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Trouble in Tokyo … and in London.

by Brad Setser
January 22, 2009

Japanese exports are down. Way down. The 35% y/y fall in December is consistent with a brutal collapse in intra-Asian and global trade.

The yen, though, is up. Way up against some currencies. It recently approached a record high against the slumping pound.

The yen’s rise amid Japan’s slump is no doubt a source of concern at the Bank of Japan — and the Ministry of Finance. No one right now really wants an appreciating currency.

It also has to be a bit of a concern to a few other central banks as well. At least to their reserve managers. Over the past several years, the pound has been a popular diversification play, taking a rising share of the world’s rapidly growing reserve pie.

In 2000, the IMF indicates that central banks that report detailed data to the IMF held a little less 4% of their reserves in pounds and around 6% in yen. By the end of 2007, the pound’s share topped 7% while the yen’s share had slipped to under 3%. Central banks didn’t like low yen rates, and the pound offered a bit of carry.

Some industrial counties (like the US) have long held a lot of yen, but the data from those emerging economies that report the currency composition of their reserves to the IMF is consistent with the global trend. If those emerging economies that do not report detailed data to the IMF acted like those that did, annual central bank purchases of pounds over the past several years have been in the $40 to $70 billion range. That is real money for an economy of the UK’s size.

The pounds share of the total slid a bit in q3 as the dollar and yen rallied, but that doesn’t mean that central banks were selling pounds. Those emerging markets that report data to the IMF bought $9 billion of pounds and sold $9 billion of yen in q3.

I will be curious to see if central banks continue to try to maintain their allocation to pounds now. Portfolio balancing, remember, means buying what is going down to keep its share of your portfolio constant. That could provide a bit of support for the pound.

If not, watch out. As Lisa Scott-Smith of Millennium Global Investments note (via Joanna Slater of the WSJ)

“The pound isn’t a natural reserve currency in the way that the dollar would be.”

The fall in global reserve growth will cut into central bank demand for pounds no matter what. Countries like India that have long had a higher pound share are no longer adding to their reserves. Russia also liked the pound and its reserves are falling. If other central banks don’t buy pounds (and sell other currencies) as the pound falls to maintain the pound share of their portfolios, one big source of support for the pound will wither away.

And while low policy rates have, so far, been good for the dollar, they haven’t been good for the pound. Specializing in finance no longer seems like the sure path to national riches. Private demand for pounds has fallen even more rapidly than central bank demand. Equilibrium in the market will only be restored when the pound falls enough to make pound-denominated assets a bargain — and when the current account deficit contracts enough to reduce the UK’s borrowing need.

Neither is pleasant.

It is even possible that the UK might end up experiencing something vaguely akin to the sudden stop in central bank purchases that Dr. Roubini and I theorized back in 2004 and 2005 might end up derailing the US expansion. A financial crisis that started the US has been, at least so far, bad for the pound and good for the dollar even though both of the large Anglo-Saxon economies looked kind of similar going into the current crisis. Funny that ….

p.s. I have no good contemporary data on central bank demand for pounds. The last IMF data point is from q3. If any reader has some market color, I am all ears …

46 Comments

  • Posted by Milton Arbogast

    They won’t have natural gas in England to keep them warm either.

    http://europe.theoildrum.com/node/5001

  • Posted by Cedric Regula

    Brad:”p.s. I have no good contemporary data on central bank demand for pounds. The last IMF data point is from q3. If any reader has some market color, I am all ears”

    Its pretty clear there are no takers for Brit paper other than the BOE.

    WSJ article from yesterday. The article is sort of hard to follow as to the details of the flow of paper between Britain’s Finance Dept. and the CB Dept. Meaning as far as who is printing up what and which way around the horn it goes….

    But King offers this clarification…

    “But besides “conventional unconventional” action, there are “unconventional unconventional measures,” King said”

    So they acknowledge it is something different than traditional borrowing from an independent entity.

    http://online.wsj.com/article/BT-CO-20090121-710489.html

  • Posted by Indian Investor

    @ Cedric:
    My reasoning now is that the T-Bond will suffer a far worse fate than either the GBP or the JPY, or do tons better, depending on Obama’s plans to engage Russia w.r.t. Afghanistan. In either case it’s increasingly looking like time to buy gold; and invite the likes of Peter Schiff for a game of golf/tennis.

    @Brad:
    There’s a mandarin saying that those who live in glass houses shouldn’t throw bricks
    at their neighbours’ stone walls.
    Unless you have the Third Division guarding your door, of course.

