Brad Setser

Follow the Money

Cross border flows, with a bit of macroeconomics

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Beware: Correlation doesn’t always mean causation … London doesn’t just handle petrodollars

by Brad Setser
July 28, 2008

Capital flows through London are often taken as a proxy for petrodollars. Bloomberg’s Daniel Kruger, for example, argues that the buildup of Treasuries (and I would assume Agencies) in the UK reflects oil money.

The Organization of Petroleum Exporting Countries held $153.9 billion in Treasuries at the end of April, Russia had $60.2 billion and Norway owned $45.3 billion, according to the Treasury Department. Combined, that represents a 113 percent increase from 12 months earlier. Oil producers own a majority of the $251.4 billion in Treasuries held in the U.K., an 85 percent increase.

Unicredito’s Dr. Harm Bandholz also uses capital flows through London as a proxy for petrodollar flows.

This isn’t unreasonable. London probably manages more petrodollars — and more Gulf sovereign wealth fund money — than any other financial center. And there is a reasonably close correlation between the UK’s purchases of Treasuries and the price of oil (or my estimate of oil foreign asset growth).


Correlation though, doesn’t imply causation. There is also a close correlation between purchases of Treasuries and Agencies through London and China’s reserve growth.


And yes, this graph implies that Chinese reserve growth has been quite correlated with the price of oil. That in some sense is the core source of the world’s imbalances: China is running a big surplus and building up its foreign assets at an extraordinarily rapid pace even as the oil exporters’ surplus soars.

The pattern of revisions to foreign holdings of Treasury and Agency bonds further suggests that China accounts for more of the Treasury and Agency bonds purchased through London than the Gulf. See the charts at the end of my last post on the TIC data.

I’ll provide one more example of a false correlation involving London — one I know well because I was almost convinced that I had discovered something important a year ago, but fortunately didn’t publish it because I couldn’t quite make everything match up.

Up until the end of 2006, rising oil prices and UK purchases of US corporate debt (a category that includes all asset backed securities that lack an Agency guarantee) were highly correlated — at least if you looked at the 12m sum of corporate bond purchases and the 12m average oil price.


That correlation, though, completely broke down in late 2007.


The rise in UK purchases of US corporate debt seems to have reflected the expansion of London-based SIVs and the “shadow” banking system far more than “petrodollars.” These flows collapsed after August. Oil prices — and one assumes, petrodollars, kept on rising.

It is also interesting to note that purchases of equities by UK investors — a category that might be expected to pick up purchases of US equities by London-based fund managers playing with Gulf money — hasn’t tracked the oil price all that closely recently. I suspect this is more evidence that a lot of Gulf money is on the sidelines than evidence that the Gulf isn’t the ultimate source of demand for a lot of the UK’s purchases of US equities. But I am just guessing.

London hosts so many different kinds of institutions that it is hard to know — a priori — precisely which set of investors is behind any given flow. We might have a better idea if the UK made an effort to produce decent capital flows data. But there isn’t much evidence that the British government is all that interested in understanding the origin of the money that passes through London. And as a result, we are all left making informed guesses.


  • Posted by Dave Chiang

    While the British government has promoted London financial institutions to manage portions of China’s sovereign wealth fund, the Chinese haven’t expressed any official interest. The European region is geographically distant from China, and there isn’t the Washington Consensus perception among the British that the Chinese are a “strategic threat” to Europe’s national security. There probably is likely some correlation between purchases of Treasuries and Agencies through London and China’s reserve growth. Purchasing US Treasuries and Agencies through London financial intermediaries provides the Chinese some measure of security from US government confiscation.

  • Posted by Dave Chiang

    China Imports Workers to Build New Embassy in U.S., Sparking Anger

    July 28 (Bloomberg) — To the touchy, tense relationship between global superpowers, add this gritty irritant: As Washington’s unemployment rate rose, China brought over hundreds of laborers to build its U.S. embassy.

    China has been using an aging motel in Washington for three years to house the army of workers who built the $250 million granite and glass embassy, which at 345,500 square feet is one of the city’s largest. Now, with the embassy scheduled to open tomorrow, some lawmakers are being less than diplomatic in their criticism.

    China’s refusal to use U.S. workers is unusual, says Robert McInturff, a U.S. State Department spokesperson. China’s decision to use its own workers has exasperated some American lawmakers already annoyed by the U.S.’s trade deficit with China — a record $256 billion last year — and what they see as the country’s grudging cooperation on trade issues.

    “It’s time we stand up to the Chinese and start fighting for the interests of our workers” says Representative Duncan Hunter, a California Republican who unsuccessfully sought the presidential nomination this year.

  • Posted by Dave Chiang

    China Central Bank to slow Yuan revaluation to aid exporters

    July 28 (Bloomberg) — China’s yuan declined by the most since a dollar peg ended in 2005 after the Politburo signaled a shift in focus to maintaining economic growth, fueling speculation the government will slow gains to aid exporters.

    The Politburo, the Communist Party’s top decision-making body, wants to cool inflation and maintain “steady and relatively fast” expansion, state-run China Central Television reported on July 25. The yuan’s 6.8 percent advance this year is eroding the value of overseas sales as manufacturers contend with the slowest domestic growth since 2005.

    “The yuan’s appreciation will slow significantly in the second half, especially in the fourth quarter,” said Lu Zhengwei, an economist at Industrial Bank Co. in Shanghai. “For the first time, the government replaces preventing overheating with maintaining growth among its top priorities.”

  • Posted by bsetser

    DC — you must be very concerned that China has adopted a policy that almost guarantees that it will continue to extend credit to the US on terms that are bad for China, as it will continue to need to intervene to keep the rmb from appreciating …

  • Posted by Dave Chiang


    The US market isn’t the only market in the world and it may not even be the most important to the Chinese. But under the existing US Dollar hegemony for global commerce enforced by US military projection power over strategic energy reserves particularly in the Middle East, a Chinese yuan revaluation impacts trade relations with all other regions of the world. It’s not so simple to just revalue the yuan versus the US Dollar without seriously damaging the Chinese “comparative advantage” for labor intensive industrial production. Multinational US corporations will rapidly shift production to lower labor cost nations. The financial losses on its US dollar foreign reserves are still manageable despite higher inflation, but the consequences of massive unemployment for unskilled Chinese labor consisting of most of the population is unthinkable to the Chinese leadership deathly afraid of political instability. Often Neo-liberal Economists forget that people without food and jobs, the people will eventually riot on the streets.

  • Posted by bsetser

    a) I wouldn’t characterize myself as a neoliberal
    b) negative real interest rates encourage the substitution of capital for labor; Chinese job and wage growth during the boom hasn’t been impressive
    c) subsidizing exports (at a very high financial cost — i would put the cost at over 5% of China’s GDP, based on the likely fx losses on China’s foreign assets) is an inefficient way of providing food and jobs to china’s people. remember that china is limiting lending growth and running a contractionary fiscal policy (both of which limit job growth) even as it spends huge sums supporting its exports (and us borrowers). the current policy take away jobs in the domestic sector as well as supporting jobs in the export sector.

