Why no dollar crisis? The needed flows don’t show up in the TIC data …
Ken Rogoff notes that at least one thing hasn’t gone wrong during the United States current financial crisis: the dollar hasn’t crashed.
One of the most extraordinary features of the past month is the extent to which the dollar has remained immune to a once-in-a-lifetime financial crisis. If the US were an emerging market country, its exchange rate would be plummeting and interest rates on government debt would be soaring. Instead, the dollar has actually strengthened modestly, while interest rates on three- month US Treasury Bills have now reached 54-year lows. It is almost as if the more the US messes up, the more the world loves it.
He is right. There isn’t any data for the last month — but I suspect the dollar ’s resilience is due both to a sense that the rest of the world is slowing far more than the already sluggish US and to of a general flight from risk, including emerging market risk. Americans seem to have started to bring some of the funds they invested abroad back home, supporting the dollar. I also suspect I know why the dollar didn’t fall by more after last August’s subprime crisis: the quiet bailout. The worst the dollar does, the more central banks tend to buy. That allowed the US to sustain large deficits over the past year.
The TIC data – especially after 2004 – has consistently understated official inflows. I won’t bore you with the details. Just trust me, it is true. Different data sources tell different stories – and they all tell us that the monthly TIC data understates official flows in general and flows from China and the Gulf in particular. We know, for example, that total official purchases of Treasuries between the end of 2000 and mid-2007 (the last survey data point) are roughly twice as large as implied by the TIC data.
Even so, total TIC flows provide some indication of total foreign demand for US assets, and total TIC official flows provide a rough guide to total official purchases. And, well, total TIC flows – counting short-term flows as well as long-term flows – are well below those needed to cover the US trade deficit. Indeed, total private flows, counting short-term flows, recently dropped to zero.
The TIC data isn’t a perfect reflection of all the line items in the balance of payments. Most notably, it doesn’t include FDI flows. But a host of data suggests that FDI inflows and outflows roughly offset. I don’t think big net FDI inflows explain why the US deficit hasn’t fall along with total net foreign inflows. There is something more going on. I just need to figure out what it is.
There is one part of the data that I do think I understand: official inflows. A graph plotting official flows v private flows shows that the composition of net flows to the US has shifted significantly over the past two years.
The kicker? I strongly suspect that the TIC data understates official purchases — relative to the survey — by a a something like $300-350b over the last 12ms (this is a testable prediction we will see when the next survey comes out). That implies that official inflows are really more like $550-600b, and private inflows are deeply negative – not zero. And the survey also misses some official flows, notably from the Gulf.
Negative private inflows is another name for private outflows. For emerging economies, those outflows are called capital flight.
One caution: the data only runs through July. There is plenty of evidence that suggests that private funds that had been invested in the emerging world came home over the past three months. That was true in July. I would bet it is true in August and September too.
Selling off your existing assets is one way to fund a deficit.
And one small technical point: the flow of funds data puts total official holdings of Agencies at $1.1 trillion at the end of q2. That is a bit higher than the FRBNY data and significantly above the total implied by adding up known official agency purchases since last June’s survey. It also strikes me as close to right – as the flow of funds seems to be using the FRBNY data to derive its estimate rather than the TIC flow data and in this case the FRBNY data is better.
Brad, this blog may be the sole remaining publically accessible, authoritative source of ‘flow of funds’ information. Much needed and much appreciated.
Yes, but it also shows that the PBoC has a moron running it. The US is transferring its bad debt to China as fast as the tickers will take it. I have claimed the Chinese economy is run by children who are just thrilled to be getting all this pretty green money and have absolutely no idea that in China they use firing squads for failure. And as Vanderbilt found out, if you have the money to play, someone will find a printing press to make bonds and stocks. What will they do when the US says “We just can’t pay you!”?
Selling off your existing assets is one way to fund a deficit.
I have always wondered if US would need to sell Montana to continue funding its debts – selling offshore assets didn’t occur to me as a legit way to fund deficits. Is there any estimate on how much US investors own abroad that could be sold?
Steve Garee Says:
‘…but it also shows that the PBoC has a moron running it…..in China they use firing squads for failure..”
Dey killed little Fluffy in this household wid de bad cat food. I was really impressed wid de organization that shot the bribe taking goombah bureaucrat that did little Fluffy in.
We could learn a lot from the CICs here.
From Mish Shedlock,
http://globaleconomicanalysis.blogspot.com/
I am almost shaking as I write this for what is happening to the capital markets, this country, and the free world. The impact of the past two weeks’ action in the financial markets, if not reversed by cooler heads, will have irreparably changed the world in a way that only terrorist attacks and acts of war have in the past.
Nationalizing Fannie Mae and Freddie Mac, providing an emergency quasi-legal bridge loan to AIG, temporarily banning short-selling on all stocks in the US, and instituting an RTC-type entity to handle the toxic waste of the financial system is economic violence on a grand scale.
The long-term cost of these actions to dollar holders will likely be in excess of $1 trillion. The basic premise of a free economy is one governed by laws and not men, where property rights are respected, where individuals are free to make contracts with each other, and where honesty and transparency exist in the marketplace. It’s questionable whether any of these currently exist in the economy of the United States.
Frankly, I don’t know where we go from here. Despite what government officials want, you cannot intervene your way to renewed credit and economic growth. The excesses of the past 25 years have come home to roost, and if we aren’t careful this country’s status as the hub of global capital markets and the holder of the world’s reserve currency will disappear.
Freezing foreclosures, mandating artificially low mortgage rates, sweeping junk assets on bank balance sheets under a Level 3 rug, delaying the writedown of debt, pursuing a witch hunt against legitimate players in the capital markets, and having the government be the lender and borrower of last resort will do nothing other than recreate the mistakes of the 1930s.
When you do graphs please use colors that contrast adequately. Dark blue and dark black are almost impossible to tell apart.