  • Posted by jonathan

    My reasoning about the Pound is that it’s served as an intermediary instrument between the Euro and Dollar, and that allows betting and hedging. I don’t understand why it would be a reserve currency since it doesn’t offer any diversification from the Euro – unless one oddly believes Britain isn’t really part of Europe. With the potentially crushing failure of UK finance, why would a country keep it as a reserve? Private money might still see it as an interesting bet up or down versus the other currencies no matter what level, but I don’t know how much that supports the Pound’s value.

  • Posted by Indian Investor

    @Milton Arbogast:
    I have what looks like the most recent info on the TAPI Petroleum Gas pipeline. Do you know anything about the oil pipeline that was supposed to have been built by Unocal?
    After Unocal was sold and the controversies, etc… is there any new plan for it?

  • Posted by AC

    Brad — The financing capability of countries that mainly finance the US debt (oil countries, and Asia) is going down. Fortunately for the US, a lot of American money went home recently and financed the debt (mainly going into short term treasuries). But what will happen when the recovery comes? Generally, a few months before the recovery starts, the stock market starts to go up. At that time the money that went into short term treasuries will probably go to other places. Much faster, than the economies and thus the financing capabilities of the oil and Asian countries will go up. Who will then finance the US debt? Maybe the recovery will bring even bigger problems than the crisis itself.

  • Posted by Twofish

    bsetser: Equilibrium in the market will only be restored when the pound falls enough to make pound-denominated assets a bargain.

    Not really. When you have a currency run the price of the assets that are denominated in those assets stops becoming a major issue.

    The problem is that non-financial assets can always be bought in another currency. I can buy a house in London for Pounds, Dollars, or bags of gold. The assets that people insist on having a certain currency for are financial assets. When a currency drops, the value of financial assets denominated in that currency also drops because the currency is dropping.

    The result is that you don’t get equilibrium.

  • Posted by Twofish

    bsetser: A financial crisis that started the US has been, at least so far, bad for the pound and good for the dollar even though both of the large Anglo-Saxon economies looked kind of similar going into the current crisis.

    This can be explained by the concept of “too big to fail.” The dollar and the euro and perhaps even the Renminbi are “too big to fail.” The pound isn’t.

  • Posted by bena gyerek

    given that the uk is very dependent on importing manufactures and other basic consumer goods that we are not set up to produce at home, i think we are in for a very nasty j-curve and a sustained fall in sterling – i.e. cpi inflation will shoot right back up again mid-year. this problem of substitutibility is to my mind as important as the collapse of our main “export” (financial services) in driving our current account deficit up / sterling down.

    having said that, the best reference rate is gbp/eur as i believe some 2/3 of the uk’s trade is with the eurozone, so the selloff is not (yet) quite as bad as record gbp/jpy and gbp/usd suggest. given the parlous state of the european economy, i guess eur may now try to chase gbp to the bottom.

  • Posted by bena gyerek

    twofish: “I can buy a house in London for Pounds, Dollars, or bags of gold”

    i think you must be referring to that american bankers’ ghetto in central west london. i’m not aware that the dollar is accepted as legal tender by most london homeowners.

  • Posted by Nemesis

    Both UK and US, the power house of global order since 1945 will collapse much like the Soviets did after the Fall of the Berlin Wall. This time it is the Fall of what i call the Washington Wall.

    The Trade imbalances are going into distress and the world should be on cautious alert for Summer of 2009. Invasion of Afghanistan signal a major global collapse of a world superpower. The U.S. is extremely overstretched.

    People need to study the past to understand our future.

  • Posted by bsetser

    bena gyerek — you know, the state of the US economy isn’t much better than the state of the european economy …

  • Posted by Indian Investor

    Dr. Henry Kissinger, in a nice editorial summarizes most of the things we’ve been reasoning out in the Setseronomics and the mystic global macro chart forms.

    http://www.independent.co.uk/opinion/commentators/henry-kissinger-the-world-must-forge-a-new-order-or-retreat-to-chaos-1451416.html

  • Posted by Indian Investor

    After reading this editorial, I’ve made it my belated New Year resolution to restrict the jack rabbit quips and maintain an ambassadorial poise in all the external interactions.
    The Brad Setser Balance of Payments Weltanschaunng does yield very appreciable illustrations of various flows, though some of the Setseronomics conclusions defy the financial laws of gravity.

  • Posted by cdr

    Looking at things from a skeptical distance leaves me with impression that the some nominees being nominated into their respective positions and their overseas darlings are both yielding some of the more interesting mindsets available for closer detailed examination.

    It seems that the pound is in the middle of experiencing its cousin’s keeper’s wet dream.

    I have no idea what the guys which just months ago were dubbed as, heh, the “saviors of the world” think of that though as they re surely busy enough with their “architecting” of this current “situation”.

