Brad Setser

Brad Setser: Follow the Money

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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 ops

    is that a devalued SDR looks like?
    they did take a nap. missed a few.
    not bad (for a price).
    anyway, welcome aboard.

  • Posted by tono

    Brad,

    If China begins to lend some of its huge dollar reserves as an alternative to the Fed and IMF, it will have to abandon its effective dollar peg? Perhaps the great engine of domestic Chinese growth we’ve all been expecting for years could come at a time when most other currencies are cheap. The prospect of export-fueled growth has certainly diminished yet the Chinese are just as keen to expand their political and economic influence.

  • Posted by bsetser

    lending dollars to the imf — or directly to emerging markets — is not all that different from switching from treasuries to agencies. it is a trade of one dollar denominated claim on the rest of the world for another (from china’s point of view).. i am leaving out the bop flows from the us to the emerging world if china switches from $ claims on the us to $ claims on the emerging world — but i am fairly sure that china could continue to peg to the $ even if it started to lend in $ to the emerging world.

  • Posted by Qingdao

    Sorry to be off topic, but I’m afraid you never will address this issue. I recently heard a lecture by Steve Dickinson of ChinaLawBlog argue that China will run out of coal in 6 (six!) years: 2014: No coal. He argues that Beijing is well aware of the problem. Because China gets 70-80% of its energy from coal, this seems to put the economic arguments into a very different perspective. By the way, he will give a lecture to the up-coming Dalian Conference in Chinese.

  • Posted by bsetser

    i am afraid that i am not an expert on coal –so you are right, it isn’t a topic that is likely to come up.

  • Posted by credulous_prole

    Qingdao:

    China isn’t low on coal: China has problems with rail infrastructure.

    There are huge coal deposits in mongolia that will soon be on-line.

    Be careful not to confuse an actual “shortage” with a supply-chain bottleneck.

    btw: China is on a tear building RR’s now…

  • Posted by Ape Man

    Dr. Setser,

    You say….

    lending dollars to the imf — or directly to emerging markets — is not all that different from switching from treasuries to agencies. it is a trade of one dollar denominated claim on the rest of the world for another (from china’s point of view)

    I am trying to figure out how this is true. For one thing, I don’t think I would count dollars owed to me by Pakistan as being the same as dollars owed to me by the US government.

    But I think that is a little beside your real point. More to the heart of your point (as I understand it) is the question of how easily China can truly move out of various asset classes.

    From my limited vantage point, it does not seem that China has had much luck shifting from agencies to treasuries. Given that spreads between the two are higher now then they were pre-crisis, it seems to me that somebody must have taken a loss. Indeed, if China marked to market, I would think that they would have taken quite large losses on agencies already.

    Of course, China does not need to mark to market. But if it wants to sell one class of assets to get another you have to take into account market price.

    Basically, I am wondering how you think China could sell agencies or treasuries to any degree with out countering the policy goals that lead to China buying those assets to begin with.

    Granted, treasuries are on the up swing so now would seem like a good time to sell. But I doubt that China can do so to any significant degree with out causing the bottom to drop out of the market.

  • Posted by soxfan

    Bravo to the Fed. We definitely all need more helicopter droppings, and to let the EM’s die on the vine because our banks imploded and can no longer finance them (or anybody else, for that matter) would have been pretty rotten.

    $120bn is small beer, but this is a big shift in policy, and can be expanded if need be. I’d say at least half of the folks in the market I talk to expected the U.S. to tell the EM world “sorry, you’re on your own.” So this was a significant surprise.

    Given all that, and the fact that the Fed has just printed up a fresh bash of Benjamins (approximately 1.08bn of them) with which to buy CP on Monday and tuesday alone, its a bit concerting that the Dollar is maintaining a bit of a bid today, and that stocks swooned into the close.

  • Posted by Twofish

    The decision not to lend to emerging nations was very explicitly a Chinese decision. Pakistan went to Beijing looking for funding, and Beijing to most people’s surprise said no. Something that is really important to emphasize is that China has no real interest in expanding it’s economic influence in the world, and it’s relations with other countries are purely “selfish.”

    There is also something of a “you broke it, you fix it mentality.” If Mexico, Brazil and South Korea had undergone currency crises because of things they had no control over, this would result in rather large amounts of anti-Americanism.

  • Posted by Twofish

    Also it seems logical that if the dollar is going to be the world’s currency, then the Federal Reserve should be the world’s central bank. I do think that this is one of those major historical decisions that seem rather trivial at the time but have huge ramifications.

