Brad DeLong's Semi-Daily Journal: A Weblog

I think that the true question is: with which currency, oil is sold? This will make either Europe, or USA

I think that the true question is: with which currency, oil is sold? This will make either Europe, or USA

I posted about this paper when it was published.

http://www.jamesrmaclean.com/archives/000562.html

and here

http://www.jamesrmaclean.com/archives/000520.html#more

I also have a link to a free copy of the paper there:

http://emlab.berkeley.edu/users/obstfeld/ca_v2.pdf

and the related "External Adjustment"

http://emlab.berkeley.edu/users/obstfeld/Lecture.pdf
******************************
He makes the point that countries have a budget constraint in their current account/capital account balances, and this is a stationary stochastic share of GDP over time. This, in turn, is based on a third paper by Alan Taylor:

"A Century of Current Account Dynamics" (PDF; pp.5-7)

http://www.economia.uniroma2.it/ceis/conferenze_convegni/banking2001/papers/venerdi/taylor-Ven.pdf

Hope this helps.

I posted about this paper when it was published.

http://www.jamesrmaclean.com/archives/000562.html

and here

http://www.jamesrmaclean.com/archives/000520.html#more

I also have a link to a free copy of the paper there:

http://emlab.berkeley.edu/users/obstfeld/ca_v2.pdf

and the related "External Adjustment"

http://emlab.berkeley.edu/users/obstfeld/Lecture.pdf
******************************
He makes the point that countries have a budget constraint in their current account/capital account balances, and this is a stationary stochastic share of GDP over time. This, in turn, is based on a third paper by Alan Taylor:

"A Century of Current Account Dynamics" (PDF; pp.5-7)

http://www.economia.uniroma2.it/ceis/conferenze_convegni/banking2001/papers/venerdi/taylor-Ven.pdf

Hope this helps.

There will be massive dollar movement, but they will be gradual, and controlled by the Chinese as they alter the peg on the dollar a few percentage points at a time. This will cause American real wages to fall (reverse Walmart effect) but will lead to a growth in employment in our export sector. I predict we will export el-cheapo autos to Asia, but robot painters will be replaced by human beings once more doing that icky-sticky job. Maybe a return to the model T Ford, high tech version.

Does the word "exponentially" in that quote have any meaning, or is it just being used as a five-syllable synonym for "a lot"?

If you haven't read it already, here's a link to an excellent post by Roubini on the prospective end of foreign central bank U.S subsidization...

http://www.roubiniglobal.com/archives/2004/11/speculative_cen.html

If you haven't read it already, here's a link to an excellent post by Roubini on the prospective end of foreign central bank U.S subsidization...

http://www.roubiniglobal.com/archives/2004/11/speculative_cen.html

Today's (11/90/04) New York Times had an interesting front page article on the Chinese banking system, but for some reason they buried what should have been the headline on page C10.
Specifically they said that in August and September the Chinese depositors withdrew only 12 to 17 billion dollars of their money, but in October they withdrew 120 billion dollars (about 3% of the total) to loan unofficially.
In China the courts are not very friendly to unofficial lenders so this means that the depositors were unhappy about either return on their investment, or return of their investment.
Since the official Chinese banks primarily exist to loan money to the state (moneylosing) corporations to keep their employees supporting the state, or to friends (moneystealing) of the bankers, to squirrel it away in Swiss banks in case the state goes away, I believe it is the latter.
The question is more than whether the Chinese banking system is going to suffer a run, it is whether the Chinese workers are going to start dissaving their bank accounts and spending the money on themselves.
In which case we won't be getting anymore cheap stuff from China.

Today's (11/90/04) New York Times had an interesting front page article on the Chinese banking system, but for some reason they buried what should have been the headline on page C10.
Specifically they said that in August and September the Chinese depositors withdrew only 12 to 17 billion dollars of their money, but in October they withdrew 120 billion dollars (about 3% of the total) to loan unofficially.
In China the courts are not very friendly to unofficial lenders so this means that the depositors were unhappy about either return on their investment, or return of their investment.
Since the official Chinese banks primarily exist to loan money to the state (moneylosing) corporations to keep their employees supporting the state, or to friends (moneystealing) of the bankers, to squirrel it away in Swiss banks in case the state goes away, I believe it is the latter.
The question is more than whether the Chinese banking system is going to suffer a run, it is whether the Chinese workers are going to start dissaving their bank accounts and spending the money on themselves.
In which case we won't be getting anymore cheap stuff from China.

