Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. Thursday's IndicatorsMore signs that the boost to US employment in August was merely a blip on the screen came in today, ahead of tomorrow's penultimate employment reports. Initial claims for unemployment continued to fall, but at a slower rate than anticipated. Applications fell 4,000 to 570,000 last week. Continuing claims rose by 92,000 in the week ended Aug. 22 to 6.23 million, however. In the all-important service-sector (from the point of view of employment), however, the pace of the business activity decline slowed, but remained in depressed territory. So the data remain uncomfortably mixed, with the outlook bias stuck in discernably negative territory. Tune in tomorrow at the same bat time for the big news to get a clearer picture (and even then...).The Washington Post reports today that the US will need "massive" hiring" to fill mission-critical posts in the next three years. But the number given, 270,000, represents a little more than the offset on one GOOD month's losses during this recession, so it's not like it's going to make much of a difference, especially over three years, as unemployment is slated to persist at more than 8 percent levels beyond 2011. Retail sales numbers came in, and confirm a contunuing trend toward success for low-end stores at the expense of those catering to fashion addicts. But the data are unusual because the important back-to-school numbers are truncated due to the lateness of the Labor Day holiday next week (which aren't included, for obvious reasons). The Financial Times reported yesterday (I forgot to post this then, and I'm piggybacking on Morningstar--thanks--for this link) that insider selling on Wall Street soared in August, in yet another sign that the summer equity rally had little substance to it (beyond huge rises for the like of AIG, Fannie and Freddie, Citi, etc., and indications that short-sellers were engaged in panic-buying to cover bets gone bad, for starters). And it's funny: whereas, during the "green shoots" days, stocks moved up with every report that wasn't a disaster, now even better news is being greeted with frostiness from investors. But bonds continue to stay with stocks at relatively advanced levels, at least if you're not in China. And stocks rose there for the third straight day, at an impressive 4.8% clip (losses from Monday's dive were 2 percentage points more), on assurances from a Chinese regulator that markets were functioning despite all the hoopla about gazillions of yuan of loans being cut off and whatnot. In Japan, howver, the Nikkei index was down because of strength in the yen (which serves as something of a safety valve when temporary or slight weakneses in the US--like a poor jobs report--surface). Also, China is bracing for another bout of instability in the west. Finally, the European Central Bank left its key interest rate at one percent, in a move that surprised only those who perhaps never knew that a Europen Central Bank ever existed. A far more interesting development will take place in two developed-country central banks, Norway's and Australia's, in the next few months. These countries, having chalked up impressive growth (both on rising natural resource prices, and Australia on super-stimulus enabled Chinese growth), are saying they will begin to extricate themselves from their "quantitative easing" programs in the next few months. You'd better believe that the folks at the Fed, the Banks of Japan and England, and the European Central Bank will be watching to see how messy an affair this could be. Labels: Australia, China, corporate profits, economic indicators, economic stimulus, european central bank, insider trading, Monetary Policy, Norway, retail sales, service industries, weekly initial claims Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). On Japan's ElectionsFirst, A couple of pieces from today's Financial Times. This one focuses on the "business community's" fears of the newly-elected Democratic Party of Japan, especially regarding temporary workers. Temps have been notoriously exploited during the long process culminating in Japanese companies (especially big exporters) returning to profitability, and have been rewarded for their labors by being let go en masse since the crash. The DPJ has promised to ease their lot, but it's an open question whether or not they're serious or capable of standing firm on this and other issues important to business.The second is about what the DPJ victory may mean by way of foreign policy. The DPJ has pledged that it will pursue a more independent (of the US) foreign policy than its predecessor, the Liberal Democratic Party, even to the point of reaching out to China. This would constitute a huge step in the development of Asian foreign relations, and one must ask whether or not the old cliche about Japan buying nuclear protection from the US by purchasing its ever-less valuable bonds will continue