. . . and proud of it, probably.
From today's FT:
Tuesday, January 12, 2016
Is there a bubble in the value of the US dollar?
Only the Chinese currency is stronger versus the US$ than it was before the crisis, and it has started the journey south to join the yen, pound, and euro. It looks like the world wants to solve its problems on the back of the US economy. How long can this go on before US manufacturing, or what is left of it, shuts down completely?
Monday, January 11, 2016
Summers in today's FT expects direct effect of Chinese slowdown on US/Europe
And he doesn't think there is any effective monetary response. So we shall just grin and bear it.
Emerging Market Debt: the 1980s Elephant in the Room
Between 2005 and mid-2015 emerging market corporate debt rose from $900 bn to $4.4 trillion. (Central bank easy money had to go somewhere.) Total debt of emerging market countries went from $5.4 trillion to $24.4 trillion during the same period. (This includes both local currency and foreign currency debt.) Total debt is now 90% of average GDP for these countries. (data from today's FT)
This debt is largely supported by the proceeds from the sale of commodities.
Latin America had a similar quadrupling of debt in the ten years before August 1982 when Mexico suspended all debt payments. The current situation is somewhat similar, except that the emerging countries have relatively more local currency debt today.
In the 1970s, the recycling of petrodollars fueled the debt boom. In recent times, it has been the search for yield and central bank liquidity.
In the case where there is not a dramatic increase in commodity prices from today's levels (e.g. a doubling) it is hard to see how a 1980-like third world debt crisis can be avoided in the near future. (The first world debt crisis looms, but is probably more distant.)
Unlike in 1982, the present crisis has been moving forward in slow motion for a number of years, so the adjustment in the 3rd world may be less brutal than in the 1980s. Local currency debt also provides a cushion of sorts.
Some sort of debt cancellation for both sovereign and corporate debt around the world in both developed and developing countries will likely solve the problem sooner or later, so there is some cause for optimism.
This debt is largely supported by the proceeds from the sale of commodities.
Latin America had a similar quadrupling of debt in the ten years before August 1982 when Mexico suspended all debt payments. The current situation is somewhat similar, except that the emerging countries have relatively more local currency debt today.
In the 1970s, the recycling of petrodollars fueled the debt boom. In recent times, it has been the search for yield and central bank liquidity.
In the case where there is not a dramatic increase in commodity prices from today's levels (e.g. a doubling) it is hard to see how a 1980-like third world debt crisis can be avoided in the near future. (The first world debt crisis looms, but is probably more distant.)
Unlike in 1982, the present crisis has been moving forward in slow motion for a number of years, so the adjustment in the 3rd world may be less brutal than in the 1980s. Local currency debt also provides a cushion of sorts.
Some sort of debt cancellation for both sovereign and corporate debt around the world in both developed and developing countries will likely solve the problem sooner or later, so there is some cause for optimism.
The Lady or the Tiger?
There was a long-ago time, in a land far away, when high school students without exception would one day be assigned to read and discuss Frank Stockton's short story The Lady or the Tiger. In this story, a barbaric king puts a young man interested in his daughter of whom he does not approve in an arena where he must choose between two doors of egress. Behind one was a lovely damsel while the other concealed a fearsome and ravenous tiger. The princess, who was seated by the king, knew which was which and was loath to let her suitor be torn apart by the beast, but she also resented the damsel. She made a subtle sign to the suitor indicating which door he should choose. What was behind this door?
This is, in effect the dilemma faced by the Obama administration in deciding how the US should react to the actions of Iran in the Middle East. I recommend that you read Prof. Marvin Zonis' interesting essay on this subject, which defines the doors. It is unclear whether Pres. Rouhani of Iran is the fearsome tiger or the fair damsel.
This is, in effect the dilemma faced by the Obama administration in deciding how the US should react to the actions of Iran in the Middle East. I recommend that you read Prof. Marvin Zonis' interesting essay on this subject, which defines the doors. It is unclear whether Pres. Rouhani of Iran is the fearsome tiger or the fair damsel.
Friday, January 8, 2016
The PBOC announced on Dec. 11 that it had abandoned the Renminbi/US$ link
So why is everyone surprised? As of December 11th, the dollar went from 100% of the basket to 26.4%. (article below) The Yuan is behaving accordingly. Given the composition of the new basket, it would not be unreasonable to expect that the Chinese yuan would drop another 30%-40% against the dollar, ceteris paribus. The super-strong dollar is not beneficial to the US economy. I am inclined to believe that the US$ is in a speculative bubble.
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