More talk about Greece and potentially draconian measures to maintain system liquidity in the Greek banking system. About a fourth of Greek bank deposits (8B EUR) have reportedly been flowing out of the country and the Greek stock market more and more looks like a fire sale. The EUR is…
Risk Takes A Tumble Amid Growing Concerns About Greek Rescue Prospects
February - 25 - 2010
In his testimony before Congress, Fed chief Bernanke stuck to the ‘low rates for an extended period’ theme and preserved the relatively dovish rhetoric that has been emanating from Fed speakers since the discount rate hike last week. In the details of his testimony, Bernanke noted that ‘private final demand…
Confidence Crisis In Europe Confirmed By Figures As Markets Ponder Upon Earnings!
February - 25 - 2010
Here we are, once again to face more confidence figures from the European continent and the euro area is still under the spot and confidence is surely the last thing felt towards the state of the economy and its outlook! Above that a heavy load of corporate earnings will shake…
U.S. Dollar Regain Due To Little Thrust On Euro
February - 25 - 2010
The euro dropped to a one-year low against the yen amid concern Greece’s credit rating will be lowered as it struggles to push through fiscal cuts demanded by the European Union, curbing demand for the region’s assets. Europe’s single currency fell toward a nine-month low against the dollar after Standard…
Financial Innovation, Part II: Defending Much, But Not All
February - 25 - 2010
Robert Litan at Brookings has a paper out, In Defense of Much, But Not All, Financial Innovation. You should check it out, it is pretty good. Here’s the summary chart (click to enlarge), that Kevin Drum grabbed from the paper:
Financial Innovation, Part I: Two Perception Problems and the TRACE Solution
February - 25 - 2010
Remember all the discussion about financial innovation, including this Planet Money podcast? Let’s dig that back up. I want to talk a little bit about problems discussing financial innovation, point out some financial innovations that are pretty great, and then discuss a new paper by Bob Litan about financial innovation in another post.
Two Problems
Energy ETFs: The Tracking Problem
February - 25 - 2010
Hard Assets Investor submits:
By Charles Armstrong
For the average investor, the commodities markets can be daunting. Many investors don’t possess the capital and/or risk tolerance necessary to invest directly in the futures markets. Further, although the number of online brokerages that offer futures trading is growing, for the most part, buying or selling commodity futures requires setting up a special account, which, for many retail investors, may be more trouble than it’s worth.
Chinese Currency Reserves Have Limited Use in a Domestic Crisis or Collapse
February - 25 - 2010
BlindReason submits:
Here’s a very clear and lucid post explaining that Chinese dollar reserves cannot be used to forestall a Chinese domestic economic contraction. Whenever I bring up the possibility of a China bubble, people bring up the large dollar reserves by China. That would be a great point if China’s currency was a free floating currency. Why is this important and how does this apply to China and the prospect of a bubble there specifically?:
- Given the Chinese currency uses an artificial peg, these dollar reserves have limited domestic use in any kind of bubble or bank solvency crisis.
- We’ve talked a little bit in the past about how China is similar to Dubai on a larger scale, where central planning has created excess capacity in real estate and manufacturing, but it’s important to remember this activity is often financed by loans from domestic Chinese banks. If there is any kind of meaningful decline in GDP, it could cause a bank solvency problem quickly.
- In any kind of serious domestic contraction for China, these foreign reserves have limited ability to actually alleviate domestic problems or shore up bank balance sheets. These reserves can be used to purchase foreign goods such as commodities or other goods but their domestic use is limited. i.e. The Chinese could sell U.S. assets then buy copper, aircraft, or computers, but that won’t help make their domestic banks solvent.
- These kind of bubbles can take a long time to manifest themselves. Jim Chanos and others are calling for the bubble to pop but one can lose a lot of money waiting for it to happen right away. My guess is that this crisis starts due to export retaliation against China by ASEAN, the EU nations and the US all working together to stem Chinese import barriers and a mercantilist trade policy. If a crisis occurs, this is the most likely scenario to set things in motion.
- The Chinese need to gradually float their currency, while the U.S. needs to dramatically cut spending and consumer consumption. U.S. government spending needs to come down by about 25%.
Full piece here and excerpt below:
China’s reserves are often thought of as if they were a treasure trove available for spending. They are not. They are simply the asset side of the mismatched balance sheet. If the PBoC wanted to “spend” $100, say for example to recapitalize a bank, it could do so, but this would automatically create a $100 dollar hole in its balance sheet. – it would still owe the RMB that it borrowed originally to purchase the $100. To put it another way, the reserves are not a savings account, free for the PBoC to spend as it likes. Reserves are effectively borrowed money.