to hold true. The FT's David Pilling is an excellent observer of Asia. Here he writes interestingly on the DPJ victory's potential impact on the Japanese ruling classes and bureacracy. Finally, Karel van Wolferen is another fine observer of the Japanese scene, who has written about Japan in New Left Review and other fine publications. Here he meditates on the prospects for real change after the election. Labels: Asia, Bank of Japan, China, David Pilling, Democratic Party of Japan, Foreign Policy, Karel van Wolferen, temporary workers, Yukio Hatoyama Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Tuesday's IndicatorsCanada grew in June for the first time in a year, but 2Q GDP fell by 3.4%In the US, manufacturing grew in August for the first time in close to 2 years: autos and homebuilders, which had vastly supported any upward momentum in this sector during the boom years, and whose job losses have accounted for half those lost since December 2007, kept things going with cash-for-clunkers and tax credits for first time homeowners. And in fact, pending sales of existing homes grew faster than expected in July. In the Eurozone, unemployment numbers weighed on stocks, as July figures rose their highest level in ten years, reaching an expected 9.5% from 9.4% in June. Also, eurozone prices fell for the third straight month, though the pace of the drop is starting to level off. China's manufacturing grew at its fastest pace since 2008 in August. And South Korea's exports fell for the 10th month in a row, at a 20.6% rate, in July, from a year earlier. All in all, today's figures give a boost to the slow, weak but co-ordinated worldwide recovery scenario, with the troubling exception of the Chinese and South Korean figures. The latter attest (regading China, the key question concerns how much of the uptick in manufacturing is a result of overcapacity enabled by veritable torrents of bank lending which may be abruptly cut off, something that caused Shanghai shares to drop much deeped into bear--20% loss from height--territory on Monday) to the persistence of vast imbalances in the international economic and financial systems that could upend recovery--especially of such a uniquely fragile sort as we seem to be witnessing. Labels: Canada, China, consumer prices, economic indicators, eurozone, GDP, manufacturing, South Korea, unemployment, United States Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). China's "Bailout" of TaiwanFrom Reuters:02:25 August 26th, 2009 China's bailout of Taiwan is good for the region By: Wei Gu Wei Gu is a Reuters columnist. The opinions expressed are her own If market performance is anything to go by, Taiwan is the biggest beneficiary of China's economic stimulus. Because of Taiwan's heavy dependence on exports to Western consumers, it was assumed there was little Beijing 'could do about its downturn. But Beijing has gone out of its way to take care of the recession-hit island. This year, it sent several procurement missions to Taiwan to buy billions of dollars of goods, even though Taiwan's trade surplus with China is already approaching as much as a fifth of its economy. China might be pursuing its unification agenda. After all, it has vowed to bring the island under its rule, by force if necessary. But money is a lot better than missiles. The whole point of inter-dependency is that there will be less chance of confrontation. Taiwan could use more investment, particularly in properties and infrastructure, while China is looking for new areas in which to invest its excess liquidity. In the short run, increased purchases from Taiwan may come at Korea and Japan's expense. For example, computer maker Lenovo (0992.HK) is increasing its orders from Taiwan companies, probably also because Taiwanese firms are happy to stay as contract manufacturers. But in the long run, warmer cross-strait ties not only benefit Taiwan and are a positive for China, but also are a very bullish development for the region, which should lead to lower risk premiums in Asia. The wall of Chinese money has pushed Taiwan stocks up almost 50 percent this year, making it the second best performing market in the world after China itself and followed a decade of underperformance. Taiwanese stocks are currently valued at 26 times of 2009 earnings--a premium versus the rest of the region. Read the rest of the article Labels: bailout, China, economic statistics, financial crisis, supply chains, Taiwan Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). China's Stimulus and Dodgy StatisticsFrom The Guardian:Too early to hail China's stimulus success China may be on course to hit its annual economic growth target, but the official figures don't tell the full story Zhang Hong guardian.co.uk Friday 28 August 2009 07.00 BST It seems likely now that China will reach its annual economic growth target of 8%, dwarfing most of the other countries in the world. In the second quarter of 2009, its GDP growth