«Yes, but it also shows that the PBoC has a moron running it. The US is transferring its bad debt to China as fast as the tickers will take it. I have claimed the Chinese economy is run by children who are just thrilled to be getting all this pretty green money»
This is just a stupid fantasy. The Chinese government are very astute, very capable guys who know perfectly well that all this USA debt is just a scam.
It is a part of a certain mindset to think that the Chinese government cares much about that debt; as if financial quantities mattered more than the real economy. A very American mindset.
The Chinese government cares about the real economy, cares about jobs being created, about exports being robust.
When they lose all the paper wealth they have accumulated and lent back to the USA, knowing full well it meant losing a large chunk of it, their country will still have all the factories, all the know how, all the roads, all the ports, all the buildings, all the real, productive assets that the gullible Usians have built for them in China rather than Ohio or Oregon.
Who cares about a few hundred billions of paper money when a lot of your country has almost gone from being Sudan to being Korea in a generation?
By doing “vendor financing” on a massive scale, keeping their currency low and the dollar high, the Chinese have not only created in effect import tariffs and export subsidies without breaking the letter of WTO rules, they have also subsidized the transfer of a very large chunk of the productive part of the USA economy to themselves, by making it more profitable for the infinitely greedy executives of USA corporations to dismantle or close down their USA productive assets and move them or create new shiny ones in China under the control of the Chinese government.
By playing the bonus mindgame with USA executives, they have incentivized those executives to have a very short term time horizon, and to sell their country’s economy and their own company’s future down the river.
As to the USA, let them eat MBSes — let them have the challenge of turning 3 million empty homes in the California and Arizona desert into productive assets, after they shipped their factories to Guangdong to earn a better ROI for their elites.
«The government be the lender and borrower of last resort»
Oh no, it is much worse than that. The Fed and the Treasury have taken on the role of greater fool of last resort.
Whatever Paulson’s “mother” of all taxpayer bailouts does to recapitalize the FIRE industries, the US Economic situation is simply unsustainable. The addition of a couple more trillion dollars in debt to the US government balance sheet may be unacceptable to foreign creditors. The China PBoC isn’t capable of acquiring another trillion US dollars.
http://www.atimes.com/atimes/Global_Economy/JI20Dj02.html
Well beyond the US’s oft-discussed addiction to oil is its never-mentioned addiction to foreign credit. In 2007, America imported 49% of total global reported imported capital, the lowest US percentage in several years. Thus, our 25% reported share of oil consumption is much lower than our share in imported capital. We became addicted to debt – especially foreign debt – and that addiction becomes an illness in a credit constriction. Leading US banks and financial firms grew large and reaped huge profits writing, packaging, trading and rewriting, repackaging and retrading all that borrowed money. Thus, the boom created the bust.
As to the inflow/outflow situation, please also note that the graphs as most others show a large change in trend (much steeper upwards) around 1995, when “something” happened to the rules of the game (apparently fractional reserve requirements were mostly nullified).
As to official/private inflows I remember this interesting quote:
«The top five foreign holders of Freddie and Fannie long-term debt are China, Japan, the Cayman Islands, Luxembourg, and Belgium.»
Cayman, Luxembourg and Belgium are capital gains tax havens, so it is pretty obvious they mean mostly Saudi nominee accounts.
«this blog may be the sole remaining publically accessible, authoritative source of ‘flow of funds’ information.»
The numbers are indeed useful and interesting, with some quite amusing and shocking graphs. I also would like to draw attention to some estimates of M3/MZM that are available from a couple of sites:
http://bigpicture.typepad.com/comments/2007/12/no-inflation-no.html
http://www.nowandfutures.com/key_stats.html
“Hidden inside the AIG bailout funding package, surely hastily cobbled together, but carefully enough to include a totally corrupt clause, was a handy dandy clause that permits account raids. The conglomerate financial firms are permitted at this point to use private individual brokerage account funds to relieve their own liquidity pressures. This represents unauthorized loans of your stock account assets.”
http://www.financialsense.com/fsu/editorials/willie/2008/0918.html
Curiously I don’t think the crisis is changing the balance of payments. People are dumping everything and buying Treasuries, and there isn’t much pressure that I can see on the dollar.
America’s role as the financial ideology leader of the world, I think is dead, but it’s role as the center of finance is unchanged, and perhaps enhanced by all of this. You will note that the major decisions in all of this are being made by Paulson and Bernanke and the Fed.
DC: Frankly, I don’t know where we go from here. Despite what government officials want, you cannot intervene your way to renewed credit and economic growth
Yes you can. China did it. So did FDR.
—-
I’ve always assumed there is some volatility in the TIC data due to some incompleteness and misclassification issues. I gather this is corrected over time with the survey updates.
There must also be real volatility in the mix of flows due to the potential for occasional delays in the settlement of payment transactions through the international banking system, or delays in asset allocation decisions by private and public investment managers. One would think both sources of this real volatility might be exacerbated in markets that are also volatile. The offset to this should be temporary flows in the form of bank deposits, since this is the conduit for settlement of international payments.
jkh — yes, there is some volatility in the data for those reasons, and because it is a high frequency data series. on the other hand, bank deposits are in principle included in the data set i used, which includes short-term flows.
DC: Frankly, I don’t know where we go from here. Despite what government officials want, you cannot intervene your way to renewed credit and economic growth
Twofish: Yes you can. China did it. So did FDR.
DC: And China is a net creditor nation. At the time of FDR, the United States was a new creditor nation. How much debt can the US government accumulate before the world’s creditors say “no more”?
Perhaps we’re not there yet, but it’s getting closer every day.
From BBC,
http://www.bbc.co.uk/blogs/thereporters/robertpeston/
This would be the mother of all bailouts. It would certainly involve the deployment of hundreds of billions of US taxpayers’ money, possibly more than a trillion dollars.
And it comes on top of the $300bn commitment of public money already made by Paulson to the rescue of Fannie, Freddie and AIG.
It all represents a massive humiliation for Wall Street, the giant US financial services industry and bankers supposed to be the canniest on the planet.
