Global financial system implosion begins

[ymu]

Momentum. Japan is stagnating, China is growing, and it needs to spend those dollars. China has more control over the exchange rate, more influence on the global economy, and that's where the capital is headed.,

 

[elbows]

China does not own the US, although power is clearly shifting and has been for a long time now.

I think there is an uneasy but fairly solid balance right now, for there is simply so much mutual dependency. There are loads of things that China could do in theory to screw the US, and vice versa, but they would badly screw themselves at the same time.

I suggest that a sane, stable and fair world would involve proper balances of trade, rather than all this mess of currency reserves, debt etc. 'America spends, Asia lends' will not last forever, but its hard to see exactly how this will end up unwinding.

As for the amounts of debt held, sure China is not the only player but I think the significance of their debt holdings may have been somewhat downplayed in recent posts, which is admittedly understandable when faced with excessive hyperbole about China owning the US.

Looking at some numbers, I was surprised to see that the UK is in third place, albeit a distant third. But as the UK in these stats includes the Channel Islands, I can probably imagine some of the reasons why we rank so highly as customers for US debt.

Here are some recent numbers:

http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt

And here are some older numbers, which suggest to me that for all the passionate words that get thrown around by both sides on the diplomatic stage, things have continued in much the same way since the megawobbles of recent years:

https://spreadsheets.google.com/ccc?key=0AgdO92JOXxAOdHRvb0Fpd3NndkFOdVpkY1hzdHhldXc#gid=0

This is no surprise, we'd have surely felt the earth shake if China has totally changed policy as a result of that crisis, and really very few of the potentially earthshattering consequences of that crisis seem to have come to fruition yet.

 

[ymu]

America isn't spending any more. Wages in Shanghai are now higher, on average, than a quarter if UK regions. China and India are rapidly developing a large middle-class. They won't need us much longer.

 

[love detective]

As for the amounts of debt held, sure China is not the only player but I think the significance of their debt holdings may have been somewhat downplayed in recent posts, which is admittedly understandable when faced with excessive hyperbole about China owning the US.

downplayed in what sense?

 

[taffboy gwyrdd]

 

[elbows]

America isn't spending any more. Wages in Shanghai are now higher, on average, than a quarter if UK regions. China and India are rapidly developing a large middle-class. They won't need us much longer.

Thats the plan, but its arrival in a big way has been anticipated prematurely in the past. The great hope that Asia had done enough 'decoupling' from the western consumer sentiment did not bear as much fruit as hoped during past economic wobbles. Same happened in the last crisis, eager eyes looked to see how China would fare, and like the rest of the world the numbers early on were bad, and suggested the decoupling is far from complete.

But yeah, the sheer scale of India and Chinas populations means that even if they only only get a small fraction to become middle class, they will have nice juicy domestic markets to serve, just so long as these new middle class actually end up consuming in the way people in other countries have in the past. There is every sign that they will create many consumers, but I think its just too easy to overstate quite how quickly that means they no longer need the US. Especially as it is not fully clear whether traditional values of saving money rather than spending it have been sufficiently eroded in these countries to ensure the kind of consumer growth rates that are anticipated by some. I believe the plan is to have both, there is not some desperate desire to dump the US as a partner, only to diversify so that they are not quite as exposed to US consumer sentiment as they have been. Sure, assuming domestic markets reach a certain size this does create more policy wiggle room, they could afford to dump the US if they really had to, but there is still a cost to that, both in terms of economy and security, so I doubt they would do it lightly or that it is completely inevitable.

 

[elbows]

downplayed in what sense?

Just in the sense that ferrelhadley said 'the US was not beholden on China to keeps on recycling its debt for factory products', and I think that was somewhat misleading, although I may have misinterpreted it. QE and suchlike created some wiggle room and did have implications for US-China relationship and certain economic balancing acts between these two nations, but the core of the relationship and the balance remains largely unchanged, so far at least. Likewise when people say things in very absolute ways, such as ymu saying that America isnt spending anymore, it comes across as too strong. The trends may point in these directions, but so often in economics these sorts of statements are made with words that sound as if they reflect the full reality at this moment, that absolute changes to these fundamentals have occurred. Well I dont think any of these destinations have actually been reached. They have been flagged up as things we may expect to happen, various data comes in that seems to show things sometimes moving in these predicted directions, but sometimes not. Perhaps we naturally zoom in to whats new and evolving round the edges, and sometimes forget just how huge the core of long established order still is.

