Secrets of SAFE, Part 1: Look to the UK to find some of China’s Treasuries and Agencies
Not everyone who read my earlier post on China’s flight from risky assets was convinced that a large share of the UK’s (net) Treasury purchases should be attributed to China.
Talk is cheap. Mine included.
In this case, though, my argument is supported by some real data work – work that I have done in conjunction with the CFR’s Arpana Pandey for a forthcoming working paper on Chinese financing of the US. The graphs — all derived from the Treasury’s TIC data — should speak for themselves. Let’s start with a plot of China’s holdings of Treasuries against the UK’s holdings of Treasuries — a chart that has been spiced up with the holdings of some other countries as well.
Three things jump out of the historical data: The UK’s holdings get revised down every June; China’s holdings get revised up every June; and in recent years, China rise accounts for a significant share of the UK’s fall.
To get a sense of what share of the downward adjustment in the UK’s holdings should be attributed to China I added the change in the UK’s holdings from the last survey (the data is revised in June because the US survey of foreign portfolio holdings is done then) to China’s holdings and plotted that sum against China’s reported holding. If Chinese end-demand accounts for most (net) purchases through the UK, the increase in China’s reported holdings when the survey comes out should bring China’s holdings up to the sum of China’s known holdings and the increase in the UK’s holdings. In 2005 and 2007 (and to a lesser extent in 2006) that is exactly what happened.
On the assumption that the share of the UK’s purchases that are reattributed to China is constant over the year, Arpana and I smoothed out the path of China’s purchases (that is the “adjusted Treasuries” line) so that there isn’t a big jump in June. And if I assume that China accounts for the same share of (net) purchases through the UK recently as it did from mid 2006 to mid 2007, it isn’t hard to get a rough estimate how many Treasuries China holds right now. Try $830 billion at the end of October, and no doubt more now.
That is well above the total reported by the US Treasury. But the Treasury’s data is almost certainly wrong, as it hasn’t been revised since June 2007 and the revisions recently have been large. We just don’t know for sure how far off it is.
The same technique, incidentally, can be used to estimate China’s holding of US Agency bonds. In the past, China has accounted for a higher share of (net) Agency purchases through London and Hong Kong than of (net) Treasury purchases through those financial centers.
My conclusion: China had around $830 billion of Treasuries at the end of October and around $595 billion of Agencies. That works out to around $1425 billion of Treasuries and Agencies. That is a lot – but remember that China had around $2 trillion in reserves at the end of October. And if you add in the non-reserve foreign assets of the PBoC, the CIC and the funds that SAFE/ the CIC transferred to the state banks as part of their recapitalization, China’s true foreign portfolio is probably around $2.4 trillion. $1.425 trillion Treasury and Agencies works out to about 60% of China’s total foreign portfolio. It is around 10% of the United States 2008 GDP – and around 35% of China’s likely 2008 GDP. Real money.
If anyone wants to challenge that estimate – especially a SAFE insider – please do. I cannot refine my estimates without (constructive) feedback.
And for that matter, if anyone who knows ADIA well wants to challenge the Setser/ Ziemba estimates of ADIA’s size and its 2008 losses, feel free. It is far easier to get a sense of what China is doing from the US data than to get a sense of what the Gulf is doing …
One big caveat: a time will come when the UK’s purchases long-term Treasury purchases will reflect demand from European rather than demand from Chinese investors. Past patterns cannot always be projected into the future. A lot of this analysis is implicitly based on a variable that I haven’t discussed: China’s reserve growth. If I didn’t know that China was adding large sums to its reserves I would have a lot less confidence in these estimates. There is an element of judgment that enters into these calculations.
And one plea: we would all know a lot more about global capital flows if the UK published their own version of the TIC data and did a survey or too of UK custodians. The UK could do a lot to increase the transparency of the global financial system on its own, without any lengthy global negotiations …
What would China and the U.K. do with all those Dollar reserves if they did not buy treasuries and Agencies?? 2-When they buy the treasuries , where do they get the dollars from? 3-What do they get when the treasuries mature? and if nobody wants treasuries, what do they do with the Dollars??
Paulson pushes to blame “savings glut”
by Jerome a Paris
In an interview with the FT:
“Paulson says crisis sown by imbalance
The US Treasury Secretary said that in the years leading up to the crisis, super-abundant savings from fast-growing emerging nations such as China and oil exporters – at a time of low inflation and booming trade and capital flows – put downward pressure on yields and risk spreads everywhere.
This, he said, laid the seeds of a global credit bubble that extended far beyond the US sub-prime mortgage market and has now burst with devastating consequences worldwide.”
“This argument – already advanced by a number of economists and largely endorsed by Federal Reserve chairman Ben Bernanke – suggests that the roots of the crisis do not simply lie in failures within the financial system.
It also implies that avoiding crises in future will require global macroeconomic co-operation as well as better financial regulation and risk-management.”
