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Credit markets: "Don't panic", they beg

by Jerome a Paris Wed Aug 8th, 2007 at 08:19:07 AM EST

Something is happening in the credit markets...

The above is the price of corporate loans in the secondary market - i.e. on the market where banks trade IOUs from corporations. If you have a contract that says that a company owes you 100, you can usually sell it (to other banks or financial investors) for 100 or thereabout - a bit more if the buyer thinks the interest rate on the loan is really good, or a bit less if it thinks the interest rate is not quite enough to cover the risk that the company might go bankrupt before paying its debt back.

As you can see above, the price of an IOU of 100 dropped brutally this month from 100 to 95 in the US (and to 97 in Europe). This is the lowest level ever for that market, and an unprecedented drop.

This is a credit crunch.

Promoted by whataboutbob


As gjohnsit chronicled in this recent diary, this means that banks no longer want to lend money to corporations. Almost no new debt was issued for the whole week. And banks that had underwitten loans (i.e. committed to lend) are now unable to sell these commitments down to other investors. Rumors puts such commitments at $300bn; at the 5% discount that such loans now carry, as per the graph above, that's a potential loss of $15bn for these banks if they want to dump that paper (they may decide to sit on it not to take any loss, as after all the borrowers have not defaulted, but that will weigh heavily on their balance sheets and at the very least will freeze a lot of capital and prevent them from doing new business).

Analysts everywhere (those that mocked the Cassandras that have said for a while that markets had gone crazy) have been forced to acknowledge that there is a brutal repricing of risk, and a new, sudden, unwilligness by banks to fuel the buy out craze - the debt-fuelled purchases of corporations by private equity funds at ever rising valuations. However, many are still calling this "healthy": a belated , but reasonable, return to normal after some excesses. (This is also what was said about the housing market before it claimed its first victims in the subprime lending sector this year). Some are even saying that all is well:


Don't Panic About the Credit Market

Housing and debt markets are not that big a part of the U.S. economy, or of job creation. It's more likely the economy is sturdy and will grow solidly in coming months, and perhaps years.

Unlike the 1998 seizure in credit markets to which many are now drawing comparisons, reservoirs of global liquidity are full to overflowing, not empty as they were that year. The deep 1997-1998 Asian crisis has been replaced with an all-cylinder boom. Unemployment rates are falling all around the world, while China's equities have continued hitting new highs.

Mr. Malpass is chief economist at Bear Stearns.

Bear Stearns? The same Bear Stearns that has lost 25% of its value after two of its mortgage funds collapsed? The same Bear Stearns that has been put on 'negative watch' by the rating agencies (i.e. they are looking into bringing its rating down)? The same Bear Stearns whose boss has been doing the rounds on Wall Street begging for other banks not to dump them?


Jimmy Cayne, chairman and chief executive of Bear Stearns, has been calling round other Wall Street chiefs to reassure them about its financial health and to head off a crisis of confidence in the bank.

Mr Cayne phoned Stan O'Neal, chief of Merrill Lynch, on Friday and has asked for a meeting with Chuck Prince, Citigroup's chief.

"Asked for a meeting?" The CEO of one of the biggest banks around is no longer able to talk to the CEO of Citibank? How scary is that?


The head of risk at a leading Wall Street bank said (...) it could be "a bit like a run on the bank" with the threat that clients, counterparties and lenders would pull back quickly if they lost confidence.

When top names talk about lost confidence and a bank run, all alarm bells should be ringing... So yes, you'd expect an all out attempt to shore up confidence, and all possible rosy arguments being brought up. But, seriously, Chinese equities?

Of course, financial players have been quick to cry for mommy and hope already for some kind of government bail out:


US stocks rebounded [on Monday] as financial shares gained ground on hopes that Fannie Mae and Freddie Mac - the giant government-sponsored mortgage companies - would help stabilise credit markets.

(...)

Fannie and Freddie soared 10.4 per cent and 7.7 per cent, respectively, as investors bet that their funding advantages would help them profit from the turmoil. Because of their links to the government, Fannie and Freddie are able to raise money more cheaply than other companies that buy mortgages, either to hold as investments or to package as securities for investors.

Investors were also reacting to speculation that the companies would be given greater opportunity to buy mortgages by their regulator, the Office of Federal Housing Enterprise Oversight.

A government bail out of the financiers that have stupidly bet on ever rising asset prices would be a major scandal, but pressure to do so is likely to increase as the crisis spreads. A bank run would indeed require public intervention, but major losses by banks, funds and other investors should certainly not trigger any kind of help, despite endearing pleas such as this one:

For once, wisdom is coming from the editorial pages of the WSJ, which apparently still host some consistent monetary hawks, and share my views on "Bubbles" Greenspan:


As always amid a credit turn, the pleas for easier money are rising. We're even hearing nostalgic cries for the return of Alan Greenspan, who is remembered fondly for supplying liquidity during the credit crises of his era. But what these cries forget is that the Greenspan Fed is one reason for the current mortgage mess. It's tempting to blame Wall Street and other bankers for all those bad residential loans, and they are paying the price now. But they were also lending into a housing asset bubble fed by easy monetary policy. Risky mortgages always look better when home prices look like they'll never decline.

Current Fed Chairman Ben Bernanke was along for the Greenspan ride, so he's hardly blameless. No doubt he'd love to play the hero role now, signaling easier money this week. However, he'd have to do so at a time when the dollar is weak, oil is at $78 a barrel, and commodity prices in general are roaring. Mr. Bernanke and the Fed might have more room to maneuver this week had they been tighter earlier. But now they can't afford to ignore global dollar weakness. The run on Bear Stearns would look like a Sunday stroll compared to a global run on the dollar.

And it seems that Bernanke has heeded such advice today, by holding Fed rates steady and maintaining their tightening bias. While acknowledging the recent economic downturn, the Fed has decided it cannot ignore the monster it unleashed earlier and needs to bringdown to size.

A couple of economists commenting on this have the right words:


"Bernanke tied to the mast, the FOMC remains deaf to the song of sirens" -- to borrow from Homer's Odyssey. Markets are like the sirens, and Bernanke and the FOMC are Ulysses and his crew, steadfast with their policies, not giving in to cries from the marketplace; economic data and credit events to date do not warrant rate cuts or neutral bias just yet. Zoltan Pozsar, Moody's Economy.com

(...)

Unless one believes the Federal Reserve to be a collection of utter buffoons, one must now suspect Bernanke and company fully realized they created a credit monster with a 1% Federal Funds rate and that they knew they'd have to clean it up at some point. Chip Hanlon, Delta Global Advisors

What this means is that the inertia of big financial masses is such that the asset price inflation continues to seep through into actual goods inflation, thus preventing a lowering of the rates. The need for the USA to fund its current account deficit by foreign investors also militates against any rate cuts (as they would cause a drop in purchases of US Treasuries, and a further weakening of the dollar) Finally, of course, the need to not cause any further panic (we're close enough to that, as suggested above) also pushes against any decisions which would be seen as an acknowledgement of the gravity of the situation. Better to do as if all were fine, for now.

The most likely consequence is going to be more volatility, as investors become increasingly unsure of the "real" value of financial assets and buy or sell on the slightest whiff of danger or comfort, as the following graph, which tracks the share price of Natixis, one of the biggest French banks, shows:

Enjoy the ride. And don't panic!

Display:
http://www.dailykos.com/story/2007/8/7/162053/1405

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Aug 7th, 2007 at 06:17:34 PM EST
Jerome,

Don't you think the markets will decline until Ben and the Fed cut by at least a half a point at the next meeting whether called an emergency meeting or the next regularly scheduled Fed meeting?

The timing of the Fed announcing a bias towards fighting inflation then BNP's announcement can be interpreted as the best short to possibly mid term opportunity to short the markets with no risk until the Fed cuts by at least a half a point. The idea people will actually think there is anything constructive you can do about this bubble besides cutting interest rates consistently over the next two years is 'thinking straight in a crooked world'

by An American in London on Sat Aug 11th, 2007 at 05:40:08 PM EST
[ Parent ]
To buy Euros or not...

Maybe I'll just stick with my 5% savings account.

you are the media you consume.

by MillMan (millguy at gmail) on Tue Aug 7th, 2007 at 06:30:09 PM EST
won, yen and renminbi.

The Hun is always either at your throat or at your feet. Winston Churchill
by r------ on Tue Aug 7th, 2007 at 07:54:18 PM EST
[ Parent ]
Had to look up Won. Embarrasing.