spiked to 7.9%, from 6.1% in the first quarter. If all goes well, the Middle Kingdom will see its economic growth rise to an even higher rate in the remaining two quarters, making it one of the few countries still enjoying a nascent economic growth in spite of the severe impacts of the global financial crisis. However, looking only at the handsome official figures and rushing to the simple conclusion that China's stimulus economic package has worked successfully would be wrong. In China, official figures don't always tell the true story. Furthermore, the economic growth curve might develop into a "W" shape, rather than the more exciting "V" shape. This means China's economy still faces the danger of nose-diving when the stimulus effects fade away. Ma Jiantang, director of China's national statistics bureau, admitted recently that some official figures might not reflect the country's real situation. A large number of net users have also questioned the latest official figures on the country's residential average income, released by the bureau, while Ma admitted that the official surveys didn't cover those employed in the private sector. With more than 60% of Chinese residents employed by the private sector, this is a major omission. Read the rest of the article Labels: bailout, China, consumption, economic statistics, economic stimulus, financial crisis, Trade Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). More on Craziness of China's StimulusFrom The Financial Times. Here's a taste:This was thanks largely to the government's Rmb4,000bn ($585bn, 409bn euro, 355 bn pound) fiscal stimulus and the Rmb7,370bn of new bank loans extended in the first half of the year, triple the amount lent in the same period a year earlier. Economists at BNP Paribas estimate that the loan expansion was equivalent to 45 per cent of half-year GDP and say they know of no other economy that has created credit on such a scale since the second world war. This lending boom, carried out by the country's state-controlled banks on the orders of the central government, has raised concerns that much of the money has gone to borrowers who will not be able to pay it back. "I worry what’s happening now is similar to what happened in the US in 2001--the government is flooding the economy with cash that just ends up papering over the problems," says a Chinese corporate executive who used to live in the US. Rule of the iron rooster By Jamil Anderlini Financial Times Published: August 24 2009 20:19 | Last updated: August 24 2009 20:19 Under the leadership of the Communist Party, the people in China brace up to cope with the financial crisis and have scored marked successes to the worldwide attention. High-level figures from the western political and economic spheres...envy China's superb performance...as well as "China's spirit"--the kind of solid, unbreakable "Great Wall" at heart to ward off the financial crisis. English-language editorial in the People's Daily, official mouthpiece of the Communist party of China, July 30 China's rulers can be excused a modicum of less-than-grammatical gloating after the economic rebound the country has achieved in recent months. With its quick and overwhelming response to the crisis, Beijing appears to have engineered a powerful V-shaped recovery and by most estimates is on track to exceed the 8 per cent growth target it set at the start of the year. Official readings of industrial production, fixed investment, power consumption and gross domestic product all show a strong revival, while equity and property prices have soared in recent months. There have even been signs of a recovery in exports, although these are still about one-quarter below the levels of a year ago. But a growing number of economists and officials say the positive growth data hide worrying structural imbalances and the government’s response to the crisis may only have postponed an inevitable reckoning. With the world looking to China as a beacon to lead the way out of economic gloom, a second downturn would have a big impact on global confidence, not to mention commodity prices. "There is such a thing as good 5 per cent growth and bad 8 per cent growth," according to one senior adviser to the government. "We worry that what we're seeing falls more into the latter category." On an annual basis, China's economy grew 7.9 per cent in the second quarter, well up from 6.1 per cent in the first quarter. If measured sequentially the rebound was even more obvious, economists estimate, with seasonally adjusted quarter-on-quarter growth at zero in the fourth quarter of 2008 but picking up to 3 per cent in the first three months of this year and as much as 16-17 per cent in the second quarter. Read the rest of the article Labels: bailout, bank lending, China, financial crisis, speculation Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). China To Keep LendingThis is just weeks after asserting (or emphasizing?) the contrary. The