As the article notes, this theory has been aking the rounds already, most notably thanks to Ben “Helicopter” Bernanke, who has specifically blamed the “savings glut” in countries like China, Japan, Germany and the oil exporters for the deficits in the US and UK (which were “forced” to borrow that excess saving and spend it on consumer goods). So the debt binge is not the fault of the borrowers – they were actually providing a service to the world.
We now see the second part of the strategy to push the blame somewhere else, ie on China and Germany: it’s not the borrowers, and it’s not the financiers either who are to blame: they were “forced” to deal with the surpluses of the countries that save more than they should, and so much money put in their highly competitive hands brought financial returns down and pushed them to seek riskier pastures to use that money. So they misallocated funds, and blew them, only because they had too much because the stupid Chinene and Saudis just have too much money!
Seriously.
This not only pushes the blame away from the policies of the neolibs (income concentration for the very rich, leading to income stagnation for everybody else, hidden from view by cheap and plentiful debt allowing consumption to continue), it also provides a convenient reason not to re-regulate the financial world. It’s NOt the financier’ fault, don’t blame them! (*)
Sweet.
I expect this concept to be massively pushed in the coming months, with all the accompanying China- and Germany-bashing. The Germany-bashing is already in ful swing, as it includes the added bonus of an Europe.Is.Doomed angle… see all the articles about how Germany is pushing the whole world into a depression by refusing to be bamboozled into a massive spending spree – how Germany diplomacy is failing, and how Merkel’s star is fading, and the mocking, snickering tones about the Germans who thought they were being prudent by not joining the fun and now are suffering as much as those that had fun while it lasted.
This is another case of passing the buck and deflecting attention from the core issue that policies over the past 10 years were geared towards the enrichment of the very rich – and the dissimulation of that fact.
(*) just one note: China’s and Asia’s did conduct mercantilist policies to protect their export-driven model, and they did have as a goal, after the 1998 crisis, to not be caught without reserves again, so they certainly were willing accomplies in the buildup of the imbalances. But they were not the cause of them.
If the Chinese are to blame, its Nixon’s fault.
After all, its the collapse of Bretton Woods that ensures that a nation wishing to pursue a stable peg against another currency “must” either have the cooperation of that nation (as, for example, Germany refused to provide when the Pound was under the pressure that eventually drove it out of the ERM), or must be pegged at a substantial discount.
And nobody can blame China for bringing down Bretton Woods.
China’s accumulation of “official” reserves are a side-effect of the only stable exchange rate policy it can effectively pursue in the context of free for all dirty floats in foreign exchange markets.
Now, one can argue that they are pegged lower than need be, and that this is neo-mercantalism … but Paulson and his sort were up to very recently very sternly lecturing recalcitrant low-income nations on the necessity of having “savings” and “attracting foreign direct investment” and all the rest of what Paulson and his sort are now criticizing China for successfully doing.
And of course its imbalanced, but its precisely the imbalance that they were insisting on.
And the hypocrisy of Paulson and others of his sort complaining that Germany is engaging in the very same neo-Hooverist policies that “they would propose for the US if they thought that the finance sector could survive the strain” … is mind boggling.
Well, at least it would be mind boggling if we were not accustomed to Paulson and his ilk exhibiting extremes of hypocrisy on a regular basis.
And of course, the question of whether to allow big chunks of the productive sector to collapse in pursuit of fiscal rectitude, or to claw off massive chunks of the product of the productive sector to subsidize an unsustainably large finance sector in something like the standard of living to which they have become accustomed … is a false dichotomy.
We need to mobilize resources to get the productive sector doing something of long term use, and slowly allow the useful bits of the finance sector to recover off the income that they earn from providing services to the finance sector, keeping the finance sector working while allowing deleveraging to occur.
And if there are people who will quit in a huff if their firm is restricted to paying no more than 10x median income as long as they are eating at the public trough, and status games in the contrast between their pay and the pay received by the President and CEO cut them back to a mere $250K … well, fine. The finance sector has to downsize, and if the biggest egos leave the building, its unlikely to be a long-term detriment.
Utsukushikereba sore de ii
by BruceMcF
Brad, I don’t follow your basic point about China vs. UK.
“Three things jump out of the historical data: The UK’s holdings get revised down every June; China’s holdings get revised up every June…”
Not in 2008.
“and in recent years, China rise accounts for a significant share of the UK’s fall.”
What fall? From 2000 through 2007, if you smooth out the zigzags, the UK’s holdings were roughly constant. From the middle of 2007 through 2008, the UK’s graph (blue) went up even faster than China’s (red). It is Japan’s holdings (purple) that have been going down in the last four years.
brad:
if the UK increased transparency by pushing TIC data, the Chinese would just move their activities to another location (singapore/japan, etc.).
i think the more interesting thing to watch will be the knock-on effects of 1) how we devalue the dollar vs. Yuan/emerging market currencies 2) how china chooses to spend that reserve money and become an engine of growth (ie. look at US export data vs. future slowing reserve growth and deficit narrowing)
thx brad for your thoughts/work.
lyle b
“Not in 2008.”
the treasury hasn’t released the 2008 tic revision yet.