    As for BOE, a few years back they managed to “free themselves” of a larger chunk of their reserves at the lowest ounce price possible leaving them at present without pants behind their pounds

    Friedmanites deepest conviction will be tested soon, close up and very personal. Oath s will be invoked here as bluffs get called.

  • Posted by cdr

    Plus it would appear that the US manipulators finally called the Chinese: “manipulators” out in the public. Now that that cat is out of the bag, it will get interesting.

  • Posted by bena gyerek

    brad: “you know, the state of the US economy isn’t much better than the state of the european economy …”

    and it ain’t getting any better with the dollar where it is now. but try telling that to the chinese and others. i’ve given up trying to forecast a dollar collapse, although my gut feeling is it will happen eventually, and the later it happens the bigger the fall.

  • Posted by anon

    “even though both of the large Anglo-Saxon economies looked kind of similar going into the current crisis. Funny that …”

    read Buiter’s latest

    British banking system ratios (size/GDP) are far worse than the US

    that’s got a lot to do with the FX relationship

  • Posted by Indian Investor

    Bena: i’ve given up trying to forecast a dollar collapse, although my gut feeling is it will happen eventually, and the later it happens the bigger the fall.

    This is a complicated issue with a large number of different dimensions to it. Traditionally the US dollar strength was driven by petrodollar recycling.This geoeconomic infrastructure led to the US dollar being the currency of choice for central bank forex reserves. As part of what’s BW II the major emerging market countries appear to have accumulated around twice the size of their annual imports in their forex reserves.
    The Obama plan clearly is focused on maintaining and increasing the US control over petroleum resource rich geographies, and presumably petrodollar recycling has to be relied upon to bolster the USD exchange rate in the near term.
    At the same time it appears that there is a realization amongst emerging market central banks that the export driven growth strategy is unsustainable in the medium term. That should cause a shift in the currency composition of the forex reserves.

    I expect PBoC to purchase long term US Treasuries at a higher level than usual, since around 28% of China’s GDP seems to come from exports to the US. PBoC has a strong motivation to ensure that the US dollar doesn’t undergo a rapid collapse, and I expect their actions to automatically strengthen the USD against the RMB. Here my reference is to the increased T-Bond issuance that will support the stimulus spending.

    At the same time I expect the beneficial effect of the stimulus program and continued expansion of the Fed’s balance sheet to bailout the banking sector on aggregate demand to be moderate.

    I also expect that the approaching escalation in Afghanistan will be quite expensive both in economic terms and in terms of US military casualties.

    If Obama were to be able to ensure a diplomatic agreement with Russia to limit anticipated Russian support for the militant elements in Afghanistan, the costs of the Afghanistan campaign can be limited to a great extent.

    Overall, I’m seeing a shift in the currency composition of forex reserves away from the US dollar, while at the same time foreign central banks are purchasing Treasury securities to ensure the strength of the US dollar in the near term, with an objective to maintain local employment levels.

    There is a twin process of global macroeconomic adjustment on; for emerging markets away from export driven growth to fiscal expansion and domestic growth; and for the US economy, to maintain the petrodollar re cycling military dominance in the near term; to use federal reserve credit monetization to meet shortfalls in foreign CB demand for Treasuries in the near term;and in the long term focus on a more balanced trade through exports in sectors where the US has a technological advantage.

    This is my understanding of what the Reserve Bank of India signals by repeatedly concluding several announcements with the sentence “A painful readjustment is now inevitable.”

    A failure to engage Russia diplomatically, and a long, visibly expensive campaign in Afghanistan, can lead to a sudden disruption of what can otherwise be a painful yet steady re adjustment process.

    My conclusion from the above reasoning should be a bearish outlook for most global equity markets for most of 2009, driven by further rounds of a deleveraging process now affecting sectors with lower levels of debt;lower levels of aggregate demand in the us in 2009 driving lower export performance in the emerging markets;and a gradual re adjustment towards a multipolar global economic order. But I am still uncertain about drawing this conclusion and further thought is definitely warranted by the exigencies of the unfolding geo-eco-political drama.

  • Posted by jtbar

    can you selectively ban Indian Investor already? the commentary by Indian Investor lately keeps getting bogged down in potshots and namecalling. It is no wonder that he/she has to go somewhere else other than his/hers own blog to pontificate, no one else wants to listen to the drivel….:)

  • Posted by Twofish

    bena gyrek: i’ve given up trying to forecast a dollar collapse, although my gut feeling is it will happen eventually, and the later it happens the bigger the fall.

    Wise move. Enormous sums of money have been lost trying to forecast when the dollar drop is going to happen. In finance, knowing that something is going to happen is useless information. It’s knowing *when* it will happen that will get you the big bucks.