Does anybody have any idea what effect derivatives are having on the value of the dollar?

(i hope this comment does not come out in duplicate like so many of the others.)

One thing that I'm pretty sure about is that Germany is in such bad shape to a significant part because of export shortfalls and internal-demand problems. The latter is a European problem. The US is a very significant export market for Europe's export-oriented economies. The internal-demand problems are partially caused by more credit discipline; Euro emission is kept in check by the requirement that it be backed up by actual goods, as opposed to an oil currency monopoly and military might.

With a deteriorating dollar Europe's export industries will be hit even more, leading to more structural dislocations and pressures (layoffs, labor protection and welfare cuts, etc.) in the economies.

"Does anybody have any idea what effect derivatives are having on the value of the dollar?"

This is on hearsay, but as I understand it, there were a lot of options bought which were bearish on the dollar. Mechanically this is bearish for the dollar, as the option writer hedges by selling the dollar.

Basically currency derivatives can amplify movements in the short-term, are unlikely to impact levels medium- or long-term.

A uniquely sharp dollar movement could create a derivatives blow-up. E.g. the dollar falling 50% in a day vs. euro is surely beyond the risk scenarios used by the banks, so we would be in uncharted ground. On the other hand, that's unlikely to happen, right? As long as daily dollar movements are within historical levels, the chances of a blow-up aren't too high. They would increase, however, if the dollar movements are accompanied by sharp interest-rate movements.

http://www.nytimes.com/2004/11/09/business/worldbusiness/09yuan.html?pagewanted=all&position=

Informal Lenders in China Pose Risks to Banking System
By KEITH BRADSHER

WENZHOU, China - The Wenzhou 'stir-fry' is not a dish you eat. But it is giving indigestion to Chinese regulators and could prove troublesome to many investors worldwide - from New York money managers, Pennsylvania steel workers and Midwestern farmers to miners in Australia.

Here in this freewheeling city at the forefront of capitalism in China, the dish is prepared when a group of wealthy friends pool millions of dollars worth of Chinese yuan and put it into a hot investment like Shanghai real estate, where it is stirred and flipped for a hefty profit.

The friends often lend each other large amounts on the strength of a handshake and a handwritten i.o.u. Both sides then go to an automated teller machine or bank branch to transfer the money, which is then withdrawn from the bank. Or sometimes they do it the old-fashioned way: exchanging burlap sacks stuffed with cash.

The worry for Chinese regulators is that everyone in China will start cooking the Wenzhou stir-fry and do it outside the banking system. In the last few months, borrowing and lending across the rest of China is looking more and more like Wenzhou's. The growth of this shadow banking system poses a stiff challenge to China's state-owned banks, already burdened with bad debt, and makes it harder for the nation's leaders to steer a fast-growing economy.

The problem starts with China's low interest rates. More and more families with savings have been snubbing 2 percent interest on bank deposits for the double-digit returns from lending large amounts on their own. They lend to real estate speculators or to small businesses without the political connections to obtain loans from the banks. Not only is the informal lending rate higher, but the income from that lending, because it is semilegal at best, is not taxed. For fear of shame, ostracism and the occasional threat from thugs, borrowers are more likely to pay back these loans than those from the big banks.

Tao Dong, chief China economist at Credit Suisse First Boston, calculates that Chinese citizens withdrew $12 billion to $17 billion from their bank deposits in August and September. The outflow turned into a flood last month, reaching an estimated $120 billion, or more than 3 percent of all deposits at the country's financial institutions.

If the bank withdrawals are not stemmed in the months ahead, Mr. Tao warned, 'this potentially could be a huge risk for financial stability and even social stability.'

With China now accounting for more than a quarter of the world's steel production and nearly a fifth of soybean production, as well as some of the largest initial public offerings of stock, any shaking of financial confidence here could ripple quickly through markets in the United States and elsewhere. For instance, if the steel girders now being lifted into place by hundreds of tall cranes in big cities across China are no longer needed, that would produce a worldwide glut of steel and push down prices.

On Oct. 28, when China's central bank raised interest rates for one-year loans and deposits by a little more than a quarter of a percentage point, it cited a need to keep money in the banking system. Higher official rates should 'reduce external cycling of credit funds,' the bank said in a statement.

The main Chinese banks have fairly substantial reserves, but they need those reserves to cover huge write-offs of bad debts someday. The International Monetary Fund's China division chief, Eswar Prasad, expressed concern about bank withdrawals in a speech in Hong Kong three days before the central bank acted.