“What fall? From 2000 through 2007, if you smooth out the zigzags, the UK’s holdings were roughly constant. From the middle of 2007 through 2008, the UK’s graph (blue) went up even faster than China’s (red). It is Japan’s holdings (purple) that have been going down in the last four years.”
the zigzag is exactly the point. each june there is a zig down. this reflects a revision of tic data where “uk” holdings are reattributed to china (and others). then there is an 11 month zag up again. this reflects the accumulation of chinese (and other countries’) holdings of treasuries that are being incorrectly attributed to uk during the intra-year period.
brad, let me know if i missed anything.
auskalo — thanks for the correction. i did mean agencies. that has been fixed in my post. alas, you need to tone down your language a bit; a portion of your comment was too hot for this site.
bena g. You got it. the 08 data hasn’t been revised yet. the survey will come out in a couple of months, and once it does i would expect there to be another zig in the data with much of the increase in the uk’s holdings reattributed to china. The zigzag, as you note, is the point.
Why is China still loaning money to the US?
China pouring money into buying dollars, which effectively loaned money to US consumers so that they could go deeper into debt while buying Chinese goods, in a way kind of made sense for the Chinese.
Now that the US consumer is tapped out though, and government speeding appears to be what will take the place of it, does that deal still make sense for China? While China may be willing to lend the US consumer money to buy consumer goods from China, are they willing to loan the US government money to buy things like natural resources for infrastructure that comes mostly from countries other than China? What happens if the amount of money that China has to spend supporting their dollar peg begins to significantly exceed their trade surplus with the US? At that point, they would still be providing something like vendor financing, except the vendor that they would be financing would be someone other than themselves.
We may find out the answers to these questions going forward because it appears that going forward, the US will now be borrowing like crazy from the rest of the world to fund economic stimulus via infrastructure improvements and such rather borrowing like crazy from the rest of the world to purchase Chinese goods.
Yeah, I know, I left out oil, but that isn’t a Chinese export either.
Sester …so you dont want to answer my question..then, can you tell me if you agree with the following..Same with you Markus.
Myth:
US consumers need to borrow $billions from foreigners.
Fact:
US consumers are funding $billions in foreign savings.
While the media continuously bemoans an assumed US dependence on foreign capital, a recap of the actual transactions involved reveals the reverse.
Let’s begin with the example of US consumer buying a German car.
If the consumer pays cash for it, the consumer’s checking account in a US bank is debited and the German carmaker’s account is credited, thereby increasing foreign savings of USD financial assets. Total deposits in the US banking system remain unchanged.
If the consumer borrows to buy the car, the bank makes a loan to the consumer, which results in a loan on the asset side of the bank’s balance sheet and a new deposit on the liability side (loans create deposits). After the car is paid for the German car company has the new bank deposit. Consumer borrowing increased total bank deposits and funded foreign savings of USD.
That’s what the finance behind the trade gap is all about – foreigners desire to net save USD financial assets and sell goods and services to the US to obtain those assets.
Following the above transaction the foreign holder of USD bank deposits may instead desire to purchase US Treasury securities. At the time of purchase, the seller of the Treasury security becomes the new holder of the bank deposit, and the foreigner the new holder of the Treasury security. (If the foreigner buys securities directly from the Treasury the result is the same.)
The US government is now said to have foreign creditors, and the US is said to be a debtor nation.
While this is true as defined, a look past the rhetoric at what the US government actually owes the holder of the Treasury security is revealing. What the government promises is that at maturity the foreigner’s security account at the Fed will be debited, and his bank’s reserve account at the Fed will be credited for the balance due.
In other words, the US government’s promise is only that a non-interest bearing reserve balance will be substituted for an interest bearing Treasury security. This is not a potential source of financial stress for the government.
Warren Mosler
February, 2004
Markus: Now that the US consumer is tapped out though, and government speeding appears to be what will take the place of it, does that deal still make sense for China?
Yes. If it props up the US economy. Government spending increases demand which increases US demand for Chinese products. The only way that this wouldn’t make any sense would be if the US goes sharply protectionist or starts behaving in ways that Beijing considers strongly against Chinese national interests.
There are geopolitical reasons why China behaves in the way that it does. Basically, a “new cold war” is impossible under the current system of international trade and capital flows.
Markus: What happens if the amount of money that China has to spend supporting their dollar peg begins to significantly exceed their trade surplus with the US?
The math works out so that these end up to be balanced.
Twofish: The math works out so that these end up to be balanced.
For a given level of borrowing, I don’t see why the US can’t reduce manufactured imports from China while increasing raw material imports from somewhere else.
For example, if government spending on importing road construction materials such as steel, cement, and oil replaces consumer spending on imports from China, then these imports do not have to come from the same country. In that case, assuming that China is still loaning the same amount of money for imports, then they are now financing the imports from another country, not themselves. In that case, the US trade deficit stays constant, but the surplus country changes.
OK, so in the case I listed above, maybe China funding the US while the US imports from someone else would cause that other country to run a bigger trade deficient with China, so China could still have its trade surplus in that case, except it would be with the country that the US is now importing from.
