Brad Setser

Brad Setser: Follow the Money

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Central banks still buy dollars when no one else wants to …

by Brad Setser
July 1, 2008

I tell pretty much anyone who cares to listen (and some who don’t) three things:

1) Central banks are providing the US with far more financing than sovereign wealth funds, and still have a much bigger impact (for better or worse) on US markets than sovereign funds. The high profile capital injections from sovereign funds into US banks are not representative to the bulk of official capital flows; boring old purchases of Treasuries and Agencies are.

2) The scale of growth in central bank foreign assets is hard to overstate, as is the extent to which central banks are now central to the financing of the US deficit. The US capital flows data significantly understate official purchases of US assets.

3) More and more of the increase in official assets is coming from places that either don’t transparently disclose the increase in the foreign assets of their governments (the Gulf doesn’t disclose inflows into its sovereign funds, China doesn’t disclose the pace at which it is transferring funds to the CIC or the extent to which the state banks have been forced to hold dollars) or that don’t disclose — even to the IMF — the currency composition of their reported reserves. As a result, the quality of the available data on how official actions are impacting and influencing markets is going down quite rapidly. (Graphs supporting all three points can be found at the end of this article)

The rising share of flows coming from countries that don’t report much is one reason why efforts to increase sovereign wealth fund — and central bank — transparency matter. In q1, “dark” official flows, flows from countries that don’t report detailed reserves data to the IMF or countries that channel their foreign asset growth through sovereign funds that don’t disclose much, were larger the US current account deficit. Countries that don’t report detailed data to the IMF accounted for $227 billion of the overall headline increase in global reserves in q1. And that doesn’t include the $45 billion the Saudis added to SAMA’s non-reserve foreign assets or the funds China shifted to the CIC and state banks in q1. The overall increase, absent valuation adjustments, easily topped $300 billion.

The extent of these dark flows means that we really don’t know how central banks and sovereign funds are influencing the market. The actions of funds that do report data to the IMF may not be representative. Their activities could be overwhelmed by the actions of countries that do not report data.

But it is fairly clear that the countries that do report data weren’t responsible for the euro’s rise in the first quarter. Central banks that report data actually sold euros in q1 (the rise in the dollar value of their euro holdings is entirely due to the euro’s rise v the dollar). That means that they were classic “stabilizing” speculators, taking the opposite side of private market players. Or perhaps the opposite side of sovereign funds, the PBoC or another central bank that doesn’t report data to the IMF — we don’t really know. If valuation gains are stripped out, about 80% of the “flow” from emerging economies that report data to the IMF went toward the dollar — and between 85% and 90% of the (smaller) flow from industrial economies that report data went toward the dollar.

These euro sales were not quite enough to keep the dollar’s share of total reserves from slipping. Reporting emerging economies — which have an average dollar share of around 60% — are adding to their reserves at a faster pace than the industrial economies, pulling the global total down. And if the industrial economies would have needed to sell more euros than they did to keep the dollar share of their reserves from trending down.

But the slight fall in the dollar’s overall share doesn’t really matter. What matters is the huge overall flows from the official sector — and the large flows going into dollars. Counting the $45 billion increase in Saudi Arabia’s non-reserve foreign assets and an estimated $60 billion transfer to the China investment corporation in q1 (but not the increase in Norway or the Gulf’s sovereign funds*), the overall rise in official assets, after adjusting for valuation changes, was $416 billion in q1 2008. That is a record; the total in q4 2007 was “only” $380 billion. Add in the increase in the oil sovereign funds and the true total likely topped $416 billion.

By my rough calculations, industrial countries accounted for $31b of the valuation-adjusted increase (a number that is overstated, as Japan marks its bond portfolio to market), reporting emerging economies accounted for $112 billion of the increase, reserve growth in non-reporting emerging economies accounted for $185 billion and SAMA/ the CIC/ Chinese state banks combined for the remainder.

