Comments on: One graph to rule them all …

By: One graph to rule them all … Outward

One graph to rule them all … Outward — Tue, 15 Sep 2009 17:37:09 +0000

[...] the original post: One graph to rule them all … By admin | category: outward, outward fdi | tags: average, black-line, fdi, [...]

By: Judy Yeo

Judy Yeo — Sat, 04 Jul 2009 15:42:55 +0000

For all their faults, central bank reserve managers still seem to consider US Treasuries safer than other dollar-denominated assets.

could it be a matter of a lack of choice? After all a switch away from the de facto currency cannot be done overnight nor a switch away from the de facto “safe” asset.

By: One graph to rule them all … | Mortgage Loans Equity .Net - Home Mortgage, Home Loans, Home Equity & Mortgage refinancing

Thu, 02 Jul 2009 21:23:13 +0000

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By: Indian Investor

Indian Investor — Thu, 02 Jul 2009 07:09:55 +0000

What you have calculated as an ‘external financing need’ for the US is simply the requirement of external financing that will keep the USD exchange rates steady against major world currencies. However your dominant thesis has been that misaligned exchange rates contributed to the development of unsustainable trade imbalances. The inherent dichotomy of your balance of payments equation:
capital inflows required = imports – exports + capital outflows
is that all the equation does is ensure that the exchange rate remains constant.
Yet you have frequently issued calls for China to allow appreciation of the RMB against the USD, and work together with the US to address trade imbalances.
As things stand in the real world, there are marked differences between the US and other countries in terms of external financing needs implied by current account flows.

By: Indian Investor

Indian Investor — Thu, 02 Jul 2009 07:03:56 +0000

Dr. Setser,
In a short period of time delta t, total (units of local currency sold for foreign currency X)/(units of foreign currency sold in exchange for local currency) = Exchange rate (local currency/foreign currency X).
As an example, in a particular minute, if 1000 USD were sold for RMB, and on the other side if 10,000 RMB were sold for USD, RMB/USD = 10.
Over a long period of time T, the ratio:
(units of local currency sold in exchange for units of foreign currency X)/(units of local currency bought in exchange for units of foreign currency X) = Exchange Rate(local currency/foreign currency X).
This would be an accurate re statement of the balance of payments identity.
The BOP identity arose out of the application of double entry book keeping to the national income accounts. the identity contains an implicit assumption based on the gold standard – that the exchange rate is an EXOGENOUS, or INDEPENDENT variable. Assuming the exchange rate to be an independent variable, you can arrive at a simple linear equation combining capital and current account flows, and the attendant reasoning for the balance of payments.
Once you allow for the exchange rate to be determined as an ENDOGENOUS, or DEPENDENT variable inside your balance of payments model, you can more easily accomodate for real world implications of capital and current account flows.
What is the relevance of this re statement to your essay above?

By: Indian Investor

Indian Investor — Thu, 02 Jul 2009 04:48:40 +0000

Dr. Setser, though I’m back to the same point, let me try to illustrate this complex issue with an approximate analogy.
Suppose a new rule is enacted in the US that all rent payments, and all payments for home loan EMIs need to be paid exclusively in physical 20-dollar bills. What would this rule do to the demand for $20 bills? Since rent and mortgage EMIs are major expense items for ordinary Americans,savers would have a preference for stashes of $20 bills over all other denominations, bank accounts, etc. Imagine that this rule stays in force for 37 years. Due to the exorbitant demand for $20 bills, they would be increasingly exchanged for higher denominations. Also, many transactions other than rentals could also be required to be done in $20 bills, due to the interplay of market forces. If somebody started at the beginning of the rule enforcement with a large existing stash of $20 bills, or if they had an exclusive right to issue $20 bills, they would get an exorbitant previlege. Perhaps people will be willing to exchange the $20 bills for $200 in other denominations over a period of time. Most would forget the original rule, and that the bill’s denomination is actually only $20. People who have access to $20 bills would be tempted to consume a lot, and incur huge debts, based on the $20 bill being worth $200 in other denominations.
What happens if the rule suddenly changes, or if it begins to change, e.g. 10 states decide to accept rent payments in denominations other than $20? How can this situation be explained through the balance of payments identity above?

By: bsetser

bsetser — Thu, 02 Jul 2009 04:32:02 +0000

Rien — cynical, but not totally inaccurate, take on the sdr denominated bond issue …

incidentally, my guess is that the black and red lines diverged in q2 09, as there are a host of indications that the US rediscovred its appetite for EM risk – -and that EM risks resumed reserve growth.

By: Rien Huizer

Rien Huizer — Thu, 02 Jul 2009 03:23:30 +0000

Should have added this link

http://www.imf.org/external/np/sec/pr/2009/pr09248.htm

By: Rien Huizer

Rien Huizer — Thu, 02 Jul 2009 03:21:16 +0000

Perhaps I will get my SWF, since it looks like the IMF is finally going into the hedge fund business: recycling EM surpluses to fund the former Comecon.. But not with the right mindset and at the wrong price. What a waste.

By: Rien Huizer

Rien Huizer — Thu, 02 Jul 2009 03:04:18 +0000

Brad,

What would make the black line move away from the red line again?

I would presume that this is the sum of FDI and portfolio investment. FDI may have undergone structural change along with structural changes in the way US firms do business overseas and the contraction of the financial services industry, and portfolio investment may have been driven by apparently better opportunities in the US (??), or, more likely, portfolio liquidation associated with the crash.

The phenomenon that if you imagine the US as a unitary actor (’George’), George during the pst 7 or so years became a hedge fund financed marginally by China and a few others, investing (marginlly again) in risky assets (meanwhile repatriating safe asstes!) . We seem now to have reached a stage where George’s outstandings are no longer growing (see also your earlier articles on the NIIP). What will George do next? What will George’s absence from the world economy casino mean for the gambling business? Yet another sign that a worldwide recovery will be very difficult. Someone has to put a few chips on the table (if you have a Schumpeterian view of economic history) and the others are to scared, poor or bureaucratic to do this.

It looks like we missed a great opportunity with the SWF craze. A couple of trillions in a trigger-happy SWF is just what we need.