But…., given that the government debt of almost every country, with the exception of maybe Japan, pays more, wouldn’t it then make sense for the Chinese to loan money directly to that third country rather than going through the US?
Also, China pouring money into now rather obviously overvalued US government debt verse Fannie/Freddie debt that is now effectively owned by the US government and is quite undervalued also doesn’t make sense.
China will probably get very badly burned on their US debt if it has any duration to it.
I’m not even sure I believe this came out of Paulson’s mouth:
Global economic imbalances helped to foster the credit crisis by pushing down global interest rates and driving investors toward riskier assets, outgoing US Treasury Secretary Hank Paulson told the Financial Times.
Really?
Global economic imbalances?
But Mr. Paulson, didn’t those “global economic imbalances” take place over a couple of dozen years? I seem to recall that China has been making cheap crap for The United States for a very long time, and it has not just been in the last couple of years that it turned into a problem, right?
Never mind your (and Bernanke’s) “solution”. Once again:
Paulson: “Global economic imbalances helped to foster the credit crisis by pushing down global interest rates”
So your (and Ben’s) solution is to push down global interest rates when that caused the problem in the first place? Isn’t this kind of like giving a Heroin Addict a bag of smack when he’s got the shakes and calling the problem “fixed”?
Hmmmm.
“Now let’s talk about what else happened Mr. Paulson.
In 2000 you do recall that you went to the SEC and Congress to request that the leverage limits that bound Goldman Sachs (your company) and the other investment banks be removed, right?
You also remember that in 2004, following that failed attempt, you tried again, and this time your request was granted, right?
You do recall that every one of the failed firms – Lehman, Bear, Fannie, Freddie and AIG – all had leverage more than double that of the previous limits when they blew up, right?
Again, you said:
Spain and the UK were much more like the US with housing being the biggest bubble.
Yes Mr. Paulson, and what do you need to create a speculative investment bubble?
Why you need lots of credit – that is, debt, right?
And how do you get lots of credit Mr. Paulson?
Why you increase your leverage. And when 14:1 isn’t enough, you go to Congress and the SEC and ask them to remove the “shackles” so that your “finely tuned risk models” can take on more leverage – that is more debt, which is a necessary condition to grow such a bubble.
So now we get to the bottom of this entire charade by your own admission, which is that you personally were largely responsible for the mess we find ourselves in.”
I profoundly dislike Hank too, but I personally blame both the “savings glut” (even though I don’t like the terminology) and the financial industry that benefitted from it plus the Bush Administration who financed stupid tax cuts and an even stupider war with treasury auctions. Both sides were guilty of exploiting the American and Chinese workers. Wages in China have followed the same path as American wages. The Chinese government just stole the savings of the Chinese worker and the American rentier created cheap credit for the American consumer to attempt to sustain his lifestyle in the face of wage stagnation. It was a horrible, unhealthy cycle that benefitted only the politically connected and wealthy in both countries. Now that it is coming to a crashing halt, it appears the same peasants will be forced to suffer the pain.
The savings glut in oil exporters and China is result of AngloSaxon centric Ponzi scheme.
As soon as oil speculators liquidated saving glut in oil exporters disappeared immediately.
Asian mercantilistic policies were benefiting from scheme but they did not cause the imbalances. The cause was US fiscal and monetary policies.
If a tomato picker making 15K can buy a house with no money down at 720K is it fault of China?
Not bdisputing anything right now, would make sense but the question is if the data through london is reflective mostly of Chinese or gulf demand, then what is happening to european demand, stagnant, or shrinking?
as for transparency, that’s not likely to be forthcoming, don’t see either tories or labour or even lib dem dismantling one of london’s big attraction as a financial centre
@kaan:
I have to disagree. Imagine China and others would have a really free floating currency. All the dollars earned would have to be sold for Yuan and so the dollar would have fallen more and those exporters currencies would have gone up to the point where US-workers would be able to compete with chinese workers. There would be a lot more jobs in the US and therefor US-consumers would have money to buy goods without going deeper into dept all the time. The global imbalances are caused by a lack of free currency markets.
The mistake was made and in the end probably most of those reserves will go worthless. Savings are just as good as the ability of the economy to deliver.
The Ponzi scheme you mention exists though. It is the base of modern state-financing in almost all non ressource heavy countries.
Bernanke’s and Paulson’s “China Savings Glut” theory is Absolute Nonsense
In yet another long winded and self serving speech, Bernanke blames everyone but the Fed for the housing and credit bubbles. Not once did he mention interest rate policy at the Fed. However, he did blame foreign investors and “the global savings” glut for contributing to the problem. There is no savings glut. Monetary printing in China to swap Renmimbi for US dollars does not constitute a “savings glut”. Nor does enormous carry trades in Japan.
There is every reason for the U.S. savings rate to have collapsed: The Fed continuously held interest rates too low thereby creating a negative incentive for anyone to save. Eventually a near unanimous belief set in that asset prices were a one way street headed North and the purchasing power of the dollar a one way street headed South. So why save?