    Looking at things historically, the use of the US Dollar as the world’s currency may continue regardless of the fate of the US as a global power. People were using the Spanish dollar as the standard global currency for centuries after Spain was no longer a major world power.

    The fact that stocks were quoted in 1/8′s until 1997 was because people divided the Spanish dollar into “pieces of eight”.

  • Posted by credulous_prole

    Twofish:

    Also it seems logical that if the dollar is going to be the world’s currency, then the Federal Reserve should be the world’s central bank. I do think that this is one of those major historical decisions that seem rather trivial at the time but have huge ramifications.

    That was the objective of this whole exericse!

    Now, let’s see how Schwarzman copes with a freshly emboldened IMF…

  • Posted by MTC

    “and all except Singapore are democracies”

    Singapore is not a democracy?

  • Posted by Howard Richman

    Could somebody explain exactly how these currency swaps work? Do they affect foreign exchange rates, are are they neutral regarding foreign exchange rates?

    Howard

  • Posted by Olkon

    yes, a historic decission, it’s a spit in the face of Russia and China with their large reserves, with today’s decission it is like saying, you don’t need reserves as long as you are a US ally. This is definitely a black day for those countries. I wonder what effect this will have on USD, as demand will now subside heavily and we have already seen the dollar losing up to 340 pips in Asian session,I think this is only the begininng

  • Posted by JSharap

    Singapore has a reserve of USD$200 billion and no major current account deficit. It needs a loan from IMF like Buffet needs a $1000/- lunch voucher.

    Gimmme a break!!

  • Posted by bsetser

    singapore was either included b/c it has a lot of banks that might need dollars, or as a signal regarding the kind of countries that the fed would support. i was a bit surprised to see it along side korea, mexico and brazil to be honest. i don’t tho think that singapore would meet most criteria for being considered a democracy — tho i am open to counter arguments.

  • Posted by bsetser

    the dollar’s fall presumably reflects the fact that the forced bid may potentially be removed from the market as there is now an alternative to buying $ spot to pay off maturing $ lines.

  • Posted by Cedric Regula

    Brad:

    My retail Forex site currency analysts are all still talking about interest rate differentials , and it being the big factor driving the dollar down. Also that Japan may cut, and we know that makes Mrs Watanabe feisty.

    But I’m willing to bet some Forex traders pick up on the significance of the Fed dollar deals, if not yet, soon.

    Something has been making the lesser foreign currencies perk up a bit the last couple days.

  • Posted by tono

    Longer term.. this alternative to buying $ spot depends on effectively inexhaustible swap lines, which in turn depend on an equally inexhaustible growth in the liability side of the Fed’s balance sheet. This could either be accomplished through outright money printing (which has not yet happened) or through an expansion of the treasury supplementary facility (TSF). TSF depends on foreign (chinese) willingness/capacity to continue to buy US treasuries, which must be finite.

    Either case, it seems like the mechanisms are in place that could bring about a much longer and deeper USD rout and maybe the end of BWII.

    Am I misunderstanding something?

  • Posted by Chidambaram

    Twofish:
    Also it seems logical that if the dollar is going to be the world’s currency, then the Federal Reserve should be the world’s central bank. I do think that this is one of those major historical decisions that seem rather trivial at the time but have huge ramifications.

    Twofish, please that I’ve already predicted a big rally in US equities and a major collapse of the USD against all major world currencies before the end of 2008.
    This prediction is based on simple stuff like
    Total Equity + Total Debt = Constant K

  • Posted by HZ

    Direct bilateral lending could be seen to have been done in return for favor (as in Russia) and would have higher risk in collection if things go badly. Doing through IMF it becomes a claim on IMF by China and of IMF to the borrowers, which makes defaulting harder since the offender will be defaulting on the whole world. I think China should do it through IMF, which seemed to be their expressed intention.

  • Posted by Cedric Regula

    tono:

    Looks to me like a definite possibility.

    The reason they are doing all these things, domestic and international, is the idea is to provide temporary relief for lack of liquidity and credit. Once everyone stops running for the same door, then in theory the swaps are reversed and the dollars go back into the non-inflationary fed vault to be burned at the Fed’s convenience.

    The question is when will everyone stop needing money?

    The swaps are safe enough since we hold foreign currency. But loans are a different story again.

  • Posted by Cedric Regula

    Looks like soon is very soon. Euro is exploding upward.

    Interest rate futures were predicting 25-50 bps from the Fed today, and 135-150bps from the ECB someday soon.

