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At this rate the world’s financial architecture will have been remade before November 15th

by Brad Setser
October 29, 2008

Today the Federal Reserve indicated that it would swap US dollars for Brazilian real, Korean won, Mexican pesos and Singapore dollars — effectively allowing a select group of emerging economies to borrow dollars on terms similar to those available to the G-10 economies. Or almost similar terms. The G-10 central banks can currently borrow dollars from the Fed without limit; the four selected emerging market central banks can only borrow $30 billion each. But $120 billion is real money — and if need be, the the size of these swap lines conceivably could be increased.

This move goes some way toward breaking down the line between the G-7 (really G-10) economies and emerging economies that emerged after the G-7 countries guaranteed that systemically important financial institutions in their economies wouldn’t be allowed to fail and the Fed expanded the scale of the swap lines available to European economies whose banks had a large need for dollars. Those moves reduced the risk of lending to another bank in the G-7 (or G-10), but increased the (relative) risk of lending to a bank outside the G-10. German banks needing dollars could get dollars from the ECB, which could get dollars from the Fed. Korean banks had no such luck.

Change has come to the IMF as well. The IMF used to be in the business of providing tranched, conditional loans. And for a long-time the stated goal of fund policy was to return to the funds traditional lending limits (for geeks, 100% of quota in a year, 300% of quota over the life of the program). Now it is willing to lend to some countries unconditionally. And to provide up to 500% of quota upfront. Today’s IMF press release:

The new facility, approved by the IMF’s Executive Board on October 28, comes with no conditions attached once a loan has been approved and offers large upfront financing to help countries restore confidence and combat financial contagion.

“Exceptional times call for an exceptional response,” said IMF Managing Director Dominique Strauss-Kahn. “The Fund is responding quickly and flexibly to requests for financing. We are offering some countries substantial resources, with conditions based only on measures absolutely necessary to get past the crisis and to restore a viable external position,” he said.

That’s change. There was a time when it was fairly standard to argue that the financing that the Fund provided was almost incidental to the success of a Fund program. The conditions were what really mattered. Now, for at least a subset of countries, the Fund thinks all that really matters is money.

The Fund cannot be a true global lender of last resort so long as it only has $200 billion to lend. Arend Kapteyn of Deutsche Bank noted recently that emerging markets have about $1.3 trillion in short-term external debt (with over $800b owned by emerging market banks) — a sum that far exceeds the Fund’s resources. But even if its lending is constrained, the Fund can provide financing in way that resemble the financing made available by a traditional lender of last resort.

That is the right move. I agree with Dani Rodrik. The scale of the current crisis demands innovation.

There are also a set of countries that need more than money — as current account deficits that could easily be financed when leverage was readily available and leveraged players sought out risk are not going to be financed in today’s environment. That requires adjustment, not just financing. Deciding who belongs where will be a challenge. Demand for unconditional financing likely will exceed supply … in part because some demand will come from countries that need conditional financing.

One other point, or perhaps two — on the potential geopolitics of today’s moves.

First, all the countries that got access to the Fed’s swap lines are US allies, and all except Singapore are democracies. Russia may be part of the G-8 but it is outside of this club.

Second, it has been fashionable to argue that the crisis would increase China’s financial influence — as China sits on a ton of foreign exchange and potentially offered an alternative source of foreign currency liquidity. Indeed, China seems keen on doing a deal with Russia that would help Russian state-owned energy firms raise foreign exchange to help cover their maturing external debts — and the in the process, help reduce the drain on the government of Russia’s foreign exchange reserves.

But so far the crisis hasn’t had that effect — in part because the US and Europe have moved quickly (by the standards of governments) to help a broad range of countries meet their foreign currency needs. That was driven first and foremost by the needs of the emerging economies — and the ripple effect their deepening trouble would have on the US and Europe. But I wonder if the possibility that institutions like the IMF could be bypassed if they didn’t respond more quickly and creatively than in the past didn’t help to spur the recent set of policy changes. Those in the IMF’s Executive Board who normally would object to unconditional lending didn’t block the new short-term lending facility — perhaps at least in part because of recognition that the IMF potentially isn’t the only game in town (or in the world).

