Brad Setser

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The return of Bretton Woods Two? (or Bretton Woods 2.1?)

by Brad Setser
June 5, 2009

If you read the headlines earlier this week, you might well have concluded that the dollar’s days as the world’s leading reserve currency are numbered. Yu Yongding of China’s Academy of Social Sciences suggested that China should shift away from the dollar.* He isn’t alone. China’s population is no longer convinced that US Treasuries should be counted among the world’s safest asset.** Try feeding that into the Caballero, Farhi and Gourinchas model.***

On the other hand, if you ignore the headlines and just look at cold hard numbers, you likely would conclude that central bank demand for dollars has picked up — not slowed down. The Fed’s custodial holdings aren’t a perfect proxy for the growth in the world’s dollar reserves. Countries can hold their dollars elsewhere. But they are decent proxy — and data from the custodial accounts, unlike the IMF’s more comprehensive data, are available in close to real time. And over the last four weeks, central banks have added $71.36b to their custodial accounts at the Fed. Their Treasury holdings are up even more: $74.62b.

Those numbers, annualized, imply $900-1000 billion of demand for US financial assets — mostly Treasuries — from the world’s central banks. That isn’t a small number. It is close to half of the Treasury’s likely net issuance this year. It would go along way toward answering the question of who will absorb the expected increase in Treasury supply.

Last fall — and even in January — the rise in the Fed’s custodial accounts seemed to reflect funds that were being withdrawn from the international banking system. Not anymore. A host of indicators suggest that the banking system has stabilized. European banks aren’t scrambling for dollar financing. The Fed’s swap lines are shrinking. Bank stocks have rallied. And nearly every Asian economy that has reported its end-May reserves has reported a big increase. And it isn’t just that the dollar value of Asia’s euros and pounds has increased.

And with oil now back above $70 before global activity has rebounded (Mark Gongloff calls it a few form of decoupling: “decoupling” once described the hope that emerging markets could grow without developed markets. Now it could refer to commodities and economic fundamentals”) a host of oil-exporting economies are likely to start adding to their reserves as well.

Bretton Woods Two has come storming back. As Tim Duy notes, it increasingly looks like 2007 all over again.

So why the angst? After all, a few years ago conventional wisdom held that Bretton Woods two was a fundamentally stable system. That was why bets on a low volatility world made sense even in the face of the obvious imbalances inside the US and in the global economy.

Well, central banks are buying dollars and Treasuries in huge quantities, but they still aren’t comfortable buying longer-term Treasury bonds. There is a glut of central bank demand at the short-end of the curve, and less than usual at the long-end. John Jansen’s ongoing commentary suggests that high levels of reserve growth haven’t translated into demand for five and ten year Treasury notes.

And popular support in key creditor countries for buying dollars has fallen.

Some attribute that to the risks posed by financing the US fiscal deficit. But that ignores the risks that were previously associated with financing the United States’ large household deficit. It isn’t clear that risks actually have increased — not so long as the trade deficit is down (see this chart from my colleagues at the Center for Geoeconomic Studies).

But it is certainly easier to grasp onto the risks created by the budget deficit. The flows are a lot more visible. No one needs my help to follow the money.

I suspect though there is another reason. Bretton Woods 2.1 isn’t quite the same as Bretton Woods 2. In Bretton Woods 2, central bank reserve growth financed a growing US trade deficit. And that it meant the countries adding to their reserves were also enjoying strong export growth.

Now the trade deficit is down. And trade is way down. The countries adding to their reserves are incurring the costs of piling up dollars that some don’t really need. But they aren’t getting the same benefits they used too.

Same costs and fewer benefits means more opposition. Especially when the costs are a lot more visible.

The $1 trillion question: does this make the system less stable than before?

* He also publicly called for China to move away from its dollar peg in 2004; Dr. Yu doesn’t set Chinese policy.
** China’s population seems worried that a Chinese investor who puts a dollar won’t get a 6.83 RMB back, not that a Chinese investor who puts a dollar into a US Treasury bond won’t get a dollar and change back. On the first point, China’s population has every reason to be concerned — but no cause to blame the United States. The United States has never promised to direct its macroeconomic policies to maintaining the dollar’s external value. The US has been absolutely clear about this: the Fed’s monetary policy is directed solely at stabilizing domestic economic conditions in the US. In the past that never prevented China from stockpiling dollars, as China had a policy of in effect overpaying for dollars to maintain an undervalued exchange rate to support its export sector. As the Peterson Institute’s Dr. Subramanian has noted, such a policy has a price.
*** The latest incarnation of this model can be found here. And this offers an accessible version of the argument.