    So the Fed rate cut shouldn’t have surprised the pair that much.

    About the only thing that has fallen against the dollar is the yen, other than unusual things like BRICs, Brazil being the only gainer and the yuan seems to be moving in a trading range for some reason. Russia and India seem to only open at lunchtime and happy hour from the looks of the daily charts. Some of the smaller Asian charts look similar.

    So I guess we call this the flight from safety? “Increasing risk appetite” doesn’t seem to fit.

  • Posted by DavidHK

    How does the swap work?

    FED swaps N$ for M won from Korea. What would be the exchange rate? Today’s rate?

    After things settle down, and Koreans return those dollars for won, what would be the exchange rate? Does it fluctuate with the market rate, or does it stick to the original rate?

    Also, there are interest rate difference between Korean won and $. Is there interest rate swap involved?

  • Posted by df

    China is just next in line. Once demand for their goods drops due to loss in revenue + rise in price of chinese goods due to higher RMB, then china’s economy will implode and their overlending practices will appear.

  • Posted by Chidambaram

    Cedric, the horse is private speculative flows and regulatory announcements is the cart. Not the other way round.

    Total Debt + Total Equity = Constant K
    There isn’t any ‘credit crisis’.
    (Please see my blog post last night on the previous thread)

    The Korean Won collapsed recently not because of some mythical economic war in ‘enlightened self interest’; but because private speculators would have seen US dollar denominated loans in Korea maturing with Korea not having enough reserves as a situation which they can use to make a speculative bear run on the Won and make some money.

    If some private folks need to build up a huge speculative position funded in US dollars in Singapore territory, they will get it passed into the regulations, somehow or other, with or without some or the other dummy justifications.

    Brad, clearly you’ve never been to Singapore or China. It’s ok for Directors of XYZ External Policy to be confused about basic stuff like whether a particular country is a democracy or a theocracy or an autocracy.

    In a recent survey 20% of Americans struggled to find Earth on a map of the globe, so your record is still much much better than Joe’s.

  • Posted by ttnk

    See. It could provide one, IF applied.

    On this topic;

    I MF, a bit late are we?

    »No, no, you didn’t miss much. We’ve been having this mysterious intellectual crisis of some sort, but then we had a sudden appearance of reason. Now? Now, we’re at the stage where not to get too reasonable too fast would appear to be reasonable-enough. Yes, you’re just what was needed. Welcome. Indeed.»

    Some more on the same topic, saying Europe should be swapping euros to their EMs, Japan (and others at the could-be-AMF) yens to theirs and possibly all three to Russia, was NOT to dismantle the US dollar, the well known US supremacy, its status nor statute, nor any other ultra-macho-stuff, not even the IMF, BUT for exactly the same »reason« as FED jump-started to swap with Mexico.

    So yes, it’s still the RERs and still The pairs. And we have now the IMF.

    Now, on »loosing the grip«, a bit: Here’s a word on someone’s monetary policy. It will be blunt. For that, I excuse.

    When examined up closely, there seems to be no written mandate for them to be »the world bank«. Besides, we have one already. O yes, and another-one, with a different name. Also, no mandate is found to “let’s take-on all the foreign affairs policies at once«; there’s even no-one on »let’s do what, soon to be out of the business (this and that) asset managers, think we should, yaix, on TV!«.

    There is, on the other hand, one that’s called »price stability«. It means »the stability of the prices«. No need now getting into »what prices« and »which stability« questions and even more, add to that, the »into whose growth«-one.

    As now we’re nearing the ZIRP, the space does seem to run out on us, as -5,5% appears as not reasonable. So, here’s some reasonable-enough thoughts on »myths of the cycles« instead.

    There are exactly two ways of loosing the grip, a bit more.

    One of them two, other factors aside, has the potential of evaporating the fairies well known “ability to restart the cycles”, AFTER they finish settling/netting/disappearing all the Ds from a hole.

    The other one goes something like this: the price of providing “stability to the world – services” seemed clearly inflated to parts of the world. So those ones now do not appear to want to pay this price any longer (f.i. because on “services-received” they might – mistakenly – be using some Gaussian-based models). For the time being, they in fact want to shoulder some responsibility, but not sure how much exactly. They might reconsider though, if ability to repair the damage (to stability) is shown. So yes, this is in fact a transatlantic problem in the first place. But “transatlantic” got much too fiscal about This damage repairs, did it? And worse, then “it” went outside, while adding its costs, without asking-anyone first. So now IS THE TIME when it would not be considered unreasonable to some, that some NON-monetary AND(!) NON-fiscal repairs get done first, BEFORE we all get-on. If done, there will be a side-one; fairies could get-back the business, they do know something about.