-----
sapere aude
by Number 6 on Wed Aug 8th, 2007 at 05:38:02 AM EST
[ Parent ]
That maybe a very bad idea.  

The South Korean economy has some serious issues of it's own, and until very recently they had strong export controls on currency.

In the event of a financial crisis, I would not be the least bet suprised if they do as Malaysia did in 1997-98, and implement curreny controls to prevent capital flight.

I have a friend who's a Korean bureaucrat (apparently a good thing back home, Confucius and all), and he managed to get his money out of Chinese stocks before things went sour on the Shanghai exchange.

Late last year he said he had doubled his investment in the 6 months he had it in.  So he always wanted to get the check when we went out. We'd always talk politics when we went out. South Korea has some serious issues with their economy, and they have a rising union movement.  The problem is that many of the "dirty" industries that they Japanese allowed to be shifted to Korea, are now being shifted from Korea to China.

And while there's hope that they can expand their share of the world auto market, they seem to be headed down the same path as the Japanese did.  Towards economic stagnation. And the chaebol are making heavy investments in China, and unliked Japan where there was a strong social safety net, there's not the sense that a company should retain staff through downturns.

South Korea is probably past its prime to be honest.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Wed Aug 8th, 2007 at 12:33:29 PM EST
[ Parent ]
They still have exports controls on the won, I believe...
Banking and financing in won has to be done in Korea.

Un roi sans divertissement est un homme plein de misères
by linca (antonin POINT lucas AROBASE gmail.com) on Wed Aug 8th, 2007 at 05:50:04 PM EST
[ Parent ]
Probably agree with renminbi.
But not sure about yen. You want to bet against the Bank of Japan? :)
by Detlef (Detlef1961_at_yahoo_dot_de) on Wed Aug 8th, 2007 at 04:05:13 PM EST
[ Parent ]
Things are due for a shakeup, to be sure. But while there's a definite possibiliy of a significant, perhaps even crash-like shake-up, I think it's more likely that we'll see a long secular decline of USD assets, with some of the more spotty parts of the market getting deservedly hammered.

Don't forget that a lot of that corp paper was going Private Equity, which has been driving some serious froth and undue corp asset inflation these past few years thanks to easy money in that market. And now there's more than some concern in P/E, conference call explicitly to that effect today, about what this means for future deals/borrowing.

So we may simply be witnessing the end of the P/E craze, which I think needed to be legislated anyhow (against Chuck Schumer's wishes, alas).

For my part I don't care, my resume's been updated and out the door for a couple of months. As has the CV.

Next year in Marseille, perhaps. Or Annecy.  

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Tue Aug 7th, 2007 at 08:02:33 PM EST
The fershlugginer economy needs Moxie ...

(Had to look up "secular" in "secular decline". Less Harry Potter for me for a while.)


-----
sapere aude

by Number 6 on Wed Aug 8th, 2007 at 05:47:56 AM EST
[ Parent ]
You've been reading Mad again, sepere dude ;-)

I havent heard fershlugginer in a coon's age

You can't be me, I'm taken

by Sven Triloqvist on Wed Aug 8th, 2007 at 06:15:26 AM EST
[ Parent ]
Well, these days "What, me worry" is usually the caption for a portrait of Bush Jr. ...


-----
sapere aude
by Number 6 on Thu Aug 9th, 2007 at 10:17:39 AM EST
[ Parent ]
although looking at back issues, it has always been.

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Thu Aug 9th, 2007 at 11:34:33 AM EST
[ Parent ]
The realization of the financial problem of today's world is breaking through. The assets are badly overpriced, thanks to all incentives to fuel cash flows. Even Pres. Bush publicly  acknowledges:
Asked about collapsing housing markets, and the risk of them declining further, Mr. Bush said: "In a way it's a necessary reaction to a flood of liquidity that came into the market in the past couple years." That was financial jargon referring to the past several years of easy money, some of it from overseas, at low interest rates.

Mr. Bush said that as a result of the deep pools of money available, "housing got really hot" and that a decline was inevitable. He added that "if the market functions normally" it will lead to a soft landing. "That's kind of what it looks like so far," he contended.

What a surprise... Yeah, easy money are to blame for volatility or whatever, but...

The president said he also discussed with Mr. Paulson and other cabinet members the possibility of tax cuts and reduced regulations aimed at overcoming what some see as a weakening of the competitiveness of American capital markets compared with those overseas. [...]

[Mr.] Bush sounded several familiar themes, accusing Democrats of wanting to raise taxes and embark on wasteful spending. He said he would veto legislation to expand the children's health insurance program, charging that it would raise taxes and "nationalize" the health sector, and reiterated his threat to veto other spending bills that went over his budget request.

The statement appeared to signal the White House's plan to go on the offensive in the fall to counter criticism and widespread economic anxiety by confronting Democrats on time-tested Republican themes like keeping taxes low and spending under control.


Aren't the tax cuts the source of a lot of easy money?! Can Bush fight fire with more fire?

The more financial engineering you have, the more chance is there for a handful of Ponzi or pyramid subschemes. Especially when everyone is still looking for maximal positive excitement.

by das monde on Thu Aug 9th, 2007 at 05:48:18 AM EST
[ Parent ]
I wonder if the Private Equity and Buy-Out people are going to be forced to run those companies they've been buying with cheap money.

Now THAT would be interesting.

:o

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Tue Aug 7th, 2007 at 09:21:23 PM EST
It's already happening.

Ask me about my day.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Tue Aug 7th, 2007 at 09:28:04 PM EST
[ Parent ]
How was your day Redstar?

Money is a sign of Poverty - Culture Saying
by RogueTrooper on Thu Aug 9th, 2007 at 04:43:20 AM EST
[ Parent ]
It's really been sucking of late.

The Hun is always either at your throat or at your feet. Winston Churchill
by r------ on Thu Aug 9th, 2007 at 04:14:03 PM EST
[ Parent ]

"Honey, I know you're pissed off that I gave you that syphillis I contracted at the brothel, but think of all the fun you'll have at the hospital!"

A 'centrist' is someone who's neither on the left, nor on the left.

by nicta (nico@altiva․fr) on Wed Aug 8th, 2007 at 01:35:50 AM EST
Cutting off your nose to spite your face

The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US Treasury bonds if Washington imposes trade sanctions to force a yuan revaluation.

Henry Paulson, the US Treasury secretary, met with Chinese president Hu Jintao in Beijing last week

Two Chinese officials at leading Communist Party bodies have given interviews in recent days warning, for the first time, that Beijing may use its $1,330bn (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress. Shifts in Chinese policy are often announced through key think tanks and academies.

Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is breaking down through historic support levels.

It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession.

It is estimated that China holds more than $900bn in a mix of US bonds.

Xia Bin, finance chief at China's Development Research Centre (which has cabinet rank), kicked off what appears to be government policy, with a comment last week that Beijing's foreign reserves should be used as a "bargaining chip" in talks with the US.

They won't do it, of course - not the whole shebang, because China will come down with it. But the selective dumping of small tranches of bonds could focus the Yanqui mind.

You can't be me, I'm taken

by Sven Triloqvist on Wed Aug 8th, 2007 at 02:25:36 AM EST
You've got two countries unwilling to accept reality, because reality is "politically unfeasible."

you are the media you consume.

by MillMan (millguy at gmail) on Wed Aug 8th, 2007 at 02:46:40 AM EST
[ Parent ]
Sorry, that should be "two governments," not "two countries."

you are the media you consume.

by MillMan (millguy at gmail) on Wed Aug 8th, 2007 at 02:47:23 AM EST
[ Parent ]
It depends how aggressive the US becomes about putting China in its place.

If the barriers become too steep and attempted interference in the value of the renminbi becomes too high handed, the Chinese may decide they have nothing to lose by expressing their displeasure.

In any case, trade is gradually being shifted towards Europe. Europe can't quite fill the gap, but Euro-trade gives the Chinese an alternative market and another incentive to dump the dollar, which is drifting downwards in value even if they don't decide on the nuclear option.

If they hold on for too long they won't be left with much, so - like everyone else who has stocked up on dollar securities - the question isn't so much if, but when.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Aug 8th, 2007 at 05:43:33 AM EST
[ Parent ]
It involves complex game theory that I can't get my head around ;-)

And neither side (China or US) imo understands the other. The US political capital conglomerates have, apparently, no understanding of social value, and the Chinese Communist Party has no understanding of the recursive Love-Me numbers that rule the minds of the US financial markets.

