custodial holdings as i do. I also would bet that I now have better data on global reserve growth than they do — though I hope i am wrong on this. I just am not sure anyone at the board in DC really has built up a big spreadsheet to track reserve flows on a high frequency basis."
You are too humble on this.
But the short term could be very nasty too.
London citizens have elected another Berlusconi. They have no idea of Anglo-Disease.
As a friend of mine (a very good writer) used to say: you could go to Paris for a real love; but you could go to Moscow for real hate (I’m 600 miles away from Paris).
And I used to say that love and hate drink from the same sources.
That’s your dilemma going on.
You know far more than Bernanke and Roubini of real flows of money, but…
In DC they try to socialise looses and save banks… isn’t it a year too late for that?
Time will tell,
Thank you anyway,
koteli
PS: Don’t loose your roots and keep on, please.
If your strategy is working why change. If your premise is that China is a war with the United States, they’re winning, big time. All without a shot fired. We’ve not a leg to stand on. We can’t even make most of our weapon systems without Chinese parts that we can’t make anymore. Other than raw materials we don’t make much the world wants except weapons even there we have to subsidize. Deep crap would be and understatement of our position. If the ships stopped coming in from China our economy would ground to a halt instantly. And as we sold our machine tool industry it’s not like we could easily change back over. Someone asked what China and Saudi Arabia gets from all this,I would say is a ownership stake that grows daily.
"Ben is doing his best to encourage [China] to move off its dollar link"…."It isn’t Bernanke’s job to make Asian central bankers life easier"
Actually, he isn’t and he is! The Fed is now outright selling treasuries out of the System Open Market Account (http://www.newyorkfed.org/markets/pomo/display/index.cfm?showmore=1) to make room for repo collateralised by spread product. Regular readers of Brad’s blog may recall that I was critical of the contribution of the SOMA to lowering US long term interest rates (http://reservedplace.blogspot.com/2008/01/us-economic-policy-shot-in-foot-1-soma.html) during the boom. The Fed now seem to be going in the opposite direction. Their aim of switching from treasuries to repo is to try to backstop the MBS market, but it will have the effect of raising treasury yields, relative to other bonds if not in absolute terms.
Now that does seem (on an initial impression) insane to me!
By the way, I set out my idea of what the US should have done to cope with the reserves capital inflows instead of trying to persuade Asia to stop sending them at:
http://reservedplace.blogspot.com/2008/04/us-economic-policy-shot-in-foot-2.html
RebelEconomist,
You said:
"Their aim of switching from treasuries to repo is to try to backstop the MBS market, but it will have the effect of raising treasury yields, relative to other bonds if not in absolute terms."
Very good point that has been overlooked.
Fed asset switches like the TSLF should increase the supply of Treasuries out there, since they are no longer on the Fed balance sheet ("off-the-market").
That should drive Treasury yields up (compared to not making the switch). It’s kind of like taking a plug out of one hole in a leaky boat, and putting it in another hole. The water leaks in no matter what and the rates paid by end borrowers (overall) remain unchanged. Someone correct me if I’m wrong.
Brad said:
"so if I had to guess, i would guess that the fed board doesn’t pay as much attention to the growth in the fed’s custodial holdings as i do. I also would bet that I now have better data on global reserve growth than they do — though I hope i am wrong on this. I just am not sure anyone at the board in DC really has built up a big spreadsheet to track reserve flows on a high frequency basis."
That is a pretty frightening statement. This implies that the Fed isn’t aware of what is really driving the economy/markets. This implies that the reserve growth ("money printing") could keep spiralling through the roof and the Fed will be oblivious to the impact of this—UNTIL IT IS TOO LATE. This money printing pyramid scheme is destined to collapse.
So if the USD is the Fiat currency of lessening last resort, and the pyramid printing is destined to collapse, what next, worldwide faith in another fiat currency? I tend not to think that’s the case.
Were input prices to stay high, and the USD to stay weak (relative to pegging Asian countries, and yes China pegs), I suspect the US, and the rest of North America, would get very competitive moving forward, seems to me a New Deal is in the offing. Wasn’t it Toffler who spoke to the return of industries to North America due to high transportation costs, along with the creation of mobile factories. On a per capita basis, North America is very much more rich than East Asia, I believe even not on a per capita basis. Whereas so much heavy lifting needs to be done throughout Asia, I tend to think that China realizes this as it scours the world for resources, and keeps investing in depreciating assets as it races to get richer, before it leaves the demographic sweetspot and ages. I would bet that lessor populations will bear this storm better.
edit: previous post
rich to "resource rich"
“You know, I would be curious to know if Bernanke looks at …”
I think your scepticism about the Fed’s view of flows is well taken. Both Bernanke and Greenspan have been questioned by Congress on the issue of the sustainability of foreign capital flows, and they have generally maintained it’s not something that keeps them awake at night. This is equivalent to saying that the money has to show up somehow - it’s a matter of what asset category and what pricing. As far as potential disruption is concerned, there’s no more reason to hedge against a super catastrophic liquidation of foreign treasury holdings than there is to hedge against the explosion of the sun. The fear of liquidation scenarios in general underestimates the potential for other investors to recognize value in treasuries once foreign holders have switched into something else.