What does that imply? Well, the increase in the world’s dollar reserves in q1 — over $300 billion, according to my estimates, easily topped the US current account deficit. If most of the increase in dollar holdings finances the US (not foreigners borrowing in dollars), then the official sector provided enough money to the US not just to cover the current account deficit but to finance an outflow of private capital.

The following chart shows the US current account deficit, my estimate of dollar reserve growth and my estimate for total reserve growth (counting SAMA/ Chinese state banks and the CIC but not the big oil sovereign funds) by quarter, all scaled to US GDP.

cofer-q1-08-graph-1.JPG

The same data can be presented on a rolling four quarter basis.

cofer-q1-08-graph-2.JPG

Other ways of presenting the data are also interesting. Consider my estimate of central bank purchases of assets denominated in different currencies. Central banks are buying more euros (close to $300 billion over the last four quarters) and pounds (nearly $80 billion over the past four quarters) than in the past, but the overwhelming majority of their asset growth is still going into dollars.

cofer-q1-08-graph-3.JPG

The word “estimate” is important. Over 1/2 of my estimate for total dollar reserve growth comes from countries that don’t report data to the IMF. That is a logical consequence of a world where countries that don’t report data to the IMF account for the majority of the flow.

cofer-q1-08-graph-4.JPG

Still, I am reasonably confident that my estimate of dollar reserve growth isn’t too far off. There are other ways of guessing what fraction of China’s — and Saudi Arabia’s — official assets are held in dollars. My estimates assume that China and Saudi Arabia have a higher dollar share than the emerging economies that report data to the IMF, as both manage their currencies against the dollar. But I also assume that they reduced the dollar share of their reserves a bit over the past year — unlike the emerging economies that report data. The dollar share of the reserves of emerging economies that report data to the IMF has been remarkably constant since 2003.

cofer-q1-08-graph-5.JPG

The overall story is pretty clear.

Overall official asset growth is now twice as large as the US current account deficit.

And the rise in official asset growth is leading to enormous purchases of US assets — mostly debt — by the world’s central banks.

*I hope to change the way my spreadsheets are set up soon. Because China was shifting reserves to the state banks, I have long adjusted the COFER data for China’s state banks. As a result, it is fairly easy to add in an estimate for transfers to the CIC. The roughly $60 billion I assumed was shifted to the CIC and the state banks is likely on the low side. Rachel Ziemba and I have developed a methodology for estimating inflows into the Gulf sovereign funds but I haven’t had time to combine the two spreadsheets to produce an integrated estimate of overall official asset growth. That should be ready by the end of the summer.

36 Comments

  • Posted by Gabor

    The share exceeding US CAD goes where? To dollar based euro carry trade, dollar based emerging market carry, dollar based commodity carry?
    So the CBs are providing cheap financing to the speculators of the world?
    What can possibly stop the bubble economy?

  • Posted by Gregor Neumann

    Brad,

    interesting stuff, but I’m still confused about the implications. We see what is happening: Money flows into the US against rational trade logic. This stabilizes the Dollar, at least for now. So financing the trade deficit and lending money is an alternative to appreciating local currencies. It might be seen as a hedge in case of a global down turn. These currencies might be falling even faster than the Dollar (we see it happening with the Vietnamese Dong).

    On the short term, this is increasing inflation. On the long term? The buyers might be locked in, because it will be hard to liquidate the assets at the same pace they are buying now, without sending the Dollar way down. So we may not see a massive sell off from the central banks.

    So the situation is extremely worrying, because the current imbalance cannot be sustained indefinitely. But why does it matter, who is the money source?

  • Posted by Michael McKinlay

    Countries need increasing dollar assets to purchase commodities especially oil. Countries need to increase their reserves because the memories of the Asian and Russian crises are still fresh and everybody but Bush and mainstream American economists know that there is an economic tsunami ready to hit the dollar known as deflation.

    The question is: Will there be any dollars in circulation in America ?