China’s rise, in effect, contributed to the a change in the political climate that helped to lift some of the political constraints that in the past limited the IMF’s scope.

I certainly didn’t anticipate this. Three months ago I was among those thinking that the rise of the emerging world’s reserves would reduce the IMF’s future relevance.

85 Comments

  • Posted by Twofish

    Chidambaram says: Everybody is interested to know the future of equities and exchange rates.

    And people that understand the markets realize that there is a limit to which you can predict the future. Part of the problem is that people make lots of money saying “I know something” when in fact sometimes the valuable piece of information is “I don’t know.”

    Chidambaram says: What I discovered today is that bulks of Lehman’s notional losses were palmed off on Taxpayer funded public sector banks in Germany and elsewhere.

    No. Not notational losses. German Landsbanks were major purchasers of mortgage backed CDO’s which they used as reserve capital. They could use that as reserve capital, because they were liquid and AAA-rated. So when the mortgage market started to go bad, Lehman had to make good on its contracts to make up for the losses on those securities. Which is one reason Lehman went under.

    Once Lehman went under, I’m sure that a lot of those banks had CDS’s with AIG, and a lot of the bailout money to AIG likely went to German banks to make up for those losses.

    Chidambaram says: AIG has huge short CDS positions which caused a potential notional loss.

    No. AIG had huge short CDS positions which caused an actual real loss when Lehman went under.

    Chidambaram says: Other Financial Institutions made collateral calls against the AIG CDS positions. Fed credit in real USD to AIG flowed to meet the CDS collateral calls.

    No. As far as I can tell collateral had nothing to do with any of this. AIG seemed to have sold contracts that sunk it.

    The fact that the Fed has pumped $100 billion into AIG at 11% seems to illustrate that the situation was quite bad.

  • Posted by Chidambaram

    Credulous:

    I’m not convinced China is doing anything other than jawbone: they want access to US markets, and they’re just trying to hit a few singles and doubles before the Big Inning at the G20…

    Thanks a ton for this. It’s what made me figure out how much of jawboning might be actually going all around the system.

    e.g.
    The German FM suddenly declared to their Parliament that the whole crisis is “An American Problem’ and that the US will now lose its dominant position.

    Merkel, Sarkosy, Brown and others claimed that they were the ones who’d initiated a global summit.

    I rapidly began reasoning that the talks might be USD vs EUR talks.

    In reality all these crooked policy makers have come together to get billions in tax payer dollars paid out into private financial institutions under the CREDIT CRISIS hat.

    Hats are already changing in the market. Time was when the market was ingoring all positive news. Today the market was calm and rose slightly despite news of shrinking GDP in Q3.

  • Posted by Chidambaram

    Twofish:
    German Landsbanks were major purchasers of mortgage backed CDO’s which they used as reserve capital. They could use that as reserve capital, because they were liquid and AAA-rated. So when the mortgage market started to go bad, Lehman had to make good on its contracts to make up for the losses on those securities. Which is one reason Lehman went under.

    Twofish, nobody could have easily found out how only Lehman went bust on its own while everyone else was declared to be too big to fail and bailed out with Trillions of taxpayer credits.
    It could be true that the German taxpayer funded banks were buying CDOs with huge losses in them hectically from Lehman and piling them up in their AAA rated capital reserve.
    What actually happened is that one of the banks was caught due to a technical error they made while wiring money to Lehman. Even after Lehman went up to the soapbox and declared bankruptcy on Sept 15; it was found that some $400 million plus of a Bavarian bank’s money was stuck in process.
    Everybody wanted to know how this money was being wired to an American bank which is already bankrupt.
    They blamed it on a big Bavarian minister who resigned.
    The ruse was that the Lehman losses were dumped on taxpayers and Lehman was allowed to collapse. Then everybody wrote reports like the Bank of England’s report where the collapse of this gigantic entity was referred to as one big reason for the global collapse. It also made people think about stuff like what would happen if their neighborhood bank branch suddenly disappeared.