  • Posted by HZ

    But if nobody is willing to lend in USD long term would that imply either A) US has to rely heavily on short term debt (which in effect tie the hand of the Fed on managing monetary policy) or B) borrow in foreign currencies for long term borrowing needs — which is what EMs such as LatAm countries had/have to do?
    So the pretension that US can manage its own monetary policies freely isn’t exactly true if it is dependent on foreign central banks for financing.

  • Posted by FollowTheMoney

    Willem Buiter claims “U.S. is more broke that the politicians may like to believe. Warns people to get out of u.s. dollar assets”.


  • Posted by Rien Huizer


    Thanks, looks like we (more or less) agree of the current applicability of the Caballero model. Just for whoever is interested in these views, another link:

    As to your comments on Caballero’s view “At points they have argued, in effect, that China’s government is just accumulating the dollars that china’s citizens would buy if china’s capital account was open’ it would be interesting to see if that was the case.

    Just imagine sudden openness (ad assume that the SOE and state CNY savings would be in private-equivalent hands) as well as that the current stockpile of foreign assets were first, but only once, offered to those savers upon (irreversible) opening. Probably then those savers would pay, in USD, (purchased from the CB in a parallel auction) just enough(but no more than) to arrive at a portfolio value that could be realized in the world market (assuming perfect liquidity, a big stretch). The point then becomes, would the whole portfolio clear ? Would newly minted investors hang on to those assets or would they diversify?. Would the suddenly competitive environment create a domestic financial asset supply response? Cabalero’s model follows the opposite trajectory (p 367 AER article), they let the share of future output that can be capitalized drop suddenly (confidence crisis etc). That is quite different from my scenario where there would be room for a domestic supply response in a country where the gvt had previously repressed the financial system.

    The suppressed/latent/hidden asset demand is not going to find a static asset supply sector. Financial technology is highly mobile and under suitable assumptions (perfect, imported regulations, governance and rule of law) plus no change in preexisting sound government policy ( OK we live in a world of generous assumptions here), a rapid process of supply capacity mobilization would occur that might lead to increasing “domestication” of the national investment portfolio. Of course, all of this this would need to go hand in hand with a flexible exchange rate (the FX auction would not be a one time event) and probably that would contribute to a narrowing of the trade surplus and increased industrial investment (in productivity), all reducing demand for financial assets. The resulting world would then follow Caballero’s model..

  • Posted by Rien Huizer
  • Posted by K T Cat

    Why could the world absorb $2 trillion of claims on US firms, households and the government two years ago but not $2 trillion in claims on firms households and the government now (with most of the claims being claims on the gov)?


    At the same time, i find analysis that says the world cannnot absorb all the treasury issuance that ignores the fall in other kinds of debt issuance in the US a bit superficial

    Businesses and individuals are not the same as the government.

    I’ve got some experience in running businesses and doing corporate turnarounds. I have a little idea about what good ones look like from the inside and what bad ones look like from the inside. The government looks like a bad one getting worse.

    While I would gladly loan money to Apple or Diamond Offshore and I would gladly make mortgage loans to folks with good credit and a big downpayment, I would not be making loans to the government right now unless I had to preserve my currency.

    From an investment or business management point of view, the government is borrowing money to do things that will increase its losses in the future. Increasing benefits is a guaranteed loser. Buying GM and then forcing it to do things which don’t make a profit is a guaranteed loser. Green energy is a guaranteed loser after you add in the cost of the subsidies. Expanding Medicare to cover the uninsured, which is effectively what the new health care plan will be, is a guaranteed loser. I can’t think of anything they’re “investing in” that isn’t going to be a colossal failure except maybe the survival of the big banks and we dealt with that many hundreds of billions ago.

    I would gladly loan money to entities that can clearly make the payment and return a profit. The current government is nothing of the sort. There is no recognizable path to profitability. That’s why our debtors are all gathered in the short term loans where they earn practically nothing on their money.

    You cannot equate personal debt, corporate debt and government debt. They are not equivalent to lenders because they are not equivalent in terms of their future profitability.

  • Posted by Indian Investor

    Dr. Setser,
    I believe the question you have raised, to identify what has changed with the replacement of private borrowing by government borrowing – and if nothing has materially – why would the world not absorb the new issuance – is perhaps the most significant point of debate in the current environment. To attempt an answer to your question, I spent nearly 15 hours of careful reasoning and several more hours reading up on recent developments.

  • Posted by K T Cat

    Addendum: You can’t be sure that should household and corporate debt demand return that they would be covered by foreign lenders. All you know is that they’ve gone away and the equivalent aggregate US demand for money is not being satisfied, hence the Fed’s actions and the rise in interest rates. It’s entirely possible that after discounting expected future inflation due to continued Fed activity, these debts would be no more desirable than the government debt unless interest rates increased substantially.

