Saturday, June 6, 2009
Wednesday, April 29, 2009
As of April 28, 2009 the International Reserve Position of the United States shows total foreign exchnage reserves of $ 75, 877 million - or around $ 76b, according to this press release from the Department of the Treasury.
According to a Treasury statement to the Associated Press, The US Treasury plans to borrow $361 billion in the current April to June Quarter. Excerpt:
The $361 billion estimate for borrowing this quarter compared with borrowing needs of just $13 billion in the year-ago period. Normally the government's borrowing needs shrink sharply in the April-June quarter because of all the tax revenue being collected.
But, please remember:
Treasury also estimated it will need to borrow $515 billion in the July-September quarter, down slightly from the $530 billion borrowed during the year-ago period. The all-time high of $569 billion was set in the October-December period.
Saturday, April 25, 2009
First of all you need to reason with the different categories of expenses or 'outlays' that a Government has. A Government needs money to provide certain public goods, for which it will collect taxes. For instance, people pay taxes and the collected amounts may be utilized to pay salaries for cops who maintain the law and order. Then you have outlays that are intended to create a long term benefit. For instance, the US Government can provide an economic stimulus for Chinese laptop manufacturers by giving free computers to school kids. The Government hopes that the kid will utilize the computer to pick up various skills, in turn earning a better income when it grows. This will result in a higher income tax collection for the Government in future.
It's important to split the Government outlays into items that are like operating expenses they have to provide required public services, and items that are intended to provide a long term return in terms of future GDP expansion and increased future tax collections.
The next part of the reasoning is on the interest the Government pays on its outstanding debt. You have to remember that a Government Bond holder isn't a beneficiary in future higher tax realizations of the Treasury. The debt holder simply receives interest and hopefully, the principal back from the Government.
The Government financier's interest is to make sure that the interest being paid is out of the money the Government is levying on citizens on an ongoing basis, and not out of the money that is realized from the Government borrowings themselves. A Government debt holder will expect interest to be paid out of the annual earnings of the Treasury. The one year term is derived on the understanding that most levies are collected on an annual basis.
From this reasoning, it is clear that on a stand-alone basis a Sovereign can borrow to the extent that the excess of its annual levies over outlays for operating expenses to provide routine public services is sufficiently large to meet interest payment obligations on its outstanding debt.
In case of the US Treasury, foreign central banks have a compulsion to lend money to them due to the military-diplomatic hegemonic compulsions. This factor enables the US Treasury to create a 'safety bubble' if it so chooses. Also, the triangular debt trading in the Treasury securities amongst the Treasury, Fed and primary dealers constitutes a method of extracting contributions to Treasury debt through the secret concession embedded in the Treasury Supplementary Financing Account.
In this framework, you need to analyze whether the US Treasury interest outgo is coming out of an excess of Treasury Revenues over routine operating expenses or not. If not, the Treasury is completely dependent on foreign central banks for financing. The day China decides to stop buying Treasuries, all other foreign central banks will have no choice but to follow suit, and in this scenario the US Treasury will go bankrupt.
To be continued ...
Thursday, April 23, 2009
Revenues and Outlays: The monthly Treasury statement contains the data on past revenues and outlays of the US Treasury. Last month, i.e. in March 2009, the US Treasury spent $192,273 million more than they earned. Since October 2009, their total excess of spending over revenue is $ 956,799 million - or nearly a trillion dollars.
Here's a preliminary analysis of President Obama's budget proposals under the aegis of the Director of the Congressional Budget Office. Excerpt:
"CBO projects that if those proposals were enacted, the deficit would total $1.8 trillion (13 percent of GDP) in 2009 and $1.4 trillion (10 percent of GDP) in 2010. It would decline to about 4 percent of GDP by 2012 and remain between 4 percent and 6 percent of GDP through 2019.The cumulative deficit from 2010 to 2019 under the President’s proposals would total $9.3 trillion, compared with a cumulative deficit of $4.4 trillion projected under the current-law assumptions embodied in CBO’s baseline. Debt held by the public would rise, from 41 percent of GDP in 2008 to 57 percent in 2009 and then to 82 percent of GDP by 2019 (compared with 56 percent of GDP in that year under baseline assumptions). ”
The US Public Debt:
As of this writing, the US public debt totals $11.184 trillion.
Sources of financing:
One of the main sources of financing for the US Treasury is Chinese purchases of Treasury and other dollar denominated securities. Dr. Brad Setser at the Council on Foreign Relations is one of the world's foremost experts in the area of balance of payments and global capital flows; and he has taken a specialized interest in studying the size of holdings, currency composition and portfolio allocation of the world's central banks and sovereign wealth funds.