The 'rational' win-lose estimations of game theory are less illuminating when each player thinks that they are in a different game, but I think they will govern play anyway.

The other interesting factor that will play a part is the wildcard of dollar-based oil trading. In a one dimensional view, the insatiable energy demand of China is satisfied more cheaply as the dollar goes down.

You can't be me, I'm taken

by Sven Triloqvist on Wed Aug 8th, 2007 at 06:07:52 AM EST
[ Parent ]
the Chinese Communist Party has no understanding of the recursive Love-Me numbers that rule the minds of the US financial markets.

I am wrong in thinking that the inner circle contains a lot of engineering types quite capable of comprehending those numbers should they feel like it? Don't underestimate the evil capabilities of technocrats.
by Colman (colman at eurotrib.com) on Wed Aug 8th, 2007 at 08:13:48 AM EST
[ Parent ]
Love-me numbers have nothing to do with engineering or indeed logic. That is the point. The stock market and everything related to it is not about logical value. Heck, it has little to do with any kind of value. That is what the Chinese have difficulty in understanding.

You can't be me, I'm taken
by Sven Triloqvist on Wed Aug 8th, 2007 at 02:41:50 PM EST
[ Parent ]
that Chinese trade with Europe is already a lot bigger than that with the US (both imports and exports)

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Aug 8th, 2007 at 06:17:03 AM EST
[ Parent ]
What is the trade imbalance?

You can't be me, I'm taken
by Sven Triloqvist on Wed Aug 8th, 2007 at 07:33:00 AM EST
[ Parent ]

Last year China's trade deficit with the United States reached $233 billion, up from $202 billion in 2005. In the first four months of this year, the most recent figures available, the gap has widened by an additional 16 percent.

China's trade gap with Europe is expanding at an even faster rate. In the 12 months leading up to May, China ran a $216.7 billion surplus with Europe. May's $22.45 billion figure was the third-highest monthly surplus on record and a 73 percent increase over the previous year's figure.

I had done the numbers for 2006 but cannot dig them up right now, but European exports to China are a lot bigger than America's.

Some numbers here but with no aggregate EU numbers.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Aug 8th, 2007 at 07:39:44 AM EST
[ Parent ]
has the following:


Exports: $963.0 billion (2006)
Exports - partners: US 21.0%, EU 18.1%, Hong Kong 17.0%, Japan 12.4%, ASEAN 7.2%, South Korea 4.7% (2004)

Imports: $795.0 billion (2006)
Imports - partners: Japan 16.8%, EU 12.4%, ASEAN 11.2%, South Korea 11.1%, US 7.9%, Russia 2.2% (2004)

Not directly usable.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Aug 8th, 2007 at 07:43:45 AM EST
[ Parent ]
i thought i'd point out that, from these numbers, china has a trade deficit with south korea and the ASEAN countries.
by wu ming on Fri Aug 10th, 2007 at 02:23:04 PM EST
[ Parent ]
Thanks. I listened to a radio report yesterday on a potential deal between FIAT and Chery, with FIAT getting cheaper cars built for Western markets, and China acquiring car design expertise. Apparently this is one part of their engineering infrastructure that does not yet exist.

You can't be me, I'm taken
by Sven Triloqvist on Wed Aug 8th, 2007 at 07:45:25 AM EST
[ Parent ]
http://trade.ec.europa.eu/doclib/docs/2007/june/tradoc_134826.pdf

lots of numbers and graphs.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Aug 8th, 2007 at 07:48:42 AM EST
[ Parent ]
But for exports that's just not true.

2007 CIA World Factbook (2006 estimates) shows Europe barely a blip on the screen.  21% of Chinese exports go to the US, and a further 16% to Hong Kong which is likely transhipment rather than consumption, again largely to the US.  

And that's mushroomed from $11 billion in 1989, to almost $300 billion now.  Yet, the EU27 is still a larger source of imports (by value) than China.

The US DOC maintains a detailed database of US trade statistics.

Does the EU mantain something similiar?

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Wed Aug 8th, 2007 at 01:00:27 PM EST
[ Parent ]
by Bernard on Thu Aug 9th, 2007 at 04:00:25 PM EST
[ Parent ]
It's like a bad marriage where the parties want to divorce but their only asset is a $2 million house but nobody's buying houses right now. So they're stuck with each other for a while longer.

Hey, Grandma Moses started late!
by LEP on Wed Aug 8th, 2007 at 10:39:52 AM EST
[ Parent ]
This no-panic game is like a case of Prisoner's Dilemma: If we don't panic things will go probably well, if we all panic we all loose immediately. But if you panic and I don't, I loose everything and you are a beneficiary in hard times.

Usually, cooperation in Prisoner's Dilemma (PD) is regarded as problematic or paradoxical. Cooperation is explainable in the iterative version of PD,  in the form of reputation building, and nice, retaliatory and forgiving strategies. But even then respect for selfish defection is in the air.

But in the financial market situation, cooperation seems to be prevailing - market participants wish to cooperate as long as possible. "Cooperation" is based on something different than usual iteration - is it a wonder of so wide manipulation, or we still have to learn PD better? It seems that market failure is clearly unacceptable to anyone, so people try to hold on to hopes. That may explain why it is difficult to time financial collapses in advance.

by das monde on Thu Aug 9th, 2007 at 05:27:28 AM EST
[ Parent ]
Wouldn't that be a good thing?

It would crash China and it would crash the casino economy in the US.

by Francois in Paris on Wed Aug 8th, 2007 at 11:17:23 AM EST
[ Parent ]
Wouldn't that be a good thing?

In the long term?

Yes, emphatically.

But, we're all ..... well you know in the long term.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Wed Aug 8th, 2007 at 01:01:37 PM EST
[ Parent ]
I'm still young enough to care where the planet will be in 2060 :)
by Francois in Paris on Wed Aug 8th, 2007 at 01:47:06 PM EST
[ Parent ]
For me it's 2100.

I plan to live to be 120.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Wed Aug 8th, 2007 at 01:57:23 PM EST
[ Parent ]
But the selective dumping of small tranches of bonds could focus the Yanqui mind.

You bet it would focus the Yankee mind, but probably not in a way beneficial to China.

by Francois in Paris on Wed Aug 8th, 2007 at 11:27:19 AM EST
[ Parent ]
This is not as evident to me.

Short term this might be a mercantile issue for the PRC, though it's been remarked here elsewhere on the thread that the PRC-EU trade relationship has grown to be much larger than the one between the PRC and the US, and the PRC's trade relationships with much of the rest of the world (Pacific Rim, Russia, Latin America and now Africa) are growing rapidly as well.

But I don't think the leaders in the PRC are as necessarily concerned about the short term impact of such a move as they might be the long term benefits of such a move.

When thinking of the value of reserves held, let's not forget the financial concept of sunk costs, I'm sure Beijing is not forgetting this. One seeks to avoid losses when the reserves one holds are devalued, but there is no reason to believe that Beijing hasn't already priced these losses into their expectations already and in any event they're necessarily adjusted their asset allocations, if purely as a function of their evolving trade relationships and a burgeoning trade surplus with the EU.

Provided that the potential economic shock that falling US demand for products made in the PRC can be managed, seen against a backdrop of increasingly diversified multilateral trading relationships (eg increasingly mitigating), I'm not so sure there's any other reason for the PRC to back down. And long term, a currency crash in the US benefits the PRC in more ways than one, for one thing, US hard power in the Pacific Rim will be strained due to financing needs; US access to energy resources China needs will be increasingly limited, and the social disruption in the US due to a massive dose of consumer inflation may further limit US' projection of hard power for some time to come, and the US Dollar's role as default reserve currency will end, all to the PRC's benefit.

For my money, it comes down to whether the Party's central committee thinks it can manage the possible social disruption a collapse in US demand for PRC products. The US position here is far weaker imho than one supposes, and the PRC's, increasingly stronger.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Wed Aug 8th, 2007 at 12:06:22 PM EST
[ Parent ]
I agree more with this view. China does have other relatively unexploited markets for it's cheap and cheerful goods. The US has hitherto been the lowest tree in the orchard - easy pickings. As a consumer market the US is fascinated by frivolous novelty and image - as long as it is at a perceived discount. And it has plenty of importing or outsourcing US players who are always happy to increase their slim margins by pandering to this fascination for style over substance.