  • Posted by gillies

    “And people that understand the markets realize that there is a limit to which you can predict the future.”

    and you cannot predict the future of (e g) the dow jones index because the index is already the prediction.

  • Posted by moldbug

    Rien, it’s nice to see someone put in a good word for Singapore. And, here in the US, can we forget what George Wallace said about the difference between Republicans and Democrats? Singapore, China and the US have more in common than any of their regimes would like us to believe.

    My worry about these swap lines is that the countries which accept them have compromised their monetary sovereignty. If there is a new “line” in the world, it is between the US and its satellites, and Russia, China, Iran, Venezuela, etc – none of which will either be offered or accept a swap line any time soon.

    Of course, perhaps this division is not so new. It’s kind of neat how these monetary events make it unambiguous, though: the world consists of the US, regimes that have a swap line with the US, regimes that don’t have one but want one, and regimes that don’t want one. Two bits of state, and assigning them is not difficult. Modern history just got a little dose of green fluorescent protein.

    Basically what a swap line, or any similar policy, creates is a dependency relationship: an invisible point of pressure which Washington can lean on at any time, as hard as it wants, to make the satellite do what it wants. Think Dulles and Eden at Suez. Of course there are many such pressure points already, but this is a particularly strong one. State will not be long in learning to use it.

  • Posted by pgmf

    Brad – Is there a post that summarizes your view of the capital inflows into the US broken out by private/public for the past few years?

  • Posted by Chidambaram

    pgmf: Please have a look at the TIC data in Brad’s blog titled ‘The August Dollar rally was not supported by underlying demand for US assets “…

  • Posted by Chidambaram

    Brad said there the TIC data might be off in terms of public flows vs private flows. More private flows might be bucketed there as private flows.

  • Posted by Chidambaram

    Moldbug: It’s kind of neat how these monetary events make it unambiguous, though: the world consists of the US, regimes that have a swap line with the US, regimes that don’t have one but want one, and regimes that don’t want one. Two bits of state, and assigning them is not difficult. Modern history just got a little dose of green fluorescent protein.

    Moldbug could you please share what it implies in your opinion for the strength of the US Dollar vs major world currencies.

    1) Does the flourescence imply that there isn’t a USD vs EUR pricing of commodities discussion on the anvil?

    2) How far will denomination of commodity trade in currencies chosen from bilateral negotiation impact the USD strength?
    e.g. what do you think of Russian oil exports to China priced in currency other than USD?

  • Posted by Dwight

    Just as the pricing behavior of a monopolist is tempered by the existence of a potential entrant into the market, the IMF’s ability to unilaterally dictate the terms of assistance has been diminished by the rise of potential alternatives. The Japanese public comment earlier in the week, expressing concern that Russia or China would bilaterally asert themselves was perceptive. We have all been so focused on the importance and consequences of the U.S trade imbalance and the financing thereof in dollars by our trading partners that insufficient thought has been given to the geopolitical power those reserves will convey, for the foreseeable future, on their holders.
    Interesting times . . .

  • Posted by john

    http://www.MortgageWidgets.org Get your free mortgage calculator widget which will allow you to calculate a mortgage payment, get an amortization schedule, and get a real time news feed on either real estate or mortgage news. Embed in your blog or website free.

  • Posted by credulous_prole

    Chimba:

    Thanks =) Check out my blog, if you deign to do so. 😛

    Dwight:

    This whole confrontation is about exactly that: concessions. China wants to win meaningful concessions. Recall Paulson’s abortive trip to China in March: they demanded 6-axis manu tech in exchange for bailout money.

    Now, they’re asking if they need to kneel or not… 😀

  • Posted by moldbug

    Chid, I really have no idea. My personal views of commodity trading are pretty close to bsetser’s. And knowing that the system is unstable does not exactly enable one to predict it!

