Perspectives on the global economic meltdown- (Nov 28 2010)

Ambar · Post by **Ambar** » 07 Jun 2011 09:11

The biggest joke is some of these analysts think the staple food prices will triple by 2030! It is quite obvious they have never visited Asia. Food prices have tripled in India in the last 3 years alone! We are close to hyperinflationary situation in Asia that no one wants to acknowledge. Today's news that China is running from pillar to post in South America and Africa to secure food imports makes me wonder how bleak things will be in 5 years time. Something somewhere is terribly wrong, and before the usual suspect jumps in and blames it on "useless snakeoil bloodsucking zionist middlemen",no, the bankers have nothing to do with this.

Hari Seldon · Post by **Hari Seldon** » 07 Jun 2011 11:28

It is no secret that food security, water security and energy security rate highest among the concerns and priorities of the Asian giants. Period. Not power-projections or global dominance or such stuff.

Part of the inflation has been contributed to by reckless currency printing, no dounbt. PRC did so as to sterlize excessive dollah inflows thanks to super-massive trade surpluses month after month and India has been doing it to feed gubmint fiscal deficits that are nowhere near the FRBM envisaged 4% of GDP level. Of course, ask Pranab da and before him, PC and they'll say they're all for FRBM and all that only.

PRC's wanton environmental degration, reports of increased desertification etc and already-high average yield in many crops are also cause for concern. INdia that way has lot of slack in food production (our avg yields in rice and wheat for example are a fraction of PRC's, so we have much to imporve and raise output with).

Anyway, post's getting too long and boring perhaps. Whoa, also been a while since I visited this dhaga, feels like.

abhishek_sharma · Post by **abhishek_sharma** » 07 Jun 2011 12:27

Jared Bernstein, Paul Krugman, David Walker & Ken Rogoff

http://www.charlierose.com/view/interview/11710

Chinmayanand · Post by **Chinmayanand** » 07 Jun 2011 14:09

Got this in mail :

Did the Fed Print Money in QE1 and QE2?

In a Wednesday opinion piece in the WSJ, George Melloan, a former columnist and deputy editor of the Journal’s editorial page, penned a piece opining on the policy problem the Federal Reserve has gotten itself into with its QE1 and QE2. His concern is one that we at Cumberland pointed out more than a year ago. That is, in returning to a normal policy regime and reducing the amount of high-powered money in the system, the Fed will have to shrink its balance sheet. But doing so by selling assets while raising interest rates, which seems to be the latest plan outlined in the most recent FOMC minutes, the Fed will incur capital losses, and this may inhibit its will to begin to return to a more normal policy stance. Indeed, for about two years now we have been tracking weekly the estimated duration of the Federal Reserve’s capital and the amount of flexibility the Fed would have to raise rates before the market value of its assets exceeded the value of its liabilities http://www.cumber.com/content/index/duration.pdf. Our current calculations indicate that this would happen if the term structure shifted up by about 40 basis points. This is far less than the increase that would be required to return to a normal interest-rate/policy regime. There is nothing new in either Melloan’s concern or the work by Ford and Todd in Forbes that he appears to have relied upon to support his argument.

While Melloan’s concerns are valid, his comparison of the Fed to a normal commercial bank, and particularly the argument that the Fed has not printed money to engage in QE1 and QE2 but rather has borrowed money from banks at obscenely low interest rates, is totally wrong.

In the fall of 2008, during the financial crisis, the Fed engaged in a number of special-purpose programs – namely the Term Discount Window Facility, the Term Securities Lending Facility, the Term Auction Facility, the Primary Dealer Credit Facility, and three programs to acquire asset-backed securities, and engaged in reciprocal currency swaps with foreign central banks. As a result, the Fed’s assets expanded from about $900 billion before the crisis to nearly $2.5 trillion. The corresponding increase in Federal Reserve liabilities was accounted for by a $600 billion increase in bank excess reserves, and the remainder was in the form of reverse repos. In effect, made loans and did so by giving the bank borrower a deposit at the Fed, thereby printing high-powered money.

It is important to recognize that once created, deposits at the Fed can only be significantly reduced by one of six mechanisms: a reduction in private bank borrowings from the Fed, a sale of assets by the Fed, a conversion of deposits at the Fed into currency, a shrinkage in the size of the U.S. banking system, a temporary reverse repo with the private sector by the Fed, or a reduction in outstanding swap lines with foreign central banks. All other private entity transactions do not create or destroy deposits at the Fed, but simply change their ownership.

