Simon Smelt

Bar Continues to Drop Dangerously on What the U.S. Will Accept as Collateral

Greta article. Interesting that you - b y implication - take it as given that the Federal Reserve is a branch of government acting pretty much seemlessly with Treasury. I agree but a year ago that would have been a shocking proposition - undermining the "independent role" etc. In short, long-standing safeguards are vanishing rapidly.

Pierre Bourdieu, Tim Geithner, and Cultural Capital

Nice point. But the test of an intelligent individual or an elite that is going to survive is that they can adapt their worldview to new information and changing circumstances. Indeed, to remain fashionable or current requires effort and continuing re-education. The picture is dynamic, not static. Is Geithner capable of adaptation? Or is he already, as it were, history?

The Coming Depression: See It Clearly Through Historical Eyes

Well, in the comments on this interesting item we have one long piece of conspiracy theory which makes out that all those who oppose Obama's stimulus package are stooges of the extreme right, another brief item which sees it all as a Rothschild plot (and the writer is in possession of this secret list of member banks of the Fed which looks a bit different from the Federal Deposit Insurance Corporation's list), and warfare between boomers and busters as to who is to blame.
The point of learning from history so as not to repeat it. Pity there's less interest in that!

Citigroup's Horrible Conference Call

The Citigroup quarter results and conference call are intended to help boost C price in the short term, so knowledgeable folk can exit their holdings for more than small change.

A Game of Confidence

Basic economics tells us that:
(1) Confidence levels will impact on the economy via decisions by households, firms and foreign lenders and borrowers as to how they dispose their income and assets.
(2) Confidence is impacted by events in the real economy.
This article looks mainly at some aspects of (1) but pays little attention to (2).

Confidence (or lack thereof) is an attempt to look ahead and adjust behaviour accordingly; e.g. if house prices will continue to rise at 10% per annum, then I can continue to borrow lots of money.

A lot of chat suggests that if we could just restore confidence levels, then all would be well. So, over to you, Mr President.

But the fact is that confidence for much of the decade has been running too high - leading to the problems we know only too well of excess asset prices, debt, and over investment in capacity. So, the reduction in confidence is a necessary adjustment. The problem for us all is finding the right level, when a great deal of government action is likely to make matters worse in the longer term.

Evidence That Big Inflation Is Coming

The article claims to shed light, but in fact spreads confusion. This is because the writer, Hamilton, is (at best) confused in his terminology and thus his argument is based on misplaced assumptions.

- As Jonathan Christopher points out, "inflation" and "deflation" refer to price movements on some scale (whether CPI or other). In the example given by Hamilton, if one had a local measure of inflation for his small Texas town then one would probably see local inflation rising.

- CPI excludes house prices. The rise in house prices had only an indirect impact on CPI (which is a severe flaw in the Greenspan policy of attending only to CPI). Now, the fall in house prices also has only an indirect effect.

- No mechanism of causation is implied in inflation or deflation. It's just a measure. Using official CPI as the metric is problematic but don't throw the baby out with the bath water.

- Growth in MZM lately is indeed very striking, as I and numerous others have already commented. However., MZM is not M0 as the writer claims, but a narrow measure which includes bank deposits with the Fed. There are well know reasons why they shot up in late 08. Whether prices rise sharply depends on three variables - none of them MZM:
(1) Expansion in money supply by the Fed (say M2, a broader definition than M0.)
(2) Contraction in very broad money (no figures available!) due to de-leveraging by banks.
(3) Reduction in the velocity of circulation of money due both to deleveraging by banks and increased saving (and hence reduced consumption) by households.

Assuming GDP to be pretty constant,. if the increase in (1) more than counter-balances the decrease in (2) and (3) then inflation will result. Personally, I think hyper-inflation is a severe risk, but not based on Hamilton's confused arguments. Understanding the issues involved isn't helped by confusing the terminology.