And after the Greenspan Fed foolishly cut rates to 1% in the wake of the dotcom bust, there was a mad dash out of cash, culminating with panic buying of houses. That panic in turn was followed by cash out refis to support consumption as people bit off more house than they could really afford. This is the origin of the much talked about negative savings rate. It is also one of the moral hazards of Bernanke’s proposed inflation targeting scheme.
http://globaleconomicanalysis.blogspot.com/2007/09/global-savings-glut-exposed.html
lost trust in the usa –
you aren’t giving paulson’s argument a fair hearing it seems to me; just because it comes from paulson doesn’t mean it is all wrong (i am an interested party for example, as i have made similar arguments in the past/ was surprised to see paulson echo them). in my view, Paulson’s argument fits the data better than you claim. china has been selling stuff to the us for a long time. but the magnitude has changed. and, as importantly, china’s surplus with the rest of the world also changed, largely b/c of rapid growth in china’s exports to europe and its surplus with europe. a fall in its deficit with the rest of asia also had an impact. the overall result is that China’s total surplus — and its total lending to the US — has soared in recent years. that is implicit in the charts above, but it will become even more explicit when i finish my series on SAFE. Suffice to say that China wasn’t buying $200-300b of US debt in 2000 (when a strong $ meant a strong rmb) and it is now over $300b (in the formal data, which i expect to be revised).
I have in the past presented data showing the trajectory of Chinese financing of the US. it starts to pick up in 02/03 as hot money starts to come to china, really soars in late 04 – and then grows fairly steadily along with China’s trade surplus (in part b/c the growing trade surplus coincides with ongoing capital inflows).
Jongerl — i am under no obligation to respond to every comment, and certainly not on a saturday night! your tone i felt was a bit inappropriate.
I also suspect that you are looking for too direct a connection between Chinese financing and US purchases. China never directly financed US consumption of Chinese goods by lending to US consumers. it financed the treasury — which buys a lot of stuff from defense contractors — and the agencies — which finance home loans. home construction uses US (and mexican) labor and Canadian timber …
but in a broader macroeconomic sense, those flows allowed the US to sustain a large trade deficit, including a large deficit with China. And the availability of chinese financing made it possible for the US government and US household sector to both be running large deficits — absent that financing, either the gov’s borrowing need would have pushed up rates, crowding out household borrowing (as higher rates = lower home prices = harder to borrow v home equity = less consumption and more savings as well less residential investment) or high household borrowing would have put upward pressure on us rates, creating a political coalition that favored less government borrowing (dick cheney couldn’t have argued that deficits don’t matter if rates were rising along with the deficit).
incidentally, Chinese financing of the US has exceeded the United states deficit with China for some time now. Probably since early 2007. that is one of the points i made in my monograph on “Sovereign Wealth and Sovereign Power.”
i am with koteli here -
the ’causes’ of the current crisis are not recent, they lie with two events in the time of richard nixon, whether or not it is appropriate to blame him personally . . . 1. decoupling of the dollar from gold, and 2. opening up ‘the west’ to china.
the present sino-american blame game does not stand up to serious scrutiny. the best analogy might be prostitution : you can complain that prostitution exploits women – or you can complain about the women for exploiting the clients. borrowing and lending is much the same – blame who you will, but if either party chooses to not turn up, the deal will not take place. it takes two to tango.
also ’cause and effect’ is not very appropriate description of circular flow situations, which exist throughout trade, finance, and economics. china is not i believe motivated to support the united states economy, but to support the global economy – the sum total of the circular flows that she is involved in.
there are economic as well as political limits to how far you can push wealth and income inequality in a national or global context. not because inequality is ‘unfair’ but because inequality is a basic imbalance. the present talk of ‘imbalances’ is a smokescreen to distract from the imbalances within america in particular (expressed if you like as a graph of c e o /remuneration / average worker remuneration)
i am not being a red hot socialist, i am just posing the basic question – if the proceeds of manufacturing are increasingly taken as profits, the wage earners will be squeezed, and how many model t fords / meals a day, does a billionaire need ? profits will drive production but wages will not then be there to drive consumption. result : obvious. wage arbitraging tends towards overproduction and slump.
the interim solution has been to recycle the chinese dollars thus allowing the american worker to be paid in part with readily available mortgage and other debt facilities which made up for a long plateau in wages. then by allowing the ‘owner’ of property of apparently ever rising value to borrow against the asset.
thus in a three step waltz – vastly simplified perhaps – the chinese workers’ wages are confiscated and paid in part to the american worker as loans, thus temporarily resolving the ‘model t problem.’
in retrospect this will seem like a scheme that will make mister ponzi seem quite respectable and casinos (’casino capitalism’ is used as an insult but in fact casinos are regulated by much stricter rules than banking) seem quite conservative managers of other peoples’ money. casinos only issue chips to the value purchased – not 12x and definitely not a post glass-seagle 30x !
all the ’stimulus’ talk is rubbish. either 30x is dangerous and the banks are going back to 12x or 10x – or the system is going to be stimulated back up to 30x. i do not believe that, and i do not believe that ’stimulus’ can kick in as fast as money is destroyed by consumer caution and shopping mall closure.