Perhaps the clearest example of printing money, to illustrate the point, is the reciprocal currency swap program the Fed entered into during the financial crisis with several foreign central banks. The ECB, for example, gave the Fed a euro deposit at the ECB in return for a dollar deposit at the Fed. Accounting-wise, the ECB’s liabilities went up by the amount of the euro deposit granted to the Fed, while its assets went up by the dollar amount of the deposit it received from the Fed. Similarly, the Fed’s assets went up by the amount of its euro currency holdings at the ECB, and its dollar liabilities went up reflecting the dollar deposit it had granted to the ECB. Both central banks printed money. The ECB then used its newly acquired dollars to provide dollar loans to European banks. When the ECB made a dollar loan to a foreign bank, the ownership of the dollar deposit at the Fed shifted from the ECB to the borrowing foreign bank. When the loan was paid back, the ownership of the dollar deposit shifted back to the ECB, the swap transaction was reversed and the assets and liabilities of both central banks returned to their pre-swap levels.

The Fed’s emergency lending programs phased out as loan programs shrank and reverse repos were retired. Had the Fed not embarked upon QE1 and subsequently QE2, its balance sheet would have shrunk. But with the start of QE1 and QE2 the rundown in the Fed’s assets due to shrinkage of its lending programs was offset by the simultaneous purchase of agency mortgage-backed securities and purchases of long-term Treasuries. In fact, those purchased exceeded the amount of outstanding emergency loans the Fed had previously granted.

From an accounting perspective, the loan programs shrank, excess reserves were retired, and the Fed simultaneously reprinted money to purchase the MBS and Treasury securities. It did not borrow money from commercial banks. Put another way, the money printed to fund the emergency loan programs, and more, was morphed into MBS and Treasury securities and this is clearly shown in a chart of the Fed’s assets http://www.cumber.com/content/misc/fed.pdf.

Think about it. Where would the excess reserves come from that banks held with the Federal Reserve, if the Fed hadn’t originally made the emergency loans or subsequently purchased assets? If Mr. Melloan’s analysis were correct, the excess reserves, which are assets to the private banking system, would have had to come from shrinkage of their assets and deposits, thereby turning required reserves into excess reserves, or by keeping their balance sheets the same size and shifting the composition of their assets by reducing loans and securities and increasing their reserves at the Federal Reserve. Just before the crisis in August 2007, banks held only $45 billion in total reserves, and $40 billion of that was in the form of required reserves. Clearly, shrinkage of deposits could not have funded the huge increase in excess reserves in the banking system that came with the Fed’s emergency lending programs. What about a shift in the composition of bank assets from loans and securities to deposits at the Fed? Data show that while bank loans have declined by about $600 billion, securities holdings have increased by about $600 billion. Therefore, the so-called borrowing from commercial banks could not have come from declines in their securities and loans.

So, George Melloan has totally mischaracterized the source of funding for the Federal Reserve’s QE1 and QE2 asset purchases. The Fed first printed high powered money through its emergency lending programs and as those programs were phased out the Fed again purchased agency mortgage-backed securities and Treasuries from the public by printing money, and the proceeds of those purchases show up as customer deposits in banks, with the offsetting asset being not new loans but excess reserves held at the Fed.

Manishw · Post by **Manishw** » 07 Jun 2011 14:21

^^ The fed will never let out their true Intentions regarding Hyperinflation/Deflation so such articles will continue till the end.Whatever One's personnel convictions be nobody will be 100% sure.Except for Faber I don't find anybody right on the money in this prolonged Drama.

Chinmayanand · Post by **Chinmayanand** » 07 Jun 2011 15:35

European Central Bank risks being 'wiped out' by bail-outs

The European Central Bank is "looking increasingly vulnerable" and may face "hefty losses" as a result of propping up indebted eurozone countries, a leading think-tank has warned.

The International Monetary Fund's partner in the recent international bail-out missions is itself in danger of becoming a liability, Open Europe has argued.

In a report published on Monday entitled A House Built on Sand?, Open Europe has calculated that the ECB has a total exposure of about €444bn (£397bn) to "struggling eurozone economies".

The bank is now "23 to 24 times levered" as a result of bailing out Greece, Ireland, Portugal and Spain.

The London-based think tank argued: "Should the ECB see its assets fall by just 4.23pc in value . . . its entire capital base would be wiped out."

Open Europe said: "Hefty losses for the ECB are no longer a remote risk." It added: "The ECB is ultimately underwritten by taxpayers which means there is a hidden – and potentially huge – cost of the eurozone crisis to taxpayers buried in the ECB's books."