  • Posted by Indian Investor

    As of 2007, there were around 128 million housing units in the united states and some 14% of them were technically ‘unoccupied’, with the US population being around 300 million +. (The exact numbers should be available in one of my earlier posts at your blog).Of these, 35% of homes were owned outright – i.e. there was no mortgage on them. Out of the mortgage loans, in terms of numbers, 5% of the loans were both adjustable rate, and sub prime. As you are probably aware, mortgage debt is, for the most part not ‘income producing debt’.Over time, a large amount of speculative profit was available to homeowners from the increased price of their homes. From my detailed discussion with Paul Swartz regarding a paper he quoted from Dr. Greenspan, et al: till 2005, only around 5% of US Personal Consumption Expenditure was financed from increases in home equity. The world was rationally expecting a ‘soft landing’ for the US economy from this information. Our first task, therefore, is to identify clearly what went wrong, why there was a crash landing for the US economy, and how it was transmuted to the rest of the world. That task has become easier in hindsight, though I have a public record expounding on the relevant factors at your blog page, albeit in my more typical manner of self expression.
    The biggest bug in the system was the fact that the national principal on credit default swaps was much larger than the underlying bond, settlements may or may not have been required physical settlements, and the short and long end of the swap could be occupied by parties with or without a direct connection to the underlying credit transaction. As a simplified example, somebody might have guaranteed a settlement of $1.2 million on a mortgage loan of $300,000; and the party purchasing the guarantee and paying the premium is neither the lender nor the borrower of that mortgage.
    In aggregate, at least $43 trillion of mortgage-related CDS was outstanding, and the total outstanding mortgage credit was only $11 trillion.
    As the price of crude rose, the expected ‘soft landing’ was triggered. However, the relatively small amount and number of defaults were magnified, and relatively very huge liabilities were triggered across the banking, investment banking and shadow banking sectors.Precautionary collateral calls on parties at the short end of CDS contracts added to the panic.
    Entities such as AIG – deeply involved in speculative credit derivative positions, and the Bank of America – which was suddenly holding receivables in the form of bonds that weren’t being paid the anticipated amounts – received government support in the form of new credit, government guarantees, new infusions of capital into their equity, etc. All of these efforts were intended to stabilize the creditors, who were unduely affected by the multiplied credit risk exposure resulting from derivative instruments.

  • Posted by Indian Investor

    As of March 31, 2009, the total commitment by the US Treasury to the financial crisis rescue efforts was $12.8 trillion, according to a compliation done by Bloomberg. Of that commitment, $4,169.71 billion is drawn down as of 03/31/2009. The $12.8 trillion includes commitments made by the Fed, Treasury, FDIC, HUD and hope for homeowners FHA. The source of this data are Mark Pittman and Bob Ivry of Bloomberg.
    From my side, I would like to add that the total commitment to date, for the purpose of helping restructure the mortgage contracts – is around $85 billion – that came in from a Geithner objective to partially assist only ‘responsible families’.Also, the total international reserve position of the united states is around $75 billion, including its holdings denominated in SDR.
    As you can see from this data and the account above – very little has been done to examine and address the root cause of the mortgage defaults – the principal focus has been to ensure the immediate continuity of the creditor institutions.
    In this regard the broader objective of these stabilization measures has been to intervene in a manner as to ensure the stoppage and reversal of the deft-deflation process. These stabilization commitments will bear fruit not from the direct result of the longevity of the creditor instituions – but from the indirect intended result of reversing the process of liqudity crisis, followed by solvency crisis, followed by credit deleveraging.

  • Posted by Indian Investor

    I agree with you that in accounting terms, the private borrowings of 2 years back have been replaced by government borrowings, even as those private borrowings have fallen. However it’s important to note that the earlier private borrowings generated a demand for goods and services, though they were to some extent underpinned on speculative profits from the FIRE sectors.In contrast, the US Government borrowing has largely been deployed in the form of stabilization measures that have succeeded in ensuring the continuity of certain creditors, a few industries and helped to reduc the liquidity problems. While the stabilization have been extremely useful, the underlying process of credit deleveraging at the consumer’s level continues unabated, from all available data, including the latest G19 releases.
    The mountain of private debt is continually defaulted, or paid down – and the US Government borrowings stand as a spectacular guarantee that the effect of these defaults, and the resultant triggers of derivatives related liabilities, will not lead to the fold up of the creditor organizations. Apart from this, some smaller outlays have been made to ensure the partial continuity of private companies that have repeatedly proven themselves unable to change their business model to suit the shifting macroeconomic demand environment.
    Since the government borrowings are deployed mainly for the purpose of a credible guarantee, and for the purpose of easing liquidity problems, the level of real demand for goods and services created by these borrowings is not at all comparable to the private borrowings of 2 years back.

