Crisis Diary as it unfolds ….

China’s call for global currency and who said what?

Chinese Central bank now wants to get rid of its US$ and has called for a global currency.

Wall Street journal

China called for the creation of a new currency to eventually replace the dollar as the world’s standard, proposing a sweeping overhaul of global finance that reflects developing nations’ growing unhappiness with the U.S. role in the world economy.

The unusual proposal, made by central bank governor Zhou Xiaochuan in an essay released Monday in Beijing, is part of China’s increasingly assertive approach to shaping the global response to the financial crisis.



Mr. Zhou isn’t the first to make that argument. “The dollar reserve system is part of the problem,” Joseph Stiglitz, the Columbia University economist, said in a speech in Shanghai last week, because it meant so much of the world’s cash was funneled into the U.S. “We need a global reserve system,” he said in the speech.

Dr. Krugman says China is stuck with dollars and now is looking for easy way out.

The big news last week was a speech by Zhou Xiaochuan, the governor of China’s central bank, calling for a new “super-sovereign reserve currency.”

The paranoid wing of the Republican Party promptly warned of a dastardly plot to make America give up the dollar. But Mr. Zhou’s speech was actually an admission of weakness. In effect, he was saying that China had driven itself into a dollar trap, and that it can neither get itself out nor change the policies that put it in that trap in the first place.




Two years ago, we lived in a world in which China could save much more than it invested and dispose of the excess savings in America. That world is gone.

Yet the day after his new-reserve-currency speech, Mr. Zhou gave another speech in which he seemed to assert that China’s extremely high savings rate is immutable, a result of Confucianism, which values “anti-extravagance.” Meanwhile, “it is not the right time” for the United States to save more. In other words, let’s go on as we were.

That’s also not going to happen.

The bottom line is that China hasn’t yet faced up to the wrenching changes that will be needed to deal with this global crisis. The same could, of course, be said of the Japanese, the Europeans — and us.
And that failure to face up to new realities is the main reason that, despite some glimmers of good news — the G-20 summit accomplished more than I thought it would — this crisis probably still has years to run.

Brad Setser adds more to what Dr. Krugman had to say

China’s 2007-2008 bet on global equities and riskier bonds likely cost it north of $50 billion — it all depends on exactly how much of its portfolio it put into risk assets. To be sure, it is in far better shape than Ontario Teacher’s Pension Plan, which lost a staggering 40% on its fixed income portfolio. Most of China’s reserves were in safe government bonds, and those bonds increased in value over the course of the crisis. But as Arvind Subramanian notes, China’s currency losses will eventually dwarf its equity market losses.

Those losses shouldn’t be a surprise. Currency losses on unneeded reserves are the price a country pays for subsidizing its exports with an undervalued exchange rate. But that doesn’t make it any easier to accept the losses – or to handle the inevitable argument that China’s leaders squandered China’s reserves.

China’s leaders are setting the stage to argue that these losses are the fault of bad US policies. They aren’t. They are the result of China’s own policy choices. Subramanian correctly observes “[China] is seeing itself as the victim of the dollar standard when it has been, for a long time, a beneficiary and promoter of this standard.” China’s leaders, though, have no incentive to recognize this.

But even if China didn’t explicitly plan to build up to many reserves, it now has them — and China’s leaders are no doubt interested in using them to increase China’s influence.

It isn’t hard to think of creative ways China could use its reserves to increase its global position. China alone could provide all the extra $500 billion the IMF now needs if it wanted to do so. Or it could set up a Chinese monetary fund to compete with the IMF.

To date, China has been fairly cautious, generally turning down countries that trekked to Beijing to appeal for emergency loans – though the recent expansion of RMB swap lines suggests that China may now be willing to take more risks. One potential problem: China would need to explain to its own citizens why it is using its reserves to help other countries rather than doing more at home.*

And then there is the elephant in the room: Will China’s large dollar holdings — and the fact that is is now the United States largest creditor — give it any influence over US policy?

No matter how this whole situation turns out, what China is going to do with its massive dollar reserves will decide the future of the US, the world financial system and US-China relationship. A lot depends on how China behave from here on.