In this paper written along with Arpana Pandey for the CFR Center for Geoeconomic Studies, Dr. Setser has described estimation methodology and data to understand the activities of the People's Bank of China and its associated Sovereign entities.
Yesterday, China revealed its holdings of gold, and here's an article in the Financial Times on that topic.
Note on the United States Public Debt:
Here's a link to the Bureau of the Public Debt web site and on the site if you go to the link "see the U.S. Public Debt to the penny" - the total as of this writing is $11, 184, 922,662,862.85. Of this total, "Intragovernmental holdings" form $4.299 Trillion, and "Debt Held by the Public" forms $6.885 Trillion. In most media and official reports, only the $6.885 trillion is taken into account as US public debt. Typically, that calculation yields around 40+ % of GDP as the US Public Debt.
Understanding the correct nature of "intragovernmental holdings" provides you the accurate, and more practical picture. The contribution made by US citizens towards social security, and other sources of revenue of US government departments, was added to the Congressional Budget as an appropriation. The US Treasury then spent those amounts and issued debt securities to those other US Government entities. Mostly, the $ 4.3 trillion is US Treasury debt held by the Social Security Fund.
The common reasoning provided for not taking the Social Security appropriations into the Us public debt calculation is that that debt is simply not held by the public, and not settled in the market. The US Treasury has payables and liabilities towards Medicare and Social Security that are as yet unfunded.
My view is that what really matters is the cash flow situation. The $4.3 trillion owed to Social Security Fund can be seen as "flexible debt". As long as the Treasury is able to meet the outflows towards its unfunded liabilities, the intragovernmental debt holdings aren't that much of an issue.
Note: I've updated my comment on the US Public Debt after some further serious thinking.
To be continued ...
Saturday, March 28, 2009
Wednesday, March 25, 2009
And here’s a link to weekend by weekend box office numbers for late 2008 and early 2009.
And here's another article on the movie ticket boom from boston.com.
Monday, March 16, 2009
One of the big lenses through which most Americans view the world’s trade is very approximately as follows: “If Americans don’t consume, global trade will crash and burn to the ground.” I expect that Fabius Maximus would have followed the reasoning in Brad Setser’s explanation for China’s February trade data. China’s exports are showing a decreasing year on year rate of decline in February versus January. The Chinese Lunar New year dates are used by Setser, Macroman, and other commentators to explain this trend. They’re unable to accept that China’s overall export volumes are not responding as expected to the fall in US aggregate demand.Another lens through which several people view the US status is that might be possible to reduce the import dependence through a “divide and rule” policy. For instance, one of the themes I’ve come across is that you can massively do away with imports from China through tariffs, etc, while the oil-exporters continue to hold dollar assets. Thus a currency crisis is prevented, and an imaginary “rapid and orderly rebalancing” can ensue, even as millions more are laid off abroad and political crises emerge there. The divide and rule advocates are unable to see the new alliance amongst the Eurasian powers, consisting mainly of Germany, Russia and China. Despite various differences amongst countries, the US dollar hegemony has become a rallying cry, and the US is now more widely seen in the world as the common enemy of all. (246 words)
What FM seems to be thinking about is a gradual import substitution, sector by sector, whatever. This is radically different from the “rapid and orderly” fantasies.The ruse here is very simple. Most people, unless they’re specialized in economics, or naturally very bright, have a belief that doing away with imports will result in higher local employment. For instance, people seem to imagine that, if you ban imports from China, local companies will come up rapidly, and local people will get jobs to manufacture things imported from China. The fact is that real wages of US workers are much higher than almost anywhere else. Consider a situation where all kinds of items, from textiles, nail clippers, electronics, etc are produced locally, and have to be priced accordingly. This provides two choices; either reduce the wages of US workers, or increase the prices of those goods. Neither of these choices results in a better economy or a better standard of living for people. Apart from reducing people to consuming only the barest essentials, the other effect is that aggregate employment will drop drastically. There’s no way to employ lots of high-paid Americans and hope to sell the same volumes at high prices. If you don’t pay the Americans well enough, despite lower prices, they won’t buy so much, so the factories will be unviable. As for hoping to increase exports, which country will buy US exports in the presence of a huge US Tariff? (245 words)
Saturday, March 14, 2009
Thursday, March 12, 2009
@Brad: The negative liability line probably represents transfers from branches of foreign banks located in the US to their branches outside the US.Liabilities of US Chartered banks to foreign banks grew from $293.8 b at the end of 2004 to $637.6 b at the end of 2008. This growth creates a picture of increasing borrowings of US banks from foreign banks. Also, the growth in US banks liabilities to foreign banks doesn’t explain the increase in liabilities of foreign bank branches to foreign banks. US Banks liabilities to foreign banks grew from $ 420.3 b at the end of 2006 to $478.2b at the end of 2007, an increase of only $ 57.9 b. The liabilities of foreign branches to foreign banks grew from -$255.3b to -$424.50b between 2006 and 2007, an increase of $ 169.20 billion in owings from foreign banks to their branches here.I remember seeing a line item in the TIC data reflecting something like claims on foreign banks payable in dollars.I think that might be a better indication of the amount of dollar loans not rolled over/withdrawn from foreign banks.