Chinmayanand · Post by **Chinmayanand** » 07 Jun 2011 15:39

Betting On the PIGs

If Greece were to default, for example, approximately 94% of the direct losses would fall on European creditors, and only 5% would fall on US creditors. However, US banks and insurance companies would have to make about 56% of the default insurance payouts triggered by such an event, while European agents would make only 43% of those payouts…

In the case of Greece and Portugal, the vast majority of the losses that would be borne by creditors in Europe would be direct losses. In fact, French and German creditors would almost certainly be substantial net recipients of default insurance payments. (That's less clear in the case of Ireland.) Meanwhile, US financial institutions would have to make substantial net default insurance payments, which would account for between 80% and 90% of all losses borne by the US in the case of default…

Chinmayanand · Post by **Chinmayanand** » 07 Jun 2011 15:46

Meredith Whitney: State finances are worse than estimated

Since 2003, state governments have raised annual outlays from $1.5 trillion to almost $2.2 trillion, or $700 billion, yet tax receipts have risen only $400 billion or $300 billion less, to $1.4 trillion. In fact, spending kept surging all during the recession, while income from sales, income and corporate taxes went totally flat in 2007...

As Whitney shows, these off-balance sheet numbers are an incredible three times the size of all onbalance sheet debt, totaling $2 trillion. The load is rising quickly; the unfunded pension burden has jumped 50% in the past year.

The danger is a continuation of what's already happening, what Whitney calls "state arbitrage," in which the low-tax, business friendly venues such as Texas and North Carolina keep drawing companies and workers from the fiscally-challenged states...

The damage from state arbitrage could increase the scale of defaults in the second type of municipal securities: Revenue Bonds. Once again, Whitney sees little threat to General Obligation bonds because states simply won't default. What the fiscal calamity calls in doubt is Revenue Bonds that back specific projects such as subsidized housing, toll roads, land acquisitions, and nursing homes. Those bonds are supported by the cash flows from the projects themselves, and they aren't guaranteed by the state governments.

Chinmayanand · Post by **Chinmayanand** » 07 Jun 2011 15:59

Decline and fall of the American empire

The economic powerhouse of the 20th century emerged stronger from the Depression. But faced with cultural decay, structural weaknesses and reliance on finance, can the US do it again?

America clocked up a record last week. The latest drop in house prices meant that the cost of real estate has fallen by 33% since the peak – even bigger than the 31% slide seen when John Steinbeck was writing The Grapes of Wrath.

Unemployment has not returned to Great Depression levels but at 9.1% of the workforce it is still at levels that will have nerves jangling in the White House. The last president to be re-elected with unemployment above 7.2% was Franklin Delano Roosevelt.

The US is a country with serious problems. Getting on for one in six depend on government food stamps to ensure they have enough to eat. The budget, which was in surplus little more than a decade ago, now has a deficit of Greek-style proportions. There is policy paralysis in Washington.

The assumption is that the problems can be easily solved because the US is the biggest economy on the planet, the only country with global military reach, the lucky possessor of the world's reserve currency, and a nation with a proud record of re-inventing itself once in every generation or so.

All this is true and more. US universities are superb, attracting the best brains from around the world. It is a country that pushes the frontiers of technology. So, it may be that the US is about to emerge stronger than ever from the long nightmare of the sub-prime mortgage crisis. The strong financial position of American companies could unleash a wave of new investment over the next couple of years.

Let me put an alternative hypothesis. America in 2011 is Rome in 200AD or Britain on the eve of the first world war: an empire at the zenith of its power but with cracks beginning to show.

The experience of both Rome and Britain suggests that it is hard to stop the rot once it has set in, so here are the a few of the warning signs of trouble ahead: military overstretch, a widening gulf between rich and poor, a hollowed-out economy, citizens using debt to live beyond their means, and once-effective policies no longer working. The high levels of violent crime, epidemic of obesity, addiction to ***** and excessive use of energy may be telling us something: the US is in an advanced state of cultural decadence.

Empires decline for many different reasons but certain factors recur. There is an initial reluctance to admit that there is much to fret about, and there is the arrival of a challenger (or several challengers) to the settled international order. In Spain's case, the rival was Britain. In Britain's case, it was America. In America's case, the threat comes from China.

Britain's decline was extremely rapid after 1914. By 1945, the UK was a bit player in the bipolar world dominated by the US and the Soviet Union, and sterling – the heart of the 19th-century gold standard – was rapidly losing its lustre as a reserve currency. There had been concerns, voiced as far back as the 1851 Great Exhibition, that the hungrier, more efficient producers in Germany and the US threatened Britain's industrial hegemony. But no serious policy action was taken. In the second half of the 19th century there was a subtle shift in the economy, from the north of England to the south, from manufacturing to finance, from making things to living off investment income. By 1914, the writing was on the wall.

In two important respects, the US today differs from Britain a century ago. It is much bigger, which means that it benefits from continent-wide economies of scale, and it has a presence in the industries that will be strategically important in the first half of the 21st century. Britain in 1914 was over-reliant on coal and shipbuilding, industries that struggled between the world wars, and had failed to grasp early enough the importance of emerging new technologies.

Even so, there are parallels. There has been a long-term shift of emphasis in the US economy away from manufacturing and towards finance. There is a growing challenge from producers in other parts of the world.