The hub of informal lending in China is here in Wenzhou, 230 miles south of Shanghai. Some of China's first experiments with the free market began here in the late 1970's, and a result has been a flourishing economy together with sometimes questionable business dealings.

Depending on how raw they like their capitalism, people elsewhere in China describe Wenzhou as either a center of financial innovation or a den of loan sharks. But increasingly, Wenzhou is also a microcosm of the kind of large-scale yet informal financial dealings now going on across the country.

The withdrawals by depositors and the informal money lending have spread so swiftly here that it is only in Wenzhou that the Chinese central bank releases monthly statistics on average rates for direct loans between individuals or companies. The rate hovered at 1 percent a month for years until April, when the authorities began limiting the volume of bank loans.

Borrowers default on nearly half the loans issued by the state-owned banks, but seldom do so here on money that is usually borrowed from relatives, neighbors or people in the same industry. Residents insist that the risk of ostracism for failing to repay a loan is penalty enough to ensure repayment of most loans.

Although judges have ruled that handwritten i.o.u.'s are legally binding, creditors seldom go to court to collect. 'If it is a really good friend, I would lose face if I sued them in court,' said Tu Shangyun, the owner of a local copper smelter and part-time 'silver bearer' - a broker who puts lenders and borrowers in touch with each other, 'and if it weren't a good friend, I wouldn't lend the money in the first place.'

Violence is extremely rare, but the threat of it does exist as the ultimate guarantor that people make every effort to repay debts. 'Someone can hire a killer who will chase you down, beat you up and maybe even kill you,' said Ma Jinlong, who oversaw market-driven financial changes in the 1990's in Wenzhou as director of the municipal economic reform committee and is now an economics professor at Wenzhou University.

An austerity policy was invoked, its goal to slow rapid economic growth in the hope of stopping an upward spiral in the inflation rate. With consumer prices rising at 5.2 percent a year despite price controls on many goods and services, and with less-regulated prices for goods traded between companies climbing nearly twice as fast, people lose buying power while their money is on deposit at a bank.

The interest rate for informal loans jumped last spring to 1.2 percent a month, or 15.4 percent compounded over a year, and has stayed there since. According to the nation's central bank, total bank deposits in Wenzhou have been dropping by $250 million a month since April as companies and individuals withdraw money either because they can no longer obtain bank loans for their investments or because they want to lend the money at higher rates to each other.

For lenders, these interest rates are much more attractive than earning a meager 2.25 percent a year, even after the recent rate increase, on a deposit at a government-owned bank. And while Beijing assesses a 20 percent tax on all interest from bank deposits, nobody pays tax on the income they receive from lending money on their own, Mr. Ma said.

Most informal loans have traditionally gone to relatives or neighbors to finance the starting of small local businesses. Wenzhou is now one of the world's largest producers of nonbrand sunglasses; Dong Ganming, the owner of a 350-employee sunglass factory here, said that his plant was just one of almost 1,000 here involved in making glasses.

Um, look at America and our ridiculous interest rates that are below inflation!

I save money only if I am parking it for one or two months before investing or spending it on some project.

Anyone "saving" for longer than that is insane.

As for us: we are deep in the red, personally and in public and we are due for a terrific bank/finance failure since ONLY the Chinese and Japanese governments are keeping our banks and government afloat.

We need to be careful how we think of China's eventual decision to adopt a more flexible fx regime. Much of what appears in the press suggests that it is the revaluation of the yuan against the dollar, in and of itself, that will matter. In all likelihood, the yuan will not be allowed to adjust by the 20% or so that is usually required to make a big difference in trade flows. If China continues to pile up dollars through trade despite a minor adjustment in the level vs the dollar, it won't matter much to dollar strength.

It is the basket notion, which would require the Peoples Bank to shift reserve holdings to a wider range of currencies, that is the big issue. That means there will be a particular period of time, the time during which China adjusts its reserve holdings, that will represent a great risk to the dollar. If speculative investors have recognized the dollar-stabilizing character the dollar peg, they are likely to recognize both that dollar stabilization will be reduced if and when the dollar peg is abandoned, but also that there will be a period when there is an opportunity to piggy-backing on official dollar selling.