Chinese are really dancing on a tightrope, here. I suppose the rest of us are, too....China to keep policy loose as economy faces new woes Mon Aug 24, 2009 8:22am EDT BEIJING (Reuters) China will maintain its stimulative policy stance because the economy, far from being on solid footing, is facing fresh difficulties, Premier Wen Jiabao said on Monday. In a downbeat statement on the government's website following a trip to the eastern province of Zhejiang, known as a hotbed of private enterprise, Wen said Beijing would ensure a sustainable flow of credit and a "reasonably sufficient" provision of liquidity to support growth. A drop in new yuan bank loans in July to 356 billion yuan ($52 billion), compared with an average of over 1.2 trillion yuan in each of the first six months of the year, has created worries among some analysts that the recent rebound in growth could be knocked off track. "We must clearly see that the foundations of the recovery are not stable, not solidified and not balanced. We cannot be blindly optimistic," Wen was cited as saying on www.gov.cn. "Therefore, we must maintain continuity and consistency in macroeconomic policies, and maintaining stable and quite fast economic growth remains our top priority. This means we cannot afford the slightest relaxation or wavering." China still faced great pressure from the slowdown in demand for exports, Wen said, adding that it was difficult to boost domestic demand in the short term to fill in the gap--despite the boost from the government's 4 trillion yuan ($585 billion) stimulus package. Thanks to the pump-priming, annual economic growth in the second quarter accelerated to 7.9 percent from 6.1 percent in the first three months of the year Read the rest of the article Labels: bailout, bank lending, China, economic stimulus, financial crisis, macroeconomics, Wen Jiabao Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Great Stuff in Today's FTFirst, Gillian Tett's appreciation of the contorted dialectics of finance (she quotes Bourdieu!).Spencer Jakab on a shift in China's dollar purchases. Labels: China, dollar, financial crisis, Financial Times, Gillian Tett, Spencer Jakab Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Today's IndicatorsMost are covered in this NYT piece. It mentions a surprise jump in first-time unemployment claims and a strong bounceback by the Shanghai Composite Index, which has lost some 20% of its value in the last couple of weeks.Calculated Risk has this update on 2Q mortgage delinquencies. Regarding the situation in China, comments in FT Alphaville and the FT itself elucidate the bounceback a bit. Finally, the Philadelphia Index of Manufacturing Activity unexpectedly expanded in August for the first time in a year. Labels: China, economic indicators, mortgage market, Philadelphia Manufacturing Index, unemployment benefits, unemployment rate Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Michael Perelman: China v. US Class WarfareFrom Unsettling Economics:China vs. the US: Class Warfare Posted August 17, 2009 Filed under: economics | In July, Chinese workers murdered beat an executive to death in protesting an immanent privatization of their steel mill. Canaves, Sky and James T. Areddy. 2009. "Murder Bares Worker Anger Over China Industrial Reform." Wall Street Journal (3 August): p. A 1. The state responded by halting the sale. McGregor, Richard. 2009. "Killing of China Steel Plant Boss Halts Sale." Financial Times (26 July). Now the money is being returned to the intended privatizer While not condoning violence, the role of the state is interesting here. China is not always known for respecting the interests of those who stand in the way of what we in the United States call economic progress. I would assume that a violent military response would occur here (unless the union would reorganize as a bank). Instead, the Chinese negotiated with the workers. I assume that some sort of punishments will be meted out, but even so, I am amazed at what happened. Here is the latest from the NYT "A Chinese provincial government halted the privatization of a state-owned steel mill on Sunday, apparently capitulating to thousands of workers who protested last week and took an official as hostage. The protests, in Henan Province in central China, were the latest sign of increasing labor activism in China’s steel industry, the world's largest and a cornerstone of China's construction-dependent economy. Three weeks earlier, rioting workers beat to death an executive who had been overseeing the sale of another state-owned steel company, Tonghua Iron and Steel, in northeast China's Jilin Province, to a private business. The privatization of Tonghua was immediately postponed after that death." Read the rest of the post Labels: China, labor, Michael Perelman, Unsettling Economics Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Chinese Sell-Off Sparks Global RoutStocks in China got hammered today, with