But there is no doubt that with bigger current account deficits in the run up to the crisis and no offsetting currency valuation effects, Spain is in a difficult place. Classic boom/ bust — though some Spanish policies seem to have helped (partially) protect the financial sector so a bigger real estate crisis may not produce a bigger banking crisis.

Perhaps to clarify: my “valuation” comment referred to the market value (in USD) of private debt securities (like CDOs) . Unlike equities, I suspect that the statistics use either pruchase price of nominal value. But many private debt securities (I know of one European bancassurance group that needed (disclosed) gvt assistance in the tens of billlions to remain adequately capitalized.

Probably one level of realism to far for the record keepers.

The Bank of Spain just published Q1 NIIP and external debt data today. NIIP: -86% GDP, external debt: -165% GDP.

I have tried to replicate your analysis with the Spanish data in my latest post a few minutes ago. Of course the Spanish story is a lot less interesting from a global perspective than the US experience. Still, 44 million people facing a much grimmer outlook than virtually anybody else in the OECD.

I am trying to improve my diplomatic skills, so i only reported my data from the US point of view. And from that point of view, the US experiences (in $ terms) a rise in its external wealth when the dollar depreciates (and say the euro appreciates) pushing up the dollar value of us assets abroad. the dollar value of foreign investments in the US (US liabilities) is unchanged.

Of course, from the point of view of the rest of the world, a dollar depreciation reduces the value of the rest of the world’s dollar holdings (in terms of their currencies) and thus produces valuation losses …

full analysis though needs to take into account stock market moves, and there the language gets more complicated, as the us valuation gains reflected greater upward moves in non-us markets than in us markets — a similarly outsized moves on the downside.

This has (forensically speaking) the fingerprints of governments fighting markets all over it. And as we all know, when governments fight markets, opportunities for opportunistic behavior abound. I guess that quite a few people in the US benefited from the gigantic valuation losses incurred by non-US investors (incidentally, I guess that your forensic analysis has not extended to marking the foreign-owned bonds to market!).

And where these investors were leveraged, and foreign financial institutions (like those adventurous German state banks setting up conduits with the help of Lehman’s Hamburg office) were liable, those claims are/were probably more robust than the assets they funded.

One of the things that may be connected is the strange anomaly that European banks keep around EUR150 bn in excess reserves at the ECB. Simultaneously the ECB and BoE extend record levels of credit and both make extensive use of swap lines. In essence the central banks involved (FED, ECB and BoE are sitting on a gigantic market failure: some banks borrow to support the toxic portfolios in conduits (do not forget the tax aspects). They cannot (or will not because of expense) borrow from the market. Other banks cannot find efficient (in risk-adjusted terms) increments to their portfolio, or are in the process of augmenting Tier 1 capital) or both, and find ECB reserves the optimal investment.

What will a gradual decrease in market viscosity (when capital is adequate again, helped by gvt stimulus that helps businesses remain more or less solvent) have for an effect on this position. If the NIIP captures the effect of transactions on the value of holdings (which it may not).

But anyway, an extremely interesting piece.

I have graphed reserves v imbalances frequently in the past, and probably will do so again when the IMF COFER data for q1 comes out tomorrow.

indian investor — you are right; that particular sentence was especially garbled, even by my standards. hope it makes more sense now.

Do not underestimate the power of the Dark Side.

True, the Fed no longer has the traditonal inflation fighting weapons. But consider these.

1)They can print money to pay higher interest on bank reserves and induce the banks to keep higher reserves at the Fed.

2) They could just increase reserve requirements.

3) With Congress approval, they can issue sterilization bonds.

But you are probably right that the Fed will not choose to fight inflation, but rather choose to grow employment in the Empire, which they believe is done with cheap money.

So it will be the task of the Bond Jedi to defend the long end of the yield curve!

My question – perhaps the same as Eduardo is asking – is do you still believe that the U.S. domestic savings rate will rise (and stay risen) sufficiently to cover the growing deficits in the scenarios a)ROW Treasury purchases level off b)ROW Treasury purchases decline?