  • Posted by Indian Investor

    From the internal perspective of a national economy, the sum total of its currency values the sum total of the goods and services consumed by it, and vice versa.When a government increases the issuance of its currency, the first aspect to examine is whether the government’s expenditure resulted in an increased level of production of goods and services – either by direct or indirect means. As long as there is a proportional increase, for instance, in tangible public works, there isn’t any immediate impact on the value of the currency in terms of the goods and services. A secondary aspect is whether the public works are actively utilized by people at their own expense later on. If a toll road is built on government expense, the value of the currency will be affected if nobody uses that toll road after it is complete.
    From the perspective of solvency of a Sovereign government – the ratio of the public debt to the GDP, in my humble opinion – is NOT a good measure of sovereign creditworthiness. Within its territories, a sovereign functions by the dictat of its legal tender currency issuance. It is only from an external financing perspective that the solvency of a government can be assessed.
    Every nation typically depends on imports of certain commodities, oil etc from other geographies for the sustenance of its economy. In turn, it has to generate revenue denominated in foreign exchange by exporting, to be able to pay for these imports. This latter rule does not apply to the United States. To know why, you need to be able to reason honestly with the petrodollar re cycling based global monetary system. The pricing of oil, the denomination of savings from oil proceeds, the control over the logistics of oil supplies – are all critical to the international monetary system as it exists till date. The relevant considerations cannot be dismissed with a bland statement that ‘the argument is old’. Millions of innocent civilians are subjected to violence, displaced, and literally hundreds of thousands have lost their lives, even in the past few months and years – to the Eagle’s quest for supremacy in the control of oil.The Eagle’s competitors have their hands just as red, of course.
    It is important to acknowledge that the sovereign creditworthiness of the US Treasury is as much a geopolitical subject as it is a macro economics subject.

  • Posted by K T Cat

    Brad, I think the difference is that you’re looking at balance sheets and the people who are worried are looking at balance sheets plus cash flow statements.

  • Posted by bsetser

    Briangobosox — the last data point is from march, and it indicated some central bank demand for notes. anecdotes suggest that these are on the short-end of the yield curve – i.e. 2s and 3s. Until then Central banks had effectively been buying only bills after LEH. from sept to feb there was huge central bank demand for bills. anecdotal evidence suggests continued buying of 2s and 3s but not longer dated notes. we will have some more hard data in about a week, but it will be for April.

  • Posted by Indian Investor

    All the way since March, I haven’t been able to take any position in the market because of uncertainty and confusion.Finally I have a crucial insight – one that can turn out to be extremely profitable.
    I’m reasoning with the FAS157 changes, the Geithner speech at the Beijing University (and Wang Qishan’s comment on the speech), the Obama address to the world’s Muslims at Cairo University, China’s currency swaps, Medvedev’s interview to Maria Baritromo and reports on the activities of the China National Development and Reform Commission. Taken with various other inputs, such as for instance, Zhou Xiaochuan’s paper on reforming the international monetary system, Geithner’s CFR reaction to the paper, the operation of the Treasury Supplementary Financing account, Indian concerns about ‘financial protectionism’, etc – a clear picture is now emerging as to the contours of the planned future course of the global economy.
    I’d like to thank Dr. Setser for coming up with the question that he did, because the question spurred me to reason out various pieces,strategies and moves on the global chess game – to arrive at a valueable insight.I’ve managed to resolve the concern I expressed above about the continued process of credit deleveraging in the US.
    I’m now quite firmly in the ‘the recession has lost its force’ and ‘the world economy will recover in the second half of 2009’ camp. And not in the ‘US Treasury is about the collapse and go bankrupt, throwing the world into a tizzy’ camp. Let me now explain why.

  • Posted by Indian Investor

    Let’s start with the activities of the China fiscal stimulus and currency swaps.

    These activities, and their effect, needs to be understood correctly from past economic history.I mean the accurate version of economic history, and not the Niall Ferguson version of it. In “What Chimerica hath wrought”, Niall Ferguson wrote:

    “But the most important reason why the United States bounces back from even the worst financial crises is that these crises, bad as they seem at home, always have worse effects on America’s rivals. Think of the Great Depression. Though its macroeconomic effects were roughly equal in the United States and Germany, the political consequence in the United States was the New Deal; in Germany it was the Third Reich. Germany ended up starting the world’s worst war; the United States ended up winning it. The American credit crunch is already having much worse economic effects abroad than at home. It will be no surprise if it is also more politically disruptive to America’s rivals. ”

    I hope that Dr. Niall Ferguson is deliberately exhibiting ignorance of the factual economic history of National Socialism in Germany. While Hitler paid for his racial biases, excesses and war crimes with his own life, what was his record in terms of economic performance?

    “We were not foolish enough to try to make a currency [backed by] gold of which we had none, but for every mark that was issued we required the equivalent of a mark’s worth of work done or goods produced … we laugh at the time our national financiers held the view that the value of a currency is regulated by the gold and securities lying in the vaults of a state bank.”