Frenzy

Now consider the stark contrast between this economic recovery and the pattern of previous cycles. Traditionally, a US economic recovery sees unemployment coming down smartly as lower interest rates encourage consumers to spend and the construction industry to build more homes. This time, it has been different. There was a building frenzy during the bubble years, which left an overhang of supply even before plunging prices and rising unemployment led to a blitz of foreclosures.

America has more homes than it knows what to do with, and that state of affairs is not going to change for years.

Over the past couple of months, there has been a steady drip-feed of poor economic news that has dented hopes of a sustained recovery. Optimism has now been replaced by concern that the United States could be heading for the dreaded double-dip recession.

In the real estate market, which is the symptom of America's deep-seated economic malaise, the double dip has already arrived. Tax breaks to homeowners provided only a temporary respite for a falling market and millions of Americans are living in homes worth less than they paid for them. The latest figures show that more than 28% of homes with a mortgage are in negative equity. Unsurprisingly, that has made Americans far more cautious about spending money. Rising commodity prices exacerbate the problem, since they push up inflation and reduce the spending power of wages and salaries.

Macro-economic policy has proved less effective than normal. That's not for want of trying, though. The US has had zero short-term interest rates for well over two years. It has had two big doses of quantitative easing, the second of which is now ending. Its budget deficit is so big it has led to warnings from the credit-rating agencies, in spite of the dollar's reserve currency status. And Washington has adopted a policy of benign neglect towards the currency, despite the strong-dollar rhetoric, in the hope that cheaper exports will make up for the squeeze on consumer spending.

Policy, as ever, is geared towards growth because the great existential fear of the Fed, the Treasury and whoever occupies the White House is a return to the 1930s. Back then, the economic malaise could be largely attributed to deflationary economic policies that deepened the recession caused by the popping of the 1920s stock market bubble. The feeble response to today's growth medicine suggests that the US is structurally far weaker than it was in the 1930s. Tackling these weaknesses will require breaking finance's stranglehold over the economy and measures to boost ordinary families' spending power and so cut their reliance on debt. It will require an amnesty for the housing market. Above all, America must rediscover the qualities that originally made it great. That will not be easy.

Manishw · Post by **Manishw** » 07 Jun 2011 16:18

Chinmayanand wrote: In America's case, the threat comes from China.

Well for what its worth to my mind the threat does not come from china.They are allies.This economic mess that US find itself is more a logical conclusion of the cold war where they transferred their manufacturing base to china to thwart inflation thereby bankrupting the FSU.

ramana · Post by **ramana** » 07 Jun 2011 19:39

One image that comes to mind about US and PRC is twins conjoined at the hip with each has one hand on the throat of each other.

Altair · Post by **Altair** » 07 Jun 2011 22:26

I have been into wealth management in India for several years now and I can say that lot of NRI customers who invested only in US previously are now happy investing in indian real estate and indian derivative markets. There have been tectonic shifts in Indian derivative markets in the past couple of years. It is surprising to know that a great many of people actually bet that dollar will fall. Its the sentiment that there is fundamentally something wrong with US. It was inconceivable fifteen years ago! We truly are in land of karma.What was taken away from us over a period of millennium is returning to us whether it is from US or PIGS or other economies one way or the other. Its a true satisfactory moment to be paid back. Har Har Mahadev!

Ambar · Post by **Ambar** » 08 Jun 2011 07:20

..and we continue to believe that emerging economies are immune to the paradigm shifts in global economy. The decoupling theory fell flat on its face in 2008 and has continued to disprove itself ever since. USD today is 20% higher against INR than what it was pre-crisis. Unless the emerging economies strengthen their currencies, the Feds will continue to create imbalances to create massive inflationary pressures in emerging economies until then. USD may well go down 25-40% from its current value, and with prevailing trade imbalances and employment situation in US that is not exactly undesirable.

About India, the market has been hanging in limbo from the last 8 months and with RBI's wrong medicine to cure the inflation disease, the economy will continue to slowdown. We never lose an opportunity to take a dig at China and their real-estate bubble, but is a 20% appreciation/yr in India sustainable ? The vacant flats/stagnant rents in metros is a clear sign of over built real-estate , stratospheric prices that have risen faster than the income of people. The only advantage India has currently is with employment situation, it'll be interesting times when that changes.

somnath · Post by **somnath** » 08 Jun 2011 07:47

Ambar wrote:We never lose an opportunity to take a dig at China and their real-estate bubble, but is a 20% appreciation/yr in India sustainable ? The vacant flats/stagnant rents in metros is a clear sign of over built real-estate , stratospheric prices that have risen faster than the income of people. The only advantage India has currently is with employment situation, it'll be interesting times when that changes

Well, the highest that INR went to was ~39, today its @ 44.67...So the depreciation is about 10% odd...