  • Posted by glory

    “there isn’t much evidence that the British government is all that interested in understanding the origin of the money that passes through London”

    otherwise it wouldn’t be passing thru london?

  • Posted by Michael

    The only sense I can make out of China (as well as Japan, Russia, the GCC, etc) continuing to accumulate U.S. dollars and debt under current conditions is that there’s a deficit of imagination among the leadership of those nations. They simply can’t figure out what the future landscape would look like if they stopped buying U.S. debt – and maybe even started selling it, like they would do any other nation whose total debt was 350% of GDP with the government raising its statutory limits $1 trillion a clip. The risks for them in a global meltdown of U.S. debt and currency are unpredictable but mostly very scary. They apparently feel the U.S. is “too big to be allowed to fail.” It’s good to be King.

  • Posted by bsetser

    Michael — there are also vested interests with a large stake in the status quo. Witness China’s decision (apparently) to slow RMB appreciation the moment export growth slowed …

    I would be interested if anyone has a critique of my argument that london flows aren’t petrodollar flows, as a lot of Chinese money now passes through london (i.e. when the survey revises the data on holdings of US debt abroad, China goes up and London goes down). I also would be interested if anyone would disagree with the argument that the UK’s Treasury and agency purchases are essentially disguised central bank purchases.

  • Posted by aim

    So I wonder where did the flow of UK purchases of US corporate debt go after the collaspe in August? Maybe into the commodities (oil) market? Oil prices begin to rise about the same time. Interesting chart.

  • Posted by TGS

    aim Says: So I wonder where did the flow of UK purchases of US corporate debt go after the collaspe in August? Maybe into the commodities (oil) market? Oil prices begin to rise about the same time. Interesting chart

    There is a lot of talk lately talk about the so called Oil-CDO’s, basically a form of highly leveraged oil (commodities) ETF/ETN-like securities, which offer much better yields than treasuries held by CB’s.

    Since (investment) banks and large hedge funds are exempt from CFTC limitations with respect to disclosure and positions, and some of them are even classified as commercial hedgers (through the swaps loophole) the Oil-CDO’s business may be responsible for a new form of debt recycling (incidentally also creating a commodities bubble).

    Maybe this is the missing piece of the puzzle in Brad’s data …

    I heard that Martin Mayer is supposed to tell some interesting stories about that particular subject in an interview which is going to be published this week.

  • Posted by Rien Huizer

    Interesting. There are no further details so there is plenty of room for speculation. Indeed, London does for very large institutions what tax etc havens used to to for illicit money, provide opacity.

    The matter of all these newly rich countries keeping their money in USD is highly interesting and until now has rested, in my opinion on several pillars:
    1. a communality of interests between the outgoing (the incoming may be slightly different but with very little intital policy space) US administration and the Chinese leadership. One wants stability (as commenters from DC to Twofish all seem to agree) and the other wants to do the things it wants to do and which require low rates of interests and plenty of labor “slack” (provided by quasi imports of casual labour (China and many others)
    plus forbearance of illegal immigration; pse note RH has no marxist sympathies). That period may be coming to an end because of the US debt situation (the sudden emergence of popular belief that debt is no longer good) and possibly Chinese realization that this process cannot go on, that creeping appreciation incites speculation and that the alternatives, no more appreciation or a more lumpy and unpredictable pattern may risk scaring the Taiwanese and Japanese. That, in a nutshell is probably what the Politburo has been deliberating about as far as it economic agend is concerned, and so far no one knows if any non-incremental policy is on the agenda. The media release is routinely meaningless (slighty populist perhaps). As to what I regard as the logic of US-Chinese cooperation (the US being the disturbance term so to speak), the Chinese should now be drawing up contingency plans for an range of future US worlds and the meeting may just have been an internal stocktaking and “game” team selection. After the olympics there must be something to fill the propaganda/news void. Mao’s old tactic of mobilization is probably not forgotten and there are plenty to do things that could receive attention. So, who knows, by January or a little earlier China may have things on the shelf that would make it easy for the new US leadership to continue the bargain but on terms also useful for the Chinese (leadership).
    2. Historic awareness among the oil producers that their gains tend to be absorbed quickly by imports and waste and that the USD is the only large currency that accommodates (practically) reserve accumulation (EURO area and Japan offer no meaningful quantities of short term risk free investments and only the GCC have capacity for long term foreign investment. Russia remains a bit strange, like Norway and the UK it is a European country that has decided not to peg to the Euro, although it probably could. It is not too big and there would be no diplomatic noise. There may in fact be an academic debate about this in an accessible language (English, American, or similar) . I will check some local source when I have time.
    3. There may well be a lingering fear among the Asian/N African oil producers (a pretty paranoid lot as I remember some of their finance people) that he US will pull some oddball rabbit out of the hat that precipitates a political flight to safety (for instance, Israel could attack Iran (not the nukes of course but the refinery complexes, with the US standing by) , unlikely as all of that now seems which would tend to depress the EUR and prevent the JPY from rising (why is everyone always bashing poor China and leaves Japan of the hook? These must be a sinister conspiracy involving Yakuza and the Klan, or something similarly plausible.

    All in all then, a little too early to observe change, but possibly, as the private component in the London flows must be winding down, this type of data may well be the place to look.

    Incidentally, for all those who thought the NAB was doing something to influence world history, today ANZ (another of the Big Four Australian banks) announced an even greater write-off, laving only 70% of its annual profit intact. That should silence populist criticism for a while (the labor treasurer tends to be critical of the banks in public, and he found a new theme, their past reckless investment behavior)

  • Posted by bsetser

    rien — japan isn’t intervening (apart from not selling the $ it gets from interest on its existing bonds); china is. ergo the focus on China.

    i am surprised tho about your claim that Europe doesn’t offer safe liquid short-term instruments. Wouldn’t a BIS euro denominated deposit work? Moreover, CBs seem to hold a lot more treasuries of between 2 and 10 years maturity than bills, and i suspect that there are plenty of Bunds and BTPs and government of belgium bonds (forget their name) in that maturity range. i don’t find the argument that BTPs aren’t bunds all that compelling. Agencies aren’t treasuries, but that hasn’t stopped many central banks from piling into the agency market …

    aim — the flow going into corporate bonds came largely from short-term dollar funding, so it was a Uk entity borrowing in the US to buy US debt. The entities tanked — and US money markets stopped reaching for yield (ABCP collapsed) and well, i suspect a lot of the money that previously was lent to the entities piled into safe t-bills … the banks in turn absorbed the entitites and have funded themselves at the fed, which sold t-bills into the market to keep its balance sheet from expanding as it provided credit in various ways to the banks and broker dealers.

    that oversimplifies and leaves a lot out but i think it has a grain of truth as well.