    – Adolf Hitler, quoted in “Hitler’s Monetary System”,, citing C. C. Veith, Citadels of Chaos (Meador, 1949)

    When Hitler came to power in 1933, Germany was virtually a bankrupt nation, riddled with the problems of reparations due from the previous war, high inflation, unbearable unemployment, and the inability to afford imports from other countries. Yet, in the first 4 years of Nazi rule, Germany experienced what needs to be recognized as an economic miracle. Many commoners thought of that period as the best time of their lives – as long as they weren’t Jews, or Slavs, of course.
    Hitler managed to bypass the entire global financial architecture with two major monetary and fiscal measures. The total value of a planned public works program was fixed at DM 1 billion. As the goods and services were delivered to the National Socialist regime, the people were issued Labor Treasury Certificates equivalent to the agreed value of their work. These certificates were tradeable amongst people and were equivalent to the Reichsmark for all intents and purposes. But their value remained high, since they were pegged to the actual physical production.
    A second measure taken by Hitler was to enter barter-based bilateral trade contracts with countries such as Argentina, for instance. Grains from Argentina for instance, were directly exchanged for industrial products from Germany through these contracts.

    As a result of these measures, Germany experiences massive economic growth, and, together with various government sops and incentives, the effect on the people was to create a sudden euphoria and confidence such as they hadn’t experienced since before the First War. Meanwhile, all other global economies continued to languish under the effects of the Great Depression.

    It was only in 1945, a full 12 years after Hitler came to power, that the US won its much-propagandized victory that Niall Ferguson writes about.

    China is now embarked on a path very similar to that of Nazi Germany. Their stimulus is principally directed at the physical production of goods and services. For instance, they have a new high speed railway line between Beijing and Shanghai that is being constructed at quite a high speed. There are 110,000 workers manning the line works round the clock to try and complete it in record time.
    China has now overtaken the United States as the world’s largest market for automobiles. Last month’s sales of cars in China was a huge upward jump from the previous one, and is an all-time record for China.
    The extent of the public works in China is truly amazing, from the Three Gorges Hydroelectric Dam, to the Pearl River Delta development plan, the repair and new construction of thousands of miles of roadways and railways, etc.
    Besides, China’s 800 million rural citizens are smiling all the way to the new local markets for electrical home appliances and back. Chinese farmers are now receiving government rebates and sops to purchase TVs and fridges – something that they couldn’t afford earlier.
    The Chinese fiscal stimulus is the world’s only hope for a recovery as things stand today.
    China has signed currency swap agreements with 6 different countries already. Last week, Brazil and Malaysia expressed interest in this. However, the actual amount of these swaps is extremely small in relation to the volume of world trade, even at these recession levels.

  • Posted by Indian Investor

    Reasoning with China’s currency swaps takes us directly to Zhou Xiachuan’s paper on a new reserve currency (SDRs), and to Getihner’s CFR reaction to it. Since the actual volume of these swaps is quite small, their immediate effect is low. Yet, the strcuture paves the way to reduce China’s dependence on a huge stockpile of US dollars to finance its imports. Remember Giethner saying “we are quite open to it … as long as it happens in a GRADUAL, EVOLUTIONARY sort of way”. The swaps are going in a gradual, evolution sort of way. Their total value doesn’t amount to more than $100 billion till date, even if you allow for the proposed entry of Brazil and Malaysia to make it eight countries in all. Also, the swaps can only be used in trade with China, since the RMB isn’t convertible yet. Now we’ve made quite a lot of good progress, as you notice.
    The US Treasury is basically OK with these swaps. Next we come to Geithner’s speech at Beijing University, and its actual implications.

  • Posted by Indian Investor

    The purpose of China’s stockpile of dollars, euros etc in its forex reserves was to join the club of the rich ‘traditional industrial countries’. It is rarely acknowledged that China is a heavily import-dependent countries. Iron ore from India, oil from the Middle East, minerals from African and Australian mines, Hard wood logs and grains from South America, are all required imports – causing a humungous $1 trillion import bill per annum for China to pay. If China were to sell its electronics and electrical products locally – that market is much larger, and more easily accessible – and, to sustain that – the question of financing even larger volumes of imports needed to be addressed.
    Though the crisis has resulted in a dimunition of the value of China’s Treasury holdings, etc – the ultimate ambition and purpose of China’s forex reserves is to finance sufficient imports to develop the local market.
    It is in this context that Geithner’s speech needs to be understood. Geithner is promising a bigger role for China in the IMF, and is quite tolerant of China’s currency swap arrangements. He isn’t asking China to stop pegging to the dollar. On the contrary, Geithner wants China to continue appreciating the RMB, something that they have been doing for several years now.
    The immediate effect of RMB appreciation is to cause a huge influx of USD investments into China. China will in turn purchase an equally large volume of Treasuries to maintain its new peg. This is the cornerstone of the Geithner plan.
    China’s only other alternative is to crash the dollar. That will not only destroy the US economy, but also cause massive further unemployment in China, and lead to severe effects on global demand for China’s exports.
    Though China might lose out in terms of the value of its forex reserves in the short term, their ultimate objective can be attained more easily with Geithner’s plan.
    The China purchases of Treasuries will ensure that no currency speculator in his/her right frame of mind will try to crash the dollar in a short time frame.
    The dollar will weaken gradually, as China becomes more focused on domestic demand, and imports from other countries; utlimately China will be in a stage where they have no exports to the US, and they are able to sustain their imports with larger swaps, larger share of SDR allocations, and perhaps even the new international reserve currency can get designed in future.
    China’s financing of Treasuries can be used in future to execute Obama’s promised ‘largest investment in infrastrcuture since the 1950s … mainly moves that will reduce the US dependence on imported oil, and prepare the US for a situation where there will potentially, in future, be no financing from China.
    As the US dollar steadily weakens under Geithner’s plan, America once again, in future can become a land of oportunity.
    This takes us to Medvedev’s speech and Obama’s address to Muslims.