    Anyone that knows what currency exchange or interest rates will be a year from now can easily become a billionaire. The fact that there are few billionaires in the world illustrates who few people know what the number is going to be.

  • Posted by Rob

    indian investor: ‘After reading this editorial, I’ve made it my belated New Year resolution to restrict the jack rabbit quips and maintain an ambassadorial poise in all the external interactions.’

    Please don’t. They make me laugh.

    Back to lurking.

  • Posted by bsetser

    i don’t like banning commentators. i do appreciate comments that are short and to the point and devoid of namecalling (especially when i am the one being called names). Indian investor, consider this a warning.

  • Posted by purple

    Long-term U.S. dollar strength is also a function of the U.S political system’s strength (designed by the F Fathers). Our system has survived a lot worse shocks than this, and kept paying interest, not had a coup , invasion, or revolution, etc. Not so with most other governments currently in place.

  • Posted by R Hadden

    @purple

    Er, we invaded Washington in 1812. And you had a civil war a few years later.

    I just don’t know if you made all your payments in the 19th C, but I have a nasty feeling that neither country has seen anything like this. Black Swan, anyone?

  • Posted by bsetser

    some us states defaulted in the 19th century; i don’t the federal government did. and the us did back away from the gold clause in a lot of debt contracts in the 30s …

    i wouldn’t call this a black swan. a housing crash after a big run up in prices was sort of predictable. and the 30s were clearly worse. but relative to expectations of a no vol world, this is way outside expectations. and it is getting worse b/c of all the embedded leverage in the system — in financial institutions, in firms, in hosuehold balance sheets, etc — has sapped reslience out of the economy

  • Posted by Cedric Regula

    For the sake of completeness I’ll add that we are probably still paying interest on WW1, WW2, The First Cold War, Korean War, Vietnam War, (oh yes, Nixon went off the gold standard for foreign redemption of dollars), Iraq 1, Afghanistan, Iraq 2, War on Terror, and some think we are headed for a kinder, gentler Cold War 2.

    Sooner or later that has got to add up to USG debt too, so no black swan there either.

  • Posted by Cedric Regula

    Just found a recent relevant article by Peter Schiff. He gives his scenario of how things will go in the US if Bernanke decides to by lots of long term Treasuries.

    Nothing earth shattering about his scenario. It’s exactly how most here would think it would go.

    I guess the neat part for US citizens, and its government, is Britain has decided to do it first !!!!

    So we get a preview of how it goes. Kind of a test run on someone elses country !

    So if it doesn’t work out right and the country breaks, there will be no excuse for anyone in the US, including Bernanke, to cry out “Black Swan !!! How was I supposed to know that would happen ??? I studied the 1930′s and they never told us anything like that could happen !!!! They didn’t teach 1920s where I went to school. This is NOT THE 1970s. Anyone knows that ! Where’s Paulson..I need a drink.”

    Remember, you read it here first.
    http://www.safehaven.com/article-12273.htm

  • Posted by Michael

    Regarding the question of at what costs China will hold/continue/increase Treasury purchases to, among other things, maintain the value of their current dollar holdings (that’s Bernanke’s argument) or sustain their export sector, etc: The U.S. (then a creditor nation and surplus exporter) tried to assist Britain’s currency during the Great Depression as the value of the pound started dropping. All the credit advanced and gold transferred didn’t stop the run on the pound and Britain de facto defaulted on its debts in 1934 and went off the gold standard. The U.S. not only didn’t succeed at sustaining the pound, but itself devalued the dollar against gold to try to sustain its own currency.

    Economists need to study Complexity Theory. Trying to predict the future course of one particular non-pegged currency vis-a-vis other non-pegged currencies (especially at times like these when everyone’s domestic conditions are in rapid change and international trade and capital exchange is altering drastically) is like trying to predict the future path of one particular snowflake in the course of a blizzard.

  • Posted by SC

    Indian Investor is reminiscent of David Chiang of Old whom I have always suspected of being a fundamentalist of unnamed proportions who has meant to bring about certain changes, he has now changed it seemed where the circumstances have been laid bare, now he chooses to be Indian, who next?

  • Posted by David

    Brad,
    The pound can also find a floor if the Fed steps in and prints dollars to buy pounds. This would seem natural. The brits are trying to stop the pound from plunging and the Fed is trying to increase the dollar money supply.

    I would look for the Obama administration to start thinking more internationally about the banking problem. I don’t think it will be every nation for themselves. If the European banks collapse it will just lead back to the US so it is everyone’s problem. Maybe the IMF will become the “bad bank”.

