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Posts Tagged ‘dollar

China Ready to Dump US Securities

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(c/o ZeroHedge)

This is serious. The Asia Times reports today that China is ready to start selling off its US Treasury Notes, ostensibly as a “punishment” for the recent US sales of arms to Taiwan. I and others previously warned about what would happen if China decided to let go of its dollar holdings – the gist is that China is the only thing standing between the US and catastrophic inflation. Previously these fears were pooh-poohed by establishment figures with the familiar arguments: “China needs us more than we need them”, “Who will China sell its surpluses to?” I even heard someone say, “Without us, the Chinese will be cavemen”. Well, it looks like China might have found itself a new trading partner, if this Asia Times article is any indication:

Dollar-denominated risk assets, including asset-backed securities and corporates, are no longer wanted at the State Administration of Foreign Exchange (SAFE), nor at China’s large commercial banks. The Chinese government has ordered its reserve managers to divest itself of riskier securities and hold only Treasuries and US agency debt with an implicit or explicit government guarantee. This already has been communicated to American securities dealers, according to market participants with direct knowledge of the events.

It is not clear whether China’s motive is simple risk aversion in the wake of a sharp widening of corporate and mortgage spreads during the past two weeks, or whether there also is a political dimension. With the expected termination of the Federal Reserve’s special facility to purchase mortgage-backed securities next month, some asset-backed spreads already have blown out, and the Chinese institutions may simply be trying to get out of the way of a widening. There is some speculation that China’s action has to do with the recent deterioration of US-Chinese relations over arm sales to Taiwan and other issues. That would be an unusual action for the Chinese to take–Beijing does not mix investment and strategic policy–and would be hard to substantiate in any event.

Where do you think we’re getting the money to prosecute these $5,000 per second conflicts in the Middle East? Where did the money for our $2,500,000,000,000 (and counting) bank bailouts come from? China. They make our money real. Without their manufacturing powerhouse backing us up, our dollars are worthless. What, you think the world is going to value our “service economy” at $13,000,000,000,000 per annum if that money weren’t backed by Chinese promises? Not likely. And now those promises are now increasingly under threat.

Be afraid.

Written by pavanvan

February 12, 2010 at 3:25 pm

Dow Overvalued

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Zero Hedge gives us yet more evidence that the Dow is overvalued: industry insiders are selling stock 82 times faster than they’re buying it.

In the most recent data set, $11.6 million in stock was purchased by insiders, while a whopping $957 million was sold. And somehow pundits are still spinning this mass orchestrated sell into the bid by those in the know as a bull market.

For significant holders of stock, now might be the time to unload.

Written by pavanvan

December 9, 2009 at 9:32 pm

The Other Smartest Guys

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The Daily Beast has an excellent report on our banking sector’s new financial practices, which – surprise! – are inscrutable to the inquiring journalist. That the late financial crisis bears remarkable resemblance to the Enron scandal 9 years ago has apparently occurred to few, though it should be obvious. Nomi Prins traces the same shadow accounting in three major banks that brought Enron down.

As she says:

While Washington ponders what to do, or not do, about reforming Wall Street, the nation’s biggest banks, plumped up on government capital and risk-infused trading profits, have been moving stuff around their balance sheets like a multi-billion dollar musical chairs game.I was trying to answer the simple question that you’d think regulators should want to know: how much of each bank’s revenue is derived from trading (taking risk) vs. other businesses? And how can you compare it across the industry—so you can contain all that systemic risk? Only, there’s no uniformity across books. And, given the complexity of these mega-merged firms, those questions aren’t easy to answer.

While we continue to argue over whether or not our banks deserve regulation, their accounting practices are transforming beyond all recognition. Whoever we hire to audit our banks – if, indeed, we ever do so – will face an impenetrable morass.

Written by pavanvan

December 6, 2009 at 7:21 pm

Too big

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I know I’m somewhat late to this party, but I wanted to point out to all who are still unaware that the ‘too big to fail’ banks which caused our late crisis are even bigger.

JP Morgan, AIG, Citigroup, Goldman, and Bank of America were the winners of Geithner-Paulson’s free money giveaway (with Lehman a bad loser), and together they have swallowed the hundreds of small and medium banks that have failed since. They now present an even bigger and more systemic risk, should they choose to gamble away their money once again.