April 5, 2009 Posted by | News, Opinions | , , , , , | Leave a comment

20-Feb-09: Crisis watch

Crisis watch as of 20-Feb-09.

S&P 500 : 769.50


VIX : 49.30


TED Spread : 97.99


GOLD : 1002$/toz.


Oil : apprx 40$/bbl


February 22, 2009 Posted by | Crisis Snapshot | , , , , , , | Leave a comment

Too big to save? Europe in crisis

One of the phrases we repetitively heard during the crisis was ‘too big to fail’ – mostly coming out of Washington. Now as we learn new developments in Europe, the problem is not just that some banks are too big to fail, they are too big to save as well. Some of the European countries like Ireland, Greece and Austria may not be in position to save their banking system on their own even if they want to simply because these banks have debts multple times of GDP of their home countries.

Things are getting really ugly. The only way to reach some solution will be consorted effort by countries like Germany and IMF to bailout troubled economies and their banking systems.

If Euro survives this crisis, Euro as a currency will survive any crisis.

More resources:
The latest Roubini interview on European crisis can be watched here.

Yves Smith of Naked Capitalism – “European banks’ toxic debts risk overwhelming EU governments” and “Will eastern Europe will trigger a financial meltdown?”

Simon Johnson of Baseline Scenario – ‘Dublin and Vienna calling’

Tyler Cowen of Marginal Revolution – Easter Europe fact of the day

World Currency Watch on European debts

Stefan Karlsson – rise and fall of Baltic boom

Spin Doctor highlights a different aspect of rising social unrest in Europe amidst this crisis

February 21, 2009 Posted by | News | , , , | Leave a comment


Shining metals are shining like never before – however old let it be, it is still Gold.

The recent rally in Gold is two thumbs down by owner’s of the wealth to the ponzi scheme fraudsters called central bankers, who print pieces of paper called currency notes and tell you to pretend that it is substitute for your wealth.

For there will be blood and chaos – perhaps all of 2009, perhaps more. And when this ends, a new world order will emerge. But first, we need to weather this storm.

People thought that history will treat George Bush as someone who brought US to her new lows. Now it appears that history will remember Mr. Bush as someone who drilled such big a hole in the titanic of US that it was just a matter of time before it eventually sank.

February 20, 2009 Posted by | Opinions | , , , | Leave a comment

Obama Stimulus: American Recovery and Reinvestment Act

Finally, US senate passed much awaited stimulus plan aka American Recovery and Reinvestment Act last week and singed into a law. This is one three important policy measures of Obama team. The other two important policy measures are financial stability plan and plan housing mortgages.

The plan is to spend 787b$ over a period of four years. It comprises of apprx 300b$ in tax breaks and 487b$ in spending. Along with infrastructure spending, there is substantial portion allocated to energy and education. The key facts of the stimulus are well-captured by Associated Press

Many liberal economists were not happy about the size of the stimulus and also the share of spending in it.

Atlanta Fed macroblog has a great post presenting American Recovery and Reinvestment Act in pictures.

A year-by-year look at where the money goes:

Note: The dollar amounts listed below are denominated in millions of dollars.








Which adds up to:


Finally, the relative size of each year’s spending:


There you have it.

By David Altig, senior vice president and research director, and Courtney Nosal, economic research analyst, at the Atlanta Fed

The pie for 2010 is much bigger than 2009. I’m not sure how this gels with Obama’s ‘We need to act now‘ rhetoric.

Econobrowser’s recap of CBO’s stimulus analysis can be found here.

Once again, I want to stress the adjectives “massive stimulus” conjoined to the noun “bill” is a matter of context. Dividing by baseline GDP shows that in a proportional (rather than dollar) sense the bill is rather modest. The fiscal impulse to GDP ratio never exceeds 2.5 ppts in any given fiscal year.


Figure 2: Estimated spending and tax revenue reductions, per fiscal year, divided by GDP. Shaded areas pertain to spending occurring outside of the 19.5 month time frame. Source: CBO, H.R. 1, American Recovery and Reinvestment Act of 2009 (February 13, 2009) and CBO, The Budget and Economic Outlook: Fiscal Years 2009 to 2019, January 8, 2009.