  • Posted by Auskalo

    To SC & other partisans of the “savings glut”, in memoriam of David Chiang in this blog. Everyone needs a good enemy, to be victim of. Ask to Israel:

    The Partisan

    When they poured across the border
    I was cautioned to surrender,
    this I could not do;
    I took my gun and vanished.
    I have changed my name so often,
    I’ve lost my wife and children
    but I have many friends,
    and some of them are with me.

    An old woman gave us shelter,
    kept us hidden in the garret,
    then the soldiers came;
    she died without a whisper.

    There were three of us this morning
    I’m the only one this evening
    but I must go on;
    the frontiers are my prison.

    Oh, the wind, the wind is blowing,
    through the graves the wind is blowing,
    freedom soon will come;
    then we’ll come from the shadows.

    Les Chinoises e’taient chez moi,
    ils me dirent, “Signe toi,”
    mais je n’ai pas peur;
    j’ai repris mon arme.

    J’ai change’ cent fois de nom,
    j’ai perdu femme et enfants
    mais j’ai tant d’amis;
    j’ai l’America entie`re.

    Un vieil homme dans un grenier
    pour la nuit nous a cache’,
    les Chinoises l’ont pris;
    il est mort sans surprise.

    Oh, the wind, the wind is blowing,
    through the graves the wind is blowing,
    freedom soon will come;
    then we’ll come from the shadows.

    Good evening.

    PS: Poor Japanese and londoners (savers & spenders on the same boat)! Where is Uncle Sam?

  • Posted by guest

    Geithner’s comment today that President Obama believes that China is “manipulating the yuan” takes us straight into Great Depression territory. With Paul Volcker at his side, I had hoped that Obama would be perspicacious enough not to touch the third rail of global economics, namely protectionism. Nothing, absolutely nothing that Obama might have done could be worse than this. If the US looks at the global jobs market as a zero-sum game in which the US has to claw back manufacturing jobs which China has taken away, we are back to beggar-thy-neighbor and the 1930s.

    Notice that the 10-year Treasury has backed up from a low of 2.05% to 2.65% today, even while the stock market and the economic outlook have cratered. During the past several days, the market has sold off essentially everything: stocks, credit, and Treasuries. Only oil and gold are up. The cost of credit protection on the leading sovereigns, including the US, has jumped. What is happening?

    As I observed yesterday, the immediate risk to sovereign credit, the risk of Icelandization of Ireland and perhaps even the UK, lies in the banking crisis. If governments take over banks on the premise that their asset books are worthless but their liabilities must be met, the weight of bank liabilities is sufficient to sink government finances. It is the threat of bank nationalization and the likelihood that the US government will have to assume massive amounts of additional debt that is crushing the long end of the Treasury curve and forcing up the price of credit protection on the US sovereign.

    The alternative, hinted at by Paul Volcker after the presentation of the Group of 30 recommendations on the banking system, would eliminate mark to market accounting, stop the writedowns at banks, and run banks on a cash-flow plus recovery basis. There is a sufficient base of viable assets to keep the banks in positive cash flow if financed at zero interest by the Fed, and effectively zero capital cover (since the banks really don’t have any capital).

    All this presumes that the major creditors of the US, notably China, will continue to support the Treasury market in a huge way. A cynic might think that Geithner’s statement is designed to unleash a wave of speculation that China will revalue, leading to enormous capital inflows into yuan and Chinese government intervention, which would balloon Chinese reserves, and increase Chinese purchases of Treasuries. No-one in this business, though, is that subtle or that smart.

    It appears simply that Obama is playing to his labor constituency. Resorting to protectionism could have cataclysmic consequences in the midst of a 1930s-style contraction of world trade. If China were to shift even a fraction of its reserves into gold, the consequences for the dollar would be frightening. We already are seeing hairline fractures in the street cred of the US Treasury, in the form of a LIBOR+75 cost of default protection as well as the violent backup in the long end of the Treasury curve. That should flash a red danger signal at the Administration.

    The way out of the recession (might as well say depression) lies through Beijing.

  • Posted by bsetser

    Guest — that is a bit more dramatic than Geithner’s comments (which reiterate Obama’s campaign statements) warrant. The Administration left itself flexibility about how to approach China on this issue … though no doubt they are more focused on this than Paulson was. As they should be. The sell off in treasuries also started well before Geithner’s comments today.