  • Posted by Rien Huizer

    Brad, thanks for these comments. Explanation:

    Re Japan. Just looked at the new FEER calculations by Cline & Williamson (I know, lots of issues with method, implementation and assumptions). The FEER I like most for these countries (even more issues) is the one where the target is stabilization of the NFA/GDP ratio. China and Japan are overvalued by about the same percentage, roughly 36 (Japan a little higher) (interestingly resource rich Malaysia and resource poor neighbour Singapore also share one percentage, 46!). So, despite the fact that Japan does not intervene, formally, it begs the question.

    Re: EUR short term investments: The BIS deposit book is roughly USD 400 bn. The bulk of that is placed in the interbank market, probably. In normal times host country supervisors would keep an eye on BIS investments of this type, for a variety of understandable reasons. Now we are in the equivalent of a run on the interbank system, that approach may not really work, the BIS is not risk taking lender and I doubt the BIS would be very accommodating to even a member bank that would like to invest say a quarter if a trillion USD AND diversify into EUR, unilaterally that is. That would also rule out any off balance sheet /fiduciary activity. As to short medium term country EUR paper, of course there is ongoing issuence and an active secondary market. But shifting say half a trillion SDR into EUR shorter term paper (and that is what I meant) is a lot harder than doing the same with USTP or even agencies). In addition it would involve intra EU credit risk and again, be regarded as a highly unilateral act. No one manages the EUR, in practice but everyone watches how it is not being managed! Exchange rates and intervention are highly fissionable material in Brussels, more so than in Frankfurt. One is keenly aware that China is very substantially undervalued, also aware of the Chinese institutional factors that could render hard fought appreciation trade politically useless (the jobs would keep moving East anyway, not to Eastern Europe, where they are needed,but to a country no European voter cares about). So, I would expect that Chinese investment requiring any form of government facilitation (greater issue volume, easier to own etc) might be available to the UAE or Kuwait, even Lybia, but much less so to China. Hmm, hard to think of another country with similar characteristics.

  • Posted by Rien Huizer

    Brad, re Belgian national debt (total just< EUR 300 bn, about 15% non marketable. Individual issues tend to be in the EUR 1 bn category.

    Maturity structure:

    It is not quite collecting stamps but it is a lot of work..

  • Posted by Dave Chiang

    Chinese Economy entrapped in US Dollar Hegemony monetary regime

    The vast expansion of US-led globalized trade since the Cold War ended in 1991 had been fueled by unsustainable serial debt bubbles built on dollar hegemony, which came into existence on a global scale with the emergence of deregulated global financial markets that made cross-border flow of funds routine since the 1990s.

    Dollar hegemony is a geopolitically constructed peculiarity through which critical commodities, the most notable being oil, are denominated in fiat dollars, not backed by gold or other species since then president Richard Nixon took the US dollar off gold in 1971. The recycling of petro-dollars into other dollar assets is the price the US has extracted from oil-producing countries for US tolerance of the oil-exporting cartel since 1973. After that, everyone accepts dollars because dollars can buy oil, and every economy needs oil. Dollar hegemony separates the trade value of every currency from direct connection to the productivity of the issuing economy to link it directly to the size of dollar reserves held by the issuing central bank. Dollar hegemony enables the US to own indirectly but essentially the entire global economy by requiring its wealth to be denominated in fiat dollars that the US can print at will with little in the way of monetary penalties.

    World trade is now a game in which the US produces fiat dollars of uncertain exchange value and zero intrinsic value, and the rest of the world produces goods and services that fiat dollars can buy at “market prices” quoted in dollars. Despite all the talk about globalization as an irresistible trend of progress, the priority for the United States in the final analysis has been to advance its superpower economic objectives, not its obligations as the center of the global monetary system. This superpower economic objective includes the global expansion of US economic dominance through dollar hegemony, reducing all domestic economies, including that of the US, to be merely local units of a global empire. Thus when the US asserts that a healthy and strong economy in Europe, Japan and even Russia and China, all former enemies, is part of the Pax Americana, it is essentially declaring a neocolonial claim on these economies.

  • Posted by A. P. Simkin

    Dr. S!

    There are a lot of hedge funds and prop traders in London, and they too take advantage of the confidentiality.

  • Posted by A. P. Simkin

    Dr. S!

    I should have added that from time to time there have been large flows into and out of the US to/from Britain under errors in the BOP. I have suspected for some time that these were hedge funds and/or prop traders.

    One more thing. Some of the flows from London may be Chinese. Japanese BOP data show an ongoing large purchase of Japanese money market paper coming out of London. I suspect – but do not know – that this is Chinese money. Who else would want Japanese money market paper in large amounts on an ongoing basis?

  • Posted by Dave Chiang

    China to Slow Yuan Gains for Economic Growth says Chinese President Hu Jintao

    July 29 (Bloomberg) — China will slow the pace of the yuan’s gains as the government seeks to bolster economic growth, said Li Daokui, a researcher at Tsinghua University who attended a meeting hosted by President Hu Jintao last week.

    “Fast yuan gains attracted inflows of speculative funds, which not only fuel inflation but also may exit on a large scale some day, threatening economic stability,” said Beijing-based Li, head of the China and World Economic Research Center at the university. “That goes against the central government’s goal of stable growth set in the recent Politburo meeting.”

    The Politburo’s concern that a global slowdown will undermine China’s boom prompted the biggest policy change in five years.

  • Posted by Sam

    DC – the purpose of this blog is to follow the capital and liquidity that is engendered by a monetary arrangement in which China subsidizes the US consumer and the US manufacturing base subsidizes that of China. It has existed since the 1997-98 Asia crisis in which Chinese Yuan derived much of its stability due to the peg and FX reserves from the export industry. (an interesting academic counterfactual could explore the consequences then had the peg not been “hard”) Thus the US consumer and US dollar became the liquidity and final demand last resort for a region rife with overcapacity and cheap liquidity. Now, the tables have turned 180 degrees and the latter arrangement only accelerated prior to the crisis and continues to this day (watch the August Tresury refunding).

    The question I believe Mr Setser is trying to address and ultimately answer is the most puzzling of all economic issues of the day: why are poor countries now subsidizing rich ones? Why is China selling cheap goods and buying expensive debt (how are the MBS securities doing in SAFE’s portfolio???)? Why has China favoured its export sector over consumers for so long? Why has China favored borrowers over lenders in both the US and China? These are all interesting questions and in my mind, only known by the Beijing technocrats who run the country. Too many engineers and academics and not enough traders and businessmen makes me fear the worst; no conception of the Black Swan, a narrow range of outcomes based on what has been seen and what has worked, a proclivity to exactitude, and a desire to fine-tune an overheating economy that has spun out of its control. My own guess is that these technocrats are incredible risk-averse to regime change, fear the economic distress that would cause socioeconomic upheaval like Tian Sq – 1989 inflation, and also a meaningful appreciation of the Yuan that would balance capital/trade accounts would expose the export sector has highly inefficient whilst a consumer sector not buttressed by a social savings net is not ready for the growth handoff. I could be wrong, who knows, but the answer is only known in Beijing and US Treasury to a lesser extent. As we traders like to say, “There’s a reason someone says they do something, and then there’s the reason they are doing it”.

