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That 70s show – episode 4
We have shown in the previous three episodes (episode 1, 2 and 3) how the US economy structurally changed after Nixon took the US off gold, letting the Federal Reserve do what it does best. Obviously, with the “hard” anchor of the US dollar cut loose, the rest followed suit. It is telling that the so-called post-Bretton Wood “gold standard” of all currencies, the Deutsche mark lost 65 per cent of its purchasing power from 1971 to 1990.
Also note that the French, with its inferior Franc lost 84 per cent of its purchasing power over the same, time hated the Germans for it. As a “victorious” nation of the Second World War, the French had a right to veto German unification, and would only agree to re-merge east and west if the Germans would give up their coveted mark and join the euro.
But we digress, in the this episode we will focus on debt levels within the context of unrestrained central banking.
Throughout history the US economy used to be leveraged, on average, 1.5 times GDP; total credit market debt fluctuated more or less within a tight range of maximum one standard deviation from its long term mean. Prior to 1971 the only time debt levels really got out of hand was during the Great Depression on back of a 45 per cent decline in nominal GDP. Total outstanding debt, in dollar terms actually fell by 12 per cent over the same time span.
So, the US economy was leveraged 1.5 times its annual output from 1840 to 1971 before fundamentally changing its trajectory. Needless to say, this low debt period was also when the US economy became the world’s largest and most sophisticated (see here) and ultimately a global hegemon.
Source: History of the United States from Colonial times to 1970, Federal Reserve, Bureau of Economic Analysis, Bawerk.net
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2 days of gains push oil up 17%, TSX up 3.6%
Global stocks calmer after a week of volatility set off by doubts about China’s growth
After a week with wild swings in the values of stocks and commodities, oil futures ended up gaining 17 per cent in two days and the TSX was up 3.6 per cent in the same period.
That didn’t wipe out the damage done to the Toronto market in the last 10 days after China’s devaluation of its currency triggered global market turmoil. The TSX is down 5.2 per cent on the year and 2,7 per cent from its level before the Chinese currency crisis began last week.
Investors were cheered by oil’s rapid recovery and bought up Canadian energy stocks, pushing the TSX up 98 points to 13,865 on Friday.
The Dow was down 11 points today at 16,643, but it has recovered its week-ago level after a sharp rise yesterday.
The Dow has lost 6.6 per cent since the beginning of the year and is trading at the same level it was at last October.
The volatility triggered by China’s currency devaluation Aug. 18 lasted more than a week. But North American markets shook off the gloom by Wednesday, with a sharp recovery in the last two days.
TD economist Ksenia Bushmeneva attributed the relative calm in markets later in the week to a statement by New York Fed president William Dudley that prospects of a U.S. rate increase next month have dimmed amid rising concerns about the rest of the world.
West Texas Intermediate (WTI), the most important North American futures contract, finished Friday at $45.43 US a barrel, an increase of 6.7 per cent on the day or $2.87 and reverses the seven-week decline that had taken it below $38.
- Canada’s economy: 5 reasons not to panic
- Students, those approaching retirement more vulnerable to market swings
Brent oil was up $2.62 or 5.5 per cent to $50.18.
WTI at $60 US would improve the outlook for North American oil producers, but it hasn’t been that price since the end of June.
…click on the above link to read the rest of the article…
Why QE4 Is Inevitable
Why QE4 Is Inevitable
One narrative we’ve pushed quite hard this week is the idea that China’s persistent FX interventions in support of the yuan are costing the PBoC dearly in terms of reserves. Of course this week’s posts hardly represent the first time we’ve touched on the issue of FX reserve liquidation and its implications for global finance. Here, for those curious, are links to previous discussions:
- China Dumps Record $143 Billion In US Treasurys In Three Months Via Belgium
- China’s Record Dumping Of US Treasuries Leaves Goldman Speechless
- How The Petrodollar Quietly Died And Nobody Noticed
- Why It Really All Comes Down To The Death Of The Petrodollar
- Devaluation Stunner: China Has Dumped $100 Billion In Treasurys In The Past Two Weeks
- What China’s Treasury Liquidation Means: $1 Trillion QE In Reverse
- It’s Official: China Confirms It Has Begun Liquidating Treasuries, Warns Washington
And so on and so forth.