    When options-considered. And the assumption: hats change does not in-itself equal the policy one.

    But then again, you could snowdrift some more. If that is what you`ll chose to chose, please pay some more attention on the “ceteris-paribus-stuff” next time around. Remember, it might be about time.

  • Posted by Qingdao

    credulous: thanks for the reply; hard to get anyone interested in this forlorn topic; but Mongolia only has about 100 billion m/tons total reserves; assuming it ALL goes to China, that adds another 6 years. And the point is NOT that there are or are not transportation bottlenecks (there are); but not much coal.

  • Posted by fatbrick

    Brad,

    Why do you say that “the curenncy needs are driven first and foremost by the needs of the emerging economies” ?

    This time, it is EU (G7) country that first got the swap line with Fed. The EM countries actually were affected by the developed countries’ crisis: western investors liquidated everything possible to get cash to save their own fates.

    For the IMF, does it never come to you that IMF has been a geopolitical tool since the first day? There are not much innovation about their crisis management. They just pour larger and larger amount of money on the crisis points. If you call that innovation…

  • Posted by DOR

    Singaporean banks are as likely to need a bailout as Lehman Brothers or JP Morgan. Take you pick . . .

    .

    While quarter-to-quarter annualized real GDP came in at slightly better than expected (-0.3%), real domestic demand, which discounts the positive effect of exports, fell sharply for the third quarter in a row. Domestic demand contracted 0.18% in Q-1 2008 (year-on-year), by 1.60% in Q-2 and by 2.38% in preliminary Q-3 data. To add to East Asian woes, real imports of merchandise contracted 3.64%, also the third quarter running. Private consumption also contracted, for the first time, by 0.04%.

  • Posted by DOR

    Take YOUR pick . . .

    (GDP data is USA)

  • Posted by mft

    To all attempting to predict which way the dollar and other currencies will go now: forget it, surely you know better!

    Twofish: that is truly the interesting question – what this all means in terms of strategic turning points in history. You made some good points there, the Spanish example also.

    A lot of people seem to think the rest of the world is kneeling there with folded hands praying for Bernanke to throw them a dollar swap line – like beggars outside the church in the middle ages. But I don’t it’s quite like that. The big boys in Europe etc. could just buy the dollars they need, and the little ones could go to the Chinese or others with big pockets (I wasn’t surprised about Pakistan/China, but I was surprised the Saudis didn’t help their coreligionists). And who suffers if all that happens, why, the USA of course, so it’s clear why Bernanke is being so generous.

    The question is, having turned on the tap, can he turn it off again? I fear not. So in the end, everyone is sitting on top of a really enormous pot of dollar cash, and we don’t really have a banking system, just a bank – the Fed. And then interest rates go to zero. What do we do with the cash then? No point in saving it any longer, so let’s spend it, but oh my, what happens then? Hyperinflation? I think this is the kind of thing that Marc Faber has been warning about.

  • Posted by DJC

    Prime Minister Wen Jiabao rejects Western demands to finance IMF

    http://www.businessweek.com/ap/financialnews/D944RDTO2.htm

    Chinese Premier Wen Jiabao appeared to snub Western calls, however, for Beijing to help boost the International Monetary Fund’s bailout pot for countries worst hit by the financial meltdown. Wen, who was speaking to prime ministers from the Shanghai Cooperation Organization, said that ensuring the security of China’s economy would be the country’s most important contribution toward global financial stability. Russia and China have used SCO to try to keep the West out of Central Asia.

    At Thursday’s meeting, Wen said China would consider issuing loans to members of the organization to ensure food security and support joint economic projects in the region. “Because of the increasing relevance of food security, China stands ready to assist SCO member organizations in the establishment of important technical facilities for agriculture,” Wen said.

    The global crisis has also prompted Moscow to ask China for loans to help top Russian energy companies pay their obligations to global lenders. The loans-for-shares deal currently being negotiated would oblige Russia to supply 15 million tons of oil a year to China in 2011-2030 in exchange for $25 billion in loans to the state-controlled Rosneft oil company and Transneft pipeline operator, Russian news reports said.

    Russian Prime Minister Vladimir Putin sounded an aggressive note at Thursday’s meeting, blaming “economic egoism” for precipitating the current crisis in a thinly veiled attack on the United States.