Flows in my view are substantially overemphasized for their specific effect on pricing. It’s always amusing to hear that there’s money “coming into the market” when stocks go up, or that there’s money “on the sidelines”, waiting to come into the market. Of course money is coming into the market. But it’s going out as well. All sorts of investors are making different value assessments and acting accordingly. It’s the balance of value assessments that forces prices higher, not the fact that one half of the transaction constitutes an “inflow” of money. 0 sum is in play.
It’s not much different when it comes to the value of treasuries. While central banks equate to large “insider” positions, the float outside of central banks is large enough to make the longer run value assessment reasonably liquid and accurate. There’s a big difference between periodic dealer front running of Chinese treasury purchases, and the fundamental value assessment that the entire market puts on treasuries. This includes the value estimated by those who may not currently hold them, who control a reservoir of potential funds that vastly exceeds foreign central bank reserves. This value is determined by, among other things, Fed policy interest rate expectations, inflation expectations, real rate expectations, and periodic flight to quality considerations. And PBOC is not beyond making these types of value assessments itself, relative to what it may actually be paying, which at times may be too much. But valuation factors dominate in the long run, and these other factors have little to do with the fact that China holds a ton of them, or is in a position with its normal trading activities to cause short term hiccups, wretched tummy acid, or temporary jubilation in the dealer community.
My comment probably extends to scepticism about the potential effect of SOMA released Treasuries on interest rates, although I haven’t considered this a great deal. The recent rise in Treasury yields is obviously correlated with a much broader resuscitation in risk taking, including a significant revaluation of equity risk. The market’s somewhat reluctant recognition of the Fed’s overall approach in dealing with the credit crisis has supported this latest episode of broad risk repricing, including the repricing of Treasury yields. I found your comment surprising in noting a variation on the theory of the savings glut and its effect on interest rates - a thesis that, ironically, I’m warming up to in part (although not the part about its effect on interest rates). Nevertheless, my bet would be that the Fed does have somebody tracking this stuff, although it may not be precisely written into their job description. Maybe somebody who reads your blog regularly, and is dying to post what he/she thinks he/she knows, but is conflicted in some way. But my further guess would be that Bernanke has pretty good incoming data radar with respect to the type of incremental data that you compile, and is quite aware of what the trend is in this regard.
"Bernanke has pretty good incoming data"
you can be sure he does
re: increase in the Fed’s custodial holdings
shouldn’t you be putting this within the context of the further integration of the ‘u.s.’ and world economies along with estimates for the overall growth/ monetization of world assets and trade - yes through inflation, but also the creation of new markets and assets which may not have existed, or been in the venture stage just 5 or 10 years ago - the ‘information industry’ comes to mind and should be of great interest to you, i’m looking at a estimated revenues of $260 billion in 2004 as compared to $381 billion in 2007 - and assets held by u.s. entities? custodians like bank of new york, citigroup and more recently jp morgan through bear stearns…
JKH — I would think that the value the market puts on Treasuries is in part a reflection of an expectation of ongoing Chinese/ central bank demand for Treasuries — and any event that led to a reassessment of the scale of such demand going forward would have an impact on the market. This i would think would especially be the case in a world where the US to finance a large current account deficit, and thus needs someone outside the US to be building up net claims. A fall in Chinese demand might prompt a broader reevaluation of the ability of the US to fund its deficit.
As for what the Fed watches, like i said, I don’t know. On a couple of occasions, I have presented some of my data to an audience that included members of the Fed’s international staff, and I got the sense that they were surprised by the pace of Chinese reserve growth — which would suggest that this isn’t something that they pay a lot of attention too. Certainly the public speeches of the Board don’t tend to emphasize the role foreign central banks play in global capital flows — they have preferred to talk of financial globalization in general terms without highlighting the role central banks outside the US have played in the buildup of external claims on the US. Whether this is indicative of a real belief that central banks don’t matter that much or indicative of a decision that it isn’t in their interest to highlight central bank flows i don’t know.
I saw the Bank of Thailand’s governor speak last year at the FRBSF; she seemed very skeptical of BWII but, with nothing better to replace it, she basically expressed the idea that you have to go with the ‘devil-you-know’ (not her words). I don’t think she’s alone.
Until someone can articulate a better alternative for ’second tier’ CBs, then as long as China and Saudi Arabia are committed to BWII it seems the rest of the emerging world has no choice but to follow along.