  • Posted by bsetser

    Gregor Neuman — I worry much more about a sharp slowdown in foreign asset accumulation than an outright sell off. And I worry less about a Vietnam — which is facing market pressure to depreciate — than about a policy shift in a country that faces strong pressure to appreciate. And I also worry about the implications of a world where this kind of flow from a set of largely non-democratic countries sustains us deficits over an extended period. The sale of US assets to other countries governments on this scale strikes me as a strategic as well as an economic risk. In my view, neither a fast unraveling now the continuation of the status quo is attractive.

    Gabor — we don’t know exactly what kind of capital outflows the reserve growth finances. Indeed, you can argue that the casuality is the other way around — flows looking for high returns in the emerging world fuel high reserve growth, and in turn get recycled back to the US. so in aggregate, private investors swap some of their existing safe US assets for emerging market assets, and the emerging market central banks end up with even more safe US assets. The BoP would suggest that one of the things that emerging market central banks are financing is US FDI abroad, as there is a net outflow there.

  • Posted by Rien Huizer

    Brad,

    “I also worry about the mlications…attractive” You hit the nail right on the head. But, this time around, it may not be that bad. If. If, oil prices come down AND only/immediately after US fuel consumers have learned that buying a device/vehicle that uses a lot, is not smart. That may give some time. Remember, it takes only a domestic savings increase of 1.5 ro 2% of GDP (sustained) to get the trade deficit within the 3% band and that might be OK barring runaway oil prices. But I hope we will have some stronger minds looking over the US economy (why are these people always concentrated in Paris or Frankfurt) next time (20012?) around. This one may just have scratched the paint (asssuming that this is the low point for the banks etc) The next one is going to hurt.

  • Posted by theinvestingspeculator

    I wonder what the US is going to do when Fannie Mae starts having problems. Jim rogers thinks it is going bankrupt. I don’t think the SP 500 will see 1400 again this year. In this weeks Barron’s Peter Schiff say the US is headed for trouble. I will tell you why @
    http://www.theinvestingspeculator.com

  • Posted by flow5

    (1)memories of the Asian and Russian crises, (2) economic tsunami ready to hit the dollar known as deflation, (3) worry much more about a sharp slowdown in foreign asset accumulation.

    (A) Dr. William Poole: The depreciation of the dollar is something that is not explicable. And the way I like to phrase this – I like to put my academic hat back on. If you look at academic studies of forecasts of the exchange rates across the major currencies, you find that the FORECASTS ARE NOT WORTH A DAMN.

    (B) That’s a problem for the unthinking (Poole). The majority of all currency crisis were the direct result of an overly “restrictive” monetary policy. They were the outcome of a sharp decline in real-gdp.

    I.e., all currency crisis were preceded by exaggerated declines in the rate-of-change in monetary flows (MVt) – its proxy for real-gdp). And unlike the data from the BEA, MVt
    identifies contractions between any two BEA periods/quarters. By narrowing the calculation to a specific month, it’s impossible to miss much.

  • Posted by Gregor Neumann

    Brad,

    I’ve been following your excellent blog for a while now and I can’t help wondering who would suffer more: the US, if China would stop financing its trade deficit, or China, if foreign money would stop flowing into the country.

    Is it possible that everybody is underestimating the financial strains in China? Are there enough solvent consumers on this planet to justify the ever rising manufacturing capacities and the property prices in the major cities?

    The faster than explainable rise in foreign reserves seems to indicate that China is absorbing a lot of money.
    http://www.piaohaoreport.sampasite.com/china-financial-markets/blog/Of-course-Chinese-dollar-holding.htm

    What is going to happen with these investments, if consumers in the US, Europe and India have less money to spend on foreign goods? If we will enter a period of global deflation, every nation will fall. But who is strong enough to stand up first?