And atually, its quite natural as well, India is one of the few emerging economies to run a consistent Current Account deficit...Hence, INR would be susceptible to capital flows, at the margin...Hence, a depreciation is quite in line...The variable that Indian policymakers track is REER...

Last, a weaker ccy is actually good for employment in India...If anything,m the grouse that a lot of people have is that RBI hasnt allowed the ccy to weaken much more..

Neshant · Post by **Neshant** » 08 Jun 2011 09:54

debasing a country's currency is no route to prosperity.

if there's one thing we've learnt, its that some clown at the top fiddling around with interest rates, printing money and claiming to know what ails the economy can lead to big disasters.

An entire industry has been built around this snake oil salesman ship that's destroying the wealth of the productive people of the world. Personally I see it as a cover for croney capitalism that benefits a few who are gaming the system at the expense of the many.

The only good news is that we have a front row seat to see how this situation crumbles and (undoubtedly) more snake oil salesmanship is used to explain away the cause of it.

somnath · Post by **somnath** » 08 Jun 2011 10:07

Neshant wrote:debasing a country's currency is no route to prosperity.

Debasing seems to have a very negative connotation to it..there isnt anything intrinsically bad about currency depreciation..Heck, China has built its own fortune by keeping its own ccy artificially undervalued...

Currency, like every other commodity, is "priced" on demand and supply...Of course, ccy is the most politicised of all markets, and hence subject to lot more state interventions...

A "cheaper" ccy helps the country's exports (which is what China does, and a whole lot of other countries)...An overvalued ccy on the other hand, can precipitate a crisis, a la East Asian crisis in 1998...

Nothing sinister in the ccy depreciating at all, its normal macro stuff..

abhishek_sharma · Post by **abhishek_sharma** » 08 Jun 2011 10:34

UNEMPLOYMENT OR INSOLVENCY: STRATEGIES FOR A TROUBLED ECONOMY
Christina D. Romer
Zale Lecture in Public Policy, Stanford University

putnanja · Post by **putnanja** » 09 Jun 2011 02:56

Republican Mainstream Flirts with Brief US Default

...
An increasing number of Republicans do not believe the Obama administration's dire predictions of economic "catastrophe" if the debt limit is not increased. They argue a period of technical default can be managed without plunging markets into chaos.

Establishment Republicans including Tim Pawlenty, the former Minnesota governor who announced his presidential candidacy last month, are backing a short-term default if it leads to deep, immediate spending cuts.

Read more: Republican Mainstream Flirts with Brief US Default

....
Fueling skepticism over this outcome is an argument made last month by legendary investor Stan Druckenmiller, a one-time ally of George Soros, who said he would favor a short-term default if in exchange lawmakers in Washington struck a deal for massive spending cuts and a medium-term plan to tackle the $1.4 trillion deficit.

"That had a lot of impact on Republicans," said Vin Weber, a veteran Republican strategist and party moderate. He said the idea that a short-term default would not be a problem "is definitely becoming a mainstream belief."

...
Bond investors say even a temporary default could erode confidence in Treasurys and the dollar, wreak havoc in mutual funds and possibly provoke another global crisis.

"It's a very dangerous tactic," said Mirko Mikelic, who helps manage $17 billion at Fifth Third Asset Management. "I think you would see investors move away from the United States and move to other markets as they lose confidence in the U.S. financial system and our ability to keep our house in order."

...
Priya Misra, head of U.S. rates research at Bank of America-Merrill Lynch, said $25.6 billion in Treasury interest payments due on Aug. 15 could be in jeopardy if the Aug. 2 deadline is not met.

If the United States defaults, money market mutual funds that invest in short-term government bills, considered one of the most secure investments, could "break the buck" by falling below $1 a share, Misra said.

The resulting losses could spark a bank run of the sort seen when Lehman Brothers collapsed in 2008.

...
The impact on the dollar could be even greater, especially if ratings agencies cut America's credit rating.

"Foreigners don't buy Treasurys for the yield but for the safe-haven status," said Citigroup currency strategist Steven Englander. "If you do your best to blow up that safe-haven status, they won't want the dollar exposure. Their patience is not infinite."

"It would be a whole new world where people would be less inclined to purchase our debt, finance our deficits, it would definitely be a game changer globally," said Fifth Third's Mikelic.

Read more: Republican Mainstream Flirts with Brief US Default

Neshant · Post by **Neshant** » 09 Jun 2011 07:15

somnath wrote: Debasing seems to have a very negative connotation to it..there isnt anything intrinsically bad about currency depreciation..Heck, China has built its own fortune by keeping its own ccy artificially undervalued...

The only thing China has built up is a mountain of US govt IOUs which will soon be worth a whole lot less if not outright defaulted on.

A "cheaper" ccy helps the country's exports (which is what China does, and a whole lot of other countries)...