those dying malls are going to close up and stay dead for a generation.
fiat money is not free money, that is another ’cause and effect’ illusion. fiat money is free credit. if this does not make sense to you, do this thought experiment : you are the worlds greatest forger and can produce $100 bills indistinguishable from the real thing. how far would you go ? at what point would damage to the global economy begin to destroy the global context in which you enjoy your ill gotten gains ?
the idea is floating around that ‘financial stimulus’ can support real production, real work and real jobs.
the spin from mr paulson and the people at the top simply tries to hide the truth – that real production, real work and real jobs are what pay for financial stimulus.
obama is not bigger than the crisis. keynes was only a clever conjurer. fiat money is only free credit. and the basic ecological rule of parasitism is this :
the flea cannot grow indefinitely until it becomes infested with dogs . . .
- and a stimulus that was not big enough to collapse the bond market would hardly be worth making. so what should the holders of treasuries be wishing for ?
Josh: Wages in China have followed the same path as American wages. The Chinese government just stole the savings of the Chinese worker and the American rentier created cheap credit for the American consumer to attempt to sustain his lifestyle in the face of wage stagnation.
Not true. Chinese wages have been going up steadily over the last three decades. You have increased income inequality as rich people’s incomes have grown more quickly than poor people’s, but you still have across the board wage increases.
Josh: It was a horrible, unhealthy cycle that benefitted only the politically connected and wealthy in both countries. Now that it is coming to a crashing halt, it appears the same peasants will be forced to suffer the pain.
This doesn’t make any sense. If the system was exploiting Chinese peasants, then why should they be hurt if it crashes? It’s the fact that the system was benefiting Chinese peasants, that people are nervous now that it seems to have crashed.
My analysis of “what went wrong” was that the US financial system didn’t do what it was supposed to do which is to take all of this free money from China and put it into “useful stuff.” If the US government had taken the Chinese money and just buried it in underground bunkers, you probably would have had better outcomes than what actually did happen.
This is why I don’t buy the idea of a saving glut. If you don’t have any use for the savings then just stuff it into mattresses in which case you have a zero percent return. As it was, the savings was put into things that actually ended up destroying value.
gilles: the idea is floating around that ‘financial stimulus’ can support real production, real work and real jobs.
The reality of a market economy is that real production, real work, and real jobs are created by the exchange of bits of paper. If you don’t have enough of those bits of paper, then everything stops.
The tragedy of the Great Depression is that you have people out of work and factories closed. If you wipe out financial instruments, then the real economy falls apart.
tarantoga: Imagine China and others would have a really free floating currency. All the dollars earned would have to be sold for Yuan and so the dollar would have fallen more and those exporters currencies would have gone up to the point where US-workers would be able to compete with chinese workers. There would be a lot more jobs in the US and therefor US-consumers would have money to buy goods without going deeper into dept all the time.
The problem is
1) As long as governments print money, there isn’t a way of having a “real floating currency.”
2) a lot of the jobs in the US that have been created in the US over the last ten years have been due to Chinese trade
3) if you have more jobs but goods are more expensive it really doesn’t help you very much.
Part of it is that American consumers reacted “rationally” to the wrong signals. If housing prices and stock market were “real” then it made sense to borrow against houses and stocks and not to save in CD’s. The problem is that those prices weren’t “real” which meant that the entire economy was based on a weak foundation.
gillies: i am not being a red hot socialist, i am just posing the basic question – if the proceeds of manufacturing are increasingly taken as profits, the wage earners will be squeezed, and how many model t fords / meals a day, does a billionaire need ? profits will drive production but wages will not then be there to drive consumption. result : obvious. wage arbitraging tends towards overproduction and slump.
If we are really in a situation of overproduction, then the logical thing is to start producing public goods. If we have lots of idle factories and people, then we can start talking about sending rockets to Mars and colonizing the moons of Jupiter.
Mr. Sester,I apologize for the tone, it certainly was not meant to be inappropriate as I understand I am a guest on your Blog.
My point is that “in a broader economic sense” the U.S. Govt does not need to borrow i order to spend. As you know rates now are near 0, and our deficit is greater than ever , Obama has another Trillion to go and there is no “crowding out”.
However China ended up with Dollars (you suggest hot money, I believe it was through trade) it does not have many options as to what to do with them. Buying our treasuries gives them an option to earn interest on the reserves they own.
If they desire NOT to hold U.S. Dollars they can 1-shred them (a benefit to us) 2-Spend them in U.S. Goods and services (reducing the deficit) 3-sell them to some other entity which will be faced with the same options
The Idea that we are at risk of foreign govts. not financing us is not applicable in our system. If they dont want to buy treasuries when they mature we simply give them back their Dollars with interest (more dollars).
Foreign holdings of treasuries is nothing more than their desire to NET SAVE dollars earned through trade!