So this was the low fruit. But in the global market, not the only fruit.

I see this game going on a low-scale tit-for-tat basis until (like the typical heavy diplomatic exchanges with Russia ), the Eastern side will escalate and see what happens. They do, after all, have less divided popular sentiment at home to cope with.

My guess is that the macho reaction of the US to this escalation, unaccustomed to having its swagger called by a heavyweight, will precipitate some very nasty events that might touch us all.

There are two more things to factor in:firstly, the 2008 Olympics. This is the gigantic window that the Chinese have been waiting for. They are ready to disrupt large swathes of industrial infrastructure around Beijing for 3 months (!) and severely curtail the freedoms of the population for half that time. This will be the biggest and most expensive ad anyone ever placed.

Secondly, the US Presidential election 2008. It will surely be the most important in many decades. It may create tensions that the Chinese cannot understand, though they will understand their importance.

So there are good reasons that the escalation, if there is to be one, will come in late 2008 at the earliest. But since we are in an era of exponential rates of change, who knows how the world will look in 6 months?

You can't be me, I'm taken

by Sven Triloqvist on Wed Aug 8th, 2007 at 12:51:13 PM EST
[ Parent ]
I'm pretty convinced China would get much more than they would be bargaining for.

China is not in the position Japan has during the last trade conflict 15 years ago. Japan was both a very important strategic ally and a supplier of critical goods - semiconductors, industrial machinery.  China not so. Made in China products are eminently replaceable - consumer goods, light industry - and manufacturing can be turned around very quickly. Countries like Malaysia, Indonesia or Vietnam would be very happy to pick up the slack (and are scared of China). Also, China is clearly perceived as a threat in the US that has to be "dealt with".

Add the political climate in the US, which is, I think, turning solidly populist and anti-trade. You should note that the pressure on China is not coming from the pro-"industry" Republicans but from the Democrats, which are the ascendant force. The US response to a "selective dumping" would be extremely brutal, probably a full blown embargo. I really think it would happen. US demand for products made in the PRC would not fall but stop dead. I don't think China would be able to weather the shock.

And don't forget that if China crashes the US dollar, they're also screwing every holder of USD denominated titles. Pretty much everybody. There would be a lot of people very pissed off with China. I'm sure everybody would love to see the USD taken down a peg or two but a currency crisis would not be taken lightly.

by Francois in Paris on Wed Aug 8th, 2007 at 01:04:38 PM EST
[ Parent ]
regime in Beijing that when confronted with the choice between the psychopaths in the White House and the CCP, they choose the White House.

China is not in the position Japan has during the last trade conflict 15 years ago. Japan was both a very important strategic ally and a supplier of critical goods - semiconductors, industrial machinery.  China not so. Made in China products are eminently replaceable - consumer goods, light industry - and manufacturing can be turned around very quickly. Countries like Malaysia, Indonesia or Vietnam would be very happy to pick up the slack (and are scared of China). Also, China is clearly perceived as a threat in the US that has to be "dealt with".

These are all excellent points.  A quick look at 2006 Us imports from China shows that it's dominated by low tech items.  Although (I find this highly disturbing given what we know about Chinese safety standards) almost a quarter of US imports from China come in the "NUCLEAR REACTORS, BOILERS, MACHINERY ETC.; PARTS."  Oh Jesus, that's just not a good thing.

I can't rember when the US import quotas on clothes ended, but I want to say it was last year.  Reimposing those quotas could be a popular move, limiting Chinese imports, while at the same time shifting trade to other countries who could then be called upon to condemn China.

And don't forget that if China crashes the US dollar, they're also screwing every holder of USD denominated titles. Pretty much everybody. There would be a lot of people very pissed off with China. I'm sure everybody would love to see the USD taken down a peg or two but a currency crisis would not be taken lightly.

It's not straight dollar numbers, but Nationmaster has foreign reserves and gold for various countries.

Top 10

#1   China: $1,034,000,000,000.00    
#2   Japan: $864,700,000,000.00    
#3   Russia: $314,500,000,000.00    
#4   Taiwan: $280,600,000,000.00    
#5   Korea, South: $239,000,000,000.00    
#6   India: $165,000,000,000.00    
#7   Singapore: $134,600,000,000.00    
#8   Hong Kong: $132,000,000,000.00    
#9   France: $98,540,000,000.00    
#10   Brazil: $87,270,000,000.00    

This entry gives the dollar value for the stock of all financial assets that are available to the central monetary authority for use in meeting a country's balance of payments needs as of the end-date of the period specified. This category includes not only foreign currency and gold, but also a country's holdings of Special Drawing Rights in the International Monetary Fund, and its reserve position in the Fund.

Japan, Taiwan, South Korea?  All major trade partners with China.  They all export the value added parts that are integrated into Chinese products.  But a cheap watch?  The leather band is Chinese, but the actual timepiece is Japanese.  Pissing off these trading partners is probably a bad idea.


And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Wed Aug 8th, 2007 at 01:23:31 PM EST
[ Parent ]
Although (I find this highly disturbing given what we know about Chinese safety standards) almost a quarter of US imports from China come in the "NUCLEAR REACTORS, BOILERS, MACHINERY ETC.; PARTS."  Oh Jesus, that's just not a good thing.

Narhhh,

That's a fluke. Chapter 84 (big pdf) is all non-electrical machinery, sprayer for horticulture, valves, washing machines, and whatnots. It just starts with "Nuclear ...".

by Francois in Paris on Wed Aug 8th, 2007 at 01:42:23 PM EST
[ Parent ]
That was frightening.  

I know all about SIC categories, but still they remain thoroughly opaque.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Wed Aug 8th, 2007 at 01:59:59 PM EST
[ Parent ]
Just a small nitpick. :)

Germany.
German gold reserves in September 2006 were at 3422,5 tons. In September 2006 that was worth EUR 52 billion (at EUR 475 per fine ounce). Today (August 8, 2007) a fine ounce was worth around EUR 490.
That alone is more than the number mentioned by "Nationmaster". And it doesn´t even include foreign reserves / currencies held by the Bundesbank. It´s difficult to believe that they would be halved in less than two years.

"The Economist" reports that at the end of 2005, Germany had foreign reserves of around $ 101 billion (gold and foreign currencies).

For what it´s worth, here´s the IMF Data on International Reserves and Foreign Currency Liquidity Official Reserve Assets (pdf-file). It confirms most of the "Nationmaster" data and puts the "Eurozone" foreign reserves at around $ 440 billion.

I´m a bit astonished though by the US data. I seem to remember that the US gold reserves were almost triple the German ones? That would be $ 150 billion+ in gold alone?

by Detlef (Detlef1961_at_yahoo_dot_de) on Wed Aug 8th, 2007 at 03:54:41 PM EST
[ Parent ]
Countries like Malaysia, Indonesia or Vietnam would be very happy to pick up the slack (and are scared of China).

But I'm not convinced they do it as quickly, or as cheaply. You'd have a significant gap in the mean time.

Is there anywhere in Indonesia that can produce an entire MacBook Pro, for example?

There would be a lot of people very pissed off with China.

Why would the Chinese care? There are a lot of people very pissed off with the US, but that's had a negligible effect on US policy.

Competing economies may not necessarily be able to afford sanctions, so the practical outcome of pissed-off-ness is likely to be a few shipping containers of not very much.

The point is really that this isn't just an economic issue. China and Russia - and to some extent also the EU - all have good political and military reasons for wanting to tame the US. Economic warfare is a much more efficient way to reach that outcome than military confrontation.  

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Aug 8th, 2007 at 01:46:46 PM EST
[ Parent ]
I know how fast a manufacturing can be set up. Six months without plush toys, cheap jeans or throw-away watches are not a problem.

And China would care but China falls if it's not running.

by Francois in Paris on Wed Aug 8th, 2007 at 02:08:07 PM EST
[ Parent ]
I would also the dominance of the Chinese in consumer goods, rather than capital goods, means that the mulitplier effect is minimal.

Losing access to cheap shirts means that you have to find new cheap shirts at a slightly higher price.  

Losing access to sewing machines, means that you have to pay people to sew by hand, or find a way to make sewing machines on your own.

The latter raises the price of shirts more so than the former.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Wed Aug 8th, 2007 at 02:14:50 PM EST
[ Parent ]
I'd like to see how Walmart shoppers deal with this.