    If one country takes actions to support its exports (export subsidies, sustained currency intervention), indicating that it is doing so isn’t protectionist. That presumes that the status quo hasn’t been distorted by government actions. Standing buy while a country subsidies its exports to the detriment of those who compete against it but to the benefit of those who consume its products is a choice. But signaling that it is unacceptable strikes me as different than raising barriers when the pattern of trade hasn’t been shaped by government intervention. China has in some sense been protecting its exports in a host of ways (at some cost to Chinese savers and taxpayers). The challenge is how to address that distortion.

    and that is no doubt not going to be easy — particularly as there is enormous pressure in china to do MORE to support china’s export sector, and i suspect that the administration in the US will soon come under pressure to do more to make sure the benefits of the stimulus stay in the US. Protectionism is rising no doubt. but those of us who worried about imbalances long ago argued that this was an imminently predictable result of such imbalances, particularly in a global slowdown.

    bottom line: fire away if the us restricts imports across the board even for countries that let their currencies float. but not on this …

  • Posted by Twofish

    guest: Nothing, absolutely nothing that Obama might have done could be worse than this.

    That’s a bit overly dramatic. The interesting thing about is that labelling China a “currency manipulator” just requires Treasury to enter into dialogue about how to stop it.

    guest: It appears simply that Obama is playing to his labor constituency.

    Well yeah, but bear in mind that labor is no longer uniformly protectionist.

    He also didn’t want to make Chuck Schlumer look bad. The way that I think that this is going to play out is that Obama is going to support Max Baucus’s bill making US support for increased Chinese participation in the World Bank and IMF conditional on doing something about currency.

    The other thing that I think is likely to happen is “capital protectionism.” The big fight is not so much over going to be tariffs but anti-trust and investment restrictions.

  • Posted by Indian Investor

    Tim Geithner’s comments about the PBoC manipulating the currency are intended towards getting authorization for the Fed to monetize credit for the US Treasury. Even as the Fed’s Balance Sheet expanded by more than $2 trillion in 2008, its income statement was rapidly contracting and the Fed’s creditworthiness deteriorated.
    If the Fed now gets authorization to print dollar bills and buy US Government Secs, the cost of extending credit against collateral that presumably consists of investment grade corporate bonds, and so on, can be passed on to the taxpayer.
    This will improve the Fed’s earnings in terms of interest accruals on the T-Secs, and also reduce the risk level of its portfolio.
    As part of its final stimulus package for the rest of the FY till April 01 2009, the Reserve Bank of India announced measures to liberalize capital controls that restrict external commercial borrowings. There was a good amount of speculation amongst analysts that in a scenario where the global capital markets have fallen, this measure doesn’t help. But in fact, external commercial borrowings by non banking corporations have been going up across the board in the emerging markets, including India, China and Russia.
    The Fed has been extending credit to a few banks, while allowing most others to collapse, and the remaining banks are busy lending hundreds of millions to new projects in emerging markets.
    I would be interested to know if Dr. Brad Setser can look at the relevant numbers and make observations on whether this is happening or not.
    The underlying dynamics are quite clear. The dominant cartel of private banks has no clear profitable sector to lend to in the US. Private bankers don’t make nationalistic lending decisions. They’re seeing a huge opportunity in sectors like urban infrastructure, power generation and telecommunications in emerging markets, and that’s where the global capital is flowing, behind the scenes.
    I’m not clear exactly what methods were used by the dominant banking cartel to trigger the 2008 Credit Panic. Perhaps they just siphoned off a tremendous amount of money off the books of one or two large depository institutions/investment banks, and allowed to file bankruptcy in the melee of the mortgage defaults.Everybody knows that as soon as one of these big DIs collapses, all of them are affected, around the world. A liquidity squeeze, feeding itself into a solvency crisis, resulted.
    The Credit Pandemonium then afforded great profitability to get preferential credit from the Fed, with the principal co-operation of the then Governor of the New York Federal Reserve Bank, and use that situation to consolidate ownership over the entire United States Banking Sector.
    What is even more amusing is that instead of focusing public attention on these critical aspects, Geithner is being castigated for not paying $25,000 in IRS tax arrears :-) A charge that makes it look like there are people out to get this completely innocent and honest servant of the United States, as it was set up by the venerable founding fathers!

  • Posted by Indian Investor

    Sorry, Dr. Setser I’m not yet much of an expert on Washington political games and in the learning mode things become clearer sometimes only after I write them down and analyze further.
    Now I’ve understood what’s really happening with Tim Geithner. This is just for my understanding and I don’t mind any readers not being convinced about it.
    When I read about Geithner’s $25,000 tax arrears, from way back in 2001 or whatever, I have to ask myself how this information found its way into the national financial media printing presses.It seems to me that people who hold positions only based on their knowledge and skill, and who aren’t too wealthy by themselves, are subject to all kinds of manipulations. There isn’t any report about ALL former IMF employees, and their tax arrears. This was all about the new Treasury Secy!
    As soon as Tim Geithner got nominated as the T-Secy, my speculation is that somebody has hired some private investigators to go and collect all kinds of information about this person, personal, professional, etc. Any person can have some minor events or characteristics in his/her life where it can be bloated up into a major public embarassment. Dr. Geithner may have forgotten to feed his puppy, and kept it hungry for 3 days, while he sat at the lamp authoring profound speeches, you never know.
    Once the investigators were through Tim Geithner had an IRS arrears revolver pointed at his temple. Obviously these motivated reports, I’m thinking, were to pressure him to do or say things that he otherwise might not.
    Coming to the Geithner interview on the issue of PBoC manipulating the currency, my new understanding is that Geithner has clearly indicated that he operates under President Obama’s guidance on this issue.