  • Posted by bsetser

    fatbrick — geopolitics has always been part of the imf. the us didn’t support an imf loan for the uk in 56 until the uk indicated it would withdraw from the suez. but there are still changes going on — the imf is going to lend more, with fewer conditions, that it did in 97/98.

    i agree that the driver of this crisis was liquidation by western banks looking to raise cash. that said, the fact that europeans got access to the swap lines but EMs didn’t added to the pressure/ increased the demands on EMs reserves; in my view that was a mistake, one that the fed has now corrected.

  • Posted by LB

    ttnk: please pay some more attention on the “ceteris-paribus-stuff” next time around…

    from The Philosophy of Mind by Brian Berkley & Peter Ludlow:

    http://tinyurl.com/5af6be

    p.s. in order to post this post, i had to add 0 and 0

  • Posted by LB

    sorry, had to pull the quote out from zeroland –

    “It is therefore surely no accident that hedged laws are typically — maybe always — not basic. On the one hand, it’s intrinsic to a law being hedged that is possible for its ceteris paribus conditions not to be satisfied.
    And, on the other hand, a standard way to account for the failure of a ceteris paribus condition is to point to the breakdown of an intervening mechanism.
    Thus, meandering rivers erode their outside banks ceteris paribus, but not when the river is chemically pure, and not when somebody has built a wall on the outside bank (not enough abrasion to overcome adhesion). In such cases, the ceteris paribus clause fails to be satisfied because an intervening mechanism fails to operate.
    By contrast, this strategy is unavailable in the case of nonbasic laws; basic laws don’t rely on mechanisms of implementation, so if they have exceptions that must be because they’re nondeterministic.”

  • Posted by charles

    “i don’t tho think that singapore would meet most criteria for being considered a democracy — tho i am open to counter arguments.”
    Singapore is no Iceland or Denmark or the US, but you were putting it “below”, for instance, Mexico, a country that had wide demonstrations because of suspected election fraud and in which personal safety is less than ideal. It seems a bit unfair to me, especially if one considers that Singapore completely blows Mexico, South Korea, Brazil or even the US in economic freedom terms.
    A characterization of Singapore could be the following : a fair election process that leads to a de facto one party rule dominated by a bureaucratic elite chosen on meritocratic terms, and a low confrontational culture of the judicial apparatus in regard to its relationship to executive power.
    Some say that this is not good enough for democracy, but this characterization applies remarkably well to Japan too, would you say that Japan is not a democracy ?

  • Posted by LB

    now that ‘conditionality’ has been relaxed (for the moment):

    is it perhaps now time to call again for passage of the 4th amendment, as it’s only been sitting around for 11 years now?
    http://imf.org/external/np/exr/facts/sdr.htm

    couldn’t this be the foundation of a new financing model?

    what about the Crockett Committee recommendations?

  • Posted by tg

    The USD will rise further. Swap lines are providing liquidity and postponing the problem. All the countries are hungry for the USD and no end can predicted in this process.
    Swap lines prohibiting the immediately collapse of foreign currencies and making slower the rise of the USD. However slow is relative in this case.

  • Posted by LB

    p.s. cedric – have you noticed the swiss franc lately? if not, do a look see of CHF v. USD/GBP/EUR.
    …strangely interesting…

  • Posted by credulous_prole

    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…

  • Posted by Twofish

    Chidam: Total Debt + Total Equity = Constant K

    This is totally false. Burn down your house without insurance and your equity drops. Squeeze lemons to make lemonade and your equity increases.

  • Posted by Twofish

    Charles: Some say that this is not good enough for democracy, but this characterization applies remarkably well to Japan too, would you say that Japan is not a democracy?

    On the other hand, if one considers Singapore a democracy, then starts becoming quite difficult to argue that the People’s Republic of China is not a democracy.

    This is more than academic since Singapore is frequently mentioned as a model of what the Communist Party wants to China to look like in twenty years. If the US argues that Singapore’s political system is “acceptable” then it becomes increasingly difficult for it to argue that China’s is “unacceptable.”

    And one other consequence that I’ve noticed is that since August, the number of voices in the United States that have argued that China has a political system that is somehow unacceptable and must be changed by whatever means necessary has basically disappeared.

  • Posted by DJC

    From Reuters,

    McCain and Obama political positions on China, Hawk and Hardline respectively.

    http://www.reuters.com/article/vcCandidateFeed7/idUSTP4380620081030

    TAIPEI (Reuters) – U.S. Republican presidential candidate John McCain would seek to defend Taiwan and play hard ball with China if he comes to office.