There's already a disconnect in terms of inflationary pressures felt by different socio-economic strata in the US and the data we hear bandied about (Core CPI). This will make it far worse. Keep in mind that it is precisely the constantly moderating influence of low-cost Chinese imports which has kept CPI in check over the past decade.

Suspect that if you're a family of 3 struggling on $24K/year, you'll be a bit less insouciant about the effects of such a currency devaluation than, say, the typical policy analyst.

Just a guess, of course, though knowing more than a few of the former, a more or less educated one.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Wed Aug 8th, 2007 at 05:22:08 PM EST
[ Parent ]
There's of course far more to it than that.

Try buying anything not made in China in your typical supermarket or hypermarket. Not just cheap toys, but foodstuffs, clothing.

These are not simply consumer items or luxury goods, but a fundamental part of the basket of goods lower income tranches in the US in particular buy. Yank them off the shelves and CPI will go up quite quickly, and the working poor in particular will feel the effects immediately.

Keep in mind there is virtually no safety net in the US. So when you have to pay 30% more for baby clothing and, say, 10% more for foodstuffs and, this is money you don't have to pay for medical care for your children which, you might not be aware, is not automatically granted in the US.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Wed Aug 8th, 2007 at 05:29:06 PM EST
[ Parent ]
Foodstuff, no. Neither drugstore items. Not made in China in any significant volume. You can find some materials made in China in foodstuff, poisonous sometimes. For non-discretionary purchases, the most impacted would clothing and house accessories.

And, having lived in the US the most of the past 10 years (and residing there as I type), I'm very aware of the health-care situation, thank you very much :)

by Francois in Paris on Wed Aug 8th, 2007 at 05:48:32 PM EST
[ Parent ]
Let's be honest we don't need to guess.

Primary imports from China

    85--ELECTRIC MACHINERY ETC; SOUND EQUIP; TV EQUIP; PTS    64,905,504,814    22.6 %
    84--NUCLEAR REACTORS, BOILERS, MACHINERY ETC.; PARTS    62,266,097,460    21.6 %
    95--TOYS, GAMES & SPORT EQUIPMENT; PARTS & ACCESSORIES    20,891,814,337    7.3 %
    94--FURNITURE; BEDDING ETC; LAMPS NESOI ETC; PREFAB BD    19,358,484,067    6.7 %
    All Others 120,350,885,249    41.8 %

The biggest effect is that the price of electronics goes up.  It's this, clothes, and footwear.  All these are products that you can hold off buying for a few months, by which time American companies have pulled out of joint ventures, and have increased American imports from the Latin American countries that have no  tariff agreements in exchange for using American fabric.  

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Wed Aug 8th, 2007 at 05:59:05 PM EST
[ Parent ]
This is simply not true. Much of the seafood and the fish you find at the market comes from China. Much of the feed used in husbandry in the US comes from China. Grain exports are fairly important.

Surely you are aware of food scares seen in the US of late related to foodstuffs immported from China?

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Wed Aug 8th, 2007 at 06:12:31 PM EST
[ Parent ]
Oh pleasse...

Chinese food and agricultural imports in the US amount to $4.2 billion (2006). That's peanut compared to the overall US market.

http://www.opencrs.com/document/RL34080

The revenue of Archer-Daniels-Midland alone was 41.35B last year.

It's not like the US or anyone for that matter is going to starve if China stop exporting. China is barely self-sufficient for food.

by Francois in Paris on Wed Aug 8th, 2007 at 06:31:49 PM EST
[ Parent ]
I didn't say people would starve. I said it would have an inflationary effect.

I know you probably wouldn't notice that you pay $10/month more for food because of a devaluation of the dollar, but there are others who are more than a bit less immune to this.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Wed Aug 8th, 2007 at 06:42:56 PM EST
[ Parent ]
You may be aware of the healthcare situation.

Are you aware of anyone in your own personal circle who must worry about such things?

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Wed Aug 8th, 2007 at 06:18:43 PM EST
[ Parent ]
I worked in healthcare, China doesn't export the value added products.  

What they do export are low value added electronic compenents that are not part of the follow up purchases.

Now I'd be very concerned if suddenly exports from Ireland, Switzerland, Germany, the UK, and France dissappeared.  That would have a huge impact.  But to be honest profit margins are so high in the US healthcare sector that they can swallow any increase currency changes bring.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Wed Aug 8th, 2007 at 06:31:24 PM EST
[ Parent ]
I'm afraid you've missed my point.

I'm saying that when inflation hits because of a USD devaluation, whether it be sudden or long and slow, it will hit the working poor first and foremost.

These are precisely the people who can least afford it, who by having to pay more for food and clothing will have even less to pay for medicine, doctor visits, much less proper health insurance which many do not have. I did not say that medicine came from China as you seem to suggest.

And yes, I do know people in such straits, my best friend for instance, so I tend to take a dim view of the economically-minded who wave their hands at such things as simple trifles which are of little consequence.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Wed Aug 8th, 2007 at 06:48:51 PM EST
[ Parent ]
Honestly the probably isn't the "poor", have you head of rummage sales, or second hand shops?

It's the "middle class" who live beyond their means, and either don't know how to save money, or feel it below them.  Take for example, food choices.  By going to Aldi's I can cut my food costs in half, but it's also known as the place the "poor people" go to shop.

Regardless, particularly in food, Mexico and Latin America is a far larger source than China, and Latin America has the excess capacity to start pumping out shirts and the like with American fabric in a short period.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Wed Aug 8th, 2007 at 06:58:45 PM EST
[ Parent ]
If the USD tanks, it will not only make PRC goods more expensive.

The Hun is always either at your throat or at your feet. Winston Churchill
by r------ on Wed Aug 8th, 2007 at 07:27:21 PM EST
[ Parent ]
Man and I disagree with the notion it would hurt the working poor particularly because, my assessment, they are not very affected by Chinese goods. The inflation would hit the middle class, domestic equipment goods, etc, and certain class of bulk industrial products, for instance, rebars or cement for construction.

If anything, if the dollar tanks, it would probably help the working poor relatively to the rest of the population because it would make light industrial activity in the US more competitive, which where non-service low qualification jobs are. They would either suffer less or even benefit from the repatriation of those jobs in the US.

by Francois in Paris on Wed Aug 8th, 2007 at 07:05:04 PM EST
[ Parent ]
As above, it isn't just Chinese goods which are going to get a lot more expensive. All imported goods will get more expensive.

And that includes the petrol used to transport California produce to Chicago, St Louis and Minneapolis.

Again, I think the two of you are dead wrong about how this plays out.

As for the middle class in America, I could care less if they get taken down a peg or two, they've got it coming.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Wed Aug 8th, 2007 at 07:29:32 PM EST
[ Parent ]
No, because you see this as a one way street where the US would stand by gently and watch China play with its reserves without doing a thing. You also assume that everybody would follow China, which is not a given at all. Actually, I don't think it would happen.

My original point is not that it would harmless for the US. The point is that it would hurt China a lot more, probably to the point of completely crashing its economy. And, IMHO, if China moved, the political situation in the US is such that it would snowball very quickly and the response would be extremely brutal.

Which is why those Chinese declarations are fairly spooky. Kabuki? Miscalculation? Weird in any case.

by Francois in Paris on Wed Aug 8th, 2007 at 08:22:37 PM EST
[ Parent ]
Well, someone is clearly miscalculating, here.

We just disagree on who.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Wed Aug 8th, 2007 at 08:24:57 PM EST
[ Parent ]
The Chinese in being liberal instead of realists.

In English, that's the IR speak for the difference between people who believe that the rules of things like the WTO are permanent in broad terms, versus realists who seem them as fundamentally variable institutions rather than something structural

Domestically, I think that the problem is that the proposition that markets exist in social contexts that generate social protection when economic activity tries to dismbed itself harming the human aspects of life is given terrible form.  The rising cost of Chinese goods in American markets, leads to millions of urban workers being forced out.  Unable to subsist off the land as before the great transformation, their efforts to restoret the human character of life take root in religous and cultural fundamentalism.

 The Chinese Communist Party either channels this anger into the creation of a virulent nationalism, or falls to those who will.  And the horrors of the 20th century  live once more. Falun Gong, Christians, Homosexuals, and other groups are made scapegoats, are discriminated against, and then genocide.

It's a question of whether China merely implodes or takes East Asia with it.

