RMB as a reserve currency, the size of China's stimulus and a comment on current account imbalances

Here's a link to my post below on the RMb as a reserve currency.
Also here's a link to Dani Rodrik's accurate statement of world stimulus packages.
China's stimulus is $586 billion, or 6.9% of GDP; the US stimulus is $787 billion, or 5.5% of GDP.

Here is a comment I made to one Rudiger von Arnhim at Brad Setser's blog:
@Rudiger von Arnhim: I noticed you have a Ph.D in economics from a US university, specializing in international economics. Is it possible for you to define “external imbalances” for me? e.g. if US consumers import 10 widgets from China, and China imports 1 widget from the US. If exchange rates adjust freely, will this result in an “external imblance”?When exchange rates DON’T adjust, who’s to blame; the petrodollar recycling scheme since 1971, the 1944-1971 Bretton Woods, or China’s ‘dollar peg’ since 2000? And where will exchange rates be if you remove China’s dollar peg?Who asked the Federal Reserve not to regulate on loan eligibility by monthly income? Was that the People’s Bank of China?When RMB strengthens against USD, how much will US exports increase to China, or elsewhere?There are 20 millions jobless and social-security-less workers in China as of today, by Government estimates. Has this led to even ONE more American job anywhere?
Update: I made some changes to this post and removed another one I made after this.

Brad Setser Censors pro-equities comments

Dr. Brad Setser runs a propaganda blog where the main point is something that goes like:
1) There can't free trade, there can only be 'balanced trade'.
2) Even if the US dollar is just a legal tender currency, China accumulates US dollars in lieu of gold, in a mercantilist manner.
3) Countries use money to 'finance the current account deficit', even when they're spending it mainly on military contracts.
Here are some objectives views about markets; these are just a small subset of various opposite views that have been censored by Dr. Setser. Since Setser runs a propaganda blog, he can't afford to have views opposing his malinterpretations gain traction at his blog page.
The Nifty peak was around 6300 in 2008, and its trough was at 2500 which was hit in October and then again in November after a dead cat bounce. The Q3 FY 2008-2009 results didn’t lead to fall below the October lows. Today’s Sensex close is lower than its October low and the Nifty is a few percent above 2500 because of different weightages.What caused the fall from 6300 to 2500? India’s exports, both merchandise and services have fallen. Imports, on the other hand have been rising, especially fertilizer and capital equipment.The real reason for the Nifty fall was that FIIs steadily sold out each month in 2008, while Domestic IIs were net buyers each month. The last two days’ fall is also a result of massive FII outflows.The INR/USD has shown a strengthening of USD against INR. Private sector banks like ICICI have something like 50% of their borrowings abroad. That has been unwinding, and not rolled over. Add up the effect of not rolling over foreign currency loans, and a sell-off of FII holdings in local equities; In my humble opinion, that explains much more of the fall in equities and weakening of the INR than a fall in real economy exports, etc.I’m expecting a functioning credit system to emerge in the US, which will lead to the reverse of the above flows.Outstanding credit has been growing in India, just as it has been in China. India is an exception to the theory that emerging markets grew mainly through exports, especially exports to the US.India’s external sector has been making a net negative contribution to GDP, while the GDP has been growing at 8-9%. While falling exports will have a negative effect, India’s GDP growth wasn’t ‘export-led’ by comparable standards.Also, this should make you think about the component of China’s growth that came from domestic expansion, though China does have a much larger share of exports in GDP, and a sizeable trade surplus, justifying the notion that exports contributed a lot to China’s GDP growth.All this doesn’t mean that India is shining. The policy makers in every country give statistical nostrums to the people. In a country with millions of uneducated or undereducated people; an agricultural sector that depends on rainfall because of the government’s inability to dig irrigation channels;etc … Consider an African American who is now paid 5 cents a day in addition to food and shelter because Lincoln abolished slavery. When his income grows to 6 cents a day over 5 years, his macroeconomy has grown 8% percent over those years!

Brad Setser's "China Yoke" Theory - replete from direct quotes

Here’s one link to Brad Setser’s analysis on what led to the ongoing crisis:
According to Brad Setser, the People's Bank of China encouraged Americans to "turn a home into an ATM":
“Absent a large savings surplus in Asia and the oil exporters, rising US rates would have choked off the housing bubble much earlier. High long-term rates aren’t conductive to rising home prices — and without rising home values it is hard to turn a home into an ATM.…Central banks reserve growth in the savings surplus countries carried this surplus to the US. … The process that led to the boom in risky assets was indirect: Central bank demand for safe assets drove down the return on safe assets and encouraged private sector risk taking. Private banks, famously, didn’t want to sit out the dance.”
APART from blaming the PBoC for the mortgage boom (you need to closely follow each of his essays to know that he’s actually referring mainly to the PBoC in the above paragraphs) Brad Setser also blames the United States Public Debt on imports from China here:
“Remember this the next time someone argues that the US will be borrowing more from the rest of the world to finance its fiscal deficit: the total amount the US borrows from the world is defined by the current account deficit and the current account deficit clearly went down in the fourth quarter even as the US fiscal deficit (and the Treasury’s borrowing need) soared.”
Here Brad Setser revises economic history by claiming that the excessive lending by private banks that weren’t regulated properly by the Federal Reserve was actually a result of China’s exchange rate policy. Excerpts:
“By holding US interest rates down and the dollar up, China’s policies discouraged investment in tradables production in the US while encouraging investment in the interest-rate sensitive sectors that weren’t competing with Chinese production. This isn’t too say that the US didn’t already have a slew of policies in place to encourage investment in housing. It did — from the Agencies to ability to deduct mortgage interest from tax payments. But the surge in demand for US bonds from the world’s central banks reinforced those policies.…More money was allocated to home construction (for a time) and less to investment in the production of goods for export than otherwise would have been the case.…Those who attribute the growth of the past several years solely to the market miss the large role the state played in many of the world’s fast growing economies. Conversely, those who attribute all the excesses of the past few years to the market miss the role that governments played in financing many of those excesses …”
Me: So you see, Brad Setser also blames China for the fact that there wasn’t much investment in industrial production facilities in the US the last several years. Either you need to follow Brad Setser’s “China Yoke” theory of the crisis, or get down to brasstacks and fix some simple lending norms for retail loans in the US to prevent this sort of thing from happening again.