In short, stabilizing the currency in the wake of the August 11 devaluation has precipitated the liquidation of more than $100 billion in USTs in the space of just two weeks, doubling the total sold during the first half of the year.
In the end, the estimated size of the RMB carry trade could mean that before it’s all over, China will liquidate as much as $1 trillion in US paper, which, as we noted on Thursday evening, would effectively negate 60% of QE3 and put somewhere in the neighborhood of 200bps worth of upward pressure on 10Y yields.
…click on the above link to read the rest of the article…
It’s Official: China Confirms It Has Begun Liquidating Treasuries, Warns Washington
It’s Official: China Confirms It Has Begun Liquidating Treasuries, Warns Washington
On Tuesday evening, we asked what would happen if emerging markets joined China in dumping US Treasurys. For months we’ve documented the PBoC’s liquidation of its vast stack of US paper. Back in July for instance, we noted that China had dumped a record $143 billion in US Treasurys in three months via Belgium, leaving Goldman speechless for once.
We followed all of this up this week by noting that thanks to the new FX regime (which, in theory anyway, should have required less intervention), China has likely sold somewhere on the order of $100 billion in US Treasurys in the past two weeks alone in open FX ops to steady the yuan. Put simply, as part of China’s devaluation and subsequent attempts to contain said devaluation, China has been purging an epic amount of Treasurys.
But even as the cat was out of the bag for Zero Hedge readers and even as, to mix colorful escape metaphors, the genie has been out of the bottle since mid-August for China which, thanks to a steadfast refusal to just float the yuan and be done with it, will have to continue selling USTs by the hundreds of billions, the world at large was slow to wake up to what China’s FX interventions actually implied until Wednesday when two things happened: i) Bloomberg, citing fixed income desks in New York, noted “substantial selling pressure” in long-term USTs emanating from somebody in the “Far East”, and ii) Bill Gross asked, in a tweet, if China was selling Treasurys.
Sure enough, on Thursday we got confirmation of what we’ve been detailing exhaustively for months. Here’sBloomberg:
China has cut its holdings of U.S. Treasuries this month to raise dollars needed to support the yuan in the wake of a shock devaluation two weeks ago, according to people familiar with the matter.
…click on the above link to read the rest of the article…
Why Saudi Arabia Won’t Cut Oil Production
Why Saudi Arabia Won’t Cut Oil Production
Nine months after OPEC decided to leave its production target unchanged and pursue market share instead of trying to prop up prices, the group is facing a set of complex problems and decisions going forward.
At first blush, the collapse of oil prices and the resiliency of U.S. shale appears to hand OPEC, and its most powerful member in Saudi Arabia, a stinging defeat. U.S. oil production has leveled off but has not dramatically declined. Meanwhile, oil prices are at their lowest levels since the financial crisis and the revenues of OPEC members have fallen precipitously along with the price of crude.
All of that is true, and in fact, Saudi Arabia is under tremendous pressure. The Saudi government is considering slashing spending by a staggering 10 percent as it seeks to stop the budget deficit from growing any bigger. The IMF predicts that Saudi Arabia could run a budget deficit that amounts to about 20 percent of GDP.
Related: Some Small But Welcome Relief For WTI
The pain is manifesting itself in different ways. Not only will the Kingdom have to cut spending, but it has also turned to the bond markets in a big way. Low oil prices have forced Saudi Arabia to issue bonds with maturities over 12 months for the first time in eight years, raising 35 billion riyals (around $10 billion) so far in 2015.
At the same time, the currency is coming under increasing pressure. Saudi Arabia pegs the riyal to the dollar at a rate of about 3.75:1, but speculation is rising that the currency may need to be devalued, given that the oil producer won’t be able to defend that ratio indefinitely.