  • Posted by AC

    Obama May Produce $1 Trillion Deficit, Gross Says
    http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aIwN.hFTsofo

    “Gross domestic investment in machines, houses and inventories has fallen by $200 billion since its 2006 peak, Gross said. Domestic consumption will soon be $300 billion short of what’s needed for an economic rejuvenation, he said. With the deficit already pushing $500 billion even before the next president is sworn in, Gross anticipates it will reach $1 trillion deficit by 2011.”

    If this becomes reality, then soon the US would need more external financing than you could imagine.

  • Posted by Stefan, Tallinn

    Knowing how many dollars is held by SWFs and central banks is soon as uninteresting as knowing how many dollars the Fed can print during one day.

    The answer is – a virtually infinite number, any usage of this potential will just destroy the dollar. The money exists only as long as it is not used.

  • Posted by Stefan, Tallinn

    Thanks to Brad, we may draw that conclusion, I think.

  • Posted by bsetser

    AC – the conditions under which bill gross’ prophecy proves true are those that virtually assure large scale financing of the US deficit. the US will only need a large fiscal stimulus if exports cannot replace asset fueled consumption as the driver of growth.

    Stefan — I am not quite sure how I get credit for your conclusion. It isn’t quite mine. I certainly think deficits need to be financed, and an external deficit cannot be financed by central bank money creation. The fed can print dollars, but that doesn’t generate an external inflow that can finance an external deficit.

    Gregor — my view is that China could easily absorb a fall in speculative pressure. less money coming in means less pressure on the central bank to sterilize. and if money and credit growth are too slow absent big inflows, the central bank could monetize domestic assets (or just cut back on its sterilization). China has options. That said, I do think China has overallocated resources toward the export sector and quite possibly over-invested in general, and thus there are real vulnerabilities there. the problem is that keeping prices distorted only adds to that misallocation of resources and the ultimate problem.

  • Posted by Shrek

    I think the markets have lost there ability to find value because there is so much intervention on behalf of foreign governments. Everyone can bitch and complain about the US, but the US has always let markets guide them. The chinese and the rest of the em’s are putting the world under enormous pressure through there reserve accumulation. It truly has become a unsustainable system that puts the entire global order at risk.

    There currencies should have been appreciating years ago, now it is impossible for equilibrium to be restored. This only leads to one thing. At some point this system is going to fail.

  • Posted by bsetser

    ah, but when and how?

    I put my name to a 2005 paper that basically said trends then were unsustainable and the emerging world could never sustain anything close to $1 trillion in reserve growth, so it would cut back — triggering a rise in us treasury rates and a credit crunch. we got the credit crunch, but for different reasons. treasury rates stayed down. it does seem that the emerging world cannot sterilize $1 trillion of reserve growth, but rather than nominal appreciation most seem to have opted for inflation …

  • Posted by Rien Huizer

    many years ago I gave up trying to see a link between that elegant branch of applied mathematics,”economics”, and things to do with policy (policy making, policy analysis, etc). The above shows that more and more of the world’s economic policy space (though still tiny compared to roughly 14 trillion USD US economy, with a financial sector of over twice that amount) is moving into the steady hands of people who trained as engineers, not lawyers or economists..

    Brad,

    Perhaps it is somehow relevant to the trade-cum-reserves discussion to note that the combined trade surplus of Germany and the Benelux are about equal to the Chinese surplus (rolling 12 month basis). The EUR as a whole is still in surplus (even large enough to fund the net of UK (—), Denmark and Sweden (++) . The sum of the deficit countries is (thus, more or less) quite a bit smaller than the US deficit, but still quite large, compared to the US on a per capita basis. This is hardly an issue for either the EU Commision, the ECB . Why should it be an issue for the strict USD peg area (GCC) politically loyal to the US and the (dirty) peggers of Greater China , who are friendly. That area is also in rough BOP balance (although not as integrated as the EU of course. As China is in the process of increasing its absorption capacity as fast as it can (you have to get people into bigger houses and buy lots on non tradeables before they can start consuming US lifestyle products, and that is precisely what they have ben doing) and the US is reversing the non oil trade deficit. weighted for GDPs (the peggers are growing much faster than the US), all it takes is that oil prices moderate (after the US driver has learned a lesson, GM retirees have gone the Enron way and the Chinese have further reduced their fuel subsidies pse) . I think it is a different problem for, say Germany-Italy, than for US-China, but what and why are we all scared that it will result in a big mess?