the Shanghai Composite losing nearly 6%, and the Hang Seng in Hong Kong down by 755 points. Japan's Nikkei was a loser as well, even as Japan scored a positive GDP gain. We've spoken before on the recent slide in Chinese shares, which started as equities in other important countries were registering big gains. Here in the US, at noon EST, Reuters is reporting increased insider selling, and the S&P is down some 5%, falling below 1,000.Yves Smith of Naked Capitalism has these comments on the potential significance of this conjucnture. Labels: China, financial crisis, Japan, stock markets, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). China's Wages "Miracle"We've noted the dodgy nature of China's statistics before on this blog. But never regarding wages, which are notoriously late, often-times, as well as incomplete, in China. This does not bode well for those hoping for Chinese consumption to ramp up. So now we may be faced with both inadequate aggregate demand and rampant overcapacity (in the form of huge investment, much of it funded by speculative bets on the stockmarket and dodgy bank loans) in certain industries in China. From Monday's Asia TimesSUN WUKONG China produces a wages miracle By Wu Zhong, China Editor Asia Times HONG KONG China's National Bureau of Statistics (NBS) has with its latest release of economic data again become a target of public censure for suspected fabrication of statistics. This time, even state-run media are making high-pitched criticism, slamming "too-good-to-be-true" figures for aggravating a "crisis of confidence" in government numbers. On July 27, the NBS said the actual per capita income of urban Chinese reached 8,856 yuan (US$1,296) on average in the first half of this year (or 1,476 yuan a month), a growth of 11.2% from a year ago. Even average cash income (excluding income in kind) of farmers jumped 8.1% to 2,733 yuan per capita in the same period. This shows that despite a slowdown in economic growth as a result of the global financial crisis, China's citizens still managed to increase their incomes. In other words, the latest statistics suggest that average income is outgrowing the nation's economy, for according to an earlier NBS report, China's gross domestic product (GDP) grew only 7.1% in the January-June period. The NBS income statistics were immediately rejected and ridiculed by the public. Commentaries on state-run media openly questioned their reliability, saying the figures were too good to be true, given widely reported bankruptcies and massive layoffs in the first half of this year. "Increase in figures, decrease in income" was the title of a commentary in the Qianjiang Evening News. The income data add to public distrust of government statistics, to the extent that even state-run Xinhua News Agency opened a discussion panel on its website to let people vent their anger amid what it called "a crisis of confidence in [official] statistics". The income data certainly seem to contradict other statistics. An index designed by the People's Bank of China (PBoC) to measure how comfortable people feel living with their current incomes registered a negative 8.6% in the second quarter, the lowest since the index was launched in 1999. (The higher the figure, the more comfortable people feel they can live with their present incomes). While such an index is more or less subjective, it is supported by hard data from other departments. The Ministry of Human Resources and Social Security said at least 20 million migrant rural workers had lost their jobs in the first half of this year, as many factories, particularly in export-oriented industries, either closed or scaled down production. The Ministry of Education said about 40% of the more than 6 million university graduates this year were still struggling to find employment. Read the rest of the article Labels: bailout, China, economic indicators, financial crisis, labor Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). 4 Must Reads on China's Problematic StimulusWith vast sums committed to bank recapitalization and our own stimulus programs in the West, the pivotal role of China in the recovery of the global economy, such as it is, from the depths plumbed last autumn (and again this March) tends to be overlooked somewhat. But China's truly massive programs, which far outpace ours in terms of percentages of GDP, are full of desperate gambles and contradictions that these four articles document.First, from The Financial Times' John Authurs, Next, a piece on Beijing's dollar conundrum and strategy. Third, Michael Pettis on how lower US debt-fueled consumption will force China into a significantly lower growth trajectory. Finally, Reuters on China's hidden debts. Labels: bailout, banking system, China, financial crisis, monetary pilicy, Trade Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Bearish Roach Losing China Stimulus OptimismFrom The Financial Times:I've been an optimist on China. But