Paulson, himself, was one of their ilk, as the former boss of Goldman Sachs.
There will be serious long-term damage to the ability of the US to export its way of doing business to the rest of the world.
The American way of capitalism doesn’t seem all that brilliant right now.
In that sense, a degree of moral authority – as well as financial clout – will shift east.
It’ll also damage the robustness of the US public finances.
Possibly the biggest risk for the US is that in bailing out the finances of the private sector, Paulson would dent international investors’ confidence in the American government’s balance sheet – which could ultimately undermine the dollar, push up inflation even more and raise the cost of servicing debt for the US authorities.
Maybe the US is still big enough and powerful enough to persuade the rest of the world to pay for the mistakes of its financial sector – which is broadly what’s being proposed.
Downgrade to the US government debt
“Totting up the numbers of Bear Stearns, AIG, Freddie Mac and Fannie Mae, and with now what we’re hearing about today, on top of a budget deficit which is already over $400 billion, and it’s possible to get number approaching a trillion dollars, that’s 7% of GDP in an environment where the U.S. economy is very weak,” James Shugg, senior economist at Westpac Bank, said. “It at least raises the question, ‘for how long can we continue to regard the US government as an ‘AAA’ organization?’”
The point Scaramanga raises is valid, and you cannot know when creditors to the US will say “no more”. But there is an even stronger wall to be hit: physical limits to growth. And people familiar with the oil industry have a pretty good assessment on when oil fields will say “no more”.
Intervening your way to economic growth worked so far because the world’s economy was far from the physical limits to growth, or in other words, on the way up to Hubbert’s Peak.
2008 Sacramento Peak Oil Conference; September 21-23, 2008; Hyatt Regency Sacramento, California
What’s interesting is that all of the money is going into short term US treasuries. People will likely stop funding the US when there is a better, safer alternative, but right not there isn’t.
When there is a crisis, people are running to Uncle Sam.
The recent policy actions of the US Fed/Treas in essence just nationalized the risks of the international financial system using the US taxpayer as collateral. These temporary liquidity measures will be made permanent because the private financial system can’t stand on its own merit.
State capitalism is now the modus operandi of the US.
there is something poetic about a state led international financial system spanning state capitalism in the us; after all the external flows that kept this going all came from govs.
lots of folks don’t want to admit that, but the imf data is clear on this — and i get the same result looking at individual central bank balance sheets and summing things up.
Yes, It appears US Treasuries are the only game in town. After all, the world still can’t buy Chinese Treasuries.
Steve Garee Says: “Yes, but it also shows that the PBoC has a moron running it. The US is transferring its bad debt to China as fast as the tickers will take it.”
Far from being morons, it seems to me that the Chinese have been acting in their own self interest by trying to protect the value of their dollar reserves.
Brad,
Note that as soon as Fannie and Freddie were taken over (which eased credit risk for the Chinese) the dollar shot up. Did the Chinese take on more currency risk?
Remember this. Ultimately there is no “free lunch” in Economics. Now, even more Treasury debt is needed to finance the bailouts, debt which will be added to the existing $9 trillion national debt. Paulson can kick the looming financial crisis further down the road with a taxpayer bailout of his Wall Street cronies, it only ensures that any future financial conflagration will be that much more deadly. The “moral hazard”, irresponsible behavior potentially threatens the monetary integrity of the US government in order to bailout private sector capital misallocation. Hank Paulson has absolutely no shame for his disgraceful contempt towards the American taxpayer.
DC: Paulson can kick the looming financial crisis further down the road with a taxpayer bailout of his Wall Street cronies, it only ensures that any future financial conflagration will be that much more deadly.
That’s not true. In the case of Chinese banks, by pushing resolution down the road, it made things easier to handle. It all depends on how the non-financial economy goes. If you end up with economic growth, then kicking debt down the road is the thing to do.
The other thing is that there is no “ultimate resolution” in economics. You fix one problem, ten years later another problem will come up. One generation’s solution is the next generation’s problem. The Federal bailout will cause lots and lots of problems, but the question is whether the cure is worse or better than the disease, and prospect of a repeat of the 1930’s with cascading collapses is what people are really nervous about.
The notion that you can do anything and fix all your problems once and for all is the sort of “end of history” non-sense that both Marx and Fukiyama was talking about.
aim: Far from being morons, it seems to me that the Chinese have been acting in their own self interest by trying to protect the value of their dollar reserves.
Not just dollar reserves. There is also export markets, and general economic interaction. If the US goes down, it takes China with it.
Can China repossess the state of California as collateral if the U.S. government defaults? Or will they be taking Taiwan?
[...] Para Brad Setser, boa parte do dinheiro virá de fora. Dos bancos centrais que continuam comprando dólares. [...]
TM: The recent policy actions of the US Fed/Treas in essence just nationalized the risks of the international financial system using the US taxpayer as collateral. These temporary liquidity measures will be made permanent because the private financial system can’t stand on its own merit. State capitalism is now the modus operandi of the US.
Hard to say what is going to happen next. But at one level I don’t care. As Deng said, black cat or white cat, as long as it catches mice. I don’t care if the US is state capitalist, private capitalist, socialist, or communist, as long as it improves people’s standards of living. The problem with thinking in terms of “isms” is that the world really is too complex for that.
Also, one of the things about Wall Street is that you have lots of clever people here and whatever the system turns out to be, people here will figure out how to benefit from it.
If it turns out that the system that works and that what people want is centrally planned socialism, then people will put up pictures of hammers and sickles, start calling each other Comrade, and start getting work being industrial planners.
No one knows what the new system is going to be like. It’s going to be interesting to watch what it does look like, but whatever happens New York City is going to be where the action is.
DC: Paulson can kick the looming financial crisis further down the road with a taxpayer bailout of his Wall Street cronies, it only ensures that any future financial conflagration will be that much more deadly.
Twofish: That’s not true. In the case of Chinese banks, by pushing resolution down the road, it made things easier to handle. It all depends on how the non-financial economy goes. If you end up with economic growth, then kicking debt down the road is the thing to do.
