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The Curious Case of Missing Defaults
THE CURIOUS CASE OF THE MISSING DEFAULTS
CAMBRIDGE – Booms and busts in international capital flows and commodity prices, as well as the vagaries of international interest rates, have long been associated with economic crises, especially – but not exclusively – in emerging markets. The “type” of crisis varies by time and place. Sometimes the “sudden stop” in capital inflows sparks a currency crash, sometimes a banking crisis, and quite often a sovereign default. Twin and triple crises are not uncommon.
Rising international interest rates have usually been bad news for countries where the government and/or the private sector rely on external borrowing. But for many emerging markets, external conditions began to worsen around 2012, when China’s growth slowed, commodity prices plummeted, and capital flows dried up – developments that sparked a spate of currency crashes spanning nearly every region.
In my recent work with Vincent Reinhart and Christoph Trebesch, I show that over the past two centuries, this “double bust” (in commodities and capital flows) has led to a spike in sovereign defaults, usually with a lag of 1-3 years. Yet, since the peak in commodity prices and global capital flows around 2011, the incidence of sovereign defaults worldwide has risen only modestly.
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My Financial Road Map For 2016
My Financial Road Map For 2016
Over the holidays, I had the opportunity to stay away from airports and hike Runyon Canyon with my dogs. For those of you that have never traversed Runyon’s peaks and dips, they are nature’s respite from the urban streets of Los Angeles, yet located in the heart of the City of Angels. It’s a place in which to observe, reflect, and think about what’s coming ahead.
As a writer and journalist covering the ebbs and flows of government, elite individual, central bank and private industry power, actions, co-dependencies, and impacts on populations and markets worldwide, I often find myself reacting too quickly to information. As I embark upon extensive research for my new book, Artisans of Money, my resolution for the book – and the year – is to more carefully consider small details in the context of the broader perspective. My travels will take me to Brazil, Mexico, China, Japan, Germany, Spain, Greece and more. My intent is to converse with people in their respective locales; those formulating (or trying to formulate) monetary, economic and financial policy, and those affected by it.
We are currently in a transitional phase of geo-political-monetary power struggles, capital flow decisions, and fundamental economic choices. This remains a period of artisanal (central bank fabricated) money, high volatility, low growth, excessive wealth inequality, extreme speculation, and policies that preserve the appearance of big bank liquidity and concentration at the expense of long-term stability. The potential for chaotic fluctuations in any element of the capital markets is greater than ever.
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China: Doomed If You Do, Doomed If You Don’t
China: Doomed If You Do, Doomed If You Don’t
Whichever option China chooses, it loses.
Many commentators have ably explained the double-bind the central banks of the world find themselves in. Doing more of what’s failed is, well, failing to generate the desired results, but doing nothing also presents risks.
China’s double-bind is especially instructive. While there an abundance of complexity in China’s financial system and economy, we can boil down China’sdoomed if you do, doomed if you don’t double-bind to this simple dilemma:
If China raises interest rates to support the RMB ( a.k.a. yuan) and stem the flood tide of capital leaving China, then China’s exports lose ground to competing nations with weaker currencies.
This is the downside of maintaining a peg to the U.S. dollar. The peg provides valuable stability and more or less guarantees competitive exports to the U.S., but it ties the yuan to the soaring dollar, which has made the yuan stronger simply as a consequence of the peg.
But if China pushes interest rates down and floods its economy with cheap credit, the tide of capital exiting China increases, as everyone attempts to escape the loss of purchasing power as the yuan is devalued.
This is the double-bind China finds itself in: weakening the yuan to shore up exports incentivizes capital flow out of China, forcing the central bank to torch reserves to mediate the flood tide of capital fleeing China.
But efforts to support the yuan crush exports based on a cheap currency, creating the potential for mass layoffs in sectors with razor-thin margins and convoluted black box financing. Nobody knows how many times the stuff in warehouses has been pledged as collateral, or how much debt is floating around the shadow banking system in China.
Forget the Fake Statistics: China Is a Tinderbox (August 10, 2015)
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Meet the bureaucrat who had the courage to tell the truth (and probably won’t have a job tomorrow)
Meet the bureaucrat who had the courage to tell the truth (and probably won’t have a job tomorrow)
It’s not very often that you hear a senior government official refer to their economic situation using the word ‘crisis’.
Yet with uncharacteristic bluntness of any government official anywhere, at least one senior Chinese government official is sounding the alarm bells.
And he would know.
Guan Tao oversees the foreign exchange of China’s $4 trillion stockpile of reserves, so he has an incredibly unique view of capital flows and currency movements in and out of the country.
Currency movements and capital flows are extremely interesting indicators.
They don’t necessarily tell you that there’s a problem. They tell you that people have figured out there’s a problem.
Look at Greece, for example.
The government is bankrupt, another default is looming, and the country is literally about to run out of money. It’s pretty obvious that there’s been a problem for a very long time.
But the central bank data in Greece now shows that roughly 8% of all customer deposits have vanished from the Greek banking system so far this year.
That’s an astonishing figure.
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China Switches to Supporting Yuan as Outflows Mount: Currencies
China Switches to Supporting Yuan as Outflows Mount: Currencies
Managing the yuan is turning into a different game for China’s policy makers these days.
After more than a decade of curbing the currency’s gains to help turn the nation into a manufacturing colossus, there are signs the People’s Bank of China is now propping up the yuan to stem an exodus of capital that’s threatening the economy.
A gauge of capital flows on the PBOC’s balance sheet fell by the most since 2003 last month in a sign it’s selling foreign currency, while the yuan’s reference rate set daily by policy makers is at itsstrongest-ever level compared with the market price.
“Everyone thought the movie would never end, and suddenly it ended, so everyone is hurrying to leave,” Kevin Lai, an economist at Daiwa Capital Markets in Hong Kong, said by phone on Jan. 22. “The authorities need to think of a way to keep the audience in the theater” as the economy slows, he said.
China amassed a world-leading $4 trillion of foreign-exchange reserves by mid-2014 as exports surged and capital flowed in, attracted by a currency that strengthened for four consecutive years. Now that the yuan’s gains are faltering, the PBOC is trying to prevent its declines from turning into a rout that could deter investment just as the economy suffers its slowest growth in 24 years.
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