This Is Just the Beginning

I took two critical points from Schiff's article:
First, that a decline in the U.S. $ will trigger inflationary pressures. Second, (though he doesn't quite put it this way) the big increases in money supply are currently being offset by hoarding / saving by banks and consumers. A movement upward in prices could unravel that fast and lead to huge inflationary pressure.
So, everything depends on the rest of the world accepting increasing U.S. debt and dollars. They have so far but at some point unknown the costs of existing U.S. assets will be less than the increasing incredibility of U.S. commitment to repay in non-hyper inflated $s.
The present situation is v convenient for those seeking a staged withdrawal from the U.S. $.
Contra expatsp, there are plenty of countries (including some of the big Euro members) with much better fundamentals than the U.S. and most will be issuing plenty of bonds to fund their own stimulus and rescue packages. Place your bets...

Book Review: The House of Dimon, by Patricia Crisafulli

A change from the "criminally insane bankers rape middle America" line.
So, let's see. James Dimon, according to Crisafulli, is the guy who has had key roles at AmeEx, Citbank, and now JP Morgan, and is:
- a great leader
- good with numbers
- risk averse
- pursues a culture of honesty and transparency
- tackles problems early.
So, what went wrong?

If Dimon has even half the qualities attributed to him, then there are five possible reasons why he (and the other Wall St tycoons) failed so drastically:
(a) the crisis was unforseeable
(b) it's all a plot
(c) bounded rationality: he got distracted by all the CEO hoop-la, trusted Greenspan et al, and took his eyes off the core issues
(d) competitive pressures left no alternative but to dance to the music
(e) moral hazard: we're heading over the cliff but the government wants us to keep pumping this garbage and will rescue us; meantime let's make $$$.

We know (a) isn't true and I don't believe (b). Personally, I suspect a mixture of (c), (d), and (e).

Why Is Oil Creeping Back Up?

Separate out the long term factors from the short term factors to get a clear picture on oil.
Long term maybe there's economic recovery and demand increases, driving oil prices up. Short term, storing excess inventory - including in tankers parked offshore - is expensive, too expensive to wait for the green shoots to blossom.
So, it's a market squeeze with the costs of storage offset by (i) gains in trades against those who've been shorting against the current price AND (ii) by taking future short positions for the time when all that inventory has to be released.

Geithner on Yuan: Misstep or Warning Shot?

China is dependent on the U.S. for trade. But the U.S. also benefits in that it gets cheap goods.
The U.S. is dependent on China to fund its debt. But China also benefits in that it funds the U.S. purchases of its goods and finds a "safe" home for its money.
Without access to Chinese goods, the U.S. would become uncompetitive on world markets. Without access to Chinese cash, the U.S. is bankrupt.
Without access to U.S. markets, China faces faces a severe economic downturn and social disorder. Without lending to the U.S., China would undermine its key market and, in weakening the dollar, undermine world trade and its own savings in the U.S.
That is a heavy set of inter-dependencies. So, let's hope the two governments can keep cool.
Over time, it will be easier for China to reduce its dependency on the U.S. than vice-versa. China can redeploy to other markets and investment areas and build domestic markets. Its' moving to do so already.
The U.S. is building its mountain of debt and thus becoming more dependent on creditors, notably China, all the time.
Therefore, at some stage, if needled enough, China will cash in the U.S.'s chips. What's holding them back is:
(1) general caution and wish to maintain (some) good will
(2) the impact globally and thus uncertainty about full knock on effects
(3) fear of domestic disorder.

Can China Do Without the U.S. Dollar?

If you were right and there is no possible alternative to the U.S. $, then America should stop worrrying and just keep borrowing until the economy comes right. 'Cos nobody has any choice but to accept the US.
But back in the real world, the main actors balance and re-assess their risks all the time. The US has extracted probably near the max from reserve currency status and is now clearly having to adapt its policies to keep its creditors content. Meantime, China is demonstrating that it is exploring many alternatives to the US $ both as store of value and means of exchange. The main protection for the U.S. is that China's elite does very well out of current export arrangements and would be threatened by any big shifts. So, U.S. survival depends on the present regime in Beijing. A more radical regime might decide to enrich its own people (China's phenomenal growth has offered only crumbs to most households) and boost domestic demand rather than export capacity or take the loss on its U.S. savings in order to achieve world domination through collapsing the U.S. economy. Meantime, what were the options of the U.S. government again? Punish China by withholding all those shiny new $$ that China so needs??