  • Posted by FG

    The credit crunch in the US should do at least some of the work to reduce the imbalances. We don’t see that so far.

    To the extent that the growth in foreign reserves in China is fueled by capital inflows now, could the picture be in fact a lot more stable than it seems… provided they find ways to control these inflows?

    (One chart that would be interesting would be the size of Chinese purchases as % of China’s GDP…)

  • Posted by Gregor Neumann

    Rien:

    “but what and why are we all scared that it will result in a big mess”

    There is nothing wrong with a healthy mix of trade surpluses and deficits as long there a ways to level them on the long run. The problem is, we are in a period of sustained imbalances. And everybody is scared that it will not be easy to reverse the trend. A glass of wine is fine if you live healthy otherwise. Too much wine for too long equals a big, ugly mess.

    The cornerstone is the massive debt level in the US. Public debt looks OK compared to other parts of the world (it’s still bad, but anyway …). Private debt due to massive overspending is beyond any measure. If they cut spending, who will suffer the most? The service sector is two thirds of US GDP. If credit lines are shrinking (are we beyond “peak credit”?) many consumers won’t have much financial breathing room to invest in fuel efficient cars.

    The big bet is: Will we see enough demand destruction to drive down the prices of commodities? Or will the Dollar fall at the same pace and thus keep up high prices for the US economy? That will make the difference between hangover and full blown rehab.

    So why did the world and especially China keep on financing the trade deficit? As Brad pointed out, they should have said “no more drinks for you, sir” much earlier. Will the bar go bust? Or are there enough other paying customers?

  • Posted by Rien Huizer

    Gregor,

    of course: “as long as there are ways to level them in he long run” A scenario where commodities prices would stay stable in USD terms (both falling fast) would not be too bad, as long as the rest of the world would consume more. That would be the much wanted decoupling. But, back to the EUR analogy (assuming you are very familiar with the EUR, does a highly developed country like Italy fulfill that condition? (portugal, Poland etc are in a different situation)

    US private debt may be a problem, for two reasons: (1) to keep the current pace of consumption, lending must go on (especially short term). That may be difficult , because the mortgage crisis has accelerated the final stage of the great US financial system shake-out, following two decades of regulatory reform. Much of the credit that you blame was simply a byproduct of the typical competition you find in a shakeout. The surviving institutions may be far less competitive. Especially if, as could happen, they are quasi-nationalized (strict supervision in response to inadequate capital caused by ongoing write-downs)
    (2) US pensionfunds and managed 401K plans rely heavily on two asset classes: equity (and much of that is financial services) and a variety of debt-types, many now vulnerable to illiquidity and unreliable pricing. The people that would be affected by this tend to be smart consumers who would normally relied on to keep spending going and bargain hunt. Bailing several large pension funds out (as may be necessary if/when the big carmakers go underand foreign buyers have to be found) may put further pressure on fiscal policy and keep even the members of unaffected pension funds very thrifty.

    But compared to an autonomous US contraction, however caused and triggered (the hangover), the likelihood of the Chinese ending their “banking” relationship with the US is as remote as the Italians being asked to leave the EUR (the favorite puerile fantasy of the Germans at the ECB?). O, wait, there is no ECB for the USD. Well, let’s see, perhaps as a new job for IMF. After all they already do the statistical work; controlling inflation in the USD zone on top of that should be a snap. The Chinese like the IMF a lot more than the US does, but it happens to have a great location and so far there is one veto membership, which could be auctioned off among the countries with the ten largest reserves. . Perhaps then the pub (sorry, bar) could become a take-out? That would allow consumers to live within their means. Anyway, this has degenerated into something more related to one of the previous topics.