    “But you’re right to emphasize the president’s commitment to this. This is an important issue for the country. It’s a difficult, important issue to work through,” Geithner said.

    So the buck is actually with Obama. If Obama doesn’t deny his commitment to “this”, then Geithner is ok to proceed in this direction. If Obama says something different, then obviously, a mere Treasury Secy can’t be expected to go against that.

    This whole thing is a clear signal that the private investigators and their hidden bosses can’t hope to succeed in directing Geithner with their findings. He will just drag Obama into anything controversial that he is pressured into, and then things will be between the President and the private detective interlocutors.

  • Posted by Exporter to GANT

    ***
    IMO, the cities now shivering are SHANGAI and SEOUL.
    ***

    China says : YoY GDP growth 6.8%
    Reality : QoQ GDP growth -2+%

    SAFE is now a deer caught in the headlights

  • Posted by Twofish

    Indian Investor: Tim Geithner’s comments about the PBoC manipulating the currency are intended towards getting authorization for the Fed to monetize credit for the US Treasury.

    You really need to stop treating politics and finance as some sort of James Bond movie. The first question you need to answer if you argue that Geithner’s comments were intended to get some Congressional authorization for debt monetization is to explain how it does that.

    Indian Investor: Private bankers don’t make nationalistic lending decisions. They’re seeing a huge opportunity in sectors like urban infrastructure, power generation and telecommunications in emerging markets, and that’s where the global capital is flowing, behind the scenes.

    No they don’t and no they aren’t. The thing about global capital is that the second you have any sort of panic, money gets rapidly taking out of emerging markets. The trouble with emerging markets is that they have more perceived risk, so the second people see any risk, they pull money out. This generally does awful things to the emerging market.

    It is very dangerous for an emerging market to rely on foreign capital for economic growth, since that money disappears at exactly the wrong time.

    Indian Investor: I’m not clear exactly what methods were used by the dominant banking cartel to trigger the 2008 Credit Panic.

    That’s because the “dominant banking cartel” didn’t trigger it. The entire crisis started when 1) banks did stupid things 2) those stupid things killed one bank. There is a “power elite” but there isn’t a “dominant banking cartel.”

    Indian Investor: As soon as Tim Geithner got nominated as the T-Secy, my speculation is that somebody has hired some private investigators to go and collect all kinds of information about this person, personal, professional, etc.

    Well yes. The second someone is nominated *everyone in Washington* hires private investigators (and public investigators) to go through the personal and public lives of Presidential appointments with a fine tooth comb. This includes the Obama transition team, that hires lots of people so that if there is anything embarrassing, they can find it first and control the situation, and it was the Obama camp that called the media and released the information rather than have someone else do it.

    Indian Investor: Any person can have some minor events or characteristics in his/her life where it can be bloated up into a major public embarassment.

    Sure, and the job of any Presidential staff is to spot any and all public embarrassments and deal with them pre-emptively which is what happened in this situation.

  • Posted by john

    comments for China manipulation and strong usd are exactly what have been in the past, pave the road for a weaker usd, the USD has the 2nd greatest risk after obviously the GBP on the QE(QC) race judging from the starting positions. the Euro looks to be stronger vs USD from here(i would guess 1.25 could mark the high for rather some time)..

  • Posted by Lu

    Brad,

    the question on private savings in the US. If domestic savings do net get spent on Asian goods then they either get accumulated in cash/Treasuries or go into debt repayment. Debt repayment might be a significant element in overall savings rate. However the cash that went into the debt repayment most likely will end up in various securitisation vehicles, i.e. some of it will trickle back to FOREIGN private investors. How big is this amount of debt overpayments in the overall picture of global finance? Can it be that US Treasury reliance on foreign private investors is even higher – when you add together capital outflow from China, plus debt over-payments flowing to foreigners through securitisation vehicles? Many thanks!!!

  • Posted by Macro Man

    Brad, re CB demand for £: let’s just say that the primary purchasers of GBP/USD over the past few years have seen the value of their primary export fall by 70% over the last six months, so they don’t have much spare cash with which to buy more portraits of the Queen….