No it does not. This is classical keynesian textbook snake oil that is wrecking the economy. The only thing destroying the value of your currency does is it distorts free market prices (as the housing bubble did) and steals money from the profitable producers of society who then have less to allocate to profitable pursuits. That stolen wealth is transferred to banking crooks doing zero for work who sit atop a fiat money pyramid scheme.

All kinds of snake oil explainations are carted out to justify the robbery of this wealth via devaluation.

To put it straight - devaluation is a robbery from savers, creditors and producers of society (basically anyone doing the right thing with the fruits of their labor) and its transfer to debtors and most importantly the useless middle man industry (banking & financing) who made bad gambling bets (on housing..etc).

Who's to say that 5% devaluation is good but 10% or 20% or 50% is bad? Why not a 99% devaluation? Surely the economy will boom.

The point is nobody is smart enough to know. Its best left to the market to determine what the value of a currency should be. If its over-valued, businesses/people invest abroad or buy capital goods/resources for their businesses IF they need. If its under-valued, they boost production for exports IF they need. Rather silly to have some con man like Bernanke sitting up top claiming he knows best what the value of the currency or housing or the stock market or (fill in the blank) should be and rigging the stock market or running up debt or printing money to keep things over-priced.

IMO keynesian economics is going to be exposed as a farce within the next 2 to 5 years. I'm on record as saying the Federal Reserve itself will be shut down in 5 to 7 years.

devesh · Post by **devesh** » 09 Jun 2011 07:32

Somnath:

please don't say things like "currency depreciation is just normal macro stuff."

debasement, on a long term or permanent scale, has had disastrous consequences in the past. US behavior presently is very similar to Rome's behavior in its last 100 years...it most certainly is not "normal." that is a gross underestimation of the insidious threat that systematic and constant debasement poses. France in the 18th century is another great example. in their struggle against the British, they followed the same policies that US is following now, which eventually led to several bubble/bust scenarios including the famous "Mississippi Bubble." powerful nations were brought to their knees b/c long term debasement destroyed the fabric of those societies and rendered a massive collapse as the only way to rectify those mistakes. once addicted to "debasement," it never stops until forcefully made to stop. France's experiment ended with the French Revolution, Reign of Terror, and Napoleon.....

there is nothing "normal" about consistent long term debasement as a national policy.....

Neshant · Post by **Neshant** » 09 Jun 2011 07:47

abhishek_sharma wrote:UNEMPLOYMENT OR INSOLVENCY: STRATEGIES FOR A TROUBLED ECONOMY
Christina D. Romer

I've heard her before. I've found what she has to say a load of bullocks. Her whole premise evolves around praising the printing of money and running up of debt and claiming its leading to recovery. She's always praising the Federal Reserve and Bernanke - despite the fact they created the enormous asset inflation and leverage problem that will inevitably ruin everyone financially. Personally I think she is fishing for a high paid CEO position as Goldman Sachs or something.

It is plain to see that with not a sinlge new productive industry having emerged since 2000 and with the debt & money printing having gone skywards, what's occuring is just the opposite of a recovery. Its the creation of a massive bubble - what i call the disaster bubble.

When this blows up as it surely will, i'd like to see her reaction. I'm betting she will claim that not enough borrowing and money printing was the cause.

somnath · Post by **somnath** » 09 Jun 2011 08:08

devesh wrote:please don't say things like "currency depreciation is just normal macro stuff."

You almost make it sound as if currency appreciation is an article of faith...I mean, do you realise that if all countries took that to heart, and all countries tried to jack up the value of their currencies, not all of them can succeed?

Principally, tools like currency are just that, tools for an end objective, which is (usually) socio-economic progress...These tools can be misused, overused and everything else, but dont blame the tool for it, blame the crafstman..

In terms of basic data, is USDGBP the same today as it was 200 years back? But it is undenaible that ciitzens of both UK and US are many thousands of times better off in terms of quality of life today than 200 years back...USDINR today, versus 50 years back? USDCNY today, versus 50 years back? All these exchange rates have changed, towards depreciation mostly, but its undenaible that the average Indian is many 1000s of times more prosperous today than 50 years back...

Net net, there is nothing so fundamentally wrong in devaluing the ccy, it depends on the context...East Asian countries recovered so fast from the 1998 crisis because they devalued, as a random example..Or the fact that the biggest constraint before the PIIGS is their inability to do so...

Neshant wrote:This is classical keynesian textbook snake oil that is wrecking the economy

Which textbook did you pick thi up from? What is so classically "Keynesian" about devaluation? Is it that "Miltonian" prescriptions proscribe devaluations? Or for that matter Krugman? Which "classical" or "modern" theory talks of a perpetually appreciating or pegged currency as nirvana?