    DC – You have not contributed anything substantive to the answer of these questions and subject of this blog. All you have done is spout the Party line in the neo-conservatism now proliferating in China (see last week’s New Yorker, or would that be biased, foreign media always is when discussing China). I think China is such a fascinating long-term story; its people dynamic and entrepreneurial. But I’m amazed at the brainwashing of young people who are ignorant of history, logic, and objective international analysis yet so smart in math, engineering, and sciences. My friend and colleague who sits next to me maintains to this day that Mao did not kill anyone, it was all his subordinates. Anyone with an iota of knowledge of who Mao was and how he operated would know that it’s 1) wrong 2) ignorant. His wife alone killed millions of people. Oh wait, maybe he didn’t know she did aferall because he had so many paramours and wives. To all the young Chinese with a bright future ahead of them: put down the Kool Aid and wake up!!!

  • Posted by bsetser

    bsetser — I had better pick up the new yorker!

    AP Simkin — I have assumed, based on the work of Jasper Koll formerly of Merrill, that the money market flows to the UK from japan are linked to the big broker dealers/ banks, who borrow in yen in order to be able to lend in yen to their hedge fund clients. The carry trade and all. And yes, i should have noted that there are a ton of hedge funds operating out of london these days — that adds to the flows. my assumption tho is that the sharp fall in uk demand for US corporate debt reflects a contraction of the SIVs and conduits and other bank sponsored vehicles more than deleveraging in the hedge fund world.

    Rien. Sure, the yen is undervalued. but JPY rates are kind of low too as well — and japan cann’t seem to inflate. so its monetary and exchange rate mix is consistent — tho no doubt the yen’s weakness, especially against the euro, creates problems. As for singapore, don’t get me started — they manage the heck of the SGD. Huge intervention, much of it off balance sheet (via forwards)

  • Posted by bsetser

    DC — you know, the dollar’s hegemony today rests far more on China’s policy choices than on US policy choices. That worries me a bit. And i am continually surprised that you insist on:

    a) China’s absolute right to limit appreciation v the $
    b) Criticize “dollar hegemony” (meaning the dollar’s international use as a denominator for much trade and a reserve currency)

    when a) rather directly leads to b).

    Moreover, there are actually voices in the US (me for one) who believe that the rest of the world’s dollar pegs, rather than being a reflection of US strength, have become a source of weakness, as they leave the US uncomfortably dependent on financing by a small number of technocratic/ autocratic players.

  • Posted by Dave Chiang


    If the Washington Consensus has a problem with Chinese imports into the US, then simply impose import tariffs which are perfectly legitimate. The US imposes 60% import duty on Brazilian ethanol to protect American corn farmers. But since almost 80% of US imports from China are by US multinational corporations, the K Street lobbyists of these corporations would adamantly object to import tariffs on Chinese industrial imports.

    As per Bloomberg, Chinese President Hu Jintao and the rest of the Politburo increasingly recognize, a yuan revaluation represents the worst of both worlds. A yuan revaluation contributes to a flood of “hot” money that destabilizes the banking system, contibutes to a decline in China’s industrial global competitiveness in third markets, increases unemployment for low skilled workers, and potentially leads to greater political instability. After extebnsively touring industrial factories across China, the decision by Chinese President Hu Jintao and the rest of the Politburo is final; the revaluation gains of the Chinese yuan will be only gradual for the remainder of the decade.

  • Posted by Sam

    One thing I never hear from the IMF Consensus is who is more dependent on whom? US consumers on Chinese lending or Chinese exporters on US consumption? There is always another side to a consensus; there is plenty of liquidity on the sidelines to fund US C/A (at a price of course), but there is no marginal consumer. My reading and study of Chinese history (under Jonathan Spence but of course his views must be discounted since we are foreigners and don’t understand China) is that China does nothing for foreigners out of benevolence. See its treatment of Sudan and Congo this decade, see its policy toward Cambodia in the early 70’s, etc. Chinese leaders have always been among most real-politik in the world (Deng, Zhou, Mao). So China will continue to accumulate USD, expand money supply, invest and export 75% of GDP, keep real rates negative, and push growth over inflation. Again, they are doing this for a reason, and the answer and resolution thereof is the single most important issue in the global economy.

    DC – Bloomberg News does not know the answer to this question

  • Posted by glory

    “there’s a deficit of imagination”

    or weird (illogical) insistence? (as displayed by DC above? 😉 like their faith in weather modification to ‘control’ pollution!

  • Posted by RebelEconomist

    I agree with Brad that there is enough liquid medium and short term debt in Europe for central bank reserve managers. Besides the German and Italian government bonds mentioned, the French have been particularly keen to structure their debt for liquidity (BTANs being the medium term issues). Belgian OLOs are less favoured, not being AAA rated. And there is always government bond repo as a (near risk-free) short term investment. Japan has more than enough government debt for the mostly smaller reserve allocations to the yen. As a matter of fact, when the cross currency basis swap made it worthwhile, central banks would even buy currency-swapped yen assets for their dollar reserves.

  • Posted by Dave Chiang


    Every nation in the world only operates for its own self-interest including both the United States and China. The IMF and World Bank are US Treasury controlled institutions for the Neo-colonial exploitation of the resources of developing nations. Sure the Chinese are in Sudan also for the oil. Darfur is only a problem in the Western media because Exxon isn’t pumping the Sudan oil. The real Chinese crime in Sudan and Congo is providing these African nations with an alternative path of economic development. There is no comparison between the situation in Iraq and Sudan; the only Chinese military troops in Sudan are under UN Peacekeeping command helping maintain the Peace and Stability. China is a status quo power that respects the sovereignty of other civilizations. By contrast, Iraqi oil reserves are pumped literally at the point of the gun by occupying foreign troops.

  • Posted by Sam

    DC – .condoning genocide is much different than deposing a dictator who killed his own people, abrogated treaties with the US and UN resolutions, jeopardized oil security (oil security is much different strategically than oil supply, of which US has respected as Iraq’s sovereign resources – fact) We can debate diplomacy and history until the Merrill’s AAA CDO’s go back above 50 cents to the dollar. It is not really germane to the central discussion.

    So I ask you (put down the Kool Aid and Bloomberg News please before responding), why is it that China will not appreciate its CNY vs USD when economically, it has to based on the trade accounts (even if they buy no USD in open market, it still must appreciate since money is coming into the country based on trade alone, forget “hot money” speculators). Why do they favor growth over inflation running out of control? Why have they subsidized banks with negative real rates for most of the last 10 years? Why have they not let Chinese households diversify savings? Why have they let money growth outpace GDP for so long? Why do they favor the export industry over consumer industry? Why do they keep buying USD when it has fallen so much since 2002?