…click on the above link to read the rest of the article…
Oil Price Collapse Triggers Currency Crisis In Emerging Markets
Oil Price Collapse Triggers Currency Crisis In Emerging Markets
Emerging market currencies are getting slammed by the collapse in commodity prices, a downturn that has accelerated in recent weeks.
The health of many middle-income and emerging market economies has been predicated on relatively strong commodity prices. A whole category of countries achieved strong growth by exporting their natural resources. For example, Brazil’s impressive economic expansion since the early 2000s, and the huge number of people that were able to jump into the middle class, was made possible by exporting oil, soy, iron ore, beef, and a variety of other resources. High prices for these goods led to more growth, a strengthening of the currency, and a real estate boom in cities like Rio de Janeiro.
The same story unfolded in many other commodity-driven economies, from Latin America, to Africa, to Central and Southeast Asia.
However, with commodity prices down dramatically from a year ago, growth in these countries has slowed, and their currencies are sharply weaker than they have been in the past.
Related: Oil Prices Must Rebound. Here’s Why
In fact, the fall of Brent crude below $50 per barrel has sparked a sudden downturn in emerging market currencies across the globe.
But it isn’t just oil prices slamming currencies. The worries over the Chinese economy, including the plunge in its main stock market this summer, have raised concerns about the vigor of emerging market economies. Worse yet, China’s surprise devaluation has sent shock waves through currency markets around the world.
Other countries now feel pressure to let their currencies depreciate, and if they have adhered to a currency peg up until now, some are being pushed to float. Kazakhstan decided to scrap its currency peg last week, and the tenge promptly lost 23 percent of its value against the dollar. Vietnam also devalued the dong.
The devaluations tend to have a cascading effect, with other emerging markets coming under increasing pressure from their competitors.
…click on the above link to read the rest of the article…
China share plunge drives selling in Asian, European markets
Benchmark Shanghai Composite Index is down 38 per cent from its June 12 peak
Oil prices, commodities and the currencies of many developing countries also tumbled on concerns that a sharp slowdown in China might hurt economic growth around the globe. Wall Street was expected to suffer heavy losses on the open.
The Shanghai index suffered its biggest percentage decline since February 2007, with many China-listed companies hitting their 10 per cent downside limits. The benchmark closed at 3,209.91 points, meaning it has lost all of its gains for 2015, though it is still more than 40 per cent above its level a year ago.
Shanghai is now down 38 per cent from its June 12 peak.
China’s dimming outlook is drawing calls for more economic stimulus from Beijing, though earlier government efforts to staunch the hemorrhage appear to have done little to stabilize markets.
Asia’s gloom spread to European markets, where Britain’s FTSE 100 fell 2.7 per cent, Germany’s DAX 2.6 per cent and the CAC 40 of France 2.5 per cent. Dow futures were down over 2 per cent while the S&P futures were 1.8 per cent lower.
Japan’s Nikkei fell 4.6 per cent to 18,540.68, its worst one-day drop since in over two and a half years.
“It is a key moment for China. The equity market in free fall, the banking system increasingly starved of liquidity, rising capital outflows, and a rapidly slowing economy,” Angus Nicholson, a market analyst for IG, said in a market note.
“Global markets look set to continue their rout into the European and U.S. sessions,” he said, noting that the scale of the losses may have been exaggerated by the thin trading volumes typical of late August.
Saudi Arabia Faces Another “Very Scary Moment” As Economy, FX Regime Face Crude Reality
Saudi Arabia Faces Another “Very Scary Moment” As Economy, FX Regime Face Crude Reality
“They are working for their market share, not for the price,” Kazakh Prime Minister Karim Massimov told Bloomberg on Saturday, during the same interview in which he predicted that sooner or later, dollar pegs in Saudi Arabia and the UAE would have to be abandoned.
The Saudis are essentially betting that their FX reserves all large enough to allow the Kingdom to ride out the self inflicted pain from persistently low crude prices on the way to bankrupting the US shale space. But the battle for market share comes at a cost, especially when ultra easy monetary policy in the US has served to kept capital markets open to heavily indebted drillers, allowing otherwise insolvent producers to remain in business longer than they otherwise would. It is, as we’ve noted before, afight between the Saudis and the Fed.