I'm starting to worry Financial Times By Stephen Roach Published: July 29 2009 03:00 | Last updated: July 29 2009 03:00 On the surface, China appears to be leading the world from recession to recovery. After coming to a virtual standstill in late 2008, at least as measured quarter-to-quarter, economic growth accelerated sharply in spring 2009. A back-of-the envelope calculation suggests China may have accounted for as much as 2 percentage points of annualised growth in inflation-adjusted world output in the second quarter of 2009. With contractions moderating elsewhere, China's rebound may have been enough in and of itself to allow global gross domestic product to eke out a small positive gain for the first time since last summer. That's the good news. The bad news is that China's recent growth spurt comes at a steep price. Fearful that its recent economic short-fall would deepen, Chinese policymakers have opted for quantity over quality in setting macro-strategy, the centrepiece of which is an enormous surge in infrastructure spending funded by a burst of bank lending. Sure, developing nations always need more infrastructure. But China has taken this to extremes. Infrastructure expenditure (including Sichuan earthquake reconstruction) accounts for fully 72 per cent of China's recently enacted Rmb4,000bn ($585bn) stimulus. The government urged the banks to step up and fund the package. And they did. In the first six months of 2009, bank loans totalled Rmb7,400bn--three times the pace in the first half of 2008 and the strongest six-month lending surge on record. Read the rest of the article Labels: bailout, banking system, China, Emerging markets, financial crisis, infrastructure Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). China To Use Forex Reserves for M and AFrom The Financial Times:China to deploy forex reserves By Jamil Anderlini in Beijing Financial Times Published: July 21 2009 19:09 | Last updated: July 21 2009 19:09 Beijing will use its foreign exchange reserves, the largest in the world, to support and accelerate overseas expansion and acquisitions by Chinese companies, Wen Jiabao, the country's premier, said in comments published on Tuesday. "We should hasten the implementation of our 'going out' strategy and combine the utilisation of foreign exchange reserves with the 'going out' of our enterprises," he told Chinese diplomats late on Monday. Mr Wen said Beijing also wanted Chinese companies to increase its share of global exports. The "going out" strategy is a slogan for encouraging investment and acquisitions abroad, particularly by big state-owned industrial groups such as PetroChina, Chinalco, China Telecom and Bank of China. Qu Hongbin, chief China economist at HSBC, said: "This is the first time we have heard an official articulation of this policy ... to directly support corporations to buy offshore assets." Read the rest of the article Labels: China, financial crisis, foreign exchange, Mergers, Monetary Policy Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Ending of America's Financial-Military EmpireJust posted at Counterpunch; hat-tip to Ben C.:By MICHAEL HUDSON | June 15th The city of Yekaterinburg, Russia's largest east of the Urals, may become known not only as the end of the road for the tsars but of American hegemony too; as the place not only where US U-2 pilot Gary Powers was shot down in 1960, but where the US-centered international financial order was brought to ground. Challenging America is the prime focus of extended meetings in Yekaterinburg, Russia (formerly Sverdlovsk) today and tomorrow (June 15-16) for Chinese President Hu Jintao, Russian President Dmitry Medvedev and other top officials of the six-nation Shanghai Cooperation Organization (SCO). The alliance is comprised of Russia, China, Kazakhstan, Tajikistan, Kyrghyzstan and Uzbekistan, with observer status for Iran, India, Pakistan and Mongolia. It will be joined on Tuesday by Brazil for trade discussions among the so-called BRIC nations—Brazil, Russia, India and China. The attendees have assured American diplomats that it is not their aim to dismantle the financial and military empire of the United States. They simply want to discuss mutual aid—but in a way that has no role for the United States, for NATO or for the US dollar as a vehicle for trade. US diplomats may well ask what this really means, if not a move to make US hegemony obsolete. After all, that is what a multipolar world means. For starters, in 2005 the SCO asked Washington to set a timeline to withdraw from its military bases in Central Asia. Two years later the SCO countries formally aligned themselves with the former CIS republics belonging to the Collective Security Treaty Organization (CSTO), established in 2002 as a counterweight to NATO. Yet the Yekaterinburg meeting has elicited only a collective yawn from the US and even European press despite its agenda—nothing less than the replacement of the global dollar