  • Posted by Indian Investor

    Medvedev’s interview to Maria Baritromo shows clearly the Russian ambition for the Ruble to emerge once again, as ‘a regional reserve currency’. Yet, there is no display of any hurry to get there. Medvedev is glad that Russia has successfully avoided the worst. If you’re in his shoes, you wouldn’t want a further global catastrophe, especially now that oil is back up at $70 per barrel.
    Oil doesn’t have any market, or any market-determined price. The oil price is decided behind the closed doors of conference rooms in the top floors of the Goldman Sachs towers.
    Obama’s nice speech to Muslims shows the deal pretty clearly. The Saudis get a $70 oil, plus Palestine will finally be given to the Palestinians. In return, the oil exporters will stick to the dollar as the reserve currency for the immediate future. Iran is diplomatically isolated amongst the Islamic countries once again with the ‘Palestine’ Cairo University address.
    Now you can also see why Obama’s meeting with Angela was actually quite formal and frigid in a vieled sort of way. The emerging Eurasian alliance has been broken. The Euro’s bid for global supremacy is on hold now.
    And, the German economy is slated to contract by 6.9% this year. Steinbruck will now be forced to do a difficult volte-face and fiscal-stimulate the German economy like there’s no tomorrow.

  • Posted by Indian Investor

    Now you see why the big leaders are saying things like ‘the recession has lost its force’,’we seem to have avoided the worst’, ‘it looks to me that we have turned a corner’, etc . They’re pretending to be like the tribal African medicine men, or the Oracles. They understand this natural ‘force’ of recession much better than you and I!
    What I expect is a slow, tepid recovery in the US economy. Because the recovery will come only after the US Government manages to stimulate some actual production of goods and services in the US. Meanwhile, I expect the quickest recovery and growth in China.
    As the global demand environment stabilizes and improves, the challenges posed by a steadily declining dollar are postponed for the next few quarters, from the perspective of countries that export to the US.
    The world will be very different in terms of the capital flows and trade flows, within around 4 years from now.But the ever lurking danger of a total collapse of the world economy has, in my humble passed for now.
    The Obama-Geithner plan of solving the problem through alliance with China came originally from Dr. Henry Kissinger. The inventor of petrodollar recycling has saved America from disaster with one more geopolitical brainwave.

  • Posted by bsetser

    indian investor — shorter comments please. thanks

  • Posted by DOR

    “China” this, “China” that. Does “China” study history? Is “the China relationship” good or bad for companies wanting to project a “green” image? A “China” trade surplus. Will “China” decouple” ?

    China ?

    This kind of simplistic thinking is what annoys me the most about the Anglo-Saxon view of the world. There isn’t any problem relating the differences among Fed Governors, between the Treasury and Congress or even between fiscally conservative Democrats and middle-of-the-road Republican’ts (both of them).

    But, when it comes to China, suddenly there is this monolith that doesn’t require anything more than a superficial glance at the data (which is swallowed wholesale and spat out retail) to “know” what “China” thinks.

    Case in point: Zhou Xiaochuan’s comments on the future of the dollar as a reserve currency.


    Read Zhao Ziyang’s memoirs, “Prisoner of the State,” please! There is no “China,” not in the way it is being used in policy discussions.

  • Posted by FollowTheMoney

    Looks like we’ve gotten to a stage of the rally, where even indian investor writes half an econ book expressing market optimism “green shoots”…


  • Posted by Rien Huizer


    “China ?

    This kind of simplistic thinking is what annoys me the most about the Anglo-Saxon view of the world”

    Since when do Indian Investors have typically Anglo Saxon views?

    Seriously, this also something that the PRC seems to encourage. There always this peculiar mixture of Kingdom of Heaven and General Motors. A wannabe monolith perhaps?