Its the same with an issue such as the scale of manufacturing in the UK. Because it declined so obviously and painfully, it can be easy to understate the extent to which it still accounts for economic activity today.

 

[love detective]

yep agree with all that

 

[ferrelhadley]

Momentum. Japan is stagnating, China is growing, and it needs to spend those dollars. China has more control over the exchange rate, more influence on the global economy, and that's where the capital is headed.,

China has leverage over the US and an important component of that leverage is the treasuries it holds. While the US is able to indulge in quantative easing the leverage is limited but when it can no longer safely exchange dollars for debts and has to rely on the markets to buy its 10 year bonds China can intervene by not buying bonds, or even dumping part of its stock so that comercial investors may buy them up forcing the treasury to make the bonds more expensive. This is what people mean when they say China 'owns the US'. China may become a political rival to the US unlike the other major holders of bonds, many Americans are painfully aware of how the US used its owning of UK debts to influnce the UK in the last century.

That trillion dollars is an important part of the end of the 'monopolar moment'.

Although I am sure others will have their views and be keen to offer them.

 

[love detective]

America isn't spending any more. Wages in Shanghai are now higher, on average, than a quarter if UK regions. China and India are rapidly developing a large middle-class. They won't need us much longer.

In putting forward your case, you're actually stating two contradictory impetuses to justify the one you asserted earlier

If your 'China owns US' is to have merit (as in, in the future, as it clearly doesn't own US now), it relies on an increasingly deeper and more ingrained symbiotic relationship between the two, i.e. no decoupling, continued US spending, continued & deepening trade deficits of the US with China, continued accumulation of US debt by China (as a result of its trade surplus), continued rates of production growh in china and the absence of a large domestic spending middle class in China, leaving it with export driven growth. This would then see China's holding of US debt raise from its current levels of 7% of total US debt to something much higher, allowing even greater influence and control, and although still nothing like your assertion about ownership it would be some kind of movement towards some kind of interpretation of that assertion (although at the same time increasingly tying its fortunes in with that of the US)

However in what you write above, you state the very opposite - a US that isn't spending any more, a move away from a low wage economy in China/India, a rapidly developing middle class in those countries, a decoupling from the US in a move from export led growth to domestic demand led growth, and a country which in your own words won't need the west much longer

Both of these contradictory tendencies are of course happening in various absolute & relative terms, but you can't use both of them to support your assertion that 'China owns US' (and that it does so because of the momentum of the movement in a particular direction) - the later one completely contradicts it

 

[Dr Jon]

Just spotted:

If Greece goes…

also

The latest twists and turns in the Greek bailout fiasco have combined with a disturbing insight into FSA attitudes here in the UK to make me concerned that the system may now be distorted beyond peaceful reform. In fact, the danger of harmful destabilisation may be much worse because supervisor actions reinforce poor outcomes.

This is what we are seeing in Greece on the streets. The Greek people have realised that the government works for the bondholders; the ECB works for the bondholders; the IMF works for the bondholders. They now understand what was not clear before: No one works for the people.

link

 

[laptop]

link

If the role of the state now is to shield HFT, dark pool and OTC markets from transparency, provide liquidity where the market fails, oversee the orderly fleecing of consumers...

 

[Dr Jon]

indeed.

Also see
Opposition to Paying for Capitalism's Crisis

if you don't have time to watch all of Wolff's video, try Robert Reich's The Problem With the US Economy In Under Three Minutes

Just seen this:

... the guys who cut those CDS deals even after the 2008 meltdown and even as they knew that Greece and Ireland will likely default, were not thinking about the long-term health of their banks.

They were thinking about cashing out their stocks.

They were thinking about their year-end bonuses.

They were thinking, IBG–YBG

 

[yield]

New Jersey Lawmakers Approve Benefits Rollback for Work Force
NYTimes June 23, 2011

New Jersey lawmakers on Thursday approved a broad rollback of benefits for 750,000 government workers and retirees, the deepest cut in state and local costs in memory, in a major victory for Gov. