Tag: Financial Crisis

Why China Still Buy US Debt

The People’s Bank of China (PBoC) accumulated its forex reserves by borrowing yuan from the Chinese people. The U.S. dollar assets and yuan liabilities are roughly balanced on the central bank’s balance sheet. If the U.S. government is addicted to debt, so is China’s.

The purpose of that precarious balance sheet is to subsidize exports by keeping the yuan’s value low and deferring inflation. An economy like China’s that is enjoying rapid productivity growth would normally see rising real wages and hence benign inflation that would increase the cost of its exports. Because that process has been stopped, China’s exporters remain competitive across a range of labor-intensive products such as shoes and garments in which the country no longer has a true comparative advantage.

Were the PBoC to stop buying U.S. Treasurys and other dollar assets, the result would be an immediate increase in the yuan’s value. The losses on U.S. investments as the yuan slowly appreciates are one part of the cost for the export-subsidy policy.

In the short term Chinese threats to stop buying U.S. debt are empty, since there are no other asset markets deep and liquid enough to absorb the purchases needed to keep the yuan stable. Were China to buy euros or yen in sufficiently large quantities, it would soon run into a protectionist backlash in Europe and Japan as those nations ran trade deficits. The U.S. willingness to run a persistent trade deficit is key to the dollar’s status as a reserve currency.

via Review & Outlook: China’s Debt Addiction – WSJ.com.

China Has Divested 97 Percent of Its Holdings in U.S. Treasury Bills

China has dropped 97 percent of its holdings in U.S. Treasury bills, decreasing its ownership of the short-term U.S. government securities from a peak of $210.4 billion in May 2009 to $5.69 billion in March 2011, the most recent month reported by the U.S. Treasury.

Treasury bills are securities that mature in one year or less that are sold by the U.S. Treasury Department to fund the nation’s debt.

Mainland Chinese holdings of U.S. Treasury bills are reported in column 9 of the Treasury report linked here.

Until October, the Chinese were generally making up for their decreasing holdings in Treasury bills by increasing their holdings of longer-term U.S. Treasury securities. Thus, until October, China’s overall holdings of U.S. debt continued to increase.

Since October, however, China has also started to divest from longer-term U.S. Treasury securities. Thus, as reported by the Treasury Department, China’s ownership of the U.S. national debt has decreased in each of the last five months on record, including November, December, January, February and March.

via China Has Divested 97 Percent of Its Holdings in U.S. Treasury Bills | CNSnews.com.

Cut Here. Invest There

Borrowing billions more from China to give ourselves more tax cuts does not qualify. Make no mistake, President Obama has enacted an enormous amount in two years. It’s impressive. But the really hard stuff lies ahead: taking things away. We are leaving an era where to be a mayor, governor, senator or president was, on balance, to give things away to people. And we are entering an era where to be a leader will mean, on balance, to take things away from people. It is the only way we’ll get our fiscal house in order before the market, brutally, does it for us.

To survive in the 21st century, America can no longer afford a politics of irresponsible profligacy. But to thrive in the 21st century — to invest in education, infrastructure and innovation — America cannot afford a politics of mindless austerity either.

The politicians we need are what I’d call “pay-as-you-go progressives” — those who combine fiscal prudence with growth initiatives to make their cities, their states or our country great again. Everyone knows the first rule of holes: When you’re in one, stop digging. But people often forget the second rule of holes: You can only grow your way out. You can’t borrow your way out.

via Cut Here. Invest There. – NYTimes.com.

The Scariest Unemployment Graph I’ve Seen Yet

The median duration of unemployment is higher today than any time in the last 50 years. That’s an understatement. It is more than twice as high today than any time in the last 50 years.

via The Scariest Unemployment Graph I’ve Seen Yet – Business – The Atlantic.

Our Hidden Inflation

Government statistics are about the last place one should look to find inflation, as they are designed to not show much. Over the last 35 years the government has changed the way it calculates inflation several times. According to the Web site Shadow Government Statistics, using the pre-1980 method, the Consumer Price Index would be over 9 percent, compared with about 2 percent in the official statistics today.

While the truth probably lies somewhere in the middle, this doesn’t even take into account inflation we ignore by using a basket of goods that don’t match the real-world cost of living. (For example, health care costs are one-sixth of G.D.P. but only one-sixteenth of the price index, and rising income and payroll taxes do not count as inflation at all.)