“then we can start talking about sending rockets to Mars and colonizing the moons of Jupiter”
hmmm — that sounds like a stimulus for currently under-utiltized financial sector quants with a background in physics or astro-physics (not that there is anything wrong with that! colonizing jupiter is certainly a far more inspiring use of humanity’s quant skills than trying to value CDOs of CDOs, or dreaming up a CPDO … )
on a more serious note, does any one have a substantive criticism of my methodology for estimating China’s holdings?
The “Chinese Savings Glut” theory may be politically correct dogma that scapegoats China but it is Absolutely Nonsense Economics. There is not really a Chinese savings glut, but a “cheap” money monetary policy by the Federal Reserve. Base M-1 money supply is expanding at a triple digit rate of over 300% annually. Every dollar of excess liquidity was created by the Federal Reserve. Unless one believes the China PBoC counterfeits trillions of US Dollars, the Federal Reserve is the real culprit for excess US Dollar liquidity engulfing the global economy.
DJC — care to explain how fed money growth led China’s savings (as a % of GDP) to increase faster than China’s investment (as % of GDP)? all those numbers are in RMB incidentally. I can see how loose fed policy might lead to inflation in the US, but i am curious how it increases China’s savings.
And I am also surprised by your confidence in asserting that the savings glut is “nonsense” economics given the data in the IMF’s table A16 (in the WEO). Is the IMF’s data here wrong? Just curious …
(the IMF incidentally documents a rather significant rise in the savings of developing economies over the past few years; we can debate why this happened, but I don’t see how asserting the “Savings glut’ is non-sense furthers this debate. There was a rise in the emerging world’s savings. The key question is why.
TwoFish,
Wages in China as a percent of GDP declined from 52% to 40% from 1999 to 2007. As you noted in comments at Pettis’ blog, if the economy is growing sufficiently fast this change doesn’t imply any decline in actual wages and very well signified an increase. I don’t presume to know the optimal level, but its irrefutable that the workers share of growth has been declining in China.
And the excess amoung of savings led to low global interest rates and overproduction. In that case the fed’s response would be to lower rates to attempt increase aggregate demand to achieve its inflation and employment targets. Sure this action may be what caused the bubble formation, but it was a reaction to policy choices in China. Unless you think the Fed should just allow China to export unemployment to the US, which would have created its own cyclical downturn.
It is a circular flow, and determining cause and effect is probably useless. But it all in my opinion, stems from the failure of the US to address its balance of payments issues.
Could anyone give a rough estimate on how much the value of China’s 1000 BUSD in treasuries will fall, if treasuries’ interest rates double in the next few months.
Thanks
USA’s doom is complete -> FHA-insurance Armageddon
http://www.businessweek.com/magazine/content/08_48/b4110036448352.htm
When government interfere with free market, thing will just get worse. USA is doomed.
Brad – great work and the numbers feel right. (Although I can’t quite see why the bank recap sums should be considered part of the foreign portfolio…) One of the key questions for this year, in my mind at least, is how fully committed to sterilisation PBoC/SAFE remain, given the stimulative aims of most policy and the amount of domestic bank capital that sterilisation soaks up.
Great board. Curious how people think this is going to end? Reading this board I’ve come to conclude that we have rather large asteroid heading our way. The question is when it does hit, will we be able to detonate parts so that it’s effect is not disastrous? Our thus the explosion is contained and that we have a new system in place to deal with it’s effect.
Thank you.
you dont need rating agency’s magic wand. just need FHA magic wand to turn toxic waste into AAA-rated security.
“The federal guarantee creates an incentive for banks to buy FHA loans and bundle them as securities to be sold to investors”
USA will be forever doomed as long as there is entities like GSE and FHA that guarantee subprime loan.
http://www.businessweek.com/magazine/content/08_48/b4110036448352_page_4.htm
Stefan — look at the volatility in Japan’s reserves in months where there was a big move in treasury yields for a rough guess … it obvious hinges on the duration of China’s reserve portfolio/ treasury portfolio. And recently china has been shortening its duration by buying a lot of s-term bills.
MMcM. thanks. I count the bank recap as part of china’s foreign assets for three reasons:
a) the banks are still state owned
b) particularly in 03 there are some big jumps in china’s reserves and reserve growth that are entirely due to the recap
c) all indications are that the banks were required to keep the dollars they received invested abroad …
This system is a terrible exploitation for Chinese immigrant farmers. Yes their nominal wages may have been increased year after year. So do their costs. The cost of health care, housing, education for children,fertilizer etc….have all gone up dramatically since 80s. If they lose their jobs now, they still have to pay these higher cost. The net effect is not much better. Not only to say that lots of them work under harmful working environment. One recent survey of 2398 immigrant workers by Social Science Bureau shows that 53.7% of immigrant workers work under the conditions of poisonous, dusty and noisy environment. 42% work more than eight hours a day. It is not an exaggeration that the growth of Chinese economy is built from immigrants blood, sweat and tears. I don’t deny that a small number of immigrants workers do get rich. But they are like movie stars (only a very few).
If the majority of Chinese do like to save more than the rest of the world, it is not because that they love to save. If you have to worry about next meal, medical bills, place to sleep, you end up saving more. The lack of social safety net and poor prospect of getting a decent job push most people to save more.