My Comments and views censored by Dr. Brad Setser (the latest set)

Following is a set of comments I posted on the blog page of Dr. Brad Setser. They have been deleted and now I'm pasting them here so anybody who's interested can read them here.

Here's Brad' Setser's advocacy on financing US Treasuries from a small private cartel instead of the PBoC

Brad Setser:That implies, if the Pandey/Setser estimates for official purchases are right, that private investors snapped up more Treasuries than the world’s central banks…My guess is that the Treasury market will be driven by developments in the US – not developments in China – in 2009.
Me:What will any reasonably smart, thinking person, think when they read this?
When we discussed how China’s purchase of Treasuries affects the $11 trillion home mortgage boom, we reasoned how flows matter. Mostly, the $11 trillion boom was fueled by flows from China’s Treasury purchases.Now we’re looking at the impact of China’s Treasury purchases on the market for Treasuries itself - and we aren’t seeing much of an impact there.
Most of those smart people who’re thinking this will also type in that you’ve made a great, wonderful analysis, and never raise this point. Some of them might actually even cheerlead your post here.

Let’s hope private market participants don’t bet on high Treasury Bond prices now. Jansen’s post suggests the classic rupture of Government Bond prices. Central Bank demand for Treasuries remained high on the day he reports on, yet prices crashed and yields rose. This is very good news for equity markets and home prices.People are clearly demanding higher yields now.

Here are some comments I made in response to comments from other blog participants:
@ KT Cat - can you consider not interpreting things as “horrible”,”dreadful”, and “shrinking” without more reasoning than you present above?
Banks are trying to dispose of a large set of foreclosed homes together, say, in a block worth around $30 million, to small groups of private investors. Sales volumes are a bit down because these negotiations take more time than a fire sale.Banks are also disposing of foreclosed properties in some areas individually; that typically goes faster.
Lower demand for Treasuries at higher Treasury prices is again very good news for the US economy.
I don’t understand what you mean by“Japan’s economy is getting killed”.
I explained yesterday that Japan’s exports and imports are down more than China’s because of lesser credit growth in the Japan economy than China, but Brad deleted my post.Once the credit problems are solved things will be much better for Japan.

jim:…they invest on fundamental strengths that are dominating the market place …
Me: Fundamental analysis based on earnings, etc in my opinion is like a relative grading system. You can put a buy,hold or sell recommendation on a particular equities by comparing them with others. The underlying assumption is that your analysis is largely to allocate a certain fixed amount of capital amongst different equities. You can also account for the differential impact of macroeconomic or other ‘market risk’ events on different equities.But in terms of determining the overall direction of indices, that part of fundamental analysis isn’t particularly useful. It’s not easy to discount future cash flows, arrive at a fixed number for the ‘present value’ of the stock and use that as a basis to be a successful investor. Your ‘present value’ rarely ties in with the market’s, especially with wide fluctuations in multiples. It’s best to recognize that, even by the conceptualization of capital market theory, market risk can at best be diversified away to reduce its impact,not eliminated. Successful investment therefore requires understanding the full spectrum of fundamental analysis, macroeconomic analysis and most importantly, the geopolitical underpinnings of international finance.Earnings are definitely weak in US equities and will probably grow slowly for some time. But the reason to go long is a market bottom, a shift in the debate to when things will get better, from how much worse things will get before they get better.Of course my actual strategy is long in the Nifty, and not the Dow, and the two things are quite different.Nomura Holdings recently hired 50 team leads with long expertise in US equities and they’re rapidly setting up a sizeably large US equities unit. If they don’t have plans to invest in US equities, or advise clients to do so, these hiring decisions wouldn’t be rational.

@DOR: Residential investment in the US was at levels of $600+ billion, out of a $14 trillion economy, even at inflated prices.The direct output effect of a collapse in residential investment is small. The US was perhaps just as much of a Hollywood Economy, rather than a Home Building Economy during the boom.That would be consistent with a 43% share of services in GDP.Home Equity Withdrawals financed 3-4% of PCE. Annual increases in o/s consumer credit were 1% of GDP.US consumption wasn’t mainly driven by using homes as ATMs,though that conceptualization is attractive.35% of US homes were owned outright in 2007. 5% of the remaining 65% homes had mortgages that were both ARMs and subprime. The mythical American risky borrowers were therefore few.The recent collapse can be explained by the non availability of normal credit. For instance, even qualifying home buyers may not get a mortgage loan. People with a good income and finances may not get approved for a car loan. Similarly, difficulties in segments like student loans, corporate working capital loans, export credit, letters of credit, etc have disrupted the US economy.A certain level of credit is neither good or bad by itself, but only in comparison with income and overall balane of assets and liabilities. Once normal credit flows are re started, things will be much better for the US economy.But growth will be slow because the destruction of personal net worth due to fall in home prices needs to be worked off by US consumers.

Important update based on Brad's comment

Brad Setser points out that India doesn't peg to the dollar as much as China; India's forex reserves are falling, (this is me: while China's forex reserves are probably rising).
So we need to understand that the only really significant support for the US dollar's status as a central bank reserve currency comes from China, among state actors.
I think there is some risk that the US dollar can in the medium term lose its status as a central bank forex reserve currency.