  • Posted by DOR

    Charles,
    Singapore’s political model looks very much like that of Japan, but only up to the point where the LDP lost power (mid-1993). After that, the similarity ends.

    Twofish,
    Let’s not forget what Deng Xiaoping said to Lee Kwan-yew when the latter offered some (unsolicited) advice on how to run China:
    DXP: “Thank you, Prime Minister Lee. If I ever run for mayor of Beijing I shall certainly heed your advice.”

    Rien Huizer,
    As a frequent visitor to Singapore, I have to agree with your description. But, here in Hong Kong we consider Singapore to be a nice effort with almost as much success as we enjoy under our “high degree of autonomy.” After all, our parliament has a very vocal opposition!

  • Posted by bsetser

    I did a series of posts on private v official capital flows in August; or google setser and TIC or Setser and Treasury survey and you should get a representative sample of my views — as noted, i strongly believe official inflows are understated. this is for 2 reasons: a) the survey data consistently revises official inflows up and b) the growth in the fed’s custodial holdings often exceeds reported official inflows. plus the SWF flows from the Gulf generally come from private fund managers managing funds for the gulf sov. funds, so they never appear as “official” — and in some sense they aren’t as the fund manager is private even if the ultimate source of funds is official.

  • Posted by adiemuso

    Brad,

    Singapore is a democracy. We have elections too. Anyone who is capable or qualified can run for office.

    It is just a fact, sadly so, that our “opposition” is not up to standards, be it locally or globally. If you have been following Singaporean politics, you will be appalled by the levels/standards of our opposition.

    Though our goverment is dominated by the the People’s Action party (PAP), it is so by merits and not thru any undemocratic means. They were voted in. Just like how the US votes in their Democratic or Republican President.

    With all due respect, US and many other democratic countries are lucky to have good men and women in both ruling and opposition parties, apparently Singapore does not.

    I have to clarify that I am a true blue Singaporean. Though the PAP Government policies do not go entirely well with me but that is the next best party that we have.

    Call me or my fellow Singaporeans pragmatic or practical, we do not vote in a party to give them a chance to rule and perhaps ruin our future. No sensible man or woman would do that. Would you? Would your fellow country man vote for President Bush and send him back to office again if he was still eligible?

    My apologies to all for the off topic comments..anyway good work Brad..your analysis on Monetary flows is always excellent despite your slightly biased views though..

  • Posted by Twofish

    Chidambaram responds: Twofish, nobody could have easily found out how only Lehman went bust on its own while everyone else was declared to be too big to fail and bailed out with Trillions of taxpayer credits. It could be true that the German taxpayer funded banks were buying CDOs with huge losses in them hectically from Lehman and piling them up in their AAA rated capital reserve.

    The stuff about German Landesbanks being major purchasers of CDO’s is something that everyone knew about. Why did German banks buy CDO’s when they knew they would lose money on them. Well, it has something to do with the fact that when they bought the CDO’s they didn’t know that the mortgage market in the US would collapse, that Lehman would collapse, and that AIG would nearly collapse. If they did, they would have done something else.

    People can’t predict the future. People also can’t know exactly what would have happened had another course of action been taken. The night before Lehman collapsed, no one knew exactly what happened if Lehman went bankrupt, and I bet that thirty years from now people will *still* be arguing over whether it was a good decision or not.

    Chidambaram responds: The ruse was that the Lehman losses were dumped on taxpayers and Lehman was allowed to collapse.

    There was no *ruse*. Once you let Lehman collapse then you start having a chain reaction of events which generated huge losses that had to be covered by someone, and Lehman’s collapse was a consequence that you had this economic bubble based on false house prices, and once you had a real revaluation, then something bad had to happen.