Why does the government understate rising costs? Low official inflation benefits the government by reducing inflation-indexed payments, including Social Security. Lower official inflation means higher reported real G.D.P., higher reported real income and higher reported productivity.

via Op-Ed Contributor – Easy Money, Hard Truths – NYTimes.com.

Forget Greece: Europe’s real problem is Germany

Germans look at the current crisis and blame their spendthrift Mediterranean neighbors for using the cover of the euro to rack up public and private debts that they now cannot support. They blame hedge funds and other speculators for making a bad situation worse and profiting from other people’s misery. And they are furious that they are being told by their leaders that they have no choice but to bail everyone out.

What Germans won’t accept is that they wouldn’t have been able to sell all those beautifully designed cars and well-engineered machine tools if Greeks and Spaniards and Americans hadn’t been willing to buy those goods and German banks hadn’t been so willing to lend them the money to do so. Nor will they accept that German industry was able to thrive over the past decade because of a common currency and a common monetary policy that, over time, rendered industry in some neighboring countries uncompetitive while generating huge real estate bubbles in others.The danger of Germans misunderstanding the causes of the current crisis is that it leads them, and the rest of Europe, to the wrong solutions.

via Steven Pearlstein – Forget Greece: Europe’s real problem is Germany.

When Will the Present Change the Mistakes of the Past?

The author outlines the post-depression social contract and the gradual breakdown of that model. In the private sector, an example would be the breakup of the AT&T phone monopoly, which opened up the Market to the introduction of cell phones and the internet. But not every industry rose to the International challenges of Globalization and hence the Detroit automotive debacle, brought-on by the recent near-depression. The author wonders what Crash will it take to get Governments to change from their WWII model. The recent close-call (assuming that the Sovereign Debt Crisis doesn’t unravel) has shocked many of the welfare-state proponents to face the unsustainability of their historical model.

American Challenges: The Blue Model Breaks Down – Walter Russell Mead’s Blog – The American Interest.

Relax, We’ll Be Fine

The U.S. is on the verge of a demographic, economic and social revival, built on its historic strengths. The U.S. has always been good at disruptive change. It’s always excelled at decentralized community-building. It’s always had that moral materialism that creates meaning-rich products. Surely a country with this much going for it is not going to wait around passively and let a rotten political culture drag it down.

via Op-Ed Columnist – Relax, We’ll Be Fine – NYTimes.com. Continue reading “Relax, We’ll Be Fine”

The Rising Sovereign Debt Crisis

Bond giant PIMCO spoke of a “sovereign debt explosion” that has taken the world into uncharted waters and poses a major threat to economic stability. “Our sense is that the importance of the shock to public finances in advanced economies is not yet sufficiently appreciated and understood,” said Mohamed El-Erian, the group’s chief executive.

Mr El-Erian said most analysts are still using “backward-looking models” that fail to grasp the full magnitude of what has taken place in world affairs since the crisis. Some 40pc of the global economy is in countries where governments are running deficits above 10pc of GDP, with no easy way out.

Italy has to refinance 20pc of its entire debt – the world’s third largest after Japan and the US – tapping the bond markets for a total €259bn this year. Belgium has to roll over 22pc of its substantial debt.

via Eurozone could risk ‘sovereign debt explosion’ – Telegraph.

Treasury Secretary Timothy Geithner

At first, some people on Wall Street feared that the Obama Administration was simply seeking a pretext for taking over embattled firms like Citigroup and Bank of America, as liberal Democrats had urged. But Geithner was resolutely opposed to such an option, at least at that stage. He and Ben Bernanke, the Fed chairman, intended to use the stress tests to bolster banks’ finances rather than nationalizing them. “That would have been a deeply transforming policy mistake,” he said to me. “The country would have suffered for decades. We’d have spent hundreds of billions of dollars more that we didn’t need to spend, and would have been stuck in those institutions for years.”

In fact, some commentators agreed that the Treasury and the Fed were being too tough on banks.  One of these skeptics was Richard Bove, an analyst at Rochdale Securities, who has been following the financial industry since 1965. He has since changed his mind. “Geithner recognized that the system needed overkill on security and soundness to rebuild the confidence that was lacking,” he said. According to Bove’s calculations, U.S. banks now have more capital as a percentage of assets than in any year since 1935. “He built in that safety and soundness throughout the industry. As time goes on, I’m getting more and more respect for him.”

Between March 9th and May 7th, when the results of the stress tests were announced, the Dow rose by almost two thousand points, and the spread between AAA and BAA bonds—a reliable indicator of financial distress—fell sharply

Read more: via Treasury Secretary Timothy Geithner : The New Yorker.