    As to the western book ascribed to Zhao’s : this fabrication can only be part of a crude Anglo Saxon plot…

  • Posted by Dennis Redmond

    Indian Investor wrote:
    Oil doesn’t have any market, or any market-determined price. The oil price is decided behind the closed doors of conference rooms in the top floors of the Goldman Sachs towers.

    Not so. Speculators may push prices up or down, but the long-term average depends on a small group of state-owned oil companies, and the state of total demand in the industrial world (shrinking but stabilizing). The Age of the Seven Sisters is long gone, and the governments of the semi-periphery now control the flow of oil. They’ll keep prices reasonably high — not so high as to damage importers, but high enough to finance internal industrialization. This is a fundamental change from the 19th and early 20th centuries. It’s a good thing, too — their economies need the cash, and the industrial world needs incentives to invest in green energy. Everyone wins, noone loses, except maybe the contractors for the US military-industrial complex, who have run out of countries to invade.

  • Posted by atomic

    Those that think that China is entirely dependent on the American consumer to soak up meaningless exports are missing the bigger picture.

    Yes, China’s economy has and will contract severely due to ongoing demand contraction in the US. But the factories and production lines that all those American and Western engineers helped build and design in China remain. So will the knowledge. While MBAs, bankers and marketeers in California and NYC lived it up with their $250k+ salaries, innumerable science and technology graduates from America’s excellent universities spend an unprecedented amount of time abroad in
    China transferring important knowledge to a geopolitical competitor. Huawei is now starting to undercut the American tech giants in emerging markets, and this is just the beginning.

    From a cold war perspective, all of this is almost absurd. The Soviets went to great lengths to steal advanced technology from the west; if only they had thought of saying “hey, we’re destitute and poor, let us build your stuff for you!” they could have had all those American engineers practically working for them.

    For amusement, check out this page:

    (Digital Equipment imprinted on a cold war-era chip: “When you care enough to steal the very best” — in Russian)

  • Posted by Observer

    Brad, thanks again for sharing your thoughts.

    Regarding your opinion that the benchmark interest rates are simply responding to the increase in public borrowing to offset private borrowing, doesn’t that defeat the point, which is to lower private borrowing costs so consumers and businesses can obtain better financing/refinancing terms?

  • Posted by Jeff Benson

    Seems like Bretton Woods 2.1 has the similar risk characteristics to 2.0. I’m betting our hyper vigilant federal reserve won’t allow for a new credit bubble, but the fragility of the current economic system has been exposed. Our monetary system is shockingly rotten. What do we do when we start de-leveraging on a massive scale? Monetizing our own debt. What a sham. The Federal Reserve uses it’s balance sheet to purchase Treasury and Agency debt???? That seems remarkably unstable to me… similar to an Enron or Bear Stearns balance sheet.. where shoddy loans are warehoused off balance sheet on SIVs that are only semi-owned by the loan originator. Or, remarkably similar to the recent accounting modifications that allow banks to post profit on trading gains from purchasing their own debt (at drastically lower prices) in the open market. I suppose these “solutions” have bolstered the market, but aren’t all of them going to crush foreign faith in the dollar. I look at the dollar like an international FICO score. You can’t really manipulate it…. or if you do…. it’s half ass value will eventually be exposed. Our monetary system is so tainted.

  • Posted by DOR

    Rein Huizer,

    I don’t think I made any comment about India or Indian investors, did I? Frankly, I don’t really care about that sort of thing. It is the mindset that bothers me. And, I find it most common among Anglo Saxon financial markets people.

    As for China encouraging a Kingdom of Heaven / GM kind of thing, I really don’t know what that is supposed to mean. Clarification, please.

    Zhao’s book: Did you spend the last three decades analyzing China’s politics? And, did you just this month discuss the origins of Zhao’s book with one of the three editors?
    I have, and I don’t think you have.

    So why did you make up this sad “fabrication” story?

    – – – – –


    The problem with China’s manufacturing-for-export is that the products are, at least to a significant degree, unsuitable for the Chinese market. Ever try to download iTunes to your iPod with a 56k fixed line connection? And, to pay for it in cash?

  • Posted by Rien Huizer


    First, I thought many of the comments that irritated you appear to be made by “Indian Investor”, a regular on this blog but apparently not an Anglo Saxon (neither am I). I thought it was interesting that the anthropomorhism that one my old Asian Studies professor tried to ban from papers and dissertations, as well as the equally proscribed Orientalism seem to be rampant on this blog and particularly in responses from people like Indian Investor. But, pse be generous, “China” is a convenient shorthand and we all know what it means.