Despite repeated calls from almost every respected economist (notably Joseph Stiglitz) that these banks are a menace, Lords Geithner and Bernanke have done nothing to restrict their size – indeed, they have made them impossibly more dangerous and lucrative.

Furthermore, none of the incentives which led to such reckless gambling (ludicrous bonus packages, easy credit, low intrest, short-term rewards) have been addressed, and instead have been reinforced.

The next bailout will have to be 700 trillion instead of a mere 700 billion.

Written by pavanvan

November 30, 2009 at 10:06 pm

Some Fine Tuning

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If you have been following the recent media saliva-thon regarding The Obama’s recent trip to China, you may be under the impression that the trip was an utter failure, an abject round of grovelling and slavering, and an unmistakable sign of both Obama’s incompetence and America’s irrevocable decline.  That is the predominant message the US mainstream apparently wishes to get across, with its endless narrative of Obama as a “profligate spender coming to pay respects to his banker”.

Once we in the US agree upon a story, we tend to believe it in the face of contravening evidence (WMDs anyone?).  How else to explain our ignoring of this article in China’s (state-run) China Daily? If one takes its message at face value, this article indicates a major victory for the Obama Administration.

From the article:

The vice-foreign minister said the RMB rate’s flexibility may widen, echoing the nation’s central bank a month ago.

The announcement by Vice-Foreign Minister Zhang Zhijun comes after the People’s Bank of China, which has the power to oversee the yuan and financial institutions, said it was in the process of reforming the exchange rate system.

China is also starting to receive more international pressure to let its currency appreciate. The nation adopted the policy of loosely pegging the RMB to the US dollar since the financial recession began.

“China will increase the flexibility of the RMB exchange rate at a controllable level in the future,” Zhang said, “based on the market demand and with reference to a basket of currencies.”

China Daily is essentially the equivalent of Pravda in the Soviet Union – a state-run publication whose role is to inform the public and businessmen on official government policy (aside from the ‘state-run’ part, not at all dissimilar to our US media). Of course, their articles are written in byzantine journal-ese and one won’t find the slightest breath of dissent within its pages, but over the years it has grown useful in deciphering what the Chinese leadership wishes to say publicly.

Thus the surprise. For more than two years now, China has steadfastly refused to allow its currency to appreciate, an act which nearly every other country considers cheating (or “aggressive monetary policy”). By keeping its currency pegged to the dollar at favorable rates, China puts its export market on steroids. The US has made its position on this practice abundantly clear; our Treasury Secretary castigated China for it literally on his first day, and our leading Nobel Laureates write accusatory op-eds in our state-run newspapers demanding that “something be done”.

Now, a few lines in a China Daily hardly pass for a substantive policy announcement, but one is led to think that Obama and his Chinese doppelganger had a nice little chat while he was over there, and they made some kind of agreement regarding China’s “currency manipulation”.

If China allows its currency to appreciate, they will have acceded to Obama’s central (though unstated) goal in visiting Asia. They will also have begun to do their part in reducing our monstrous and unsustainable trade deficit. However it is also clear that any currency re-valuation on the part of China will spell hardship for America’s “middle class” (that is, the bottom 95%). We depend on cheap products from China to a wholly unhealthy extent, in much the same manner as a heroin user. When inexpensive Chinese currency is no longer an option, import prices are bound to inflate. Of course, this matters little to our policymakers at the top; their interest is in preventing the further hemorrhaging of value from the dollar, thus securing their overseas investments.

So! Good news, I guess?

Written by pavanvan

November 27, 2009 at 3:20 pm

Geithner and AIG, Sitting in a Tree

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The Times reports on a recently released audit which concludes, beyond the shadow of a doubt, that Timothy Geithner (now Treasury Secretary, then President of the New York Fed) voluntarily gave up vast negotiating powers when choosing to shower AIG with billions upon billions of dollars.

The article is written in standard Times-ese, which is to say that it seeks to relate truly scandalous information in such a way as to cause as little uproar as possible, but although it must be translated into standard English, some truly damning testimony emerges:

Just two days before the New York Fed paid A.I.G.’s partners 100 cents on the dollar to tear up their contracts with the insurance giant, one bank volunteered to take a modest haircut — but it never got the chance.