February 19, 2009 Posted by | Crisis Snapshot | , , , , , | Leave a comment

Is it a bottom yet?

We touched Nov lows again on DOW.

But after initial lower open, markets decided to rest at the level forever. As Bob Pisani of CNBC said, there was anxiety but no panic.

I guess tomorrow is crucial. If market bounces off from these levels in coming weeks we might see another 10-15% bounce.

Jim Cramer looked frustrated on his show today. He did not call it a bottom. I think this is ultimate capitulation. But whether is this the bottom? Anyone’s guess is as good as anyone else’s.

February 17, 2009 Posted by | Opinions | , , | 2 Comments


I know it is too late to blog on Davos, yet I don’t want to miss it altogether.

World Economic Forum was held in Davos in January’09 and details of Davos tidbits could be found on FT’s Davos blog

Various voices emerging out of Davos were,

1. China and Russia attacked west for the bad economic management. Apparently, these same people were not bothered when they were building their surplus by manipulating currency exchange rates and kending money to US to buy stuff from them.

2. Several economists did not like the idea of ‘bad bank’, while politicians lead by Mr. Brown continued their effort to sell the bad idea of bad bank.

3. Davos should be known for rather conspicuous absense of big players from Uncle Sam’s team.

‘Why Davos man is waiting for Obama to save him?’ by Martin Wolf was most widely quoted for its analysis of event by econo-blogosphere.

A hyperpower’s place is in the wrong. This is particularly true when, as last week at the annual meeting of the World Economic Forum in Davos, the hyperpower in question is barely represented, at least at the official level. But, truth to tell, the critics of the US – led by prime ministers Wen Jiabao of China and Vladimir Putin of Russia – had an easy story of incompetence and malfeasance to tell.

Yet, however easy it may be to blame the US for the current global economic woes, it is also to the US that the world looks for a solution.

The general mood in Davos was one of gloom verging on despair. The gloom is justified, as the update of the World Economic Outlook from the International Monetary Fund makes plain. Global economic growth is now projected to fall to a mere ½ per cent this year, its lowest rate since the second world war. Output in high-income countries is expected to fall by 2 per cent, the first annual contraction since 1945. Industrial production and merchandise exports are in free fall, as consumers decide they do not need that new car or other goody right now (see charts).

Given the rate at which they have been downgraded, reality could be far worse even than these forecasts. The global downward spiral of uncertainty, caution and cutbacks in lending and spending may continue. Alternatively, policy action may turn the ship around. But that action must be decisive. This is particularly true for the Obama administration, on which so much depends. It has a golden opportunity to reverse the spiral now. After that it becomes part of the problem. So far the evidence is discouraging. It should be far bolder.

Not all news is dreadful. Spreads between expected official interest rates and those on inter-bank lending have fallen sharply; those between US Treasury bonds and risky assets are also easing, though they remain at very high levels. The decline in oil prices represents a huge shift in income from savers to spenders. Since today’s collapse in demand and output is the lagged result of past disruption, better news may lie ahead.

Alas, such optimism must be kept in check. As the update of the IMF’s Global Financial Stability Report notes: “Worsening credit conditions … have raised our estimate of the potential deterioration in US-originated credit assets … from $1.4 trillion in the October 2008 GFSR to $2.2 trillion.” Losses are also spreading to many other asset classes and economies as the slump worsens.

Private credit growth is falling across most economies. Trade finance has been particularly affected, with dire results. The flow of private funds to emerging economies is collapsing: according to the Washington-based Institute for International Finance, net private flows are projected to be just $165bn in 2009, down from $466bn in 2008. Central and eastern Europe is particularly vulnerable.

Protectionist pressures are rising rapidly, not only in finance, but in trade. On the former, Gordon Brown, UK prime minister, turned up in Davos as hypocrite-in-chief, bemoaning the rise of the financial protectionism his own government has been practising. On the latter, nothing can surpass the folly of the Buy America provision in the draft US stimulus package. This is an invitation to retaliation. For a country that must export its way out of its slump, this is mad. For one that made an open global economy the keystone of its foreign policy for two generations, it is vandalism. Is this the change we must believe in?