    McCain has said he would approve future arms sales to Taiwan, a topic that draws Beijing’s ire, including a controversial F-16 jet fighter package. Obama has been less explicit but Medeiros said he had not ruled out specific arms sales.

    Taiwan, McCain believes, deserves “meaningful participation” in the World Health Organisation and other international bodies dominated by China allies, which have blocked the island for decades, his foreign policy adviser Randy Schriver said.

    “What is the obstacle? It’s China,” Schriver told a video conference. “Sometimes, if a cause for freedom is worthy enough, you have to stand up despite China’s objections.”

    McCain has blasted Beijing over transparency, export safety and monetary policies, while Obama has said he would go tough on China over international trade disputes.

  • Posted by Cedric Regula

    DavidHK: “How do the swap lines work?”

    Haven’t been able to find any details in the recent press releases on the exact mechanics, but they could of course be easily hedged against currency risk and interest rate risk.

    Here’s an interesting article today about Korea. The announcement made the won go up 11% today(or last night).

    http://www.forbes.com/afxnewslimited/feeds/afx/2008/10/29/afx5623745.html

  • Posted by Rien Huizer

    As a former resident of Singapore, I would say that Singapore has top class, professional, government and is blessed with a population that appreciates that rather than go for cheap trinkets and populism. Or at least, they consent, which is all a government needs. Whatever democracy may mean, if it is to be something good, it should not stand in the way of good government. There are quite a few foreign detractors (some Malaysian probably) and whiners. But honestly, is there any less autocratic country in Asia where living standards are higher and -especially- Gini coefficients are better. Even Japan does not come close. We can all argue for ages what it is that democracy means -the classical greeks had interesting thoughts about this whilst practising slavery- but any organized state needs order. If I had the choice between democracy and good government (one of LKYs demogogical devices), I would probably choose a rest, but that is not the point here. Singaporeans have reasonalbe civil rights (compared to the neighbourhood, not to Sweden or Holland), similar to most Americans, and very good government (unlike most Americans, although states vary)

  • Posted by Chidambaram

    Brad:
    singapore was either included b/c it has a lot of banks that might need dollars, or as a signal regarding the kind of countries that the fed would support. i was a bit surprised to see it along side korea, mexico and brazil to be honest. i don’t tho think that singapore would meet most criteria for being considered a democracy — tho i am open to counter arguments.
    October 30th, 2008 at 12:39 am

    Brad,
    Please try to understand that Singapore is very much a democracy. The Department of State does NOT indulge in close alliances with ‘their dictator’ in Singapore.
    Since you have never been to Singapore and since you’re a generally clueless person as far as geopolitics is concerned, State is unlikely to object to some ignorant international finance economist wondering how Singapore qualifies as a democracy.

    Now before understanding why Singapore is included in the list of swap line countries, we need to understand why Lehman didn’t need to be bailed out.

    I understood only today why Lehman didn’t need to be bailed out.

    This has caused a redical change in my prediction #2.
    My prediction #2 is now changed to say that USD will weaken a little bit against all major world currencies, which has already been happening since my prediction; but at the same time it will not “collapse” as I earlier predicted.
    Prediction #1 still stands and nobody will lose money by going long in equity in delivery on money that you don’t need to get back for some time.
    I’m expecting a major rally before the end of 2008.

  • Posted by Chidambaram

    Brad,
    It would be very useful to have your comment on the following analysis.
    Everybody is interested to know the future of equities and exchange rates.
    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.
    The mechanism seems to be:
    Disclose Notional loss and hide Notional Gain
    Use Notional Loss to justify Real Credit from Fed and Real Equity from Treasury.
    Use the real credit from Fed to settle Notional Gain
    (This settlement of notional gains can happen with a time gap, obviously)
    Secondly:
    Reduce Fed holdings of Treasuries while channeling liquid USD Forex reserves from world CBs to world private banks.
    i.e. Use a swap line to extend credit in USD Treasuries to foreign CB. Accumulate Forex in the Swap line.
    Foreign CB gets US treasuries into its books in exchange for its own currency. The Treasuries can be held against liquid USD credits to private banks.
    Can a swap work this way?
    Liquid USD credits to foreign private banks from the foreign CBs come back into the books of US financial institutions as real dollars.
    These amounts can also be used to settle notional gains sitting in hidden books.
    Example:
    AIG has huge short CDS positions which caused a potential notional loss. 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.
    Now real tax payer dollars are sitting on the books of those other Financial Institutions to be used for settlement of any further real or notional gains.

  • 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. :P

    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… :D

  • 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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