    Second, as to my remark about China as a wannabe monolith, that was serious. China (I mean the PRC here, not the Republic of China) and I think that it does not need much adstruction: the Chinese government is very keen on showing unity and does not facilitate a great diversity of (respected) views. So it tries to look monolithic (whether it is or not is beside the point). Occasionally there is attention for apparently divergent views from non-dissidents (I m not so sure about the dissidents, that is not my expertise but I suspect that not all of them are as saintly as some people seem to believe) and that usually has a meaning. But it is not a wise bureaucrat in the PRC who goes out and talks to the press without having obtained clearance. Actually, that was something the GMs of this world do/did too.

    I am not quite sure about your question of spending the last three decades analyzing China’s politics. Not really, but I tried occasionally (and hard) , from the late 1960s. A rather frustrating effort I should say. the USSR was a lot easier. The most surprising (and a delight for collectors of historic curiosa) was of course the cultural revolution. A pity for China but great politics. Never seen anything like it. Is that what you mean or is this inappropriate?

    And let me explain my sense of humor, because my remark that included the word “fabrication” was meant to be ironic (I apologize for my exceedingly bad taste if Zhao was a relative of yours). Books based on some kind of inside story in China and not endorsed officially (too many to list here, but the Tienanmen papers are probably still at the top of my list) are invariably considered “western fabrications”. I have no idea (lack the resources) as to the veracity of Mr Zhou’s speakings. So for the time being, until it has been stamped “genuine” by Beijing, let’s consider this as a work of fiction. I have not read it but if it is like the Tienanmen papers, it may contain quite a bit that is of interest and contains genuine material.

    Your apparently know one of the editors and that may have helped you to form your own opinion. I have not had that pleasure. You are truly lucky.

  • Posted by Rien Huizer


    Welcome! you have been reading my mail. And this is how history develops: trial and error. No one ever learns.

    So let’s hope that all those engineers and factories will do the right thing and not turn their plowshares into swords (incidentally there was a great programme in the US in the 1950s called Plowshare that aimed at peaceful use of nuclear explosions, for instance to extract shale oil from shale deposits in the Rocky Mountains (the heat would melt the shale and the explosion create a huge chamber). For some reason not even the USSR tried something as clever as that but at least the US did the preparatory work.

    I am pretty sure that somewhere in China there are young scientists who returned home (not too many job offerings in the US these days) with things as weird as this plowshares projects.

    But I guess that you expected China to become an economic threat, working hard while the hedonistic Americans are partying. Well, if that happens, it is at least in line with historic patters.

  • Posted by DOR

    Rien Huizer,

    Thanks for the thoughtful response. No, I’m not related to Zhao Ziyang, but Bao Pu gave a talk in Hong Kong recently and I had the chance to ask him about the book.

    The idea that the Central People’s Government has control, let alone absolute control, over the economy is from the 1970s. More than half of all foreign trade – both imports and exports – are fully controlled by foreign-invested enterprises that aren’t even on the Central Committee’s mailing list. Financial institutions are so far out of the reach of the regulatory authorities that it makes headlines if the CPG tries to “guide” lending.

    State Council level (and above) officials frequently float trial balloons in the media. The key to understanding what’s an important signal and what isn’t is more in the reaction than in the original message. When Mao’s (early 1960s) editorials were printed in Renmin Ribao, and nowhere else, we knew he was sidelined. When every paper in the country reprinted Deng Xiaoping’s every comment, we knew he was The Man.

    Zhao Xiaochuan floated a balloon, and the international financial community went nuts.

    Just as many dissidents would qualify for sainthood as would congressmen. But, China’s dissidents are enjoying one of the most open periods that country has ever seen. It started with faxes, then cell phones, text messages, email and now twitter. Newspapers? That’s so 20th century!

    As for The Tiananmen Papers (great stuff!), it is pretty well established among neutral professional analysts that they are authentic, if not complete. Zhao’s book will have to await more analysis, but in my professional opinion, it rings true. Sure, there are some slants, but not enough to call the entire thing into question. Let’s consider both to be works of history, until reliable sources prove otherwise.

    Apologies if I misread your comments.

  • Posted by Rien Huizer


    Of course. I guess our view are not that different then. A good trial balloon needs some sanction (often a tcit one would be most effective), otherwise it is just a personal opinion of an official or otherwise important figure. And I do not really believe that important people in the PRC speak, especially about international affairs without some kind of sanction or belief that they will not get into trouble.

    I also believe that there is far more space for genuinely dissenting opinions and, another aspect (not the trial ballon) of strategic comminication: the public sharing of policy dilemma’s. Sometimes embedded in trial balloons of course but also sometimes normal human communication.

    To return to the good Mr Zhao (I doubt he had been as good as the Jiang/Zhu couple in managing the economy after Deng had his epiphany in the South) let’s see how his former associate Wen responds to this book once it has settled down a bit. Any comment or response would be interesting, but I do not expect any. Anyway, you convinced me I should get it…