Contrary to views expressed in some circles, notably in the US, depressions are neither good for us, nor unavoidable. What is needed is determined and globally co-ordinated action. The lead must come from the US: it remains the hyperpower; the economic system is one it promoted; and the crisis had much to do with mistakes its policymakers and private institutions made, even if aided and abetted by mistakes elsewhere.

So what are the principles to be followed? I suggest the following:

First, focus all attention on reversing the collapse in demand now, rather than on the global architecture.

Second, employ overwhelming force. The time for “shock and awe” in economic policymaking is now.

Third, make future normalisation of fiscal and monetary policies credible.

Fourth, act in concert. Even the US cannot solve its problems alone.

Fifth, avoid protectionism.

Sixth, strengthen the ability of global institutions to help the weaker.

So how are we doing against these standards? “Better than in the 1930s” is the best one can say. The world desperately needs Mr Obama to take a firmer grip at home and lead abroad. The plans he is now announcing give him a chance of doing the former. The April summit of the Group of 20 countries, in London, is his chance for achieving the latter.

Unfortunately, what is coming out of the US is desperately discouraging. Instead of an overwhelming fiscal stimulus, what is emerging is too small, too wasteful and too ill-focused. Instead of decisive action to recapitalise banks, which must mean temporary public control of insolvent banks, the US may be returning to the immoral and ineffective policy of bailing out those who now hold the “toxic assets”. Instead of acting as a global leader, there is resort to protectionism and a “blame game”.

This way lies a catastrophe. I expect little enlightenment from the rest of the globe: the European Central Bank is allowing the eurozone to collapse into deep recession; Japan is in meltdown; China has at least announced a big stimulus package, but it lacks a credible plan for needed structural reforms; and most other emerging countries can only try to stay afloat in these storm-tossed seas. Their accumulated foreign currency reserves of the 2000s will help. But the resources available to the IMF, even with their hoped-for doubling, are too small to give most emerging economies the confidence they need to risk keeping their spending up.

Decisions taken in the next few months will shape the world for a generation. If we get through this crisis without collapse, we will have the time and the chance to construct a better and more stable global order. If we do not, that opportunity may not recur for decades.

We are living on the cusp of history. The priority is to reverse the downward spiral of despair through overwhelming and concerted action. That will only occur if the US now gives the leadership we need. Mr Obama may even find, as many presidents have found before him, that leading the world is easier and more rewarding than cajoling a recalcitrant Congress. This may not be the challenge he expected. But it is the challenge he confronts. History will judge his presidency on whether he dares to succeed.

February 16, 2009 Posted by | Crisis Snapshot | , , , , , | Leave a comment

Bad ‘Bad Bank’

Bad bank? Hmmm .. bad bank! How good can it be, when they name it bad bank?

What is Bad bank?

‘Bad Bank’ is the new gimmick tossed around by the same people who came up with but could not work out TARP – Troubled Assets Relief Program. The same set of intellientia has rebranded TARP as ‘Bad Bank’ and is running around proselytizing people to their newly formed faith – born again TARP.
“Bad Bank’ aims at isolating toxic trash from banks’ assets and create a new giant bad bank to carry only this toxic junk. This will improve the quality of asset book of all the banks and they will be back in their usual business of lending again. Good thought. So where is the problem?
The problem is, who will provide the capital for ‘Bad Bank’? Since most of the assets that are going to end up on the balance sheet of Bad Bank are worth nothing, they are essentially going to eat up most of the capital. So in the name of which crazy f*ing variant of capitalism, is it fair to ask taxpayers to cough up the capital for ‘Bad Bank’? They call it Lemon Socialism. I am no fan of socialism, but pure socialism is million times better than this Lemon Socialism.
The idea of ‘Bad Bank’ is going to fail for exact same reason the original idea of TARP failed. How to price the Toxic Assets? If they are priced at what they are worth i.e. zero, no bank will be willing to part them from their balance sheets. If they are priced anywhere near their book value, it is really bad deal for taxpayers.

Let’s look at what are the general perspectives we get to hear about Bad Bank.