DC: So where is the economic growth going to come from. The Real Estate bubble which has saturated the entire country with empty Houses provided whatever low-quality US economic growth there was. In our debt-based monetary system, we are left with a debt pyramid in the tens of trillions of dollars that has been made even more dysfunctional with our loss of societal purchasing power due to the outsourcing of the US industrial base. There is very little “real wealth” industrial capacity left in the United States. Even the high-tech Boeing 787 is mostly built in high-wage Japan. We are now seeing the results of Neo-liberalism economic policies that have made America an increasingly impoverished nation.
Im in 100 percent agreement with Steve Garee. China’s leadership is obtuse.
I like CNBC Rick Santelli’s comment this morning…
“We had fundamental bottoms and technical bottoms in the financial makets…. but now we also have legislative bottoms. The SEC will throw short sellers in jail.”
Free capitalist markets? LOL.
DC: So where is the economic growth going to come from.
Science, technology, American ingenuity and inventiveness. Lots of smart people in the country, people will figure something out.
Brad,
Thanks for the effort and time you put into your blog.
I’d have no idea where a lay person like myself would gather this information and interpret it. Even though I’m not in Wall Street or high finance, I do try to take kernels of knowledge from your postings and the comments.
Blah, blah, blah….well, just wanted to say your efforts are appreciated.
DC: So where is the economic growth going to come from.
Twofish: Science, technology, American ingenuity and inventiveness. Lots of smart people in the country, people will figure something out.
DC: Science and technology from wishful thinking and a disturbing lack of any US Economic strategy? It almost sounds better than CNBC’s Larry Kudlow and his story about Economic Goldilocks. The stark reality is that the unemployment situation for Chinese and Indian scientists is bleak.
From BusinessWeek,
Chinese Scientists Build Big Pharma Back Home
http://www.businessweek.com/magazine/content/08_37/b4099052479887.htm
In a reverse migration, U.S.-trained scientists are setting up biotech startups, contract-research companies, and university labs on the mainland.
Chinese are joining mainland ventures because prospects in U.S. industry seem so dim now. Neurologist Charles Huang filed 10 patents and published 20 papers when he was a senior scientist with Neurocrine Biosciences in San Diego. Later he joined fast-growing Shanghai R&D outsourcing firm Sundia MediTech, also headed by Chinese veterans of U.S. industry. He calls the job picture in America “gloomy.” What’s more, Princeton’s Shi warns that shamefully few Chinese scientists rise to the top of major U.S. companies or research programs. “Unless the U.S. solves this glass ceiling problem, you will see a serious brain drain,” he predicts.
LOL.
From Mish Shedlock,
http://globaleconomicanalysis.blogspot.com/
US Taxpayer: A Giant Dumpster For Illiquid Assets.
Paulson is sponsoring a $1.2 trillion bailout of US corporations at taxpayer expense.
“It sounds like there’s going to be a giant dumpster for illiquid assets,” said Mirko Mikelic, senior portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan, which oversees $22 billion in assets. “It brings up the more troubling question of whether the U.S. government is big enough to take on this whole problem, relative” to the size of the American economy, he said.
Government manipulation can never prevent financial Armageddon. In fact, government intervention and manipulation in the free markets eventually guarantees financial Armageddon.
Armageddon was not prevented, only delayed, and at taxpayer expense.
Mama Mia. Everything guaranteed by the feds now. Uncle Alonzo is stomping mad ’cause he thinks his insurance biz is going straight to hell. Who’sa gonna buy fire insurance if the feds own all the houses?
But anyway, just got back from the 7-11. Had a little chat wid my man Pradnesh over der. Pradnesh use’ta be a computer geek till IBM outsourced his job to Bangledor. He’s da smartest guy I know.
So Pradnesh give me a tip I’ll pass along to yous folks. He says the 7-11 lobby in fedland is trying to get fed guarantees on lottery tickets. Says de upside is millions and yous still can buy ‘em for a buck!
So’s I figures it’s a good bet and bought a couple of ‘em, and one of them tasty hotdogs too.
@Blissex — I very much appreciated your post and as a hindsight explication of the “vendor financing” that has occurred, I very much agree with you. I would hesitate, however, to attribute this to astuteness. Even in a single party state with a nominally state-managed economy, the decisions that end up having macroeconomic effects are still the product of hundreds of thousands of people (especially in a country with a population over 1 billion), including wealthy financiers and factory owners not to mention legions of party operatives throughout the nation competing for status and rank. In many ways, the vendor financing can be seen as a political strategy as much as an economic one (not that it is possible to fully divorce political from economic). I just mean to point out that the entire system encouraged this vendor financing, not just a few astute government officials. Regardless of this minor dispute over labels, I do very much agree that the effects of these manifold actions will be the rise of China by means of huge infrastructure improvements and the decline of the US by means of a tremendous mis-allocation of resources into non-productive housing worth far less than replacement value.
“Hard to say what is going to happen next. But at one level I don’t care. As Deng said, black cat or white cat, as long as it catches mice.”
And if the black cat catches more mice than the white cat?
Economic systems are not equal in their performance.
The Anglo capitalism of the 20th century has historically proved to be the best system.
http://finance.yahoo.com/tech-ticker/article/63833/Americans-Get-Ready-for-an-Enormous-Tax-Bill?tickers=JPM,AIG,XLF,%5EDJI,%5EGSPC,BAC,C
Ah, yes. There is no free lunch. Just how significant an amount of taxpayer dollars remains unknown, but it’s going to be massive.
Estimates of the proposal to let the government buy bad assets from banks range from $500 billion to $1 trillion — and that’s in addition to costs already incurred for various government actions this year, including, but not limited to:
$29 billion to fund JPMorgan’s takeover of Bear Stearns
Up to $200 billion each for nationalization of Fannie Mae/Freddie Mac
Up to $85 billion for AIG
$50 billion to insure money market funds
Approximately $300 billion of Fed liquidity measures this week alone.