    The notion that you have that there is a fixed supply of wealth in the world is just wrong. The amount of wealth in the world is a quantity that constantly changes in unpredictable ways. If any human being can predict the future of house prices or stock prices, that person is going to get very wealthy, very quickly, but we live in a world in which the future is unpredictable. I don’t know what is going to happen. Paulson doesn’t know. No one knows.

  • Posted by Twofish

    My personal view is that democracy is too vague and emotionally charged to really use in a discussion. Singapore isn’t a multi-party liberal democracy, but I don’t think that is a bad thing. If the system of government in Singapore works, then it really doesn’t matter to me what it is.

    As far as qualified people in opposition parties there is a “chicken and egg” situation that you are starting to see in mainland China. The problem is that unless there is some fundamentally ethnic or ideological issue, once one party becomes dominant, then no one competent starts working for the opposition. This is happening in mainland China, since pretty much every bright, talented young college graduate who wants to get involved in politics ends up working for the Communist Party rather than against it. Over time, this “talent leakage” tends to destroy the opposition, since you have a cycle in which an incompetent opposition causes competent people to defect over the the ruling party.

    As the opposition weakens, the regime can often become more liberal because there is less chance that they might actually lose power. When the Chinese Communist Party looks at what its future looks like, the Singapore People’s Action Party, the Japanese Liberal Democratic Party, or even the British Labour Party are names that often get mentioned for what to do, and the Communist Party of the Soviet Union are names that get mentioned for what not to do.

  • Posted by Twofish

    You can define democracy in a lot of ways, and it’s possible to define democracy in a way that Singapore ends up being a democracy. The trouble is that it is really quite hard to define democracy in a way so that Singapore is a democracy and the People’s Republic of China is not.

    The PRC does have contested elections, and from time to time people not approved by the party win them, and the laws on the books regarding political dissident and detention that Singapore has are far harsher than anything the PRC has, although Singapore uses those laws much less frequently. And also, there is one area of the People’s Republic of China that is a multi-party liberal democracy (namely Hong Kong). One point that is often missed is that Hong Kong is as much a part of the People’s Republic of China as Shanghai is.

    The basic issue is that if the United States says that Singapore has an “acceptable” form of government, then I don’t see much basis for somehow saying that the PRC has a form that is “unacceptable.”

  • Posted by bsetser

    the economist went to some effort to evaluate how democratic various countries are (the publish a democracy index). no doubt their methodology can be challenged. but i was still pleased to see that brazil (which elected lula — a rather large political change), Korea (which elected DJ, also a large change) and Mexico (Fox = not PRI i think) all ranked higher than Singapore. Singapore fell just below the cut off to be a “flawed democracy” and instead was labeled a mixed system.

  • Posted by DavidHK

    Please correct me if I’m wrong. These swap arrangements are basically loans of US dollars to foreign central banks, with a certain amount of the receiptor’s (foreign) currency hold as collatoral. The FED is unlikely to spend these collatorals on anything, which will just sit there. The receiptor country will spend the dolloars to support their local currency or stock market or economy.

    In the bank resecue, US is using its sovereign creditworth to save financial institutions. The currency swap is another case of using US severeign creditworth, albeit, to save emerging economies.

    It’s a nice thing for the FED to do. The risk is only that FED may not get back those dollars, when the receiptor country messes up its rescueing efforts and economy. But even in that case, it would probably only delay the return of the loan, unless this country sinks into civil war or some unforseeable disaster. Actually, the risks involved in such swaps are probably lower than rescueing AIG/Fanny/Freddie/banks.

    It shows another big advantage of reserve currency. Even at a time when treasuries are sold in large quantities, US still has enough creditworth to save other countries. They will be grateful, and in the long run will contribute to American strategical advantages.

    I don’t see much downside to such operations, as long as the receiptor countries are carefully selected, not upon political ideaology, but on economic/financial soundness.

    The debate on whether Singapore is a democracy or not is moot. Singapore is in because its finance is well managed and it occupies an important strategic position. Pakistan is definitely out, since it’s too unstable, despite the fact that it is strategically important and it has democratic elections. Indoneisia, Argentina, …, will be judged case by case, which shall force them to mind their behaviors.