Brad: the combined assets of the broker-dealers and funding companies rose by around $325b (if I got the math and netting right)
Me: From L129 and L130 I got an increase of $326.60 b. I took the funding cos investments in broker dealers out of the total assets for 2008 and 2007. The difference could be rounding.
Tuesday, March 10, 2009
In simpler terms, a voting/quota share determines the amount of forex that each country is eligible for out of a total increase in SDRs. SDRs are electronic credits from the IMF to countries, that can used for foreign exchange. This is like an equity stake that each member country gets in IMF combine.
The link below takes you to an FT Op-ed by Edwin M. Truman, after he took office as the US Treasury’s IMF person. (Title: ‘How the IMF can help save the world economy’)
And here’s a link to another Op-ed by Ted Truman on IMF Reform:
Ted Truman proposes overall, an increase of $250 billion in the world’s foreign exchange through SDR credits from the IMF. And, somewhere between 5 and 10 percent of voting rights will be re-distributed away from “traditional industrial countries” to others (as a best case).
Currently the United States has 16.77 % of IMF voting rights, and China has 3.66%. Australia has only 1.47%. Geithner was the US Treasury's representative to the IMF during the 1998 Asian crisis. He personally made sure with his program then, that all those countries would learna lifelong lesson not to depend too much on foreign loans, and to build a large enough forex reserve.
Monday, March 9, 2009
“US banks’ need for European currencies is much smaller because US banks have leveraged their domestic operations with foreign assets much less.”
When you’re telling lies with statistics, it requires the use of complicated terminologies with clever twists in them as well. Such as, for instance, Brad Setser’s phrase “financing the US current account deficit”.
There is, in fact, no such thing as a European bank “leveraging domestic operations with foreign assets”. The more you think about this, the more confused you will be.The financial laws of gravity are simple. A global bank will source funds where interest rates are low; and lend where interest rates are high. Given that both short term and long term rates were much lower in the US, European banks borrowed in dollars and lent in local currencies.“Interbank market” is a euphemism for a bank HQ’ed, say, in Germany, borrowing USD from a local US bank. When this type of source is disrupted, the dollar funding can’t go on any more.Secondly, the existing USD loans weren’t rolled over.Which is why there had to be inter-central bank currency swaps.Apart from the US and the UK, I haven’t seen many reports of retail mortgage borrowers in any geography defaulting in large numbers. Of course, a liquidity crisis can transform into a solvency crisis rapidly.But the BIS papers are a clever attempt to confuse readers on the topic of “European banks’ need for dollar funding”. That ‘need’ developed as a result of lower US rates; and persisted due to non-rollover of existing dollar debt.
Also, I highlighted the highly expensive nature of any kind of technical training in the US, and the lack of programs in US corporations to improve skills of workers. Thirdly, I highlighted the bloated bureaucracy in most American Fortune corporations, and compared them unfavorably with State run bureaucracies in countries like India.
Brad Setser had no problem with wide eyed foreigners breathlessly discussing Bank of America's decision not to recruit bonded laborers on H1Bs. But as soon as some real information about the evil H1B visa modern slave-trading scheme was made available to his reading public, he deleted the comment.
H1B visas are just a form of modern slave trade. You get a H1B visa, then every time you think of changing your job, the new employer has to pay $10,000 to transfer it.Secondly, you can’t change your job without losing status if you have a parallel employment based immigration petition.It takes something like 7-10 years before you can get a permanent residence on this track. Then, another 5 years of maintaining residence before they finally give you American citizenship.Meanwhile anything from 10 hours to 15 hours of every weekday of your life is mortgaged to the folks who filled in your H1B forms. And in a recession if you lose your H1B job and stay back in the US to look for another one; you could end up arrested, jailed and tortured by the Homeland Security Police.Immigrating to the US is a good way to lose your job flexibility; also most people working in the US don’t have access to train for new skills; you become a typical overspecialized American worker. What you knew technically when you landed in the US is what you’ll know 15 years later, when you get an American passport.There are some chances that you can become a typical American corporate bureaucrat meanwhile. American Fortune Company bureaucrats are technically behind even bureaucrats in Indian State Governments manning Animal Husbandry departments. Using a blackberry is a skill you can pick up in any country in less than a month; and that’s just about what you can learn professionally by working in the US.