This is a long-winded way of saying that the period of transition may be particularly volatile, but in the longer term, the change in China's fx policy won't be that big a deal for the dollar. I'm not smart enough to even try to guess whether the same holds for US asset prices.

kharris:

If you don't think a 20% adjustment will make much difference in trade flows, I suggest you take a sale s job for a while and test the effect of always quoting a price 20% higher than you competitors'.
Or, take a management job and test the effect of getting 20% less revenue per sale on your ability to fund plant investment and R&D.

jm,

I didn't say a 20% adjustment to the yuan rate woundn't matter. I said a 20% change probably would make a difference. It is smaller changes that don't have much impact. Even so, let me suggest that you think more broadly than from the perspective of the salesman. One reason that relatively large shifts in fx rates are need to affect trade flows is that managers don't just take changes in the market lying down. They work to keep market share, accept lower margins to maintain penetration, seek wage and other cost adjustments. In addition, some offsets are automatic. A stronger currency means a lower cost of imported inputs, in domestic terms, or no change in the cost of inputs, in terms of the foreign customer's currency. Only domestic value added (plus any tax on domestic value added) is affected by fx changes. A 20% appreciation in the home currency is not a 20% rise in total input costs.

I would also suggest that you look into the history of exchange rate changes, and try to find large impacts on trade flows from small fx adjustments. Japan's yen has appreciated from over 350 to the dollar in 1971 to around 107 today, and Japan enjoys a substantial trade surplus with the US. China's yuan is pegged to the dollar, but during the period of the peg, has been building a surplus at a very rapid pace. In neither case is a change in fx rates an obvious explanation for the pattern of trade flows.

Not defending Bush administration economic policy (or the lack thereof), but to say that adjustments are going to painful doesn't mean they should be avoided.

You should always be suspicious of people with the big time bucks spewing out disaster type talk.

What do they get out of it? Current Account deficit is big, but these are the same folks who tell you that it is wonderful to buy cheap stuff made overseas, which runs up the deficit. What is their motivation? I cannot believe that it is a good one. They are using us for suckers, manipulating are minds, and that kind of stuff has GOT TO STOP!!

Take out cheap clothes out of Current Account Deficit, and that would be an analysis I would really like to see.

And by the way, how is reality-based lovemaking? Curious ones would love to find out.

Marginal Revolution had an interesting post today on the effect of a falling Dollar. I also posted on the Trade Deficit at my blog. His major contention is it would bring on higher Interest rates to prop up the Dollar. Mine is that the real worry is the sharp curtailment of Imports across the whole spectrum, when the American industry is dependent on foreign assembly parts. lgl

Marginal Revolution had an interesting Post on the falling Dollar, stating basically the only fear would be rising Interest rates to prop up the Dollar. I posted on the Trade Deficit at my blog, stating the worst fear is radical increased Import prices across the spectrum, with the American economy dependent on foreign Parts for assembly. American business could lose Exports simply because they could not control production costs. lgl

Wanted: New Secretary of Commerce

The top job at Commerce is often reserved for a presidential friend, fund-raiser or political adviser, such as Maurice Stans in the Nixon administration, or Ron Brown and Mickey Kantor under President Clinton.

Brady said Bush will similarly need to find a successor for Evans who will not rock the boat, said Henry Brady, a professor of political science and public policy at the University of California at Berkeley. Often mentioned for Evans' job is Mercer Reynolds, national finance chairman for the Bush campaign, who raised more than $260 million to get him re-elected.

"It's such a wild card," Brady said. "(Bush) needs to go look for somebody who supported the campaign, someone who is loyal. It doesn't take a lot. It's a way to pay off somebody, to be blunt about it."

http://angrybear.blogspot.com/2004/11/wanted-new-secretary-of-commerce.html

KHarris

"I would also suggest that you look into the history of exchange rate changes, and try to find large impacts on trade flows from small fx adjustments. Japan's yen has appreciated from over 350 to the dollar in 1971 to around 107 today, and Japan enjoys a substantial trade surplus with the US. China's yuan is pegged to the dollar, but during the period of the peg, has been building a surplus at a very rapid pace. In neither case is a change in fx rates an obvious explanation for the pattern of trade flows."

A remarkable comment. How could Japan and China not have a trade surplus with the United States given their high private saving rates and our low rate?

http://ea.nytimes.com/cgi-bin/email?REFURI=http://www.nytimes.com/2004/11/10/nyregion/10irish.html&position=

Back Home in Ireland, Greener Pastures
By NINA BERNSTEIN

They arrived as the New Irish in the 1980's and 90's, thousands drawn to a New York that still glittered in family lore as a place where hard work could bring prosperity.