    You guys are so negative. In this case, FED is being innovative and very smart.

  • Posted by adiemuso

    Twofish,

    I agree with you. It doesnt really matters if Singapore is defined or classified as a “democracy” or “mixed” or whatever.

    Like Mao said, “Black cat, White cat, as long as it catches mice, its a good cat.”

    Put in context, as long as the government is efficient and generally free from corruption, it should be in office.

    As for the difference between PRC and Singapore, i guess the historical and ideological basis for the two government/parties play a significant part about the stance US is taking. Accepting PRC’s way is as good as embracing Communism. Though in my opinion, modern Communist China is very different from what it was used to be.

  • Posted by Rien Huizer

    Kids,

    Interesting but nonsensical discussions. Twofish’s remark about unpredictability of asset prices is somewhat exaggerated (unpredictaility in this case is perhaps something like democracy: a word that has meaning only in sofar as there is a consensus between reader and writer about that meaning) but to the point. However, our economy is more than just a machine consisting of components endowed with rationality, perfect foresight and devoid of transaction costs. Despite the fact that no one will will pass basic finance course without submitting to some form of the efficient markets hypothesis, people gamble on houses, stocks and horses, as well as offspring and crossing the street. The thing is that people like to believe a few irrational things: (1) that they can both invest and borrow cheaper than the market (i.e. an implied negative spread for the service providers) (2) that there exists an affordable expertise that can make them rich, residing in financial advisers and investment managers (i.e. the ones that passed the finance exam). (3) that if things “unexpectedly” go wrong, someone else will pick up the tab. This has led to a very long stretch of personal financial success for some pretty rational people..

    Even if the governments around the world do not use this opportunity to demystify finance and clearly put buying individual stocks for short term gain (not to mention using leverage to do so) into the same box as buying lottery tickets (i.e. a consumptive, recreational activity more likely to cost than to earn), most probably people will be a bit less optimistic about their personal luck.

  • Posted by Twofish

    bsetser responds: the economist went to some effort to evaluate how democratic various countries are (the publish a democracy index). no doubt their methodology can be challenged.

    There are a lot of “democracy indices” out there. Freedom House and the Heritage Foundation also have them. As long as we are talking about definitions of democracy, there really is no point in challenging those definitions. However, I would argue that the ranking of Mexico and Pakistan in a “democracy index” tells you a lot more about Freedom House and Heritage Foundation than it does about Mexico and Pakistan.

    One thing that I would be interested in is to take someone on the Chinese State Council, the Singapore Cabinet, and the US Department of State, and have them do a “democracy index” ranking of the nations of the world in order to figure out what someone on the State Council thinks of when they say democracy. It’s not obvious to me how they would rank Hungary, Brazil, Mexico, Pakistan, and Canada or if people would come up with similar rankings.

  • Posted by Chidambaram

    Twofish:
    Well, it has something to do with the fact that when they bought the CDO’s they didn’t know that the mortgage market in the US would collapse, that Lehman would collapse, and that AIG would nearly collapse. If they did, they would have done something else.

    So they were buying some stuff from Lehman, which they thought would be profitable for German workers, and they had this $400 + million pending in a wire transfer on September 15???
    Whoever can predict the future, anyway?

  • Posted by fatbrick

    Does the question that Singapore is or is not a democratic country really matter here?

    There are more than a hundred democratic countries in the world. You do not see FED bail most of them out. This is about capital flow and its impact.

  • Posted by Chidambaram

    Twofish,
    I’ve been fortunate to meet and work with people from various different cuntries.
    I once met a banker from Saudi Arabia and we were discussing things and I was going on the thought that their Prince owns all the oil fields and doesn’t need to tax them.

    He kept on insisting that their Prince gets a good salary, and that’s about it … the oil fields are owned by ‘the people’.

    Similarly I’m amused how you’re able to insist that PoC is ‘a democracy’ by ‘vague standards’ because ‘democracy’ itself is ‘vaguely defined’.