    This is not an issue of rewarding “hot money” speculators. These speculators see the situation for what it is, and CNY must appreciate against USD based on the fundamentals. China’s economy has its own imbalances, and the policies adopted and maintained the last 5 years have only exacerbated them, not to mention contribute to the global yield bubble that popped last August. You cannot grow 10% for 20 years without misallocation of capital, labor, and resources, particularly when the economy is not a free market and micro managed and retarded by corrupt bureaucrats beholden to manufacturers. Have you read about what happened to Japan after pursuing similar mercantilist policies? China will have a financial crisis and economic dislocation that will make what’s happening in US and UK look like a tea party. It will be a great buying opportunity, but a shakeout is inevitable when growth has been the policy aim for so long while ignoring credit growth, inflation, and misallocation of capital. So, I ask you one more time DC, why are they doing this? The only answer you have given is that they don’t want to reward speculators. What a great trade-off for the Chinese – screw the hedge funds and foreigners long the CNY at the cost of exacerbating the imbalances built up in the Chinese economy. Then again you might expect that from Communists.

  • Posted by running bear

    The correlation you are looking for might not be with the oil price however but with gross or net exporting country revenues.

    Then you would have to account for changes or not in the “parking” location and changes in the uses of parked funds either directed or intermediated.

    The decorrelation of oil corp debt equity does not therefore have much weight

  • Posted by flow5

    the greater the imbalances with China, the bigger the black market for their currency

  • Posted by Dave Chiang


    There is a civil war conflict, but there is no genocide in Sudan, just as there never was any genocide in the US civil war. There never was any genocide in Bosnia. Any nation that disagrees with the Washington Consensus is automatically labelled a “strategic threat or enemy”. Was little Serbia in the Balkins really a strategic threat to Americans? And just where are those supposed Serbian concentration camps discussed in the Western media during Clinton’s little unconstitutional war? Where are the physical evidence, building structures, or killing fields of these Serbian concentration camps? Oh never mind, it was entirely a false flag operational lie by the Clinton Administration and CNN media political supporters. The Serbian people, ethnic brothers to the Russians, were put in their place under the control of NATO.

    Then what’s Darfur Sudan all about? It’s the oil stupid.

    Today China draws an estimated 30% of its crude oil from Africa. That explains an extraordinary series of diplomatic initiatives which have left Washington furious. China is using no-strings-attached dollar credits to gain access to Africa’s vast raw material wealth, leaving Washington’s typical control game via the World Bank and IMF out in the cold. Who needs the painful medicine of the IMF when China gives easy terms and builds roads and schools to boot?

    Using the genocide charge to militarize Sudan’s oil region

    Only Washington and the NGO’s close to it use the charged term “genocide” to describe Darfur. If they are able to get a popular acceptance of the charge genocide, it opens the possibility for drastic “regime change” intervention by NATO and de facto by Washington into Sudan’s sovereign affairs.

    The Chinese economic presence in Chad, ironically, may be more effective in calming the fighting and displacement in Darfur than any African Union or UN troop presence ever could. That would not be welcome for some people in Washington and at Chevron headquarters, as they would not find the oil falling into their greasy bloody hands.

    Chad and Darfur are but part of the vast China effort to secure “oil at the source” across Africa. Oil is also the prime factor in US Africa policy today. George W. Bush’s interest in Africa includes a new US base in Sao Tome/Principe 124 miles off the Gulf of Guinea from which it can control Gulf of Guinea oilfields from Angola in the south to Congo, Gabon, Equitorial Guinea, Cameroon and Nigeria. That just happens to be the very same areas where recent Chinese diplomatic and investment activity has focussed.

    “West Africa’s oil has become of national strategic interest to us,” stated US Assistant Secretary of State for Africa, Walter Kansteiner already back in 2002. Darfur and Chad are but an extension of the US Iraq policy “with other means” – control of oil everywhere. China is challenging that control “everywhere,” especially in Africa. It amounts to a new undeclared Cold War over oil.

  • Posted by Dave Chiang

    “What a great trade-off for the Chinese – screw the hedge funds and foreigners long the CNY at the cost of exacerbating the imbalances built up in the Chinese economy. Then again you might expect that from Communists.” – SAM

    For two decades, the Chinese economy has been growing at breakneck double-digit speed. In reality, the Chinese economy is actually growing faster than official statistics since the government seriously undercounts the huge informal service component of China’s GDP. What the Chinese don’t require is the self-serving advise from Paulson and Bernanke who have difficulty keeping the US Economy in the plus column even with grossly manipulated economic statistics (ie. Real Inflation understated with the removal of energy and food costs in order to overstate GDP growth). The Chinese like to say, mind your own damn business.

  • Posted by Sam

    DC – you have not answered my question about the Yuan’s undervaluation in the face of severe imbalances. Thank you for edifying me of the fact that China’s interest in Africa is to secure resources, that is an earth-shattering insight of which I had no idea. As far as the Balkans goes, have you ever heard of Srebenicia? Kosovo? of Milosevic’s conviction at the Hague? of the UN and NATO resolutions concerning the Balkans? It was genocide and ethnic cleansing, of which the UN sought admirably to stop and succeeded with the US at the helm, caring about human rights and not about oil (where was the Middle East while ethnic muslims were being “cleansed” by the Serb Christians??). Fortunately, China and Russia were not in the way to veto UN action as they are now in the Sudan tragedy.

    But let’s please not discuss this anymore. You still have not answered my question on the Yuan, I’m interested in what you think about the growing imbalances in China as a result of the Yuan policy. And again, please save the Kool Aid and Bloomberg News.

  • Posted by Sam

    “For two decades, the Chinese economy has been growing at breakneck double-digit speed. In reality, the Chinese economy is actually growing faster than official statistics since the government seriously undercounts the huge informal service component of China’s GDP.” -DC

    Do you think this “breakneck” growth has come without a cost!? Exporting and investing 80% of your GDP a year, growing 10% a year for two decades, money aggregates out of control, an extremely undervalued currency, not sterilizing interventions, nominal rates below inflation across the yield curve, bank deposit rates screwing savers with nowhere else to go. Let’s not even bring up the oppressive pollution that makes its great cities look disgusting and filthy (I was there in March) Look at the US economy in 19th century and UK in 18th century, its like a sine wave on an upward trend. Free, flexible economies go through ups and downs, as the US and UK (the most flexible in the world) are doing so now. China will have a horrific crash once the imbalances grow beyond repair, much like US housing market became. You do not grow like that, with all emphasis on growth and not inflation, without excesses and imbalances, which to me are evident and abundant. The Chinese authorities should be scared to death on inflation, look what it did to the Nationalists and Chiang Kai Shek in the 40s. The Chinese will have an economic contraction of epic proportions to purge the excesses of 20 years of runaway growth that should have been 5-8 years growth, contraction, 5-8 years, contraction. It will be socioeconomic chaos and asset deflation. Get ready, it’s coming and when it does I will be on the bid for cheap Chinese assets denominated in Yuan.

  • Posted by Dave Chiang


    Every year for the past two decades, Western Economist pundits have been predicting that the Chinese economy will crash and burn. The Chinese don’t follow the Neo-liberal economic dictates of unregulated free capital markets. Too bad the real world doesn’t follow the dictates of Western Ivory tower economists. The Chinese economy will continue to grow at double digit rates for the next decade simply because when hundreds of millions of people are moved from the rural farm to the urban economy, the productivity of society increases by multiple factors. For better or worse, the Chinese don’t need self-serving advise from the Washington Consensus.