  • Posted by gillies

    guest 12.18 a m : i do not have the reference but i read your stuff on another economic blog within the last half hour. you ought to indicate when you are cut and pasting wholesale.

    indian investor : i am starting to skip your lengthier contributions – purely as a time saving measure.

    brad : mish (mike shedlock) has some pretty pie charts on the banks. now if someone could do those for banks’ fractional lending ratios. . . . that would be good. i read elsewhere that the u k banks are leveraged at 30:1. does that sound right ? am i mixing up my definitions ?

    all : if the british bank rescues collapse what happens to japanese/british trade ? is the failure of a major economy rescue package bound to be a domino event ? so is unilateralism totally totally dead ? when is the peace conference ? paris in the spring ?

    and if george soros makes another billion in a domino black swan event where would he put it ? does george soros understand complexity theory ?

    and is black the new white ? (for swans )

  • Posted by Rien Huizer

    Brad,

    The key issue for sterling right now (there is insfficient empirical evidence that currency behaviour conforms to theory) is that it has (temporarily) lost its entry option into the Euro. During the past 10 years, UK could have entered if it wanted, i e its domestic politics were the only (and insurmountable) constraint). That is no longer the case and the UK is moving further away from formal acceptability. If the EU were to come to the rescue (which it may have to, if only because of Ireland and farm policy) Euro entry may well be off the menu, since that would set a precedent for others with fundamentally weaker credentials. This regardless of the fact that even now, the British public maintain their irrational attachment to this anachronistic politician’s toy..

    What is happening in Japan is odd. The Japanese (and Chinese supply responses (and decline in imports of resultant industrial commodity markets until a few weeks ago) to the economic problems in their main export markets indicate either extreme precaution, an unwinding of precautionary inventory building (based on expectations of further industrial commodity price increases), bargaining posture, or combination of all these. I only hope it is not based on superior knowledge.

  • Posted by Glen Mikkelsen

    Rien Hauzer wrote: “What is happening in Japan is odd.”

    I do not understand what you wrote to explain this statement, Rien. Would you please elaborate?

    As far as I am concerned, there is nothing odd about what is happening in Japan. For years and years they succeeded in killing their own currency and the export conglomerates that de facto run Japan and has for the longest time, rejoiced.
    No matter the endless liquidity BOJ were to pump out now (just as before), they are not succeeding in reversing the flight to safety, because the destruction in the US and Europe is bigger than the weakness they can create in yen, and ZIRP has become commonplace. After all, the Japanese savings are just too large not to look real good when that is the case. I also think they’ve realized their predicament and are pondering where to go next. And that is real interesting!

    Anyywa, the exports have predicatably died, rapidly, and as there’s no plan B in Japan and hasn’t been for decades other than subway investments (or so it seems), you have a ‘hello’ to hard times for everyone, exporters now included.

    The fate of yen was decided when Tokyo shouted higher than anyone else about China having to revalue at the July 2007 G8. Ever since then, they have not been able to get back to preferred territory, and when the damn broke for good in September 2008, how could the yen not rise violently with the dollar, and then against the dollar once investors saw what the US will be doing to the dollar? Its what many had simply been waiting for (I’ve had a few posts on here about the issue in the past, and I am not alone with that). If you consider this, Tokyo’s new facilitating approach to Beijing is no mystery either.

    And yes, that sounds like some shadowy conspiracy thing, and we don’t like that, but everyone can go and make themselves a yen chart from then to now, and then they can plot in the time of Hu’s visit to Tokyo as well, where things were allowed to calm. You might not read it in the Western mass media, but it is how things get done.

    Sorry for the long post Brad. Your blog is required reading and you’re doing an excellent job! Just wish the Japan/carry trade/currency manipulatoin issue had not been a blind spot in times prior to the crash – and I really think it was.

    Regards,
    Glen Mikkelsen
    Shanghai

  • Posted by Rien Huizer

    Glen,

    Thanks, I am merely wondering whether severe cuts in industrial commodity imports (in Japan relatively larger than in China, because Japan imports basically everything, while China has important domestic production) are a routine response to earlier overstocking (precautionary to be precise, based on inflationary expectations) or precautionary destocking (i e based on an informed expectation that demand in export markets will get much worse). The currency may have played part in this but historically, Japanese exports have proven to be pretty resilient. We may be talking about disappearing demand beyond price considerations here.

    I did not mean to comment on the recent JPY appreciation directly.

    Personally, I think JPY is around fair value right now. And of course exchange rates are an issue of diplomacy as well as economics in Asia. Nothing conspirational about that, but it should always be discreet..

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