UBS, of Switzerland, alone offered to give a break to the New York Fed in the negotiations last November over how to keep A.I.G. from toppling and taking other banks down with it. It would have accepted 98 cents on the dollar.

The Fed “refused to use its considerable leverage,” Neil M. Barofsky, the special inspector general for the Troubled Asset Relief Program, wrote in a report to be officially released on Tuesday, examining the much-criticized decision to make A.I.G.’s trading partners whole when people and businesses were taking painful losses in the financial markets.

So this means: The New York Fed decided to print 100% of the value of AIG’s investors’ bad loans in order to get them to divest from AIG, and (hopefully) save the money-laundering giant. Realize, now, that the Fed was under no obligation whatsoever to guarantee these loans with taxpayer dollars, and certainly not guarantee them at full value. Given that these CDS loans were later revealed to be totally fraudulent, this decision makes even less sense.

If I convinced you to give me real dollars for Monopoly Money, and then you complained to the government that the Monopoly Money you received was actually worthless, would you expect them to just print 100% of the value and give it to you, no questions asked? Or would you expect them to give you nothing and tell you, in effect, to be smarter next time?

What’s truly astounding about this episode is that some of the banks offered to take less than 100% of the value of their worthless investments, but Geithner refused! He said to them, essentially, that “oh well, it doesn’t matter – it’s taxpayer dollars anyway! Go ahead, take the full value!”

This is the man who is now our Treasury Secretary.

The China Problem

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charttradedeficitwithchina

Paul Krugman’s recent bellicosity in The New York Times has seen much discussion, though more for its economic implications than its political. The tone with which he writes reflects a growing indignation among our policy circles toward China’s monetary dealings. Krugman asserts, essentially, that China cheats, and most of our policy makers (most notably, Timothy Geither) seem to agree. Krugman’s offering is worth discussing in detail because it presents, in a form to be consumed by the public, a significant debate occurring on an international level.

Like most of the economic establishment, Krugman believes that a so-called “weak” dollar should actually benefit the US economy. A “weak” currency, he says, inherently supports exports (since the dollar would be valued favorably against foreign currencies), and would encourage employment in those industries. He rightly disparages those “conservative” demagogues who decry the falling dollar as an unmitigated evil which confers no incidental benefits.

Krugman argues, however, that China, by keeping its currency at a fixed value against the dollar, also benefits from the weakening, and in a manner much more pronounced. Their currency is set to be very cheap against the dollar, and by mandating that its value against the dollar doesn’t shift, they can ensure their currency remains the “weakest”, and their export industry thus the strongest. When the dollar tanked last summer China experienced an unprecedented boom in its exports. Our Treasury Secretary has openly called this practice “currency manipulation”, and the Chairman of our Federal Reserve can makes speeches about “international imbalances” with everyone getting the message.

Krugman even lays the blame for the global economic crisis at the feet of China’s monetary policy, saying:

Many economists, myself included, believe that China’s asset-buying spree helped inflate the housing bubble, setting the stage for the global financial crisis. But China’s insistence on keeping the yuan/dollar rate fixed, even when the dollar declines, may be doing even more harm now.

In the end he paints a rather bleak picture, asserting that “Something must be done about China’s currency”, but leaving the specifics of it up to our capable policy handlers. Unfortunately, the options we have for dealing with this situation are severely restricted. As the world’s largest holder of US currency, China remains a problem which, if handled improperly, could cost $2.5 Trillion dollars.

It is telling that Krugman implicitly blames China for its trade imbalance, neglecting to acknowledge that disproportionate exports require a ready buyer. In particular, America gratefully shipped most of its manufacturing jobs across the Pacific during the years 1998-2008 while its corporate class enjoyed an accumulation of wealth unheard-of since the 1920s. By pursuing an import-centric monetary policy (the  “strong dollar” model), America did more than its part in inflating the severe trade imbalance we see today.