In the midst of it all, the petrodollar has died a rather swift if quiet death and as we documented on Saturday, the demise of the system that has served to underwrite decades of dollar dominance has left emerging markets in no position to defend themselves in the face of China’s move to devalue the yuan. With Kazakhstan’s decision to float the tenge, we are beginning to see the post-petrodollar world (or, the “new era” as Karim Massimov calls it) take shape.
Over the weeks, months, and years ahead we’ll begin to understand more about the fallout and nowhere is it likely to be more apparent than in Saudi Arabia where widening fiscal and current account deficits have forced the Saudis to tap the bond market to mitigate the FX drawdown that’s fueling speculation about the viability of the dollar peg. Here’s Bloomberg on why the current situation mirrors a “very scary moment” in Saudi Arabia’s history.
…click on the above link to read the rest of the article…
Turkey On The Brink As Calls For Martial Law, Civil War Send Lira Plunging Again
Turkey On The Brink As Calls For Martial Law, Civil War Send Lira Plunging Again
For anyone who might have missed it, Turkey is quickly descending into chaos on all fronts.
The lira is putting to new lows against the dollar on a daily basis as confidence suffers from a worsening political crisis which began in June when AKP lost its parliamentary majority for the first time in over a decade throwing President Recep Tayyip Erdogan’s plan to transform the country’s political system into an executive presidency into doubt. Not one to give up easily (especially when it comes to consolidating his power), Erdogan proceeded to launch an ad hoc military offensive against the PKK in an attempt to undermine support for the pro-Kurdish HDP ahead of new elections which, thanks to the willful obstruction of the coalition formation process, are now virtually inevitable.
Turkey’s central bank hasn’t helped matters and the lira legged lower on Wednesday after it was made clear that a rate hike was not in the cards until Fed liftoff is official.
Citi has taken a look at the situation and determined that in fact, the lira is the most vulnerable of all EM currencies they track:
We believe it is going to be difficult for the local markets angle of the EM asset class, in this important (potential) transition of monetary policy in the US, and also taking into account any potential move by the ECB in 2016 (away from a QE stance). That prompted us to revisit our FX vulnerability model. In the model, we look into EMFX from three angles: 1) the macro vulnerability aspect (focused on BoP dynamics, FX reserve metrics, portfolio flows and CDS); 2) interest rate coverage (measured by 1y1y forward real rates, current implied yields and bond yield premium after hedging costs); and 3) our assessment of positioning by real money investors and leveraged accounts in the several EM currencies. TRY, BRL, ZAR, MXN and MYR rank high in terms of aggregate vulnerability.
…click on the above link to read the rest of the article…
Indonesia Impaled: Currency Crashes To 1998 Asian Crisis Low As Exports Crater
Indonesia Impaled: Currency Crashes To 1998 Asian Crisis Low As Exports Crater
On Monday we laid out the rather dire road ahead for the world’s emerging economies in the face of China’s entry into the global currency wars. The path ahead is riddled with exported deflation and decreased trade competitiveness for a whole host of emerging economies [and] all of this is set against a backdrop of declining global growth and trade, a trend which many had assumed was merely cyclical, but which in fact may prove to be structural and endemic.”
Well don’t look now, but trade just collapsed for Indonesia as exports and imports plunged 19.2% and 28.4% (more than double to consensus estimate), respectively in July.
Imports of raw materials dove 24%. Manufacturing and palm oil exports fell 7.1% and 2.4%, respectively, nearly tripling June’s declines. Oil and gas exports fell nearly 8%.
Meanwhile, Bank of Indonesia kept its policy rate on hold at 7.5% and indeed the bank looks to be stuck in a dilemma similar to what we described earlier this month when we noted that “EM central bankers are grappling with slumping exports and FX-pass through inflation or, more simply, bankers are caught between a ‘can’t cut to boost the economy’ rock and a ‘can’t hike to tame inflation’ hard place. The rupiah, like the Malaysian ringgit, is trading near multi-decade lows and hit its weakest level since August 1998 earlier in the session. Depressed commodity prices and slumping demand from China aren’t helping.