Sunday, March 8, 2009
Saturday, March 7, 2009
Global banking activity had grown remarkably between 2000 and mid- 2007. As banks’ balance sheets expanded, so did their appetite for foreign currency assets, notably US dollar-denominated claims on non-bank entities, reflecting in part the rapid pace of financial innovation during this period.
European banks, in particular, experienced the most pronounced growth in foreign claims relative to underlying measures of economic activity.
We explore the consequences of this expansion for banks’ financing needs. In a first step, we break down banks’ assets and liabilities by currency to examine cross-currency funding, or the extent to which banks fund in one currency and invest in another (via FX swaps). After 2000, some banking systems took on increasingly large net on-balance sheet positions in foreign currencies, particularly in US dollars. While the associated currency exposures were presumably hedged off-balance sheet, the build-up of large net US dollar positions exposed these banks to funding risk, or the risk that their funding positions could not be rolled over.
To gauge the magnitude of this risk, we next analyse banks’ US dollar funding gap. Breaking down banks’ US dollar assets and liabilities further, by counterparty sector, allows us to separate positions vis-à-vis non-bank end users of funds from interbank and other sources of short-term funding. A lowerbound estimate of banks’ funding gap, measured as the net amount of US dollars channelled to non-banks, shows that the major European banks’ funding needs were substantial ($1.1–1.3 trillion by mid-2007). Securing this funding became more difficult after the onset of the crisis, when credit risk concerns led to severe disruptions in the interbank and FX swap markets and in money market funds. We conclude with a discussion of how European banks, supported by central banks, reacted to these disruptions up to end- September 2008. "
On the European Banks' reactions to the crisis:
Banks reacted to this shortage in various ways, supported by actions taken by central banks to alleviate the funding pressures. Since the onset of the crisis, European banks’ net US dollar claims on non-banks have declined by more than 30% . This was primarily driven by greater US dollar liabilities booked by European banks’ US offices, which include their borrowing from the Federal Reserve lending facilities. Their local liabilities grew by $329 billion (13%) between Q2 2007 and Q3 2008, while their local assets remained largely unchanged.
This allowed European banks to channel funds out of the United States via inter-office transfers (right-hand panel), presumably to allow their head offices to replace US dollar funding previously obtained from other sources.
Friday, March 6, 2009
Thomas Hoenig, President of Kansas Fed - mulls pre-privatized "bridge bank" resolution of insolvent US banks
For U.S. policymakers today, complacency is tempting because of comforting arguments that it is not in creditors’ interests to precipitate a crisis. One comforting argument is that it would take a decision by a major creditor to dump all dollar reserves to cause a run on the dollar — and that this sort of decision is so drastic as to be unlikely.
But history contradicts this argument. During the Suez crisis, both British chancellor Harold Macmillan and Prime Minister Anthony Eden were convinced that the U.S. government was behind the run on the pound. But the U.S. government actually reduced its sterling holdings by only four million pounds—or around $11 million dollars—between the end of September 1956 and the end of December, a fraction of the $450 million drain from September through November with which HM Treasury had to contend.43 The United States did not need to sell pounds to put pressure on Britain, just as Russia, China, or Saudi Arabia might not need to sell dollars to put pressure on the United States today. As W. Scott Lucas writes: "The Americans did not have to sabotage the pound to influence Britain ... they merely had to refuse to support it."
Contrary to what the comforting narrative might suggest, a country seeking to use its holdings of dollars to influence U.S. policy has options that fall short of the "nuclear option" of dumping large quantities of dollar reserves.
– A creditor government could sell holdings of "risk" assets and purchase "safe" U.S. assets, creating instability in certain segments of the market. This could be done without triggering the appreciation of its own currency against the dollar or directly jeopardizing its exports.
- A creditor government could change how it intervenes in the currency market. A country, for example, could halt its accumulation of dollars without ending all intervention in the currency market if it sells all the dollars it buys in the market for other currencies.
– A creditor government could stop intervening in the currency market, halting its accumulation of foreign assets, whether in dollars or other currencies.
– A creditor government could halt its intervention and sell its existing stocks of dollars and dollar-denominated financial assets, the "nuclear option." If it held a large equity portfolio, this could include large stock sales.
In this essay at his blog Brad Setser says "And now even government-backed Agencies are too risky. " (He's discussing the Russian Federation's 2008 action to offload all holdings of Agencies, while accumulating increased volumes of Treasuries.)