  • Posted by Sam

    DC – you are a funny guy DC, I’ve entertained myself today on the blog listening to your brainwashed comments. You sound like a true Chinese bureaucrat, afterall that’s what every young Chinese wants to be these days. Enjoy the crash

  • Posted by Dave Chiang


    Too bad the wishes of the Western Elites to see the Chinese economy crash and burn won’t be fulfilled. The recent US Central Intelligence Agency supported Tibetian protests was an enlightening experience for most Chinese. A disabled Chinese women carrying the Olympic torch in Paris was physically assaulted and cheered by a street mob. The entire minority Hui Muslim community was burned to the ground in Lhasa Tibet without a word from the biased Western media. Women and children were burned alive to death in gasoline bonfires on the streets of Lhasa Tibet. Do the police in Los Angeles allow rioters to burn down building, loot stores, and murder children on the streets. Yet the constant refrain by the Western media led by CNN was that the riots, lootings, and murders were completely justified in the context of denigrating the Chinese people. The double standards of the US media expose the real hypocrisy of Western human rights dogma.

  • Posted by Sam

    Nobody wants the Chinese economy to crash and burn – it’s still quite a poor country in the rural areas. I’m guessing that you live in the US because it’s a much standard of living (since you are on this blog).

    What people like me want to see is market prices adjust in line with fundamentals. No currency peg has ever worked in the history of mankind, neither will the Chinese manipulation of USDCNY. It has created its own distortions that have compounded to create massive imbalances in the world economy. Selling cheap exports and buying expensive debt and currency is an abysmal national economic policy to promote export and investment-driven growth. Oh but wait, China doesn’t adhere to the Wash DC consensus, free market dogma, bla bla bla. I guess buying high and selling low will always work for a China that is immune to the laws of economics. Keep drinkin the Kool Aid there DC and enjoy the Olympic smog

  • Posted by Shrek

    Im in complete and total agreement with you sam. Day in and day out Im stunned that US bonds are always bid. And as Brad has pointed out it isnt from the private sector. Rates need to rise in the US and the currency in china needs to appreciate.

  • Posted by Dave Chiang


    For your information, China has more internet users than the United States.
    More people connect to the Internet in China than in any other country in the world.

    I bet you have never even visited China, but you still think like all of the rest of the Western armchair economists that you are qualified to make 2 cents worth of comments regarding China’s economy. Nor does a visit to the lobby of the Beijing Hilton qualify you as an expert on Chinese economics.

    The Neo-liberal Western economists at the US Treasury controlled IMF have little compunction for destroying the families and livelihoods of millions of developing workers in the name of Wall Street profitability. I dare any of the limousine Neo-liberals to show a slight amount of conscience by spending a week or even a day among the developing world working poor.

  • Posted by Dave Chiang

    Unless the US Treasury is willing to financially compensate the millions of Chinese workers that will go unemployed and hungry, the currency in china should not appreciate. The voting share of China at the IMF and World Bank is restricted by the United States and Western powers to less than little Holland. Therefore it is not China’s responsibility to address global financial imbalances.

  • Posted by Sam

    DC – I was in China and HK in March, and if you read the rest of my posts you would know that by now. You are just pulling a whole bunch of nonsense out of your hat that has no relevance to the issue at hand. “Chinese currency undervalued and distorted?” “Well China has more Internet users, take that Western neo-liberalism evil free market Wall Street elites!!” Btw, of course China has more users, it has 3x as many people. How about usage and bandwith by capita?

    Now I feel threatened because China has more Internet users. Well, US invented the Internet at the Pentagon. US firms like Cisco pioneered the circular system of the Internet. Microsoft and Apple have pioneered OS and interface. I would venture to even say you use Windows (or at least a pirated one). I wonder what US trade deficit would be with China if they actually paid for all our software, entertainment, and industrial designs that they now copy and the rest of the world justly pays market price for. What doesn’t China copy in its economy? China produces many times US does in engineers per school year, yet fewer are capable of a real job, most likely because they’ve been cheating their way through school. The cheating culture in schools is reflective of the copy and cheat industrial economy and the corrupt bureaucracy.


    And while we’re on comparing Internet usage, the US has more Book Club of the Month members, so take that!! You’ve successfully driven the dialogue on the Yuan away from substance to Internet usage rates, way to go. You remind me of the Iraqi Defense Propaganda Minister or David Lereah, ex-chief economist from the National Association of Realtors.

  • Posted by Dave Chiang


    It’s absolute pure BS nonsense that the Chinese yuan will resolve any US Economic problems. The yuan revaluation issue is overhyped Washington Consensus scapegoating to denigrate the Chinese. No level of revaluation will return labor intensive industry back to the United States. US multinationals are already shifting production to lower cost nations including India and Vietnam. Period.

    The majority of Chinese people live on $2 dollars a day. So you can pontificate in your $300 per night Hong Kong hotel and denigrate the Chinese as much as you hate them. But as independent sovereign nation, the Chinese people will choose their own destiny right or wrong. China monetary policy, trade policies, environment, human rights, Tibet is none of the damn business of the Washington Consensus to dictate. The Chinese like to say, “mind your own damn business”.

  • Posted by Dave Chiang

    The crux of US foreign policy problems is the Washington Consensus constant interference in the internal affairs of other civilizations. I have solution that is guaranteed to solve 99% of US foreign policy problems, please mind your own damn business.

  • Posted by bsetser

    running bear —

    gross revenue correlates almost one to one with the oil price. net doesn’t — but i snuck in an estimate of net oil exporters revenues (i called it the foreign asset growth of the oil exporters in the chart on China without really explaining it b/c my methodology there is complicated). I fully realize the oil surplus has to be invested externally — and any decomposition has its problems. but after looking closely at the data, i have concluded that london treasury and agency purchases are more china than oil … i am curious if you disagree with that bottom line.

  • Posted by Rien Huizer


    Thanks, just finished reading your own blog on the Euro as a reserve currency and, despite not being British (or your being British , hey this could become a Sam – DC dialog!), I agree with most of what you write, although you too recognize that there is not a lot of application potential for a large inflow of foreign official money (I guess you would agree except for smoothing the oil cycle, hence GCC money would be welcome provided they would bring the oil price down nicely after a while). Using excess inflow to build up currency reserves (in what ? Sterling? ) one of he applications you suggest would indeed be an imaginative way to do that, but not very obvious with funds from state that uses the exchange rate to effectively conduct labor market policy.

    Europeans are postmodern but do not underestimate their knowledge of voters (a necessary evil unfortunately, most would say, why did Bismarck give everyone the franchise and invented the welfare state) so while the odd mercenary in the EU might opportunistically kowtow, there would never be a consensus in favor of overt and structural participation by Chinese (or japanese, whatever) official reserves institutions in overfunding the European public sector, like the US appears to have had. That is , as long as the underlying exchange rate policy of the oficial investor were considered antagonistic to EU policies.