Finger-pointing aside, it is clear that returning to some semblance of balanced trade requires an active effort from both parties, something for which Krugman and our prevailing economic establishment only advocate a one-half response. They would like China to re-value its currency to a more “fair” proportion to the dollar while at the same time ensuring that all executive decisions and high-level positions remain in the US. The massive US trade deficit, which began under Bush II and largely financed our tax cuts and wars abroad, hardly factors into the equation.

The first step to solving a problem, after recognizing it, is to locate its sources. If we agree that the US-China trade imbalance is a problem, we cannot solve it by focusing on China’s culpability while ignoring our own.

Written by pavanvan

October 25, 2009 at 10:03 pm

Hyperinflation

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Motley Fool gives us an excellent rundown of the arguments in favor of Dollar hyperinflation next decade.

Give it a read, and get ready to start papering your walls with Ben Franklin’s handsome likeness!

Written by pavanvan

October 5, 2009 at 12:09 am

Iran and the Dollar

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iran-nuclear-facility

America and Iran are now engaging in high-level talks with the reported aim of inducing Iran to abandon its nuclear ambitions. This development comes at a point of extra ammunition for US negotiators, having just revealed their knowledge of a secret enrichment facility in Qom.

But wait a minute. The US Government admits it has known about the Qom facility for at least three years. Why should they choose this particular moment to show their hand? Given that these high-level meetings occur literally on the heels of their Qom revelation, a sort of bargain using the facility as leverage isn’t difficult to imagine. But what do we want from the Iranians?

Administration officials claim the main goal of these talks is to persuade Iran to give up its claims to a bomb, but recent events would suggest that is only a secondary objective. Primarily, our policy planners wish to ensure Iran’s cooperation with the dollar.

Last week, mere days before the US government made public the nuclear facility in Qom, Iran began shifting its foreign currency reserves from the Dollar to the Euro. This comes well after Iran created its own oil exchange, The Iran Oil Bourse, and began trading a majority of its oil in Euros or Yen. It cannot be a coincidence that the US decided to reveal its knowledge of a secret facility and ramp up its vilification campaign immediately after Iran undertook this decision.

Much has been made of the similarities between our current stance toward Iran and our statements regarding Iraq immediately before we invaded (the hysteria over “weapons of mass destruction”, the demonization of their leaders,the open threats, etc.), but to those we can add one more example: Both countries threatened to liquidate their dollar holdings shortly before the melodrama over their “weapons programs” materialized. On October 4, 2000, on the eve of President Bush’s election, Iraq decided to begin selling its oil in Euros, the only OPEC country at the time who dared to do so. The quickening drumbeat in favor of war in Iraq began soon after.

Written by pavanvan

October 1, 2009 at 10:36 pm

This Week in Failed Banks

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From the FDIC:


Bank Name

City

State

CERT #

Closing Date

Updated Date

Irwin Union Bank, F.S.B. Louisville KY 57068 September 18, 2009 September 18, 2009
Irwin Union Bank and Trust Company Columbus IN 10100 September 18, 2009 September 18, 2009

Written by pavanvan

September 18, 2009 at 9:31 pm

China and the Unlimited Shopping Spree

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China's Worldwide Investments (Source: The Heritage Foundation)

China's Worldwide Investments (Source: The Heritage Foundation)

So this is how China plans to release itself from its dollar obligations.

China, for the past decade and more, has gorged itself on US Treasury Securities, investing heavily in the dollar and amassing by now over $2 Trillion in US assets. They represent the single largest holder of US dollars, and they’re not happy about it.

Oh, it was well and good while the US consumer economy boomed (up to 2007), but now that our economy has slowed, our deficit has soared, and our National Debt has loosed from the realm of reality, China is seeking a way out of its US holdings.

Indeed, as early as March 2008 China expressed its “worry” as to the health of their US investments and the ability of the US to pay back its debt. They have since sounded a steady drumbeat in favor of an international currency, or even a basket of currencies. A recent spat over tariffs exacerbated the tension. It should suffice to say that China is deeply unhappy with its investments in the US dollar, and, after seeing Obama’s $9.2 Trillion deficit projections, seriously doubts that the US will be able to pay back its debt.

At the same time, China is trapped. They hold $2 Trillion in securities and cannot get rid of them. As the largest holder of US assets, the rest of the world takes their lead when it comes to US investments. If China were to suddenly sell their US Treasuries, or even hint that they were about to, the rest of the world would likely follow suit, crashing the dollar and rendering China’s investments worthless.