“It’s impossible to put any reasonable estimate on what it’s going to cost us as taxpayers,” says Tom Brown of Bankstocks.com and Second Curve Capital. “We know it’s going to cost an awful lot [and] the more they borrow the more interest rates go up and the more taxes we’ll have to pay.”
I just wander if it is possible that treasury is creating shadow dollars that do not show in their balance sheets. That would be be the easiest explanantion for the missing flow in the official tic-data.
I do not have much trust in US treasury and find it plausible that they are creating off-balance-sheet dollars.
What do You think Brad? I am sure the idea has crossed your mind…
The talk about “costing the taxpayers” misses the question of “which taxpayers?” It seems to me that the socially fair thing to do would be to have the government absorb the mortgage losses and then to pay for this increase taxes on the rich and super-rich.
If you try to get the money from “bank creditors” then you miss the point that the bank creditors are the people that have deposits in the banks. The executives that caused the mess have already left the building. You aren’t going to get them unless you increase their taxes.
So I’m all for a “taxpayer bailout” if you hit the right taxpayers. When you have the head of hedge fund talk about “we taxpayers” then watch your wallet since he is a bit worried that you’ll want to change the tax code so that he pays and you don’t.
What makes sense to me is a five year surtax on salaries more than $1,000,000/year. That should bring in more than enough money to cover the mortgage losses and hit the right people as well.
TM: The Anglo capitalism of the 20th century has historically proved to be the best system.
Doesn’t look that great right now.
while everyone wonders why china are betting on black – or red – the chinese themselves may have a go at buying the casino ?
This unprecedented taxpayer bailout will calm the financial markets in the short term but may put the US Federal government on “life support” in the long term and further weaken the US economy both financially and politically at home and around the world. The implications of these massive taxpayer bailouts are not good to state the least. Where will the financing come to rebuild the crumbling US physical infrastructure? Will there be any money left to develop alternative energy, or breakthrough R&D technogies? As the Federal government continues to concentrate its entire holdings into worthless assets in the hundreds of billions and even trillions, the US government is exposing the country to tremendous risks that could sink the American economy for decades to come. Who would then bailout the US government?
Mama Mia, things are getting busy with The Regula’s. Just got off the cell wid Uncle Bruno (that’s where he’s calling from..pun…HAHAHAHA) . Uncle Bruno is da accountant in de Family and he’s really a excited about the feds guaranteeing money market funds. Funny what trips peoples triggers, eh now?
But he thinks there’s a angle to work here and was looking for my thoughts on the matter. Sez structured financing is out of favor at moment, but that’s all a bad rap, and it really could work if you do it right. Hope Uncle Enzo doesn’t here him say that, ’cause he”ll go right thru the roof. He’s still peed about those house loans he made.
So’s I tells Uncle Bruno about the tip I gots from Pradnesh at da 7-11 ’bout the feds may guarantee lottery tickets. Uncle Bruno almost drops da phone and I’kin hear da gears spinning. Uncle Bruno is the financial genius of da Family, so’s I’ll just relates to yous folks whada he say’n, ’cause I don’t understand it completely myself. But he says da plan needs “juice” to keep everyone’s interest in providing da service. Dat part I gets.
So he sez we’s prints up coupons saying “90 day $200 guaranteed money market fund” on dem and gives dem to Pradnesh (I dida ask whyda $200 and nada $100..Uncle Bruno sez “inflation”). Den Pradnesh sells them at da 7-11 wid de implicit guarantee that de feds might guarantee lottery tickets. Pradnesh records da customer name and amount in da “book”.
Now for da juice dat makes it all work.
1) Da customer comes back in 90 days and turns in his coupon for $200, a lottery ticket(held in trust by Pradnesh ) , and a hotdog !
2) Pradnesh’s boss gets paid for the lottery ticket sale and the hot dog too, so he be happy camper.
3) Up front der is a 10% service fee , wid is what keeps Uncle Bruno, Pradnesh and me interested in providing dis service.
Whadaya all think about that? Pure genius I say. Uncle Bruno advises he does franchises too wid folks he trusts, so if’n any of yous have family too, give us a jingle.
Twofish: The talk about “costing the taxpayers” misses the question of “which taxpayers?” It seems to me that the socially fair thing to do would be to have the government absorb the mortgage losses and then to pay for this increase taxes on the rich and super-rich.
It doesn’t happen very often but I agree with Twofish entirely on this.
TM: The Anglo capitalism of the 20th century has historically proved to be the best system.
Historically?? Anglo-US capitalism worked well for about 20 years between 1950-1970 – and that was after all the public programs from the New Deal. The free-market deregulators led by Reagan and Greenspan have since then damaged the system quite a bit.
The Failure of Rubinomics Neo-liberalism
http://www.rutlandherald.com/apps/pbcs.dll/article?AID=/20080919/OPINION01/809190310/1038/OPINION01
“In past eras, American financiers and government have directed the nation’s wealth toward the development of railroads, highways, universities and other infrastructure that would enable the nation to develop in ways that would enrich all of us.”
“If the system were not designed to encourage that giant pyramid of paper wealth, American companies could have been investing in American factories, providing better paying jobs to American workers. The government could have been enforcing laws to protect workers’ rights and investing in education and infrastructure that would enrich rather than impoverish the nation.”
“Now the paper castle is tumbling down. When it comes time to rebuild, let’s hope our leaders understand the need to foster prosperity based on real production by working people, not financial instruments built on nothing.”
@pseudorandom
“Anglo-US capitalism worked well for about 20 years between 1950-1970″
Notably, until the first oil crisis in 1973. Sure enough, correlation does not prove causality. But suggests there may be.
@Twofish
“(economic growth going to come from) Science, technology, American ingenuity and inventiveness. Lots of smart people in the country, people will figure something out.”
An article of faith, whose creed is the Solow model. If you dare challenge that belief, see the work of Robert Ayres and Benjamin Warr.
And I am questioning your assumption in general, not about Americans in particular.