Seriously, your understadning of these issues is so shallow (this isnt the only post) that you need to start reading 100 stuff before going on your rants..

devesh · Post by **devesh** » 09 Jun 2011 10:54

I am specifically talking about consistent debasement as long term national policy. perhaps I should have been more clear: when consistent long term debasement becomes a supposed "cure" or when debasement becomes the hiding place where it is looked at as a solution to other structural and fundamental economic ailings, that is when societies are on a such path to destruction. Debasement is not a happy solution for economic problems. what is happening in US is debasement is unofficially being accepted and taken for granted. with that attitude, currency becomes toilet paper.

somnath · Post by **somnath** » 09 Jun 2011 11:59

devesh wrote:I am specifically talking about consistent debasement as long term national policy.

What does this mean?

devesh · Post by **devesh** » 09 Jun 2011 19:47

use your common sense. look at US monetary behavior in the past 10 years and keep observing it.
look at what Rome did in its last 100-150 years. look at the arguments peddled by Roman authorities to support consistent long term currency debasement policies and how that killed Roman empire from the inside.
look at France's monetary and fiscal behavior in the 18th century which they justified by talking about "national needs," and "helping people," and see how that turned out for France.

for your benefit, I'll post some definitions of the word "consistent" :
"of a regularly occurring, dependable nature"
"In a consistent manner; constantly; always"
"Unchanging in achievement or effect over a period of time"
"the same throughout in structure or composition"

somnath · Post by **somnath** » 09 Jun 2011 20:35

devesh wrote:look at US monetary behavior in the past 10 years and keep observing it

Well, what has been so devilish about US monetary policy int the last 10 years? It sure has shown immensely proligate fiscal behaviour in that time period - but pray, tell me what was so counterfactual about its monetary policy?

And given your massive reading of both the English dictionary as well as economic history of nations, maybe you can also explain what consistent "debasement" of the currency means...I have read of, and work off, currency deprecitation/devaluation, but debasement? Kindly educate...

devesh · Post by **devesh** » 09 Jun 2011 20:51

somnath wrote:
devesh wrote:look at US monetary behavior in the past 10 years and keep observing it
Well, what has been so devilish about US monetary policy int the last 10 years? It sure has shown immensely proligate fiscal behaviour in that time period - but pray, tell me what was so counterfactual about its monetary policy?

And given your massive reading of both the English dictionary as well as economic history of nations, maybe you can also explain what consistent "debasement" of the currency means...I have read of, and work off, currency deprecitation/devaluation, but debasement? Kindly educate...

if you're really asking the question in the bolded part, then there is nothing I can say to you.

you would know what "currency debasement" means if you knew that historically currency value was measured against something of intrinsic value, like Gold, or Silver, or some other commodity. when a certain fixed quantity of currency earns you less and less of the commodity against which it is measured, it means that currency is loosing value.....it means each unit of currency is worth less and less. this is basic economics. any 2nd year undergrad Econ student can tell you what currency debasement means. i'm sorry you're not aware of it.....

and once again, please do acquaint yourself on what happens to countries when they become used to the idea that currency debasement is a panacea for their economic ills, and pursue that policy consistently over a long period of time....

krisna · Post by **krisna** » 09 Jun 2011 22:08

China warns U.S. debt-default idea is "playing with fire"

Republican lawmakers are "playing with fire" by contemplating even a brief debt default as a means to force deeper government spending cuts, an adviser to China's central bank said on Wednesday.

China is the largest foreign creditor to the United States, holding more than $1 trillion in Treasury debt as of March, U.S. data shows, so its concerns carry considerable weight in Washington.
"I really worry about the risks of a U.S. debt default, which I think may lead to a decline in the dollar's value," Li said.
Congress has balked at increasing a statutory limit on government spending as lawmakers argue over how to curb a deficit which is projected to reach $1.4 trillion this fiscal year. The U.S. Treasury Department has said it will run out of borrowing room by August 2.

Financial markets are following the U.S. debate but see little risk of a default.

Indian babus

How can the U.S. be allowed to default? " said an official at India's central bank. "We don't think this is a possibility because this could then create huge panic globally."
Indian officials say they have little choice but to buy U.S. Treasury debt because it is still among the world's safest and most liquid investments. It held $39.8 billion in U.S. Treasuries as of March, U.S. data shows.
The officials declined to be identified because they are not authorized to speak to the media.

For a change uncle is breathing fire than the dragon

Chinmayanand · Post by **Chinmayanand** » 10 Jun 2011 01:25

Somebody once told me that India holds less dollars in treasuries but a big chunk in fixed deposits in US. Does anybody have any clue to that whether that is true and if it is, how much is held in FDs and what is the risk on that?

Ambar · Post by **Ambar** » 10 Jun 2011 06:30

Why would GoI do that ? A 10 year CD yield and 10 year t-bill yield is nearly the same.