70% of the population is farmers. There is no surprise that the number one job for Chinese policy makers now is social stability. The political pressure will tilt their policies toward farmers in the near future.
Brad
I noted that Russia’s reserves climbed quite a lot (from slightly above 400 to some 450 BUSD over a few weeks)recently when treasuries’ yields were declining. This in spite Russia supporting its currency. And, as far as I remember, Russia has more or less left agencies for treasuries.
Assuming that treasuries have only started their decline from its lowest yield levels since the early 1950s, I assume we could see quite an interesting drop in China’s reserves going ahead.
…sure Russia has a significant EUR-exposure as well
Russian reserves are back down to @ $440b.
http://www.cbr.ru/Eng/statistics/credit_statistics/print.asp?file=inter_res_08_e.htm#week
the bounce back to $450b was due to the euro’s bounce v the $. Russia does mark its reserves to market so they will also reflect bond market moves, but russia’s reserves have a fairly short duration (Russia has pretty strict guidelines on permissable reserve assets) so this is less of a factor …
as far as I know, the reported value of China’s reserves reflect fx moves but are otherwise valued at book, not marked to market. Otherwise there should have been a bigger fall in sept, when the value of SAFE’s equities took a big hit … frankly tho with SAFE no one really knows. or at least I don’t.
ving — i strongly hope that China uses some of its stimulus to tilt policy toward rural areas (tho not by holding the rmb down to protect the farms from low-cost imported rice; that helps the farms to be sure but it really is geared at supporting exports — and it generates huge spillovers) and adopts a slew of new initiatives intended to build a stronger safety net and especially to improve rural education and health care.
jorgerl — the dollars that the us sends abroad when others accepts $ in exchange for their goods do ultimately come back to the us, whether as purchases of financial assets or purchases of goods (leaving aside those used as currency abroad). But the price at which they return isn’t a given. If china doesn’t want to buy US goods or buy US assets it would sell its $ to someone who does, and it might sell them at a discount — putting downward pressure on the exchange rate. It is the price movements that worry people.
Josh: Wages in China as a percent of GDP declined from 52% to 40% from 1999 to 2007.
40% of an expanding pie is better than 60% of a shrinking one.
Josh: And the excess amoung of savings led to low global interest rates and overproduction. In that case the fed’s response would be to lower rates to attempt increase aggregate demand to achieve its inflation and employment targets.
The problem is not increasing aggregate demand, but how aggregate demand was increased. A much more interventionist government that spent more on infrastructure and had very tight rules to keep the money from being spend on subprimes would have left the United States in a much better situation than what actually happened.
Ying: This system is a terrible exploitation for Chinese immigrant farmers. Yes their nominal wages may have been increased year after year. So do their costs. The cost of health care, housing, education for children,fertilizer etc….have all gone up dramatically since 80s.
But to fix this problem required a massive reform of the tax system, the industrial system, and the financial system. Now that the SOE’s are in reasonably good shape, it’s time to start pulling out dividends to pay for public goods like health and education.
Ying: If the majority of Chinese do like to save more than the rest of the world, it is not because that they love to save. If you have to worry about next meal, medical bills, place to sleep, you end up saving more. The lack of social safety net and poor prospect of getting a decent job push most people to save more.
Which means that the number one priority is to keep the banks operating so that Chinese peasants don’t lose their savings. Also the interesting thing is that household savings have been more or less constant over the last 30 years. The huge increases in savings have been due to corporate savings.
The logical thing for the state to do is to take the corporate earnings and then use them to pay for public goods. The problem with doing that is that if you take corporate earnings the second that they make a profit, corporations will no longer want to make a profit.
Also the fact that Chinese (and Indian) people save is because they have a stable banking system and relatively low inflation. If you look at places with unstable banks and high inflation, the poor do not even try to save because there is no point, at which point the countries just get trapped.
The Chinese economic system is not a particularly good one. It’s just better than anything anyone else has been able to come up with.
Mr.Sester…I was not talking about the exchange rate, what I meant was that 1-The U.S. debt to China or the rest of the world for that matter, is NOT a concern or a source of potential problem.They can’t foreclose on the debt!
As you say, if they dont want to own $ they sell them to someone who doeas, ultimately someone has the dollars and they HAVE to make the decission to spend it or save it. wHEN THEY DECIDE TO SAVE, THEY BUY OUR BONDS!!
2-The U.S. govt does not need to borrow in order to spend
[...] Agencies, yes. But not Treasuries. [...]
[...] Agencies, yes. But not Treasuries. [...]
[...] Data on the stock of marketable Treasuries comes from the monthly statement of the public debt; data on the Fed’s holdings of Treasuries and foreign custodial holdings comes from its balance sheet data; data on official holdings comes from the work I have done with Arpana Pandey. [...]
[...] Agencies, yes. But not Treasuries. [...]
[...] Data on the stock of marketable Treasuries comes from the monthly statement of the public debt; data on the Fed’s holdings of Treasuries and foreign custodial holdings comes from its balance sheet data; data on official holdings comes from the work I have done with Arpana Pandey. [...]