Realtink:
Pradneshh, da computer geek at da 7-11, did get a job offer from a outfit in Bangledore after he got canned by IBM. But he said 7-11 matched it, and also has a “overtime bonus plan” like wad dat fed law says. Sez he may even come out ahead if he puts in the same hours that computer geeks do.
He sez he really didn’t wanna go back to India neither. The company there was swearing Bangledore is a brand new city and they built it wid indoor plumbing. But Pradneshh sez he developed a taste for Italian food and da Indian restaurants just don’ta compare.
Twofish: Science, technology, American ingenuity and inventiveness. Lots of smart people in the country, people will figure something out.
I agree with DC: I’m an engineer and work in the US. I’m not American (European). 80% of the engineers around me are not Americans either. Many are going back to their home countries for better opportunities. I’ve seen a few go for a MBA. And why not? The only thing that works well in the Anglo capitalism is (was) finance. The Economist had this statistics that 40% of US companies profits come from financial services. Yes, US companies are very ingenious and innovative at pushing people into debt and then milking a rent out of them. It was good was it lasted.
I suspect things are not what they seem: the US has forced the GCC, BRICS, and EU to bail out their financial system. We are, I believe, about the witness a brilliant coup, with wealth pouring BACK into the US: our creditors are shackled to a corpse, and that corpse is what finances our militaries that control their governments.
Pretty smart, eh? It’s why they’re in charge. =)
ha_ha- That would make a great plot twist for a novel. If your prediction turns out correct I will be happy to change my opinion of the guys behind this. The image of US creditors enslaved by a militant zombie corpse alone is worth the price of admission, and surely would have propaganda value for someone.
[Cedric] “7-11 lobby in fedland is trying to get fed guarantees on lottery tickets. Says de upside is millions and yous still can buy ‘em for a buck!”
Light entertaiment at the end of the tunnel, indeed. Way too funny. Now stop, I can’t think straight while laughing.
“The good old days weren’t so good and tomorrow isn’t as bad as it seems.”
If you look at the 19th century, you had bank runs like these both in the United States and in Europe, and the financiers of old weren’t less immune from putting things into paper assets than fell apart. The type of paper asset changes each time. In the 1870’s then were railroad stocks, today they are credit default swaps. Same thing.
People’ don’t change, and I don’t think it is possible to prevent boom-bust cycles. It’s possible to reduce the severity of those cycles, but they will go on because people very quickly forget the lessons of the past.
FG: I agree with DC: I’m an engineer and work in the US. I’m not American (European). 80% of the engineers around me are not Americans either. Many are going back to their home countries for better opportunities.
That’s actually the genius of the American system. Rich people get fat and lazy. Rich countries get fat and lazy. The reason that the United States has done as well as it has is that it has this constant influx of immigrants. You have the best and the brightest of the world coming to the US. Some of them stay. Some of them don’t. The ones that stay have kids who get, having grown up in a suburban climate of wealth. are fat, lazy, and spoiled, but it doesn’t quite matter because there are people who are fresh off the boat that aren’t.
ha_ha: I suspect things are not what they seem: the US has forced the GCC, BRICS, and EU to bail out their financial system. We are, I believe, about the witness a brilliant coup, with wealth pouring BACK into the US: our creditors are shackled to a corpse, and that corpse is what finances our militaries that control their governments.
That’s also more or less what I think is going on. This also is the main reason why the US has been able to survive for as long as it has, and why people are reacting by *buying* US treasuries. If the US was an oridinary nation, it’s economy would have collapsed long ago. But the United States indeed is quite special.
Mama Mia. Uncle Bruno called again. This always makes my brain hurt.
Sez he been at the library at the fed country club he’s in. They gots lots of computers an’ they all hooked up to da internet. Uncle Bruno sez a lot of the inmates like to socialize on Facebook, but he usually just researches financial stuff.
So then he asked me if I ever hearda a2/p2 an’ I says “Dat little robot in Star Wars?”. He sez “NO GOOMBAH, its lower rated commercial money market paper. Goombah” an I hears him shake’n his head. So I sez “You really into that, huh, Uncle Bruno?” an’ tried to sound interested.
So’s then Uncle Bruno launches into his pet peeve about feds borrowing money and crowding out small and medium size business, like us. (He’s been complaining about dat since the ’70s.)
To prove his point he gives me dis data series from da feds demselves. Says da feds sold $180 Billion in treasureals, probably starting the 16th, to raise money to give to der friends, which is always banks. Dis time he sez dey even banks in the old country.
But da good news is the feds is spooked ’bout dis too, ‘en dats why dey guaranteeing money market funds. So’s Uncle Bruno thinks paying out one hotdog and an expired lottery ticket will be competitive again next week.
CP/RATES/RIFSPPNA2P2D30_N.B Description 30-Day A2/P2 Nonfinancial Commercial Paper Interest Rate
CP/RATES/RIFSPPNA2P2D30_N.B Unit Percent
CP/RATES/RIFSPPNA2P2D30_N.B Unit Multiplier 1
Unique ID Time Period Value
CP/RATES/RIFSPPNA2P2D30_N.B 2008-09-18 6.02
CP/RATES/RIFSPPNA2P2D30_N.B 2008-09-17 5.02
CP/RATES/RIFSPPNA2P2D30_N.B 2008-09-16 3.80
CP/RATES/RIFSPPNA2P2D30_N.B 2008-09-15 2.98
CP/RATES/RIFSPPNA2P2D30_N.B 2008-09-12 2.96
CP/RATES/RIFSPPNA2P2D30_N.B 2008-09-11 2.89
CP/RATES/RIFSPPNA2P2D30_N.B 2008-09-10 2.93
CP/RATES/RIFSPPNA2P2D30_N.B 2008-09-09 2.79
CP/RATES/RIFSPPNA2P2D30_N.B 2008-09-08 2.89
CP/RATES/RIFSPPNA2P2D30_N.B 2008-09-05 2.91
CP/RATES/RIFSPPNA2P2D30_N.B 2008-09-04 2.88
CP/RATES/RIFSPPNA2P2D30_N.B 2008-09-03 2.86
CP/RATES/RIFSPPNA2P2D30_N.B 2008-09-02 2.94
CP/RATES/RIFSPPNA2P2D30_N.B 2008-08-29 2.96
CP/RATES/RIFSPPNA2P2D30_N.B 2008-08-28 2.96
Corporate Welfare at its Absolute Worst!!!