On Jul 02 12:24 PM Mad Hedge Fund Trader wrote:

> Not in a million years. Make that ten years. Will people pleeease
> stop incessantly talking about the possibility of China dropping
> the dollar as a reserve currency? What else are they going to use?
> Monopoly money? Taiwanese dollars? Collectable postage stamps? At
> nearly $2 trillion, the Middle Kingdom’s reserves are so enormous
> that no other currency in the world could accommodate the switch,
> and no other security offers the necessary depth and liquidity but
> Treasury bills. Chinese attempts to buy anything in size causes its
> price to immediately skyrocket, such as we saw in the relatively
> Lilliputian commodity markets last year. And really, how like is
> it that China embarks on policies that quickly halve the earnings
> of the country’s exporters, as well as its 30 year hoard of accumulated
> savings? The demise of the dollar has been predicted more often than
> the ditching of Microsoft’s Windows as the global PC operating system,
> and is just as likely. Hate the greenback as much as you like, but
> there just isn’t any other alternative. I have been hearing these
> arguments ever since the US went off the gold standard in 1973. First
> there was a perennial Arab threat to price crude in a basket of currencies.
> Gee, they never seem to complain when the buck is going up. Then
> there was the speculated emergence of the “Yen Block”, in the eighties,
> back when Japan was dominating international trade and the yen was
> bumping up against ¥80 to the dollar. Remember the book “Japan as
> Number One? Ha! Double Ha! Then we got all that European whining
> after the launch of the euro when the weak dollar was everyone’s
> one way trade. Let’s face it, Europeans hate using someone else’s
> currency as the primary reserve instrument. Before the dollar, sterling
> was in widespread use and was equally despised. So rather than waste
> time discussing this issue anymore, let’s talk about something more
> important, like which of those two flies over there will jump off
> the wall first.

China: Exports vs. Domestic Demand, The Argument Rages

Excellent insights and references again. What you don't mention is that the debate on how hard to tackle export dependency is closely related to different interest groups (and provinces) who stand to gain or lose from such a major shift in the economy.
In terms of these interest groups, there are three reasons for gloom in looking for useful reform in China:
1) Much of the big (and interesting) money comes from trade
2) The SOEs are of course not only "safe" (in the same way as the U.S., zombie banks - almost inextricable state backing) but influential in a way that SMEs are not. So SMEs remain last in the queue for cheap loans.
3) A more subtle one this but perhaps the biggest difficulty: Improving domestic demand requires erecting real health and social welfare safety nets. But, if this was to reach the countryside, then the reserve wages of excess labour there would rise from near zero. This in turn would spoil the huge reserve army of labour that has powered China's economic success. Put simply, the elite need an impoverished countryside to feed their growth machine in the coastal cities . That this is eerily similar to the (much less efficient) regime that Mao took over from and caused its downfall, must make the present leadership a little uneasy.

China-U.S. Ties: Recovery Without Rebalancing

The deep level of commitment between China and the U.S. you suggest requires China to trust the U.S. but not vice versa. China sells goods to the U.S. and loans money to the U.S. In return, the U.S. promises that in the future it will not default or inflate away the value of its debt to China. U.S. gets stuff now. China gets promises. And how many votes for U.S. politicians in imposing harsh domestic policies in order to fulfill those promises?

Why China and India Want the IMF to Sell Its Gold

The maths from Vuke and capt Brian are fun. What they illustrate is that gold is a bad buy beyond the short term. There is not enough of it physically to provide liquidity globally unless it is revalued one hundred fold or more. That would be a nice gift to the gold bugs and to South Africa and Russia but can you see the U.S., China and Russia going with that? Dislocation of trade and finance would be huge.
If there's total collapse, then tins of spam might be more useful as a means of exchange.

The Fed: Why I'm Worried about Where It's Headed

Thanks for the thoughtful article. I suspect Bernanke is prisoner of the received wisdom from the Greenspan era that at the systemic level the job of a central bank was to keep CPI inflation under control. Given that, loosen monetary conditions in a downturn and deal with any particular misdemeanours or banking problems.

That's still the play sheet, though conditions are very different and the received wisdom on CPI inflation proved wrong (asset price inflation and debt ratios do matter at the systemic level!)

I can see no evidence of an alternative play sheet apart from "can't-spend-too-much" crude Keynesianism. Would replacing Benanke make any difference?