Now the happy version of this supposes that enough social capital exists in the Chinese state unions and other elements of civil society to faciliate a social democratic response.


And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Wed Aug 8th, 2007 at 09:27:50 PM EST
[ Parent ]
Oh, yes indeed. Not all is peachy rosy upper middle class, even in the Silicon Valley.
by Francois in Paris on Wed Aug 8th, 2007 at 06:52:55 PM EST
[ Parent ]
Southeast Asia does the majority of the world's semiconductor packaging and testing (far outstripping China). The infrastructure is certainly there for those sorts of operations. Competing with China's "bottomless" labor pool is the only question.

you are the media you consume.

by MillMan (millguy at gmail) on Wed Aug 8th, 2007 at 02:15:40 PM EST
[ Parent ]
I think that the real issue with SE Asia (Old French Indochina) isn't whether it has cheaper labor costs than China, it does hands down.  It's a matter of getting goods from the factory to the foreign market.  

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg
by ManfromMiddletown (manfrommiddletown at lycos dot com) on Wed Aug 8th, 2007 at 02:26:53 PM EST
[ Parent ]
It's a logistical problem. I'm not yet convinced that Vietnam and the rest have the infrastructure to step in at short notice. You'd need tens of thousands of factories to replace China's output, plus the transportation and intermodal connections to handle shipping, both in and out.

You also don't have the engineering skills base to do anything too impressive. China and India have engineers, Vietnam mostly doesn't.

Having said that I think it's more likely that China will push for a slow devaulation rather than an overnight sell-off while it develops some new markets.

A slow devaluation is going to be just as unhelpful to the US, but without the PR mushroom cloud.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Aug 8th, 2007 at 05:07:55 PM EST
[ Parent ]
I agree this is the most likely scenario, and this is why USD-denominated assets look likely to enter a long period of secular decline (in fact, have already entered).

The point I would simply make, and made above, is that all this talk about how the PRC will do itself in if it hastened a USD crisis is a bit overblown, and all this talk of how easily the US wriggles itself out of discomfiture in the event of a major financial crisis is a bit pollyannish for my tastes, for some of the reasons you are here enumerating.

The PRC is in a stronger position than we think, the US weaker, and the relative position of the former improves with each passing quarter.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Wed Aug 8th, 2007 at 05:18:39 PM EST
[ Parent ]
here.

Because so many of these Chinese firms are operating on paper thin margins, a 40% rise in cost to American customers could push them over the edge.  

Consider that the series of quality issues that we've seen in the past year, may be indicative of an economy that's reached a point at which it can no longer bank on cheap labor, and being unable to increase productivity because that would require greater autonomy for workers they resort to debasing their products.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Wed Aug 8th, 2007 at 05:44:07 PM EST
[ Parent ]
The quality issues are systemic, and a side-effect of free-booting capitalism rather than an indicator of Chinese incompetence.

You only have to look at Microsoft's Vista or some of the trash produced by the US car and food industries to see that you don't have to be Chinese to produce useless and dangerous rubbish.

The only difference between the Chinese and the US model is that in the US, systemic quality defects are hidden by marketing spin if they're non-fatal, and by lobbying if they're physically injurious. There's also a more direct risk of litigation.

But otherwise the common aim is to cut costs and maximise profits. If customers and workers are endangered at any point, that's only seen as a bad thing if it's discovered and made public and subsequently impacts the bottom line.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Aug 8th, 2007 at 06:32:28 PM EST
[ Parent ]
The only difference between the Chinese and the US model is that in the US, systemic quality defects are hidden by marketing spin if they're non-fatal, and by lobbying if they're physically injurious. There's also a more direct risk of litigation.

Quality systems and regulation are still quite strong in the United States.  Particularly in the healthcare industry. While enforcement varies greatly, there are very strict rules about reporting in the healthcare sector.  I know.  That used to be my job.

If someone so much as got a paper cut from the packaging we had to file a report with regulatory agencies here in the US.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Wed Aug 8th, 2007 at 06:53:23 PM EST
[ Parent ]
The only difference between the Chinese and the US model is that in the US, systemic quality defects are hidden by marketing spin if they're non-fatal, and by lobbying if they're physically injurious. There's also a more direct risk of litigation.

in china you can get executed for sloppy discharge of responsibility..

their video games allow you to 'kill' corrupt officials, (and their bikini-clad mistresses).

just sayin'...

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Wed Aug 8th, 2007 at 10:55:51 PM EST
[ Parent ]
Most consumer goods are not 'engineered.'  They are assembled from standard components and sub-assemblies.  

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Thu Aug 9th, 2007 at 11:53:15 AM EST
[ Parent ]
In many respects, it doesn't matter if other countries "pick up the slack".

The scenario we're hinting at here will cause not just the CNY to rise against USD, but all currencies of major trading partners with the PRC, of which the entire Pacific Rim, will more than likely rise against USD as well. It's hard, in fact, to imagine that JPY wouldn't as well given the increasingly tight trading relationship (as supplier) it has with the PRC and the fact that any PRC dumping of USD assets would more than likely provoke at least some asset-reallocation response on the part of Japanese USD asset holder.

If USD tanks, it more than likely will tank against most everyone, just as when the Argentine Austral tanked against USD it tanked against the Euro, the Yen and damn near everything else.

And if this is the case, inflation in the US will be a sight to behold, ST interest rates almost certainly pretty nasty and, like in Buenos Aires not too long ago, long middle-class lines at the soup kitchen.

I'm certainly not saying this is likely, but it is certainly not impossible, and the US margin of maneuver relative to the world economy would be, as was the case for Argentina, far more limited than one might expect. Raise tarrifs on something less and less people can afford anyway?

There is, of course, hard power.


The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Wed Aug 8th, 2007 at 05:37:13 PM EST
[ Parent ]
The difference is that Argentina was not a major export market for much of the rest of the world.  That makes the incentive to rescue the currency far less convicing.

If America goes down, you're all going straight to hell with us.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Wed Aug 8th, 2007 at 05:45:51 PM EST
[ Parent ]
I dunno, EUR is trading at 50% higher levels against USD than just 5 years or so ago, and the EU seems to be doing just fine on the trading front with the US. You'd expect that the US would start exporting with the weak dollar, but it isn't really happening, and yet the EU continues to grow, Japan isn't doing half bad on the strength of exports to the PRC, and the Pacific Rim and the PRC are diversifying their trade relationships. Hell, even Latin America has a bigger trading relationship with the EU than it does the US.

Let's face it, true the US is a far more important economy than the other Peronist regime in the hemisphere, but it ways increasingly less than it did. One big Argentina. If I were Canadian, I would fret, just as the Finns really took a hit when the old SU collapsed. As for the rest of the world? Probably recessionary pressure, but the real suffering will be done by working Americans.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Wed Aug 8th, 2007 at 06:08:42 PM EST
[ Parent ]

If America goes down, you're all going straight to hell with us.

Not Europe.

Our trade and financial flows are each basically balanced. Openness to the outside is on the low side when you look at the real commercial EU-zone (EU+Russia+Africa+Middle East). Domestic demand will not be savaged by a US or Chinese downturn. Company profits and stock market prices might be, but hey, tough. The euro will stay strong and protect purchasing power.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Aug 8th, 2007 at 06:10:12 PM EST
[ Parent ]
Now I have no doubt that Europen exports to the US are less price sensitive than those from China, but if the Chinese put their money into Euros, that puts European exports at a serious price disadvantage.

Detailed American imports from the EU show that several fields are probably not going to be able to absorb a big price increase.  Automoviles?  Machined pieces?

And the EU exports $332.1 Billion annually to the US.  Where do those exports go to if the US can't but them?

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Wed Aug 8th, 2007 at 06:21:42 PM EST
[ Parent ]
$330bn is 2% of EU GDP. Big chunks are not price sensitive. It'll be swallowed easily.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Aug 8th, 2007 at 07:07:08 PM EST
[ Parent ]
There's two ways to look at it:  It's possible Europe might run into a tough time if America slides into a nasty recession.  On the other hand, it's possible that European -- and, to a lesser extent, Asian -- strength helps to pull the US out of the ditch and get back on track.  We'll see which effects play the dominant roles.

The truth of the matter is that this "crisis" needed to happen eventually.  We've all seen it coming for a long time, and it's finally here.  A weakened dollar is necessary, too.