standard with a new financial and military defense system. A Council on Foreign Relations spokesman has said he hardly can imagine that Russia and China can overcome their geopolitical rivalry, suggesting that America can use the divide-and-conquer that Britain used so deftly for many centuries in fragmenting foreign opposition to its own empire. But George W. Bush ("I'm a uniter, not a divider") built on the Clinton administration's legacy in driving Russia, China and their neighbors to find a common ground when it comes to finding an alternative to the dollar and hence to the US ability to run balance-of-payments deficits ad infinitum. What may prove to be the last rites of American hegemony began already in April at the G-20 conference, and became even more explicit at the St. Petersburg International Economic Forum on June 5, when Mr. Medvedev called for China, Russia and India to "build an increasingly multipolar world order." What this means in plain English is: We have reached our limit in subsidizing the United States' military encirclement of Eurasia while also allowing the US to appropriate our exports, companies, stocks and real estate in exchange for paper money of questionable worth. The artificially maintained unipolar system," Mr. Medvedev spelled out, is based on "one big center of consumption, financed by a growing deficit, and thus growing debts, one formerly strong reserve currency, and one dominant system of assessing assets and risks." At the root of the global financial crisis, he concluded, is the fact that the United States makes too little and spends too much, particularly its vast military outlays, such as the stepped-up US military aid to Georgia announced just last week, the NATO missile shield in Eastern Europe and the US buildup in the oil-rich Middle East and Central Asia. The sticking point for all these countries is the ability of the United States to print unlimited amounts of dollars. Overspending by U.S. consumers on imports in excess of exports, U.S. buy-outs of foreign companies and real estate, and the dollars that the Pentagon spends abroad all end up in foreign central banks. These banks then face a hard choice: either to recycle these dollars back to the United States by purchasing US Treasury bills, or to let the "free market" force up their currency relative to the dollar—thereby pricing their exports out of world markets and hence creating domestic unemployment and business insolvency. Read the rest of the article. Labels: balance of trade, China, dollar, militarism, Russia, trade deficit Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Sinking Dollar (Wallerstein)Very clear and interesting commentary by Immanuel Wallerstein; hat-tip to Bob F. Also check out the cover story from our Jan/Feb issue.May 15, 2009, Commentary No. 257 When Premier Wen Jiabao of China said in March of 2009 that he was "a little bit worried" about the state of the U.S. dollar, he echoed the feelings of states, enterprises, and individuals across the world. He called upon the United States "to maintain its good credit, to honor its promises and to guarantee the safety of China's assets." Even five years ago, this would have seemed a very presumptuous request. Now it seems "understandable" even to Janet Yellen, the President of the San Francisco Federal Reserve Bank, although she considers China's proposals concerning the world's reserve currency "far from being a practical alternative." There are only two ways to store wealth: in actual physical structures and in some form of money (currency, bonds, gold). They both entail risks for the holder. Physical structures deteriorate unless used and using them involves costs. To utilize such structures to obtain income and therefore profits depends on the "market" - that is, on the availability of buyers willing to purchase what the physical structures can produce. Physical structures are at least tangible. Money (which is denominated in nominal figures) is merely a potential claim on physical structures. The value of that claim depends on its exchange relation with physical structures. And this relation can and does vary constantly. If it varies a small amount, hardly anyone notices. But if it varies considerably and frequently, its holders either gain or lose a lot of wealth, often quite rapidly. A reserve currency in economic terms is really nothing but the most reliable form of money, the one that varies least. It is therefore the safest place to store whatever wealth one has that is not in the form of physical structures. Since at least 1945, the world's reserve currency has been the U.S. dollar. It still is the U.S. dollar. The country that issues the reserve currency has one singular advantage over all other countries. It is the only country that can legally print the currency, whenever it thinks it is in its interest to do so. Currencies all have exchange rates with other currencies. Since the United States ended its