There have also been other essays from Dr. Brad Setser, comparing the Fed's willingness to take a higher level of risk, to provide stability during the crisis; against the de-stabilizing influence exercized by foreign central banks, such as the People's Bank of China when they dumped Agencies during the crisis. (I'll try to provide more links to Brad's blog essays and excerpts as time permits)
While he doesn't explicitly state this in his latest essay, Dr. Brad Setser has been advocating increased Agency purchases from foreign central banks for some time now.
If foreign official creditors were excessively concerned about exercising influence on US policies; they could have done that by making conditions in return for continued lending to the US Agencies in 2008. Setser's data clearly shows they massively exited their Agency holdings, and exchanged them for Treasuries. Since there is no information about any conditions made by them that the US Government did not meet, the foreign official Agency debt sell off is an indication that foreign official creditors, in 2008, did not pursue the agenda postulated in Dr. Brad Setser's paper on Sovereign Wealth and Sovereign Power.
In September 2008, the Henry Paulson announcement of a conservatorship for the Agencies made it abundantly clear that though they are known, till date as "Government Sponsored Enterprises" or alternatively as "Agencies" of the US Government; in fact, they are private entities enjoying only a limited guarantee from the US Treasury. Clarification of the non-Governmental status of the Agencies, clearly, was the main cause of the foreign official sell-off in Agencies.
If foreign central banks were to buy Agencies now, that would in fact signal some nefarious intentions on their part, as long as you still accept the risk of foreign official creditors wanting to use their creditor status to influence US policies. So I see a discrepancy here between the recognition of that risk in Brad Setser's paper linked above; and his on going advocacy of a stabilizing influence from foreign official Agency purchases.
Thursday, March 5, 2009
The war in Iraq, that is still being unwound, led to the loss of life for an estimated more than 100,000 Iraqis, and more than 4,000 US soldiers. The war was provoked by what turned out to be wrong information indicating a massive build up of WMD in Iraq, and suspicions that the Iraq regime was complicit in the 09/11 attack. This war contributed a great deal to the failure of the incumbent and the Republican candidate in the recent US Presidential elections. The process by which this war came about has been highlighted in various forums, as being a simple result of wrong judgements and evaluations by military intelligence experts.
Another, separate, unconfirmed, reason postulated is that the war was provoked deliberately to deal with the Iraq regime's actions to change the composition of their reserve currency from USD to EUR; and to propose exports of their crude output denominated in a currency other than USD; thereby threatening the US geopolitcal influence over the Middle East and the petroleum trade.
Similar ideas about moving away from the USD status as a reserve currency, and the denomination of international trade settlements in USD have been expressed by the leaders of Iran,Germany,Russia, France and Venezuela, according to various press reports. Also, there are reports that China plans to get the RMB accepted in its region as a reserve/trade settlement currency in a very limited way. At the same time, with the exception of Iran, the intention of the other central banks seems to be to gradually re adjust away from holding mainly USD to holding a combination of USD and other currencies.
In this context, it is likely that the USD exchange rate will gradually decline, leading not only to a more multipolar geoeconomic order, but most importantly, an opportunity for the United States to gradually rebalance its trade with several large economies. If things go according to plan, the United States will most probably emerge from the 2008 crisis with a much stronger economy, increased exports, a more feasible and sustainable USD exchange rate; and still retain its military strength and all other aspects of soft power and geopolitical influence.
Note 1) While most people write very dreamily about a "New World Order" I tend to think that the only notable changes are likely to be economic, rather then geopolitical; a weaker dollar, and increased US exports to other countries, in my view, increase US influence rather than decrease it.
2) Though we're already in the third month of 2009, I'm yet to accept the popular notion that the rest of this year will continue to be a 'crisis'. In my view, even the emergence of a clear direction towards economic recovery should lead to declassification of the global economy as being in a 'crisis' of some sort. Recessions are in the mind, as Dr. Amartya Sen pointed out recently. (Amartya Sen is well known for proving, for instance, that many aspects of social development, such as literacy, are independent of economic development, such as per capita GDP' through comparison of these variables across different Indian states.Also, his research in economic history on the Bengal Famine showed that in fact, there was no physical shortage of foodgrains during that famine. Traders hoarded foodgrains due to the widespread belief and expectation of a famine, leading to massive starvation and loss of life for humans and cattle, in the his analysis of the history. If cows can die in the Bengal Famine history, as Amartya Sen showed, due an imaginary shortage of food grains in traders' minds; US banks can refuse to lend money to anyone, due to an entirely imaginary 2009 Global Depression)
To be continued ...