  • Posted by DJC

    China to export 25 ARJ-21 Regional Jets to US Airline for $735 million

    http://www.chinadaily.com.cn/china/2008-10/31/content_7160444.htm

    China will sell 25 jets to a US company in a “breakthrough” deal that marks the country’s entry into the big-plane market dominated by European and US players.

    The Commercial Aircraft Corporation of China (CACC), which developed the ARJ21-700 regional aircraft independently, will sign a 5-billion-yuan ($735
    million) contract on Tuesday, the Guangzhou Daily said Thursday.

    The deal, to be inked on the opening day of the 7th China International Aviation and Aerospace Exhibition in Zhuhai, Guangdong province, proves China’s homemade aircraft have won international recognition, experts said Thursday.

    The ARJ21, an acronym for Advanced Regional Jet for the 21st Century, is China’s first homemade regional jet.

  • Posted by DJC

    On October 28, RIA Novosti reported that Russian prime minister Vladimir Putin suggested to China that the two countries use their own currencies in their bilateral trade, thus avoiding the use of the dollar. China’s prime Minister Wen Jiabao replied that strengthening bilateral relations is strategic.

    Russian president Dmitry Medvedev said that the “economic egoism” of America’s “unipolar vision of the world” is a ”dead-end policy.”

    China’s massive foreign exchange reserves and its strong position in manufacturing have given China the leadership role in Asia. The deputy prime minister of Thailand recently designated the Chinese yuan as “the rightful and anointed convertible currency of the world.”

    Normally, the Chinese are very circumspect in what they say, but on October 24 Reuters reported that the People’s Daily, the official government newspaper, in a front-page commentary accused the US of plundering “global wealth by exploiting the dollar’s dominance.” To correct this unacceptable situation, the commentary called for Asian and European countries to “banish the US dollar from their direct trade relations, relying only on their own currencies.” And this step, said the commentary, is merely a starting step in overthrowing dollar dominance.

    The Chinese are expressing other thoughts that would get the attention of a less deluded and arrogant American government. Zhou Jiangong, editor of the online publication, Chinastates.com, recently asked: “Why should China help the US to issue debt without end in the belief that the national credit of the US can expand without limit?”

    http://www.counterpunch.com/roberts10302008.html

  • Posted by Twofish

    Chidambaram responds: Similarly I’m amused how you’re able to insist that PoC is ‘a democracy’ by ‘vague standards’ because ‘democracy’ itself is ‘vaguely defined’

    I’m not insisting that the PRC is a democracy. Quite the opposite.

    When I use the term “democracy” I mean “liberal democracy.” This involves multi-party competitive elections in which the opposition parties have a strong influence on policy, the PRC outside of Hong Kong is not a “democracy”, neither is Singapore.

    The thing is that I don’t like into a definitional war so if you have a different definition of “democracy” I’m not going to spend too much time arguing whose definition is the correct one. If you argue that Singapore is a democracy then you are using a different definition than the one I use, which is fine as long as we both know what we are talking about.

    One way I do this is that my definition of democracy is “liberal democracy.” This makes it much easier to have a discussion, since most people from the PRC will agree that the PRC is not a “liberal democracy” just as if someone wants to argue that the PRC is a “socialist democracy” I’m not going to argue very much against it.

    My question is that if someone has a definition in which Singapore is a democracy, then it is very difficult for me to see how the PRC is not a democracy using that definition. On the other hand, it does seem that people who consider Singapore a democracy, don’t strongly object to the PRC also being considered a democracy.

  • Posted by Twofish

    To DJC: Don’t give people the impression that “the Chinese” believes or even “the Chinese government” believes something just because particular Chinese or particular Chinese within the government believe something. Chinese and Chinese officials disagree about policy as much as Americans and American officials do.

    Personally, I think it would be a bad idea for China to get too close to Russia (or to the United States). For China to have an independent foreign policy it means maintaining good relations with both Russia and the United States.