    As to euro-debt, admitted, some of it is in convenient form but it involves credit risk (usually acceptable though) and the current stock circulates -for the simple fact that the Euro area has a negligible current account balance- internally. The Euro area has a very high internal need for longer paper, and much less for shorter maturities. However, a sudden shift in demand in the order of half a trillion USD, plus the prospect of adding as much annually for the next couple of years, would definitely influence the market, and if a souvereign actor tried to do that, that might be considered hostile.

    So, the each of the obstacles I see are not definitive or large enough, but in combination it does not make it very easy. I guess also that -if diplomacy got involved- (and mind that the French (more or less neutral), Germans (China-sized trade surplus) and Italians (multiple deficits), all have different ideas about how to dal with the problem of trade imbalances, exchange rate intervention and also have different preferences as to from whom (if not anonymous) they would like to borrow and for what reason. I am still sure that a consnsus would be receptive to GCC official money and reluctant towards China.

    As to Japan, yes to the first part of the argument (enough for smaller reserve needs) and “interesting” to the second. I have a faint idea what type of central bank would by synthetic Japanese USD assets. China though, would not be small and POBC/SAFE might not be very good at exploiting that type of arbitrage opportunities. And how would the BOJ ract when it detected a sudden inflow of Beijing dollars waiting to be rechristened Jap Yuan?

  • Posted by Rien Huizer

    DC, I would love laobaixing to mind his own business but reject that the non-capitalist exploiters in Beijing (often luxuriating in HK hotels (pse tell me where in HK you can luxuriate for 300 a night -must have ben USD, but even then..) should have the right to impose their policies on my battlers, by my government not standing in their way, in whatever way that works and does not upset relations with other, friendly countries. Preferably, we would cooperate of course. Seems that you like China to be non-cooperative. My recommendation: report to the head of the State Council Secretariat and offer your services. They may need someone of your chosen type for a very dangerous but heroic assignment, far from Beijing of course

  • Posted by RealThink

    Sam @ #34

    “Look at the US economy in 19th century and UK in 18th century, its like a sine wave on an upward trend. Free, flexible economies go through ups and downs,”

    Sam, those US and UK “Kondratieff winters” in the 19th and 18th centuries were the result of monetary systems based on the gold standard. Same for the 1930 Depression. But once the monetary system was freed from the “golden fetters”, the Kondratieff cycle was tamed. Greenspan is quoted as saying in the 60’s: “I would love to be Federal Reserve Chairman when the Kondratieff Winter comes because I think I could override it by dropping the interest rates and printing enough money that it would overcome all the deflationary aspects of the economy.” And he certainly did exactly that in 2001, and as a result the US experienced only a very brief and mild recession. So, to the extent that recessions are caused by lack of demand from the economic actors that use a certain currency, the Chinese (and any other) Central Bank can perfectly minimize a recession by just printing enough of that currency.

    The only reason why China (and the world) can (and will) experience “an economic contraction of epic proportions” is because of physical limits to growth, particularly the peaking and subsequent decline of the extraction rate of fossil fuels.

    For China, 70% of total energy and 80% of electricity comes from coal. An excellent review of studies on the propects of Chinese coal extraction has recently been published at (by an analyst who is certainly not part of the Washington Consensus).

    “The studies cited here (with the exception of BGR) suggest that China’s domestic coal production growth cannot be sustained much beyond 2020; indeed, in the most constrained case (that is, if the EWG forecast is correct) demand will outstrip domestic supply dramatically during the next ten years.”

    “China’s furious pace of economic growth, which is often touted as a sign of success, may turn out to be a fatal liability. Simply put, the nation appears to have no Plan B. No fossil fuel other than coal will be able to provide sufficient energy to sustain current economic growth rates in the years ahead, and non-fossil sources will require unprecedented and perhaps unachievable levels of investment just to make up for declines in coal production—never mind providing enough to fuel continued annual energy growth of seven to ten percent per year.”

  • Posted by Rien Huizer


    There is plenty of coal outside China.

    That reminds me of something that might be interesting for this blog, the suspicion/hypothesis that I heard recently from an Australian mining expert (but keep in mind that “a mine in Australia is a hole in the ground owned by a liar” as the old City saying used to be) that China may be importing minerals and oil (sometimes far) in excess of what it needs to supplement domestic production. There could be two legitimate reasons for underproducing domestically: (1) domestic stuff is more costly to extract and especially transport, often far from the coast (2) domestic ores and coal may not yet meet the quality standards of modern equipment, compared to coal and steel from Australia etc which is preprocessed to meet exacting technical standards in Japan and Korea. There could of course be a third reason,. which is that China might be keeping domestic production in reserve, i.e. in the ground. They ‘ve got plenty of money to import and also to buy mines abroad.

  • Posted by ZFC

    RealThing: “China’s furious pace of economic growth, which is often touted as a sign of success, may turn out to be a fatal liability. Simply put, the nation appears to have no Plan B.”

    Plan B has been announced for some time: 15% energy production from renewable energy sources by 2020. I assume that percentage can also increase, depending on necessity.

  • Posted by Rien Huizer

    The oil producers’ perennial surplus position may well become reality if one believes the following (decent academic pedigree, sponsored by BP, Shell plus the quiet and non-senstaional government of a country with it own oil and gas.

    That report with its plausible theory (also used in internal scenario analysis in an oil major) would put the equilibrium price in the suggested “new” oil pricing regime at around USD 110 pb. Quite a bit highet than the long term projections of the US EIA..

  • Posted by Sam

    “Look at the US economy in 19th century and UK in 18th century, its like a sine wave on an upward trend. Free, flexible economies go through ups and downs,”

    From the empirical evidence I have seen, I am not a big believer in the Kondratieff Waves. Technologies and productivity revolutions have certainly contributed long cycles like the steam engine (early 19th cent), automobile (1920s), consumer good (1950-60), and the Internet and PC (90s). However, I only mentioned the volatility of the economic cycles of rising powers to underscore the paucity thereof in China. Animal spirits in a free economy cause the boom-bust pattern that Soros and Keynes have written about. However, recessions and dislocations purge the excesses of the last cycle and sow the seeds of the next boom (eg Wall St and the City right now). People like DC think a government can micro manage its way to perpetual growth and ever-rising living standards, but the historical record of both emerging powers and central planning economies contradicts this notion. I cannot see how the extraordinary 25-year boom China has experienced and the policies that have caused significant imbalances/distortions in the economy do not end in a violent shakeout. I also do not see how China will be immune to what is occurring in the US, European, and Japanese economies now. This does not mean I desire it to happen, nor that the Chinese economy is doomed forever.

    Let’s remember that much of China’s economic policy success is directly attributable to the liberalization and free-market reforms of Deng. This may not have been the Washington Consensus in its pure form, but it was much more liberal and reform-driven than the collectives and central planning of the disastrous policies under Mao and Zhou that caused starvation, upheaval, and severe contractions in agricultural output that left millions starving.