And neither is Beijing’s devaluation of the yuan which means that suddenly, Indonesia has lost export competitiveness to China while anything China imports from Indonesia will now cost more.
…click on the above link to read the rest of the article…
Greeks Flock to Grassroots Alternative Currencies in Affront to Euro Debt Slavery
Greeks Flock to Grassroots Alternative Currencies in Affront to Euro Debt Slavery
Necessity is the mother of invention.
When Christos Papaioannou noticed his car needed new tires, the Greek computer engineer bought them with euros—but used an alternative currency, called TEM, to pay his mechanic for the labor.
His country has avoided a catastrophic exit from the common currency, at least for now. But a small but growing number of cash-strapped Greeks, who are still grappling with strict money-withdrawal limits, have found another route in TEM and other unconventional payment systems like it.
Before then, Ms. Sotiropoulou said she was only aware of two such programs. No official record of the number of alternative currencies and local bartering systems appears to exist in Greece. But according to an Athens-based grass roots organization called Omikron Project, there are now more than 80 such programs, double the number in 2013. They vary in size, from dozens of members to thousands.
– From the Wall Street Journal article: Alternative Currencies Flourish in Greece as Euros Are Harder to Come by
Hundreds of millions of people throughout the Western world are being forced to admit an obvious, yet uncomfortable reality.Democracy is dead. Your vote and your voice doesn’t matter. Not at all.
No group of people understand this as intimately as the Greeks. They voted for one thing, got something else, and in the process were unceremoniously reminded of their political irrelevance. The Greeks are now in a position to show the rest of us how it’s done. Communities need to take matters into their own hands and tackle challenges at the grassroots level. Nowhere is this more impactful and necessary than in the monetary realm, and some Greeks are already leading the charge.
…click on the above link to read the rest of the article…
China Provides Another Threat to Oil Prices
China Provides Another Threat to Oil Prices
First it was a stock market meltdown, now it’s a weakening currency.
China continues to present significant risks to the oil market. On August 11, China decided to devalue its currency in an effort to keep its export-driven economy competitive. The yuan fell 1.9 percent on Tuesday, the second largest single-day decline in over 20 years. The yuan dropped by another 1 percent on Wednesday.
Related: Bullish Bets On Oil Go Sour
The currency move followed shocking data that revealed that China’s exportsplummeted by 8 percent in July. A depreciation of the currency of 3 percent will provide a jolt to Chinese exporters, but will slam companies and countries that export to China.
China insisted that the devaluation was a “one-off” event. “Looking at the international and domestic economic situation, currently there is no basis for a sustained depreciation trend for the yuan,” the People’s Bank of China said in a statement.
Related: When Will Oil Prices Turn Around?
But it also appears to be a move to allow the currency to float more freely according to market principles, something that the IMF has welcomed. “Greater exchange rate flexibility is important for China as it strives to give market-forces a decisive role in the economy and is rapidly integrating into global financial markets,” the IMF said. Although there is still quite a ways to go, the move is also seen as a prerequisite for the yuan to achieve reserve-currency status.
For oil, the move has raised concerns that oil demand will take a hit. China is the world’s largest importer of crude, and a devalued currency will make oil more expensive. On August 11, oil prices dropped to fresh six-year lows, surpassing oil’s low point from earlier this year. But with China’s economy – once the engine of global growth – suddenly looking fragile, it would be difficult to argue with any certainty that oil has hit a bottom.
…click on the above link to read the rest of the article…
Desperate move by China a worrying sign: Don Pittis
Instead of boosting economy there is danger China’s sudden move will hurt confidence
As the world responds to this week’s extreme andunexpected devaluation by the Chinese central bank, it sounds as if Beijing was taking the good doctor’s advice. And while the obvious intent was to snap the Chinese economy back to health, the frightening thing is that Beijing’s move smacks of desperation.