    In particular, if China gets too close to Russia this means supporting Russian activities in Georgia which would set a very, very bad precedent for the Taiwan issue. Also, other than oil and weapons, there is not very much that China can get from Russia.

  • Posted by Twofish

    Chidambaram responds: So they were buying some stuff from Lehman, which they thought would be profitable for German workers, and they had this $400 + million pending in a wire transfer on September 15???

    This is unrelated to the CDO, and is an example of operational risk. What happens in these swaps, is that bank 1 will wire over $400 million on day one, and the very next day bank 2 is obligated to wire back some amount say $390 million or $410 million on day two.

    If bank 2 goes bankrupt between days one and two, then you have a problem. What bank 1 should have done is to stop the wire transfer, but no one thought to do that…. Technically bank 1 is legally obligated to make the transfer, but if it doesn’t, then there isn’t that much bank 2 can do.

    Someone goofed up….

    This isn’t the first time this has happened.

  • Posted by DJC

    “there is not very much that China can get from Russia.”

    Russia supplies Oil, natural gas, uranium, but also industrial products like weapons and nuclear reactors.

    What does the US supply to China? Some Boeing aircraft, and tons of fiat paper US Dollars. High-tech US exports are mostly prohibited for export to China so the biggest US export to China is literally recycled garbage paper, and even more paper US dollars bills.

    At least Russia supplies China with raw material and industrial products of “real economic value”, whereas the US supplies China with fiat US dollar paper printed in unlimited quantity by Helicopter Ben Bernanke.

  • Posted by Beau Butts

    The IMF’s expansion of its lending facilities is welcome, but it is nowhere near adequate to the scope of the crisis. Additionally, because the new lending facility only comes into play when there is already a crisis, its ability to prevent panic and avoid destructive capital stampedes is limited.

    What the IMF needs to do is to deliver a massive general SDR allocation to ensure that all IMF members have enough reserves to meet their short term needs. Such a measure would both reassure the markets and simultaneously ensure that there would be time to put together a proper long term package for countries in trouble without worrying about how the troubled country would pay its import and sovereign debt bills. Considering the size of the crisis, an additional 500 billion SDR (roughly $750 billion) would go a long way towards ensuring the economic stability of the world financial system.

  • Posted by Twofish

    DJC: What does the US supply to China?

    Future Nobel Prize winners, CEO’s and members of the Politburo.

    DJC: High-tech US exports are mostly prohibited for export to China so the biggest US export to China is literally recycled garbage paper, and even more paper US dollars bills.

    And Russia will not sell China its latest military technology, and even what the US can sell China is better than what the Russians can offer.

    China ultimately needs to stand on its own and have world-class aerospace industries and not be dependent on Russia, the United States, or Europe. This requires a skilled workforce, and the US/UK is providing China with that, and Russia isn’t.

  • Posted by flow5

    “And people that understand the markets realize that there is a limit to which you can predict the future”

    “and you cannot predict the future of (e g) the dow jones index because the index is already the prediction”

    These statements seem like common sense – but they aren’t true. I called stock market bottoms in Oct 74, Oct 82, & Jun 84. I called the bottom in bonds Sept 81. I called the market fall in 87. It only took 1 trade to beat Robert Prechter in 84. (he had 200+ when he won a trading contest).

    I used bank debits. The cycles for real-gnp & inflation never vary (they’re always exactly the same). They are the same for legal reserves and bank debits.

    The FED discontinued the series. Almost no one at the FED used the debit series (Paul Spindt was an exception but he didn’t know how to construct a time series.

    We would never have gotten in this trouble using bank debits. That is the Holy Grail.

  • Posted by JSharap

    Twofish,

    China will soon get its hands on US weapons technology; all the jobless weapons researchers will be moving to Beijing to help pay off the USD 1.9 trillion dollar deficit. To make it faster to pay off the debt, just sell all the aircraft carriers and stealth fighters at one go!!

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