Housing had to go down.  (Asking $500k for a 1700 sq ft single-family home or townhome -- a house that would rent for about $2000, maybe even less -- is just nuts.  Nothing in the fundamentals supported it, as most people here at EuroTrib have known for much longer than the press.)  I think people have gone insane over it because of how "quickly" this hit.  The market around my neighborhood -- just outside the Beltway -- is in an all-out collapse, unlike anything seen in decades, from what I'm told.  (And this was supposed to be the one city immune to a collapse in the housing market, yet prices here are falling at rates double the national average.)  You can drive down a typical street and see three, four, five, even six houses for sale, no doubt by desperate sellers who have yet to realize (or simply won't admit) that it's already too late.

On the whole, it's a good thing.  Prices will decline.  Consumers will continue to trim spending.  Irresponsible companies -- the ones whose bigwigs are apparently on the phone to Cramer nightly -- will go bankrupt.  Global imbalances will begin the long process of getting back to equilibrium.  Thinking of the big picture, it's difficult to see this as anything but a necessary evil.

It's going to be a painful experience, but, even if it leads to recession (and I say this as someone who, as a low-level employee, could lose his job in such a scenario), it's not going to be the end of the world.  And it should serve as a much-needed wake-up call to Americans:  Take away the Baby-Boomers' credit cards, Social Security and Medicare now before they sink the whole damned ship with their psychotic spending habits.  And incorporate asset inflation into the CPI.  And set a CPI target.  And balance the budget.

I'll say this, though:  If I were in Britain or Australia right now, I'd be scared out of my mind.  If this is how bad things will get in America, which suffered a much less severe bubble than our fellow Anglos, what's it going to look like when the shit finally hits the fan in those countries?

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Thu Aug 9th, 2007 at 12:25:41 AM EST
[ Parent ]
is likely to be protected to some extent by the fact that it sits on loads of (increasingly valuable) commodities.

OTOH, it might be the first to suffer from the consequences of global climate change, wirh a continent that was never very hospitable to start with suddenly becoming even more hostile.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Aug 9th, 2007 at 04:11:16 AM EST
[ Parent ]
at this moment the main problem in Australia is to slow down the economy, the interet rates just increased again yesterday.

The immigration and strenght of the economy make any recession quite unlikely, especially if we talk about house prices, there is a affordability crisis and lack a supply.

my state, Queensland, runs at 5% of growth and 3% unemployment (and still dropping).

by fredouil (fredouil@gmailgmailgmail.com) on Thu Aug 9th, 2007 at 05:03:33 AM EST
[ Parent ]
In the same way that equity market prices will always be underpinned by dividend flows, so will property prices be underpinned by land (the major component of property) rental values.

I think that the UK property market is protected by demand for rented property, due to the restricted supply of land/property in the UK. The US is totally different in terms of over-supply, I think.

While there is already some pain in the massively growing "buy to let" sector here, a distressed over-geared investor does not have to drop prices too far before another investor steps in who is happy with the rental yield achievable.

The problem we had in the 1990's bust was caused by a recession and the fact that people who had lost jobs could not afford more than a "social" rental, never mind a mortgage. So rental values were dropping alongside property prices and could not support them through invetsment by would be landlords..

That is not the problem now, so UK prices are not, IMHO, going to crash the way they are in the US.

Nor did we reach quite the same levels of craziness in the UK in terms of credit excesses, and risk aversion / prudence has now set in big time..

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Aug 9th, 2007 at 04:48:53 AM EST
[ Parent ]
As long as the BTL "legal tax dodge" is still in effect, prices will stay up.

May I have a BLT instead, please?


-----
sapere aude

by Number 6 on Thu Aug 9th, 2007 at 12:33:53 PM EST
[ Parent ]
Take away the Baby-Boomers' credit cards, Social Security and Medicare now before they sink the whole damned ship with their psychotic spending habits.

Or take away the endless and frankly criminal financial farming schemes that leech wealth out of the pockets of people who work for a living into the overseas tax-free accounts of the hyper-rich.

There is more than enough wealth in the planetary economy to provide food, shelter, education and health care for every inhabitant.

If a tiny minority has to be deprived of pointless and excessive luxury to make that possible, that's not necessarily a bad thing.

As for the UK - unfortunately we simply don't have the housing stock in the UK to make a crash likely. Unless the economy tanks spectacularly - which is possible, but not likely given how closely we're tied to Europe - house prices will start to settle, but a headlong 50%+ nose-dive seems unlikely.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Aug 9th, 2007 at 07:38:08 PM EST
[ Parent ]
The difference is that Argentina was not a major export market for much of the rest of the world.

I'm amazed that people continue to ignore this elephant-sized fact. This country is going to suffer because of the credit and overconsumption binge, not because the economy produces nothing of value. Yet I continually see comments (not from redstar necessarily) that either implicitly or explicitly claim that the US "makes nothing."

The medium term is what makes or breaks the US. When our standard of living is reduced to that of Western Europe (or lower), are we still going to put half of our national treasure into the military? If so, we're doomed. If not, and that money goes into education and other social goods, our long term prospects look on par or better than Europe's due to our relative isolation from the coming volatility in Asia and better placement to exploit alternative energy.

Until that gets sorted out (nuke the planet, or roll back to regional military power), each forthcoming presidential election will be considered "the most important in history."

you are the media you consume.

by MillMan (millguy at gmail) on Wed Aug 8th, 2007 at 06:18:38 PM EST
[ Parent ]
This is a good point. It is far from true that the US no longer makes anything, and in fact there is a lower limit to how far things can go down because of superior US position in IT, MedTech and so forth. In this way, there's really no way that the armageddon bottom falls out, but there will be some significant pain, no doubt, and given how the US political economy is structured the lower you are on the SES scale the more you're going to suffer.

In any event, the Argentina crisis turned out relatively ok, and many previously shuttered manufacturers re-opened when the Austral dumped the USD peg and became competitive with Brazilian and Uruguayan suppliers. In some cases, the plants were taken over by workers, also a good thing.

For my part, the militarism will end up being the biggest problem, and given the upcoming correction, the likely source of future unrest.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Wed Aug 8th, 2007 at 06:26:41 PM EST
[ Parent ]
the lower you are on the SES scale the more you're going to suffer

Yes, and while the European safety net really helps it won't ultimately stem the tide of the same trends. Your job skills are an increasing component of your future prospects with country of birth rapidly declining in importance. The middle class will continue to shrink as the number of people required to run the world economy declines. I don't know that dwindling energy supplies necessarily change that, either, I think the world economy will simply shrink. The difference for the poor will probably be having to work in the fields rather than going to the food bank. Those employed in manufacture will be able to scrape by on a bare urban lifestyle, while current tech/knowledge workers will occupy the middle class. Then the usual parasites on top. Essentially everyone moves down a half or full step on the ladder, with the poorest in the 3rd world disappearing. For my own prospects, I might have to be flexible enough to work in SE Asia for a while.

you are the media you consume.

by MillMan (millguy at gmail) on Wed Aug 8th, 2007 at 07:11:05 PM EST
[ Parent ]
When our standard of living is reduced to that of Western Europe (or lower)

You're being sarcastic, right? Or are you talking GDP?


-----
sapere aude

by Number 6 on Thu Aug 9th, 2007 at 12:36:17 PM EST
[ Parent ]
Not sure I follow? I believe average per capita income for western European countries is a bit lower than the US, with several coming in above.

you are the media you consume.

by MillMan (millguy at gmail) on Thu Aug 9th, 2007 at 02:27:00 PM EST
[ Parent ]
As always, median would be a more useful indicator.

We don't have a huge concentration of billionaires to skew the mean, but we do have - at least we used to have  - a much less extreme income distribution curve.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Aug 9th, 2007 at 07:41:47 PM EST
[ Parent ]
I was trying to avoid that particular discussion. What is important is the perception of standard of living of US citizens - how will they react when the perception is that they're significantly worse off than Europeans. I noted the two ultimate options.

you are the media you consume.

by MillMan (millguy at gmail) on Thu Aug 9th, 2007 at 09:28:06 PM EST
[ Parent ]
OK, that's what I thought, thanks for clarifying.

(I was trying to avoid the "GDP"-"standard of living"-"measurements"-"perception"-"quality of life"-"damnyankee"-"oldeurope" discussion as well. No good can come of that. Sorry if I came across as snarky! :))

-----
sapere aude

by Number 6 on Fri Aug 10th, 2007 at 04:54:42 AM EST
[ Parent ]
Err sorry, yes I meant GDP.

you are the media you consume.

by MillMan (millguy at gmail) on Thu Aug 9th, 2007 at 02:28:22 PM EST
[ Parent ]
'There is, of course, hard power.'