The smart ones …

These people are the founding fathers of Bad Bank initiatives – the shrewd class of diplomats in cahoots with nation’s bankers. They have their own interests in getting things running again – even if it comes at the cost of taxpayer dollars. They want to sell this idea of Bad Bank somehow, because it is one perfect medicine that will mop up all the dirt from balance sheets of all banks. the ultimate cleansing of body and soul, you see.

The naive ones …

There are always few who fall for such cunning ideas of political craft. They say that toxic assets are in reality worth more than what they sell for in the market. So if gov’t sits over these assets for long duration, taxpayers will end up making profit on in. Okay. So markets don’t know how to price these assets, eh? But wait a minute, markets are supposed to know the best, isn’t it? Yes, and they do. These assets are really worth nothing.

The wise ones …

This includes economists like Joe Stglitz , Paul Krugman and Yves Smith, who openly criticized the idea of Bad Bank in its current form – just because it is exactly what it says it is .. Bad.

February 7, 2009 Posted by | Opinions | , , | 2 Comments

China conundrum

Here is a great blogpost by Brad Setser explaining China America relationship and how the interests of the two economies are diverging.

Three final observations:

1) The US needs financing, but China also needs markets for its exports. The “balance of financial terror” is such that China cannot reduce its financing of the US without also reducing the market for its exports. That limits China’s options. My own guess is that China is more constrained than in the past, as it presumably doesn’t want to do anything with its reserves that would add to the global slump in demand for Chinese goods. If hot money outflows subside, China will almost certainly need to continue to add to its reserves. And China’s ability to shift its reserves from dollar to the euro is also constrained by its desire to maintain good relations with its European trading partners. Key eurozone countries wouldn’t appreciate a big euro rally right now induced by a surge in Chinese purchases, especially if China maintained its dollar peg during the process.
2) China’s currency has appreciated significantly in real terms even as the pace of its appreciation against the dollar has slowed. That implies more not less friction between the US and China. China was willing to allow the RMB to go up against the dollar when the dollar was going down against other currencies and other countries were snapping up more Chinese goods. Now that the dollar is going up and Chinese exports are going down, China is reluctant to allow the RMB to appreciate at all against the dollar. But the US naturally cares far more about the RMB’s value against the dollar than its value against other currencies.
3) Even though China’s currency has appreciated significantly in real terms recently, most real exchange rate indices put it only a bit above its levels in 2000. The expansion of China’s current account surplus since then – and the huge increase in China’s exports since then — suggests that the RMB remains fundamentally undervalued. Other Aisan countries exports are actually falling faster than China’s exports. But the RMB’s real appreciation clearly came at a less than opportune time. The RMB was weak in real terms when China’s domestic economy was strong, and now it is getting stronger when China’s domestic economy is slowing sharply.

The US — a large deficit country — would benefit in a lot of ways if it could export its way out of trouble. That would also help to bring the world closer to balance. Yet with its own economy slowing sharply, China’s willingness to accept a stronger RMB has likely gone down. Here, US and Chinese interests diverge. Both want to draw on external demand to support their own growth.

Fortunately it is a littler harder to see why China would think that a major fiscal stimulus isn’t in its interests …

January 25, 2009 Posted by | Crisis Snapshot | , , | Leave a comment

Ouch, professor!

Dr. Krugman finally took on all conservative economists in one sweep.

What’s been disturbing, however, is the parade of first-rate economists making totally non-serious arguments against fiscal expansion. You’ve got John Taylor arguing for permanent tax cuts as a response to temporary shocks, apparently oblivious to the logical problems. You’ve got John Cochrane going all Andrew-Mellon-liquidationist on us. You’ve got Eugene Fama reinventing the long-discredited Treasury View. You’ve got Gary Becker apparently unaware that monetary policy has hit the zero lower bound. And you’ve got Greg Mankiw — well, I don’t know what Greg actually believes, he just seems to be approvingly linking to anyone opposed to stimulus, regardless of the quality of their argument.


Dr. Mankiw responded here.

Meanwhile, it’s getting really ugly out there in economic environment. In sudden change of weather, sky is all covered with dark clouds, as if heavy pouring is going to start any minute.
I’m getting really really bad feeling that something sinister is about to happen.

January 19, 2009 Posted by | Uncategorized | , , | Leave a comment