  • Posted by RebelEconomist


    Thanks for taking time to read my argument. One way forward for the eurozone might be to make room for reserve inflows by setting up a debt-funded sovereign wealth fund that sells debt specifically designed to appeal to reserve managers, and invests in a diversified portfolio of many currencies, including yen and sterling, but also convertible growing currencies like Canadian dollars, reais, rand etc. Obviously, the eurozone governments would have to underwrite the exchange rate risk, but if the exorbitant privilege really exists, the expected financial return from the project should be positive. And no doubt the French would enjoy eclipsing the dollar anyway!

    Clearly, though, as China’s economy continues growing relatively fast (and unlike Twofish, I do believe that China will become the dominant economic and political power in my lifetime, if only because of its sheer size), it becomes increasingly difficult for the rest of the world to accommodate their investment while it is difficult to invest in renminbi.

    I usually avoid getting into fruitless geopolitical debates with DC because this blog is supposed to be economic, but I will say that if China’s line is that nations “mind their own business”, they should apply that to Taiwan, Tibet, Xinjiang etc. In my opinion, unless it is obviously some kind of opportunistic resource-grab, regions of a country should be allowed self-determination, like Slovakia in Europe, and potentially even Scotland in the UK. While I admire China’s drive, I sometimes find Chinese nationalism disturbing, and I hope it will be muted at/by the Olympics.

  • Posted by Dave Chiang


    Taiwan, Tibet, Xinjiang were a part of China from over 400 years ago. Unless the United States is prepared to return back the entire North American continent back to the native American Indians, the topic of breaking China into subserviant states to the Western powers is non-negotiable. What is most disturbing is the Western media double standards to justify unilateral aggression by the United States to invade Iraq and threaten to attack Iran, Syria, and North Korea. Saddam Hussein is long dead and buried, but the United States continues to insist on the right to occupy Iraq by military force for at least another 100 years, in the words of Senator John McCain. The United States no longer has the legal or moral authority to tell the rest of the developing world to do anything. It’s not too much to ask for the US to mind its own damn business and leave the rest of the world alone to solve their own problems.

  • Posted by shrek

    Bottom line is the refusal to address global imbalances threatens the entire global economy. I cant stress enough how much interest rates need to rise. Eventually inflation will destroy the chinese economy and other economies

  • Posted by Sam

    Shrek – yes the imbalances are unsustainable. US overconsumed and China kept its currency undervalued, real rates negative, and money supply/bank credit out of control. US consumers now paying the price, only a matter before China does for the distortions of the overconsuming US consumer / mercantilist China monetary arrangement.

    DC – I assume you live in US since your comments surface in US time zone. [EDITED]America was built on Italians, Irish, Chinese, and Hispanics who came here looking for a better life and integrated into society. Most have done that successfully and are proud to be American for affording that opportunity to them. I’ve met people like you who enjoy the American living standard but bash and fault it at every turn. [EDITED]

  • Posted by running bear


    I confess that I cannot discern by eyeballing a closer correlation between oil and China “foreign asset”.

    I will defer to your hard work.

    Looking at your UK holdings patterns with exception of 2001 there is a build up through, and then apparently a sell off, coinciding with end of financial year. Could this be related to company transactions then? Or is it distribution?

    Must say I was initially favouring oil due I think to timing of increases in UK deposits from BIS data. Also I think I remember a pattern of large increases in UK deposits in Citicorp annual report.

    This of course could be due to either of the parties you are mooting.

  • Posted by bsetser

    running bear — the rise in treasury/ agency purchases over the course of 07 preceded the rise in oil prices, hence the apparent correlation with “China.” My point tho was that all three have been rising, so it is hard to know if it is China or oil. I think the correlation may be cleaner tho if you look at the rolling 3m sums.

    the apparent sell off in UK holdings isn’t a real sell off — it is the product of the data revisions that follow the release of the US survey data in June. Basically, some treasuries and agencies that the US thought it sold to investors in the UK (tracked via the TIC data) turn up in the hands of investors around the world, not in the hands of UK investors when the US surveys actual holdings rather than tracking sales. And the real reason for the “China” not “oil” argument is that the biggest upward revisions (offsetting the downward revisions for the UK) have come from China.

  • Posted by Rien Huizer

    Once again DC,

    It hurts to see someone with a Chinese looking name (but not spelled in Pinyin) show so little understanding of Chinese history beyond the propaganda, primary school or readers digest level. As you should know, China (Kangxi Emperor) had a few frortesses on an island (previously under tribal control, like most of the western Pacific islands at the time) then usually called Formosa, primarily inhabited by non-Han people, taken from the Dutch East India Company, who had in terun tken it from the Portuguese (the pirate admiral Coxinga did this at great cost with some help from the Portugues/Jesuits who were accepted at Kangxi’s court) . Kangxi then decided to populate part of the East coast of the island with Fujianese people, who were not particularly keen. For 250 years the Island was neglected until the Japanese obtained it in the late 19th cntury. Contrary to the Koreans, the Taiwanese were not unhappy with the Japanese because they finally had a government that did not quite treat them s equals, but at least built schools, hospitls, railways and introduced modern sanitation. In the 1920s (as several Taiwanese friend have assured me), Taiwan was probably the most developed part of what is now China outside Shanghi and Tianjin. In 1949 the mainlanders came and made a big portion of the Taiwanese even more pro-Japanese than they already were. I could go on..I hope you catch my drift.

    But anyway, can you explain what makes you utter all these nonsensical comments that no one takes seriously and take up a lot of space. Does it have some function?

  • Posted by A. P. Simkin

    Dr. S!

    Jesper may be right, but with bank lending so weak in Japan and with the banks there very liquid and looking for business, why would anyone buy Japanese money market paper in London? Enlighten me, please.

  • Posted by flow5

    “But there isn’t much evidence that the British government is all that interested in understanding the origin of the money that passes through London. And as a result, we are all left making informed guesses.”

    Nothing has changed. Russia, formally the epitome of state controlled economies, did not use the ruble in its foreign exchange operations. Since all trade with the Soviets was monolithic, it was to their advantage to establish a single money center bank through which all foreign financing could be channeled. Their LONDON BANK was one of the first to become a part of the Euro-dollar system, an unregulated system of money creating banks operating on the principle of prudential reserves, as contrasted to regulated legal reserves.

    London Banks could not compete without offering privacy, security, and protection of their international clients’ assets and information, i.e., a tradition of bank secrecy.

  • Posted by RebelEconomist


    I dare say that European foreign exchange reserves managers buy yen treasury bills in London because they do not want to get up early enough to buy them direct from Tokyo!

  • Posted by A. P. Simkin

    Rebel Economist:

    It’s not that bad. There’s only a 7 or 8 hour difference between Frankfurt and Tokyo.

  • Posted by flow5

    “Why have they let money growth outpace GDP for so long?”

    If China’s money & credit growth is spent on projects which increase productivity and reduce waste, the expenditures are beneficial no matter how financed. The initial inflationary effects of bank financing are quickly overcome by the larger output and lower unit costs.

    Debt incurred which reduces unit costs of production and promotes the health and welfare of the population obviously is “good” debt.