  • Posted by Gregor Neumann

    Rien:
    “But compared to an autonomous US contraction (…) the likelihood of the Chinese ending their “banking” relationship with the US is as remote as the Italians being asked to leave the EUR”

    It is Brad’s well take point that China is still buying Dollar even if nobody else does. This is stabilizing on the short term, but increasing the dependency on the long term. That is a dilemma, or as Brad said: “In my view, neither a fast unraveling nor the continuation of the status quo is attractive.”

    We differ in the notion, if China can continue doing this for much longer. I believe that China is buying Dollars, because they still see it as a good investment. Why? Because their economy might be a lot more vulnerable than we know. If the world economy is taking a hit, bubbles take the larges losses (US financial stocks, anybody?). So still buying Dollars now might be a hedge against a possible depreciation of the Yuan. I don’t see any other reason, why someone would continue to buy assets that are likely to continue to depreciate.

  • Posted by RebelEconomist

    It’s been a while since I made this point, so I will make it again for new readers. It is not certain that China will lose money on its dollar holdings, unless America actually defaults. Sterling lost its status as the main reserve currency through the first half of the twentieth century, but Britain never defaulted. Because private sector investors required higher interest rates to compensate for sterling depreciation, they recovered their losses after various depreciation episodes. While this recovery did take years, China’s investment horizon is long, because there are few imaginable circumstances in which China might want to liquidate its reserves while the renminbi is weak. Effectively, investors are protected by long-term uncovered interest parity.

    I present the UK evidence at:
    http://reservedplace.blogspot.com/2008/01/it-is-often-asserted-eg-in-brad-setsers.html

  • Posted by RebelEconomist

    Correction: “while the renminbi is not weak”

  • Posted by bsetser

    As i noted to Rebel many times, China has bought dollars even in the absence of an interest rate differential. Hell, right now the interest rate differential implies the RMB should depreciate over time. Massive intervention to support an undervalued exchange rate is likely to produce losses —

    I am not sure tho that it matters much whether China holds $ or euros. what matters is the scale of its intervention — and total purchases of overvalued US and European financial assets. I like Rien’s point that the global economy is increasingly run by engineers (in China). And, of course, traditional sheiks, who seem more akin to traders than engineers or technocratic economists.

  • Posted by RebelEconomist

    But the interest rate the Chinese roll over at matters even more (otherwise it would be a question of covered interest parity). Much depends on what maturity bonds China buys (ideally not too long) and whether they get so large that they effectively set the marginal interest rate.

  • Posted by bsetser

    Rien — your GCC+US+China dollar zone is like the EU (or eurozone) with surplus regions (China, Gulf, Germany) funding deficit regions (Us, Spain for eurozone, Eastern Europe for the EU) analogy is one that Stephen Jen made quite frequently two years ago, before he was arguing that the GCC should break its peg.

    Incidentally, I think it makes more sense to look at the deficit of the EU ex the UK. the British deficit (see above) is overfinanced by pound reserve growth in the emerging world. The EU as a whole has a significant deficit. And a lot of that is funded by eurozone banks intermediating reserve inflows. external inflows to the eurozone end up financing — through lending by banks that fund themselves in euros — deficits in Eastern Europe.