Bush rescue plan seeks $700B for to buy bad mortgages, would raise limit on national debt
http://biz.yahoo.com/ap/080920/financial_meltdown.html
The plan would give the government broad power to buy the bad debt of any U.S. financial institution for the next two years. It would raise the statutory limit on the national debt from $10.6 trillion to $11.3 trillion to make room for the massive rescue. The proposal does not specify what the government would get in return from financial companies for the federal assistance.
In a session with House Democrats, they described a plan where the government would in essence set up reverse auctions, putting up money for a class of distressed assets — such as loans that are delinquent but not in default — and financial institutions would compete for how little they would accept for the investments, said Rep. Brad Sherman, D-Calif., who participated in the conference call.
“You give them good cash; they give you the worst of the worst,” Sherman said. A critic of the plan, he complained that Bush and his economic advisers were trying to panic lawmakers into rubber-stamping it.
1. even when private outflows are matched by official inflows during a certain period, it is quite possible that currency speculators develop a notion of outflow (because many more agents can observe private flows than the official ones while they happen) and hence a downward momentum develops in this roughly mean reverting market (with weak trends over longer periods).
2. USD weakness or strength occurs usually not in all USD currency pairs at the same time. Most USD currency pairs are managed or pegged. The managers and peggers have often become very wealthy during the past 10 years, hence their main mnagerial job is to facilitate US inflows, typically by not converting USD receipts for goods and services exports. The main unmanaged currency pairs are USD/EUR, USD/GBP and possibly USD/CAD and AUD. Brad and I disagree about USD/JPY, but that may be at least as “managed” as AUD. Perhaps, in general, very open economies with central banks operating under a Taylor rule, are likely to at least “watch” their currency closely given that exchange rate movements are, like employment fluctuations,early indicators of inflation changes and responding to interest rate changes (somewhat). So, possibly AUD and CAD have a reputation among rational currency speculators that weakness of the local currency (ceteris paribus) will invite an interest rate response.
3. What e have seen recently is that USD/EUR (probably the most freely floating pair) has returned to more fundamentally defensible levels (about the most recent FEER estimate) followed by AUD, GBP (still quite overvalued relative to EUR, its political nursing home) and CAD. AUD and CAD have the commodities story as well and this may not worry the Canadians but the Aussies are probably in a bit of a problem: further interest rate declines may spark a currency slide which will stimulate inflation).
4. So what matters is really (a) hat the market perceives s flow in real time)and (b) what the home currency of the main in-and outflow drivers are. Are outflows converted into EUR or JPY (no space in the others) or not. Hence, outflows (as they can be observed contemoraneously or in hindsight) are not a very useful concept (indirect, incomplete) for making statements about movements in the external value of financial assets denominated in local currency. It is just one of several bad theories for predicting the unpredictable (short term FX movements)..
As to Rogoff’s implied speculation on the relative affordability of government support packages in the US and Europe (who has deeper pockets) It is an interesting aspect deserving of much study, but the key determinant of policy affordibility is to what extent policy has a high political cost. If financial markets intervention would be “a ponds perdu” . More or less like an altruistic war, expensive but no financial benefit allowing for cost recovery, we would be talking abou truly enormous amounts that would have to be borrowed AND repaid out of future taxation. In this case the US is in a position to reignite some form of housing appreciation plus wage inflation which would repy all those bad mortgages except a few.
Europe doe not have the same problems (because the European financial institutions with mortgage problems are usually investors in US mortgages (UK institutions more complex, but that is less than 15% of the EU, and Polish etc ones possibly similar). Hence, European institutions will benefit from US efforts to deal with the housing finance problem though inflation and residential appreciation. It is probably more difficult for national EUgovernments to support local firms, given EU competition policy, but these firms (a) will need little support if the US domestic efforts are successful and (b) there are plenty of consolidation opportunities and srong consolidators left in the EU so the main victims seem to be shareholders. The deeper US pockets are pretty irrelevant, until there is a housing crisis in mainland EU as well, and that appears to be a very local affair (Spain) and typically in countries with extremely strong banks and little securitization.
As usual, the devil is in the detail.
yes, the creditors are shackled to a corpse, but the corpse may have little choice but to go in the direction the creditors choose. in a contribution months ago which elicited no response – i asked if the chinese ( representing the creditors, or the non-supine ones ) needed to dump the dollar to radically change the global situation, or merely to hint that they were getting close to it.
how much of the fannie / freddie bailout was to avoid offence to the chinese ?
i also have an intuitive mental picture of the tendency of money to ‘go home’ in uncertain times. a black hole of wealth destruction at home, plus falling asset prices, plus bottom fishing, plus dollars invested abroad fleeing home to patch the holes in sinking investment strategies, plus a general ‘rabbit in the headlights’ freeze up . . . . . to me it spells a strengthening dollar ( depends against what, of course ) in a growing deflationary slump.
the high oil price / emergent nations growing strongly / helicoptered dollar / military expansion / hockey mom economy . . . . is a scenario from the fading family album.
gillies:
THe Chinese and russians tried to go it alone, adn they both had hard market crashes.
This nonsense about their gov buying stock on the markets: are you kidding me??? They had NO backstop to a deflationary spiral.
No, they buckled and are financing our ABS’ and maybe even consumer debt again. They are not nearly as strong as they think they are!
Btw, why is Russia so friendly again? What happened? They want to make nice-nice with Georgia?!
TM: The Anglo capitalism of the 20th century has historically proved to be the best system.
twofish: Doesn’t look that great right now.