Likewise, the US economy itself would collapse, along with our consumer power, should China decide to dump its US assets. Since China’s economy is “export-oriented” (their prosperity depends on a huge export vs. import ratio), collapsing the dollar all at once would be tantamount to shooting themselves in the foot.

So for the time being, China has no choice but to play our game. But there are indications that they’ve decided upon a solution: a Global Shopping Spree. The idea, so far as one can ascertain, seems to be to spend as much as possible on commodities and hard resources (as opposed to “soft” resources, such as security-backed assets), thus converting their dollars (which they perceive as worthless) into tangible items (factories, coal, oil, etc.)

Once they’re satisfied they can simply dump their Treasury bonds, and provided they can stoke domestic consumption to make up for a decline in US consumption (we’ll all be poor by that point, remember), they should emerge as the undisputed economic hegemon.

From the article I link in the opening paragraph:

Late last month, PetroChina made a $1.9-billion bid for a majority share of two Alberta oilsands projects–a deal to buy a 60% interest in Athabasca Oil Sands Corp.’s MacKay River and Dover projects.

And also:

CIC made its first major investment in a Canadian company in July when it acquired a 17.2% stake in Teck Resources, Canada’s largest diversified mining, mineral processing and metallurgical company. Teck also holds a 20% interest in the Fort Hills oilsands project owned by Petro-Canada.

(CIC is the Chinese Investment Corporation).

China has also expressed interest in converting its dollars into US property assets:

As the CIC turns its attention to America’s damaged real estate assets, there is little information regarding how much the fund is willing to invest, but the potential firepower of the sovereign fund is huge. Some have suggested that it could be upwards of $10-billion (or more) by 2014.

And:

The CIC this year has invested money in a real-estate trust in Australia and bought an indirect stake in Canary Wharf Group in London. In addition, it has put some money into a global property fund run by Morgan Stanley. Clearly, China will continue to pour billions, if not trillions, of dollars into direct investments around the world.

I wonder how hard it is to learn Chinese.

Written by pavanvan

September 16, 2009 at 6:19 pm

An Investment Banker on China

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The banker from the previous post also commented upon China Question (i.e. “is it a good idea to borrow so much money from China?) His answer repeated almost verbatim the answer I previously received from several of his industrial colleagues.

Without the US (runs the standard interpretation), China would have no market for its goods, and thus, for China to prosper, the US must also prosper.

He continued to remark that no other country has the raw purchasing power of America. Our GDP outstrips the next largest by a factor of three. Only the combined European Union has a larger economic output than ours.

(A graph, to illustrate. The Y-axis is in millions of US dollars.)

Poor China!

Poor China!

It’s clear that no other country has the power to fuel China’s growth. If they wish to rise their people from the depths of poverty they must do so through us. Who else can they sell to? Therefore, my friend triumphantly concluded, China will do nothing to sabotage our economy.

Tellingly, however, he made the statement: “We need them and they need us – maybe they need us a little less, but the fact remains.”

He winced when I noted that these figures are based on dollar-centric monetary system. There was a possibility, he conceded, that China may wish to supplant the dollar as global currency with another, or even its own.

But this was “at least five years down the line”, he declared.

Written by pavanvan

August 23, 2009 at 10:51 pm

Inflation, again

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I just spoke with a relatively high-ranking investment banker who said he was “extremely worried” about dollar inflation. He said double-digit inflation within the next five years was a “certainty”, and mentioned some compelling reasons as to why it hasn’t happened yet.

First, the role of China in purchasing our debt cannot be overstated. They are the lifeblood of our liquidity. The dollars they pump into the Treasury have had a huge effect in keeping US interest rates low.

Also, my friend pointed to the Federal Reserve’s prime lending rate, which has been kept artificially at zero percent for almost a year now. This essentially amounts to free money to whosoever wishes for it. Needless to say the lending rate cannot be kept at zero indefinitely, and when it rises, my friend said he expects inflation to shoot upward as well.

His advice? Invest in gold.

Written by pavanvan

August 23, 2009 at 8:28 pm