fixed rate of exchange with gold in 1973, the dollar has fluctuated against other currencies, up and down. When its currency went down against another currency, it made selling its exports easier because the buyer of the exports required less of its own currency. But it also made importing more expensive, since it required more dollars to pay for the imported item. In the short run, a weakened currency may increase employment at home. But this is at best a short-run advantage. In the middle run, there are greater advantages to having a so-called strong currency. It means that the holder of such currency has a greater command on world wealth as measured in physical structures and products. Over the middle run, reserve currencies are strong currencies and want to remain strong. The strength of a reserve currency derives not only from its command over world wealth but from the political power it offers in the world-system. This is why the world's reserve currency tends to be the currency of the world's hegemonic power, even if it is a declining hegemonic power. This is why the U.S. dollar is the world's reserve currency. Read the rest of the commentary. Labels: China, dollar, Immanuel Wallerstein, reserve currency Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). China Reduces US Dollar Reserves In FebruaryIt's hard to tell how significant or durable an occurence this is, but it certainly deserves close attention. From Brad Setser's fine blog, Follow the Money:China Reduced Its Dollar Holdings in FebruaryPosted on Wednesday, April 15th, 2009 by bsetser It is a good thing the US trade deficit has come down, because foreign demand for US financial assets--actually foreign demand for US assets other than short-term Treasury bills--has dried up. Foreign investors bought $68 billion of T-bills in February. Russia alone (likely Russia's central bank) bought close to $14 billion. Private investors--seemingly Japanese private investors--also bought $23.5b of longer-term Treasury notes. Otherwise, though, foreign investors didn't buy much of anything. And Americans also didn’t buy many foreign assets.* After Keith Bradsher's New York Times article, though, all eyes are on China. In February, China bought Treasuries. $4.64b by my count. It bought $5.61b of bills, while reducing its long-term Treasury holdings by $0.96 billion. But China also reduced its US bank deposits by $17.24 billion. Consequently, by my count, China's total US holdings fell by $13 billion. Short-term claims fell by $11.3b, and long-term claims fell by $2b. The data on China’s short-term claims can be found here. Is this the beginning of the end? Has China decided to stop buying US assets? Read the rest of the post Labels: bailout, Brad Setser, China, dollar, financial crisis, Monetary Policy, trade deficit, Treasury bonds Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). China To TIGHTEN CreditThey did this in the run-up to the crash, too. And were blamed for it then. Article contains a distressing picture of China's real estate market from one of Chiona's chief economists, which would pour some cold water on hopes that China's stimulus program can create, rather quickly, demand on the scale required to put a serious dent in trade and currency imbalances. From The Financial Times:Beijing to tighten controls on credit By Kathrin Hille and Jamil Anderlini in Beijing Published: April 12 2009 16:43 China's central bank on Sunday warned it planned to "strictly control" credit to some sectors of the economy after the country recorded a record surge in bank loans and money supply in March. The central bank's statement, made after a routine quarterly monetary policy meeting, followed the release on Saturday of the money supply data. The data appeared to confirm that Beijing's stimulus measures are revitalising the domestic economy but raised credit risk and inflation concerns. Read the rest of the article Labels: bailout, China, financial crisis, Monetary Policy, Trade Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). China to stick with US bonds (FT)From yesterday's Financial Times; hat-tip to Larry P. for this. The money quote is from Luo Ping, director-general of the China Banking Regulatory Commission: "We hate you guys" (said of the United States, or its financial system and government, at least). Treasuries—can't live with 'em, can't live without 'em.We cover this and related issues about the risk of capital flight (why it started to happen, but reversed when the financial crisis went global) in Marie Duggan's cover article in the current issue, "The Specter of Capital Flight: How Long Will the Power of the U.S. Dollar Protect the United States?" It's available only in the print edition, but you can order that issue here, or subscribe. By Henny Sender in New York | February 11 2009 23:33 Read the rest of the article. Labels: capital flight, China, Treasury bonds Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). |