Compared to what? Communism? The only place communism exists in the world as an economic philosophy is North Korea. Not exactly a paradise, is it? In many ways, today’s China is actually more capitalist than the US. The problem with the US isn’t too much capitalism – it’s not enough capitalism.
Also, spare me the bromides about China’s amazing economic management. If the US were a technologically backward country and had 1/10 China’s wages and access to a wide-open (and rich) Chinese market, and all the technology it wanted to copy, it would be growing at double-digit rates, too.
The reference to how Anglo capitalism doesn’t look so hot right now is literally true but about as useful as the response “you are now sitting in your car” to a passing motorist’s question “where am I?”. Compared to what? If the depths of the Great Depression were about as low as Anglo capitalism could take us, I’ll take that any day over the tens of millions of dead during Chinese communism’s Great Leap Forward and the Great Proletariat Cultural Revolution.
FG Says: “I agree with DC: I’m an engineer and work in the US. I’m not American (European). 80% of the engineers around me are not Americans either. Many are going back to their home countries for better opportunities.”
FG, Don’t you realize that it is because of you and the rest of your H1B buddies that so many American engineers have been put out of work. We have been threaten with losing our severance pay if we don’t train our foreign replacements like you. Again, this is all the result of currency manipulation.
aim: “Again, this is all the result of currency manipulation.”
That’s the currency manipulation that we enable by running huge deficits, you mean?
The Yen carry trade has been a strong temporary support under US financial assets. At the private level one sells Yen and Buys US dollar in an arb play on interest rates. Since Japan wishes a cheaper Yen it works. One can track daily changes in Yen/$ cross with SP500 directional change with significance.
I was wondering how this would flow into the TIC since Japan seems to be a net seller of US debt.
Ian says: That’s the currency manipulation that we enable by running huge deficits, you mean?
Are you talking US trade or budget deficits? As I see it, currency manipulation is the root cause of the trade deficit. Many Foreign goods are artificially cheap because of currency manipulation. So American consumers buy the currency manipulators product rather than a US made product eventually putting any US competition out of business. American consumers are then forced to buy foreign made goods because there is no US alternative. Currency Manipulation has kept the US hooked on foreign oil, which is has most recently been the biggest contributor to the trade deficit.
aim: “As I see it, currency manipulation is the root cause of the trade deficit”
Uhuh. And how is the currency manipulated?
Ian, Currency manipulating countries maintain a weak currency and don’t allow their exchange rates to adjust based on their GDP growth. In other words, a country’s exchange rate needs to reflect its economic health.
Yes yes, and what technique do they use to accomplish this?
Ian Hurst,
I explain how “currency manipulation” works in my blog at: http://reservedplace.blogspot.com/2008/09/mad-about-mercantilism.html
Note, however, that I conclude that it should do the US a favour. I certainly do not think that currency policies explain the US dependence on foreign oil. I am sure that, at present oil prices, US oil reserves are exploited as much as environmental regulations allow, regardless of the value of the dollar.
Thanks, Rebel.
Though I don’t presume to understand this issue as well as most here, my question to aim was rhetorical. I have heard all over the place that the Chinese peg has US industry at a disadvantage. And I have heard all around that China maintains this peg through the acquisition of US debt and whatnot. And this is all interesting stuff up to here.
But the other thing I hear all over the place, and what really seems to drive me crazy, is that we can blame China and only China for this peg of theirs–as if we do not sell them bonds of our own free will; as if we do not choose our own spending; as if we do not choose our own tax rates.
Every time I read somebody saying, “blame only China”, I just want to reply, “grow up!” It seems to me–and please correct me where I’m wrong–how can somebody fault just China for its peg, when the financial policies of the US government itself facilitate it?
Ian Hurst,
I agree. China buys bonds which the US offers for sale to allcomers. It is true that China denies the US the opportunity to fight back by buying Chinese assets in the same way, but even where this is possible, as in the case of Japan, the Americans have never done this. That would be to save instead of consume, and America has not been up for that! You might also appreciate another post of mine in which I explain what the US might have done with the capital inflows from the currency peggers: http://reservedplace.blogspot.com/2008/04/us-economic-policy-shot-in-foot-2.html
Rebel,
Thanks again. I enjoyed both of your posts (in fact I’d run across one of them before, now that I’m thinking about it), and I agree with your implication that the root of the USA’s recent problems is a failure of responsibility at a number of levels. And I think that’s the most important thing to keep in mind here – that you cannot blame some one else for your own choices.
Rebel, What you are suggesting is impractical. The US always needs to have Treasuries available to sell. It provides safety when investors want to get out of the stock market. What do you expect the US treasury to do? Start checking buyers nationalities? Then what? Tell the the Chinese buyer that he can’t buy anymore this year? Or worse that I as an American can’t buy any Savings Bonds because the Chinese Government bought them all.
aim,
I am suggesting that the US should have sold more treasuries into the demand from China, and, in a form of asset-liability matching, either saved the proceeds in the form of building its own reserves, or invested them in infrastructure. As it was, the US state actually reduced the supply of treasuries, partly through buybacks, and (of which I am most critical) by piling them up in the Fed’s System Open Market Account (SOMA). I hate to offer another of my posts to read, but this one covers the effect of the SOMA:
http://reservedplace.blogspot.com/2008/01/us-economic-policy-shot-in-foot-1-soma.html
I believe that a significant contribution to the present problems of the US has been its dogmatic attitude to the role of the state in the economy (and no, I am not a left winger; I did vote for Mrs Thatcher!). What more appropriate way to deal with official capital inflows into government bonds than with a government programme? And how ironic that, perhaps as a result of under-intervention, the US now looks like undergoing a massive increase in the role of the state.
I am planning to post more on how to deal with reserves capital inflows in future weeks. If you would be interested, send me your email address and I will alert you when I do.
Rebel,
Sell more US treasuries (at a higher yield of course) to the Chinese? This would help to support their currency manipulation. No wonder the Fed did a buy back.