    I think the the Dollar zone is just like europe but more cultural diversity aargument though has its limits:

    a) Adjustment inside the Eurozone/ EU without exchange rate adjustment could prove quite difficult. Some countries will need to deflate at times and deflationary adjustment can be tough. real rates get pushed up — tis the opposite of the inflationary catch up phase, where real rates are low (see spain over the past few years)

    b) the EU has an integrated — or semi-integrated labor market — and open financial markets. It is a lot closer to an optimal currency area than the GCC + China + the US. No labor mobility there. The gulf has trouble getting into New York ’cause of post 9.11 security. And there is no financial market integration either: china maintains capital controls. A german can have their savings in a spanish bank if they want; I cannot have my savings in RMB (legally at least).

    c) China entered into this monetary union at a wildly undervalued exchange rate — and it entered well before it converged. that creates a set of dynamics that increase the risk of a break-up. And over time China should become the largest economy in the zone, which will upset everything –

    d) China is not viewed by the US military as fully “friendly”

    e) the EU is a union of oil importing economies who should react to an oil shock in the same way, not a union of oil-importing and oil-exporting economies.

    Finally I disagree with the argument that China is increasing its absorptive capacity as fast as it can. i would argue that it rather is doing everything it can to restrain growth in its absorptive capacity in order to avoid the overheating that naturally results from exchange rate misalignments. Lending by the banks is limited by adminsitrative means. huge amounts of deposits are locked up in reserve requirements. the government is running a restrictive fiscal policy. It has huge deposits with the PBoC (to help with sterilization). the SOEs aren’t paying dividends. Labor income is falling as a share of GDP — and transfers aren’t making it up.

    Strange as it may seem given the scale of China’s boom, china is actually restraining the growth in its absorbtive capacity to try to avoid inflationary real appreciation. As oil spending increases (and if oil prices moderate), bringing the oil surplus down — barring further adjustment in Chinese policies — i would expect China’s surplus to continue to expand.

    the IMF i suspect has the same expectation.

    So as of now I don’t see the natural adjustment mechanisms being allowed to work.

  • Posted by JKH

    “Effectively, investors are protected by long-term uncovered interest parity.”

    In other words, dollar cost averaging.

    Same line of thinking holds for SWF investment returns.

    And you’re probably right, to some degree.

  • Posted by Gregor Neumann

    Brad,

    there is alot of treasure in #24. Perhaps you should make one or two blog post out of it. Would be a shame, if the ideas got lost in the comments.

  • Posted by Rien Huizer

    Indeed, and hard to argue with, except the EU deficit (I ws referring to the EUR, which has small trade surplus. Have not looked at the EU for a while, but with UK’s deficit and Scandinavian surpluses, that should also be neutral to very slightly in surplus. Not quite sure what banks financing E Europe have to do with that. That would create external assets.
    Re China: I meant they are absorbing at the” maximum orderly rate “(of course it could go faster if you would abandon a host of internal rigidities. But that might make control even more difficult.

  • Posted by bsetser

    Rien — look at the IMF WEO data for the EU. Norway isn’t part of the EU — so that pulls down the surplus. and the countries of Eastern Europe that have been admitted to the EU generally run very large deficits.

    And i would argue that there are a series of steps (including ways of raising labor income, which has been trending down v GDP) that would be consistent with a faster pace of orderly expansion of domestic absorption in China, especially if combined with a more appreciated RMB. the current policy mix — an undervalued RMB, negative real rates, rising SOE profits financing high levels of investment, falling labor income v GDP, contractionary fiscal — strikes me as one that isn’t orderly or at a maximum.

  • Posted by Stefan, Tallinn

    Brad
    Not only can dollar-printing finance real imports/inflows, it does.

    Theoretically the dollars are of course supposed to be value preservers, i.e “something real”. We know that they are not exchangeable for “something real today” – they could be exchangeable for “something real tomorrow”. Obviously the Chinese and the Arabs think so.

    The dollar (euro) holds a confidence-capital – but for how long. How long do we believe that it preserves value, i.e how long do we believe that the world currency reserves preserve value…

    How long does the creditor believe that the debtor will pay him back. Well it is up to him, but if there are several creditors they might be tempted to realise their value before the others. Just as early movers among banks realise more value in a downturn than those who wait.

    In other words, I would focus the analysis on the value of the dollar (euro).

