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  • Are the Chinese capable of shaking up the US Economy?

    This is more towards the US-China trade rather than the Chinese asset bubble, but I’d still like to share it since we are discussing China.


    In early 1990s, the Chinese government pegged their currency to the US dollar. At that time the need was more to create a tinge of stability in globally volatile currency markets. Today however, China continues to peg its currency against the US dollar with an altogether different purpose – to maintain its level of exports or trade surpluses with the US. In the 9 months ending September 2009, US trade deficit stood at $165.8 billion, that is, it imported a whopping $212.3 billion worth of imports while exporting only $47.0 billion to China. In 2008, the trade deficit for the same period in 2008 stood at $197.0 billion. The annual trade deficit by the end of 2008 stood at $268.0 billion, the largest in the world between any two countries.


    If the US simply borrowed and spent less; its trade imbalances would grow smaller, right?? Not really…


    China sets the value of its currency to equal a set amount of a basket of currencies; one of them being, the USD. When the dollar loses value, China buys dollars through US Treasuries to support it. This keeps Yuan's value always within its targeted range. As long as the value of Yuan is lower than the USD, China's goods will remain cheaper in comparison. This also means that a manufacturer in US will have to either produce goods at a lower cost, or quit business. China has been enabling this behavior for years – buying trillions of dollars in US government debt and mortgage securities as part of its continuing effort to keep the Yuan from appreciating too much against the dollar.


    But there’s more to this than what meets the naked eye. China’s purchases of the US treasuries have made it the largest lender to the US government. In July 2009, China owned approximately $800 billion or 23% of US treasuries giving it political leverage over the US. If China decided to stop purchasing these US treasuries, interest rates in the US would start rising, affecting the speed at which our economy recovers. In addition, Obama on his last trip to China had requested large Chinese banks to take-over small and medium troubled banks, giving the Chinese a bigger hand in maintaining stability in the US financial system.


    Now superimpose a shaky Chinese economy (I hope I’m right in calling it shaky, considering the asset bubble) onto an already shaky US economy. It doesn't take a genius to figure out how this will end!!!


    For more discussions:

    Tags: US, China
    Jan 05 2:34 AM | Link | 1 Comment
  • Strong Spanish foundations finally turn Shaky
    After months of denial that Spain’s economy will not be too badly hit by the banking crisis, the Spanish Government now faces a harsh reality. A forecast by the International Monetary Fund in early October 2009, predicted that Spain will enter recession in 2010 and will be "harder-hit than other countries." Treasury Secretary Carlos Ocana admitted then, that the economy might not recover well until 2011. The Spanish banking system has begun crumbling under the pressure of increasing loan defaults, especially with real estate boom in Spain coming to a halt. A downturn in this sector sent huge tremors throughout the economy. In the first seven months of the year the government had built up a budget deficit of close to €10.0 billion. The scale of the impact of the global economic crisis is shown in the fact that Spain's budget was in surplus only last year. Some 80% of household assets in Spain are tied up in real estate. Unemployment reached 11.3% in September, its highest level since 1997. This is a dramatic change from the days, not so long ago, when Spain was creating roughly a third of all new jobs in the euro zone. Unemployment has risen for five consecutive months, with analysts predicting that Spain will top the European region for unemployment.
    The other biggest conundrum that the Spanish government faces is the rising government deficit. During November expenditures amounted to €168.7 million (21.5% over the same period in 2008) while €97.2 million (22.2% less) in revenues. In terms of the national accounts, the state registered a deficit until November of €68.5 million compared to negative balance of €11.0 million in the previous year. According to the state treasury, half of this deficit is the result of the crisis and the other half of the measures taken by the Government to combat it.
    The Spanish crisis is an expression of a general economic deterioration. Much of Spain's economic growth over the last decade was fuelled by cheap money from Europe and a housing boom created largely by debt. The global economic meltdown is finally seeping through the crevices of the so called strong walls of the Spanish financial system.

    For more discussions:
    Tags: Spain
    Jan 05 2:28 AM | Link | Comment!
  • Accounting Gimmickry raises its Ugly Head...
    Banks had dug up graves for themselves and in order to save themselves, I believe, there will be more cases of accounting gimmicks involved. We have highlighted a handful of these, and you will discover a few on your own… All we have to do is keep our eyes open and believe in the all supreme “common sense”.

    According to Foresight Analytics, California, delinquent payments 30 or more days late reached 4.3% during the 2Q09, the worst since the recession in the early 1990s. An estimated $7.0 billion of commercial mortgages were in foreclosure in 2Q09, nearly four times the level in 4Q07, when the recession began. Because banks are getting clobbered by bad commercial real estate loans, financing for development deals is hard to come by. The problem is compounded by lower prices for commercial real estate properties, which have fallen 24% during the past year. 

    Commercial real estate prices are depressed and performance has been poor, with delinquencies and defaults rising. Commercial mortgage defaults jumped four-fold, from $9.4 billion in 4Q07 to an estimated $38.0 billion in 2Q09, according to Foresight Analytics. Just as mounting job losses exacerbated the subprime mortgage crisis nationally, banks are coping with business failures across the country, fueled by the recession. According to the American Bankruptcy Institute, 16,014 businesses filed for bankruptcy in the 2Q09. That's the most of any quarter in 15 years, and double the 7,985 filed in fourth-quarter 2007, when the recession began. The ABA's composite ratio, which tracks eight loan categories, hit a new high of 3.35% of all accounts; the highest recorded since the industry group began tracking the rate in the mid-1970s, and tops the previous record of 3.23% set in 2Q09.

    Can we expect banks to get out of this mess anytime soon? The problems are so severe that any near-term improvement in fundamentals of banks should come as a surprise to us. As a result, accounting irregularities are increasingly being witnessed in the US. US Securities and Exchange Commission (SEC) had recently launched an informal inquiry into revenue recognition practices of Apollo Group Inc. Internet retailer underwent scrutiny from government regulators last month over accounting of certain expenses. These two companies are some of several big-names that disclosed accounting irregularities over the last few weeks.

    The current environment is merely propagating the concept of “survival of the fittest”. And to prove to the general public that they are fit enough to carry on; banks may reveal a little and hide a little

    Tags: Banks, Banking
    Nov 10 7:02 AM | Link | Comment!
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