Prem · Post by **Prem** » 11 Jun 2011 00:11

http://www.businessinsider.com/us-alrea ... ncy-2011-6

China's Dagong credit ratings agency is at it again, now saying the U.S. is already in default, according to the AFP. The firm said last year that the U.S. and European countries should have credit ratings below China, and announced its own rankings to back up its statements. Their reason for default, however, is a little suspicious.
From AFP:
“In our opinion, the United States has already been defaulting,” Guan Jianzhong, president of Dagong Global Credit Rating Co. Ltd., the only Chinese agency that gives sovereign ratings, was quoted by the Global Times saying.Washington had already defaulted on its loans by allowing the dollar to weaken against other currencies — eroding the wealth of creditors including China, Guan said.that's Dagong's reason for the downgrade, doesn't that imply that China too, frequently devaluing its currency to keep pace with the dollar, is also in default to foreign creditors?

( Ultte Baans Bareli ko)

Christopher Sidor · Post by **Christopher Sidor** » 11 Jun 2011 00:17

The threat of US default may seem like a political stunt. But it happened before. US president, Nixon defaulted on the promise of exchanging 1 gram of gold for 35 USD in 1971. It was called as the Nixon Shock

So it is possible that US might default again. Will it impact dollar's prospect? Fat Chance. Despite the 1971 shock, USD still remains the only reserve currency in the world.
It would be a disaster for the Chinks no doubt. But so would it be for the japanese, certain middle-eastern countries and certain European countries. America being a largely domestic driven economy and not an export led economy like Germany/China/Korea/Japan would be lightly hit. But for other export driven countries it would be a disaster.

Aryaputra · Post by **Aryaputra** » 11 Jun 2011 02:27

Christopher Sidor wrote:The threat of US default may seem like a political stunt. But it happened before. US president, Nixon defaulted on the promise of exchanging 1 gram of gold for 35 USD in 1971. It was called as the Nixon Shock

So it is possible that US might default again. Will it impact dollar's prospect? Fat Chance. Despite the 1971 shock, USD still remains the only reserve currency in the world.
It would be a disaster for the Chinks no doubt. But so would it be for the japanese, certain middle-eastern countries and certain European countries. America being a largely domestic driven economy and not an export led economy like Germany/China/Korea/Japan would be lightly hit. But for other export driven countries it would be a disaster.

What makes you think that China, Japan and India would not further devalue their currency in response? Have you heard about the term 'Currency wars'?

Virupaksha · Post by **Virupaksha** » 11 Jun 2011 02:32

Aryaputra wrote: What makes you think that China, Japan and India would not further devalue their currency in response? Have you heard about the term 'Currency wars'?

inflation

Aryaputra · Post by **Aryaputra** » 11 Jun 2011 02:34

ravi_ku wrote:
Aryaputra wrote: What makes you think that China, Japan and India would not further devalue their currency in response? Have you heard about the term 'Currency wars'?
inflation

Inflation is a given in Keynesian economics. Come up with a better answer.

devesh · Post by **devesh** » 11 Jun 2011 09:01

^^^
food price inflation is already 9%. in a beggar-thy-neighbor policy, it will reach 20% and beyond. No Indian govt can have 20% food inflation and survive. it just won't happen. India's electoral politics, especially in the present circumstances, will not allow for the govt to get into an all out currency war.

abhishek_sharma · Post by **abhishek_sharma** » 11 Jun 2011 11:53

The Banking Emperor Has No Clothes

Ambar · Post by **Ambar** » 11 Jun 2011 18:16

devesh wrote:^^^
food price inflation is already 9%. in a beggar-thy-neighbor policy, it will reach 20% and beyond. No Indian govt can have 20% food inflation and survive. it just won't happen. India's electoral politics, especially in the present circumstances, will not allow for the govt to get into an all out currency war.

The 9% food inflation is a "nutella spread" figure released by the GoI. Food inflation for staple food items (grains,legumes,pulses,fruits) have risen at the rate of 20-25% in the last 3 years.There is no end in sight for inflation problems in India as weak INR,capital inflows,supply-side bottlenecks,logistic problems and more important crooked traders and end sellers all ensure the prices never drop.

Najunamar · Post by **Najunamar** » 11 Jun 2011 18:50

Christopher Sidor wrote:The threat of US default may seem like a political stunt. But it happened before. US president, Nixon defaulted on the promise of exchanging 1 gram of gold for 35 USD in 1971. It was called as the Nixon Shock

.

A minor nitpick, the peg was $35 to 1 Oz of gold (1gm = $35 would suggest approx. $1090 = 1Oz, more likely the real peg!)

anmol · Post by **anmol** » 12 Jun 2011 00:04

Quants: The Alchemists of Wall Street (Marije Meerman, VPRO Backlight 2010)