  • Posted by flow5

    Huizer – the BLS data (The Occupational Employment Statistics)- supports what you say. But world wide I think we still are underweighted in science, math, engineering etc.

    Math? I think that most of the math used in economics is just window dressing.

    Joseph Granville’s followers anticipated a market call back in Sept 81, and collectively they bought so much stock that Granville didn’t get to announce a buy signal. So it would be useless if MVt was common knowledge.

    But monetary flows behave similar to Planck’s constant in physics. It’s not as written in the text books. I.e., there are no such things as variable lag(s).

    I picked it up from Leland J. Pritchard, Ph.D. Economics Chicago 1933, MS Statistics Syracuse

  • Posted by marxbites

    When will the topic of how to profit from it turn to how to take the FED and it’s criminals working for private banking and never in the interest of the US Taxpayer?

    There will never be enough dollars printed to pay off the debt. Each dollar Congress borrows indebts taxpayers $2.20 P&I.

    No other industry is allowed this egregious a monopoly cartel.

    The FED is govt’s unltd CC that indentures the unborn – how moral is that?

    Their entire job is to milk the masses without actually killing off their golden geese.

    They juice the markets which gets people over-extended, then contract it and suck up the bankruptcies they created for pennies. The big banks did this in concert even before there was a Fed – and were precisely the sources of all those banking “panics” they created to make the sheeple believe gold was the culprit, when it was their unconnectedness to gold doing it all the time.

    Gold keeps the bankers and govt honest or we run the particular bank. That’s when bankers didn’t have taxpayers by the throat to bail them out when behaving criminally. Now it’s sanctioned and enforced by the Police State ever more gearing up to protect itself from WE THE PEOPLE – People!

    Govt just does NOT have to have ANYTHING to do with money – they don’t even have to mint it – but thats the first step in stealing the freely market chosen metals from those that earned it by those who’d rather live off them, like bankers do who charge interest for money they create from thin air, let alone their stealth robbery via the printing press created inflationary debasement that robs our purchasing power secretly.

  • Posted by Ian Hurst

    God, another one.

  • Posted by Rien Huizer

    Brad, briefly: I was trying to refer to the EURR(the euro region) which has appr 70 bn in trade surplus.Apologies for not being clearer. The countries yet awaiting admittance can still bring FEER, BEER etc estimates into play when looking at entry rates (theoretically). Obviously the private sector in non-euro EU is attracted to low EUR interest rates and in many cases that may be economically justified, even it the local currency needs a depreciation in order to fit into euroland.Most of th lending is probably done by banks, predominently euroland-owned. That could become a problem.

    Re China’ “orderly” I simply meant conditions that keep riots at an acceptable level.

  • Posted by flow5

    “Bernanke appeared to be addressing the growing lag in math, science and reading skills among American students when he raised education’s role in the economy.”

  • Posted by pappy

    Doesn’t this reflect more $ needed for Oil purchases by foreign central banks (since prices have triped in a few years!) as well as their own increased money printing to keep their currency’s from appreciating very fast (which would kill their manufacturing sector).

    w/o this oil price increase perhaps the dollar’s status as reserve currency may have weakened. I guess what i am saying is that higher oil prices and increase central bank $ demand, which keeps % of $ reserves steady, which sans this increase, data may have shown foreign central banks diversifying more, so in other words should the price of oil drop, central banks would probably hold a significantly lower % of dollars, and OPEC would probably have more incentive to swith to euro (since as of now they are getting 300% more petro dollars, on a 30-40% dollar devaluation) which is a pretty good deal for the shieks.

  • Posted by bsetser

    central banks don’t usually buy oil, private oil cos (or nat’l oil cos) do. and if you want to buy oil, you have no need to hold $. the euro has fallen less relative oil than the $ … so those wanting to buy oil have as strong an incentive to hold euros as $, if not a stronger incentive.

    in my view, this has everything to do with currency management, and nothing to do with the rise in the oil price.

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