No there isn't. I'm not having a go at you over this, because it seems to me that your position is more realistic than some others. But the idea that the US can rely on 'hard power' is absurd. (Again, I do not attribute this idea to you.) The truth is that the US is, in military terms, very weak indeed. I'm sure that this statement will raise eyebrows amongst most of you, but as someone else once said, you have to take everything into consideration, not just amount of money spent and amount of stuff. If you have the world's largest military, which happens to be staffed and controlled by morons and is strategically and tactically idiotic (see, e.g. William Lind's comments), then you have no 'hard power' worth talking about. The truth is that the US has all the military competence of Fascist Italy. Yes, they can nuke the whole world, but otherwise they can't fight their way out of a paper bag. Even the British despise US soldiers for their jittery nerves and utter incompetence.

More generally, I'm surprised at the polarization and lack of subtlety this aspect of the debate here has engendered. Everyone seems to think it will be China dumps its holdings and the US rolls up its sleeves and gets ready to whup some ass (as if it can actually do so ... ) ... instead, it will be China pointing out the obvious, and then everybody else in a panicky market dumping their dollars before China does. And the US will have no recourse.

by wing26 on Thu Aug 9th, 2007 at 07:26:38 AM EST
[ Parent ]
The truth is that the US is, in military terms, very weak indeed. I'm sure that this statement will raise eyebrows amongst most of you,

We've been making similar arguments here for a while now, so you may be overstating the likely surprise.

But the real problem faced by the US is that it's politically split down the middle. In a bizarre way the neocons are right - if they could have set up their ideal fascist super-state the US could have walked into Iraq and taken the oil without being seriously challenged.

But that would have meant a draft, and a suspension of the Constitution, and not even 9/11 could make that plausible, partly because of that pesky liberal tradition.

So - because the neocons prefer inertia to reality, and can't be accused of flexibility or long-term creative thinking - they carried on with the original plan, pretending to the themselves that they had the mandate they needed.

As a result the US military has been bled dry for no useful outcome of any sort - unless you count the profiteering - and the whole economy is looking very crash-prone.

Nothing short of an all-out invasion on American soil can turn the US back into a single unified state now. The splits between the hyper-rich conservative exploiters and everyone else run too deep.

If inflation explodes and a wave of bankruptcy creates a new Depression, I think there's a real danger of a much angrier response from the dispossessed middle classes than happened in the 30s. People who grew up in the 00s, 10s and 20s lacked the entitlement culture that's been a staple in the US since the 60s. Living standards are also higher, and people have been conditioned relentlessly by advertising to expect them as their due.

If that expectation is snatched away, they're not going to be happy.

And while that drama is playing itself out, the US is hardly going to be in a position play leader.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Aug 9th, 2007 at 07:27:50 PM EST
[ Parent ]
There was a over the top diary last night on Daily Kos, and in the comments someone made what I think is a deep revelation.

What if all the bluster and fuss is just fine theater?

For the Chinese to allow a revaluation of the Yuan and save face with their population. And to put off the possibility that America might impose import restrictions on whole categories of products, toys etc, on safety grounds.

Last night on CNN, they did a piece that said that 93% of us import duties were never collected.  That could be a lot of cash, essentially free money for a politician looking for ways to fund social programs.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Wed Aug 8th, 2007 at 12:38:28 PM EST
[ Parent ]
Probably yes, may be not, likely both.

Even if it's a fascist regime, the Chinese gov is not a monolith. The theatre is probably not just meant to placate the public pride but also more or less belligerent factions within the Chinese government, in particularl the PLA itself that Hu Jintao had to ally with to sit his own power.

That's the kind of theatre that can get out of hands very quickly.

by Francois in Paris on Wed Aug 8th, 2007 at 01:25:22 PM EST
[ Parent ]
That's the kind of theatre that can get out of hands very quickly.

Well as our neo-liberal friends tell us, trade between states negates the foreign policy based on national pride and non-utilitarian values.

Because conflict results in a deadweight loss to the world economy, so long as the portion accruing to parties potentially in conflict is greater than that gained by war, peace will prevail.

As history taught us in the long period of peace betwen France and Germany in the early 20th century.

Because non-utlitarian values like national pride and the desire for raw coercive power don't exist in the world of market liberalism..... </rolls eyes>

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Wed Aug 8th, 2007 at 02:11:27 PM EST
[ Parent ]
In the first graph, what was the cause of the downward US spike in 2002?

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Wed Aug 8th, 2007 at 08:04:52 AM EST
For some reason I thought that spike was in autumn 2001, but after a second look at the graph I can clearly see I was wrong. Might still be related thought.
by Trond Ove on Wed Aug 8th, 2007 at 09:29:17 AM EST
[ Parent ]
What an "Oh Christ he got in again" hangover?

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Wed Aug 8th, 2007 at 11:59:55 AM EST
[ Parent ]
Jim Cramer's buddies are getting what they deserve.  They got fat and rich on the backs of the financially illiterate, and, now that the loans aren't being paid back, they're losing their asses.  Boo.  Fucking.  Hoo.  The speculators, too, bought into this, -- hook, line and sinker -- and they are rightly now playing the pitbulls to the smarter people's Michael Vick.

One of the first rules people are taught in investment is "Don't Be a Pig."  I've never even studied it, and I'm a complete know-nothing when it comes to thinking of where to put my (nonexistent) money, but even I know that.  A lot of people have been enormous pigs for the last few years.

The only people who deserve sympathy in all of this are the millions of working people who, through no fault of their own, may well be dragged down by the stupidity of Wall Street firms.

I hope Bernanke raises rates and bankrupts these assholes.  I'm proud of his stance thus far, and I'm thrilled by Bill Poole's words.  Poole is right:  They got what they deserved.  As for Bernanke being an "academic," -- did Cramer not know he was an academic prior to his appointment? -- it's certainly preferable to the Greenspan Put.

Forget this business of acknowledging the chaos on the Street.  As an occasional (read: when channel-surfing) CNBC viewer, I can think of only two words I want to hear from Bernanke (after the rate increase):  "Booyah, Jim."

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Wed Aug 8th, 2007 at 11:51:56 PM EST
And that is, of course, to say nothing of the fact that Jim Cramer is a fucking confessed criminal.  It's the SEC that needs to wake up and lock his fat ass in jail.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Wed Aug 8th, 2007 at 11:53:13 PM EST
[ Parent ]
An episode of televised punditry:

In my home country, I watched TV news the previous week looking for market news a day after a bad Thursday. They reported a fall in the local share market, but gave no mention of the global context whatsoever! The reason they gave was that investors were cashing in after mid-year reports - asif it is normal that these regular and predictable occasions cause markets to jitter!

It is not that they don't know what they are talking about. Just a month ago they were explaining low volumes of summer trade. Hey, if this storm is happening mid summer, what we are to expect in the autumn?!

by das monde on Thu Aug 9th, 2007 at 05:57:16 AM EST
[ Parent ]

BNP suspends funds after subprime shock

BNP Paribas bacame the latest European casualty of the fallout from the meltdown in the US subprime mortgage market after announcing it had suspended three of its funds because jitters among its investors.

The French bank said in a statement that the decision to suspend Parvest Dynamic ABS, BNP Paribas ABS Euribor and BNP Paribas ABS Eonia funds followed the "complete evaporation" of liquidity.

It said the valuation of the funds would resume as soon as liquidity returned to the market and added that in the continued absence of liquidity, additional information on the envisaged measures would be communicated to investors within a month.

A spokeswoman for BNP could not immediately comment on the latest net asset value of the three funds.

BNP shares fell 2.4 per cent in early trading in Paris and sent markets around Europe lower as fears about the scale of the losses in the banking sector mounted.



In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Aug 9th, 2007 at 06:25:36 AM EST
The European Central Bank just loaned €95B to help bail out lenders, hoping to avoid greater volatility I suppose.  This is even higher than the previous largest lend, €69B the day after 9/11.

Kill the markets to asuage the credit crisis?

"Life shrinks or expands in proportion to one's courage." - Anaïs Nin

by Crazy Horse on Thu Aug 9th, 2007 at 09:34:16 AM EST
[ Parent ]


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