Posts Tagged ‘dollar’
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.
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.
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.
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.
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?
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.
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.