Comments on: Today’s balance of payments release was overshadowed …

By: Adam Leeds

Adam Leeds — Sun, 21 Jun 2009 18:04:21 +0000

A question for everyone:

I was reading this article in light of Andy Xie’s article here: Tight Spot for Fed, Blind Spot for Investors

Xie writes that what we’re seeing or going to be seeing now is that Treasury demand will no longer be driven by central bank demand (and thus yields will go up). He says this because central bank demand is price insensitive, instead responding to the current account deficit (which is collapsing). But my question is, if the central banks are targeting an exchange rate, why is the current account deficit the relevant number to determine their US$ demand?

I’m sure this is an elementary question that shows how little I’ve learned about these subjects, but if someone would enlighten me I’d be grateful.

By: yoda

yoda — Sat, 20 Jun 2009 00:44:43 +0000

why people from China and Japan think buying dollars or dollar denominated asset can help them to build wealth is beyond me. they have themselves to blame for their destruction of wealth as dollar and USA weaken due to massive debt.

By: Too Much Fed

Too Much Fed — Fri, 19 Jun 2009 00:00:26 +0000

Need some more help.

Assuming I’m remembering my numbers correctly, isn’t there something wrong when a current account deficit equals or almost equals currency in circulation in a year???

By: Too Much Fed

Too Much Fed — Thu, 18 Jun 2009 23:51:07 +0000

bsetser said: “too much fed — yes, at the margin, if capital losses from fx moves are charged v the income statement. in practice though some of china’s reserves back cash in circulation, which pays no interest –”

So, what is the total value of sterilization bonds? Or, what amount of chinese currency has been “sterilized” via bonds?

By: don

don — Thu, 18 Jun 2009 22:12:10 +0000

“That framing though misses a key point, namely, that the pre-crisis world — one where the US relying ever more on a small set of governments to finance a large trade deficit”
Once again, my time-worn response: The official flows from that smnall set of governments is causing the U.S. current account deficit.

By: bsetser

bsetser — Thu, 18 Jun 2009 21:53:35 +0000

too much fed — yes, at the margin, if capital losses from fx moves are charged v the income statement. in practice though some of china’s reserves back cash in circulation, which pays no interest –

By: Too Much Fed

Too Much Fed — Thu, 18 Jun 2009 21:50:06 +0000

Here is a question from my example above.

If china was paying 4% on its “sterilization” bonds and its currency was appreciating by 3%, does china need a 7% return to break even?

By: Too Much Fed

Too Much Fed — Thu, 18 Jun 2009 21:46:46 +0000

“China’s hand — I suspect — can be seen in the changing composition of central bank purchase. The sharp rise in demand for Agencies in 2005 and 2006? That is largely a function of China’s attempt to get a bit more yield out of its reserve portfolio. The rise in purchases of corporate bonds and equities (other assets in the US data) from mid 07 to mid 08? That is also China. The Gulf was also buying a lot of equity then, but its purchases don’t really appear in the US data. The Gulf’s sovereign funds makes extensive use of external fund managers; SAFE opted to manage its equity portfolio “in-house.””

Someone correct me if I am wrong here, but the way I understand it is that some of the dollar peg countries sell bonds to “sterilize” excess free currency from having a fixed (or near fixed) exchange rate and a trade surplus. To make interest payments on the bonds, the free currency needs to be invested in financial assets in the “other” (dollar here) currency.

If the returns on financial assets in the “other” currency do NOT make the interest payments, will there be trouble?

Is that why china invested in agencies then because interest rates on treasuries were not high enough?

By: Too Much Fed

Too Much Fed — Thu, 18 Jun 2009 21:35:39 +0000

“A lot of ink has been spilled analyzing whether the recent crisis has reduced US global power. That framing though misses a key point, namely, that the pre-crisis world — one where the US relying ever more on a small set of governments to finance a large trade deficit — wasn’t exactly on a favorable trajectory for the United States.”

What about wealth/income inequality?

Was it unfavorable for the lower and middle class in the USA (and probably other high wage countries) and now the USA gov’t?

Was it favorable for the spoiled and rich in china, in the oil regimes, and in the USA?

Is that actually “the plan”?

By: former journalist

former journalist — Thu, 18 Jun 2009 21:28:21 +0000

I am so sorry Brad and everyone else about my triple posts. I don’t quite understand what happened.