But the glitter began to dim along with the economy and the government's attitude toward illegal immigrants. Now they are streaming back to Ireland at such a clip that in the neighborhoods they regreened in Queens, Yonkers and the Bronx, once-packed pubs stand half-empty and apartment vacancies go begging.

Some immigrants, longtime illegal residents losing hope for legal status, say they are being driven out by new security crackdowns that make it harder for those without a valid Social Security number to drive, work or plan a future in the United States.

Others, already naturalized citizens, say the price in toil for health care and education was too high, and hope for a less-exhausting life in a prosperous Ireland.

"It's the complete reversal of the American dream," said Adrian Flannelly, chairman of the Irish Radio Network in New York, who has served on an Irish government task force on returnees. The exodus from the city, he said, signals a historic shift in a relationship that is part of the city's backbone, inscribed in the subways and bridges built by Irish immigrant labor in past centuries.

Michael and Catroina Condon, both naturalized American citizens who spent 19 and 11 years in New York, respectively, say Ireland's style of prosperity promises a better life for their children. After the birth of their first baby, they said, they rebelled against the toll of seven-day workweeks to pay rising costs in a sluggish American economy.

"It's longer hours, less money, and a lot of the time you see people working for their wage just to pay their rent, to pay their health insurance," said Ms. Condon, 31, who was a corporate secretary in Manhattan before returning in September to Mullingar, in County Westmeath. Her husband, a carpenter, is starting his own business, and she envisions a wedding-planning enterprise.

http://ea.nytimes.com/cgi-bin/email?REFURI=http://www.nytimes.com/2004/11/10/nyregion/10irish.html&position=

Back Home in Ireland, Greener Pastures
By NINA BERNSTEIN

They arrived as the New Irish in the 1980's and 90's, thousands drawn to a New York that still glittered in family lore as a place where hard work could bring prosperity.

But the glitter began to dim along with the economy and the government's attitude toward illegal immigrants. Now they are streaming back to Ireland at such a clip that in the neighborhoods they regreened in Queens, Yonkers and the Bronx, once-packed pubs stand half-empty and apartment vacancies go begging.

Some immigrants, longtime illegal residents losing hope for legal status, say they are being driven out by new security crackdowns that make it harder for those without a valid Social Security number to drive, work or plan a future in the United States.

Others, already naturalized citizens, say the price in toil for health care and education was too high, and hope for a less-exhausting life in a prosperous Ireland.

"It's the complete reversal of the American dream," said Adrian Flannelly, chairman of the Irish Radio Network in New York, who has served on an Irish government task force on returnees. The exodus from the city, he said, signals a historic shift in a relationship that is part of the city's backbone, inscribed in the subways and bridges built by Irish immigrant labor in past centuries.

Michael and Catroina Condon, both naturalized American citizens who spent 19 and 11 years in New York, respectively, say Ireland's style of prosperity promises a better life for their children. After the birth of their first baby, they said, they rebelled against the toll of seven-day workweeks to pay rising costs in a sluggish American economy.

"It's longer hours, less money, and a lot of the time you see people working for their wage just to pay their rent, to pay their health insurance," said Ms. Condon, 31, who was a corporate secretary in Manhattan before returning in September to Mullingar, in County Westmeath. Her husband, a carpenter, is starting his own business, and she envisions a wedding-planning enterprise.

Sorry about the double post. I do not know how i came to be so. These comments have minds of their own :)

Anne,
just more of the increased output from computers.

We are nothing if not productive :)

I was talking with my financial advisor today, and I mentioned your recent post and that of Steve Roach, and he told me (I suppose this is common knowledge) that Warren Buffet has a huge bet on a dollar decline. I'm glad he does, as Berkshire is my biggest asset.

Anne;

Those "re-emigrants" are in for a shock. Check out Dublin's house prices.

kharris:

I must apologize for misreading your post. I was bleary-eyed and in a great hurry when I scanned the blog, and the light gray sans-serif font with which it displays on my browser is hard to read. I've seen so many articles opining that exchange-rate changes of even 20% won't make any difference that I reacted reflexively. It's nice to find someone else who thinks 20% is quite enough to make a big difference.

In the late '70s when the yen appreciated to around 180 to the dollar I was with Yokogawa Electric in Tokyo, then in the mid-80s was with Motorola when it sank back to the 250 range. When it was at 180, Yokogawa was under an enormous handicap, and felt that a rate around 210 would be about right; it spurred them to build a factory in Georgia. Then Motorola was put under intense stress when the rate ramped back to 250.

where is Soros when we need him?