The modern equivalent of that Hippocratic maxim is: “Desperate times call for desperate measures.” As the Chinese currency and world markets took a dive, investors and trade partners around the world were asking themselves: “What does Beijing know that we don’t?”
Falling off a cliff. Chinese currency saw biggest one day decline in decades. (CBC news)
It’s not the first time this year that China has used strong government action to try to counteract inimical market forces. This spring, Beijing intervened, once to encourage stock markets to inflate, and then repeatedly in an attempt to stop the irresistible plunge when savvy traders realized stocks had become unrealistically high.
- Asian markets plunge despite measures to halt China meltdown
- China’s reminder that markets are never risk-free
The trouble is that markets do not like wild swings. And an economy that requires repeated radical intervention is one, like Russia, where no one knows what the government might do next.
Until recently, the fact that China was willing to back its own economy made it seem like an giant island of stability in a volatile world. In the darkest days of the great recession after 2007, China pumped money into its economy by encouraging borrowing and keeping the renminbi undervalued.
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China’s 1929 moment
China’s 1929 moment
Anyone with a nose for markets will tell you that the Chinese government’s attempt to rescue the country’s stock markets from collapse is far from succeeding.
Bubbles collapse, period; and government interventions don’t stop them. Furthermore, we are beginning to see a crack widen in the foundations of China’s capital markets that could end up undermining the whole economy.
Since the government owns the banking system, some of the knock-on effects will doubtless be concealed. A consequence for China is that domestic financial instability could threaten her current plans for the international development of her currency. Here the timing couldn’t be worse, because in a few months the IMF is due to announce its decision about the inclusion of the renminbi in the SDR*. The odds were in favour of China succeeding in this quest, on the basis that China was deemed to have fulfilled the necessary conditions, and the IMF itself has been supportive.
A 1929-style collapse in China’s stock markets would change this delicate balance. In mainstream macroeconomic theory, the only way China can resolve her excessive financial imbalances is to devalue the renminbi against other SDR currencies, hardly a good start for a new member. The IMF, probably egged on by the Americans, could be forced to defer its decision again, reviewing it in 2020.
This would be a bad outcome, given China has set her sights on joining the IMF’s top table. There can be little doubt that the recent announcement increasing her gold reserves by only 600 tonnes was made in the context of her desire for the currency to be included in the SDR. If she is rejected, China could swing the emphasis more firmly towards gold, which she owns and mines in abundance.
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New currencies and their relationship with fiat currency
New currencies and their relationship with fiat currency
Complementary Currencies aim to work alongside the pound or the dollar. Classically they seek to broker exchanges of underused resources with unfulfilled need, and facilitate activity in niches neglected by the mainstream economy. They do much good work and are worthy of support.
Intentional Currency designs on the other hand will generally be grounded in a critical assessment of the way fiat currencies operate, and recognise and seek to remedy or mitigate their dysfunction. In this way they are competitive with fiat. Consequently if fiat currency plays a role in the start-up or continued operation of a new currency, it is appropriate to manage these interactions carefully and to understand the impact that fiat-dependence can have on the currency’s development.
This article outlines management issues associated with some of the potential interactions with fiat. It has been produced as a Working Paper as part of the Feasta Currency Group’s development of a Charter for Intentional Currencies.
Creating and maintaining a currency without any interaction with fiat is clearly a challenge. It’s like asking fish to reinvent water while they are swimming around in it. But if we consider the main forms of interaction with fiat, some clues as to the management of the difficulties may emerge.
Three important fiat-interactions are:
i) access to fiat capital for a start-up phase or for a step-change in the development of the currency
ii) the issuance of currency units in exchange for fiat (fiat-backing)
iii) general exchangeability with fiat
Capital Investment
Most projects need start-up capital, but fiat-friendly projects have the option of repaying investors or contributors in fiat once they are successful. A fiat-cautious project might think twice about this. To some extent this challenge has been successfully navigated by a number of ‘Open’ projects, at least to the extent that contributors defer any claim on project success until revenue streams flow or until ‘satellite’ fiat-earning activities are identified.
…click on the above link to read the rest of the article…
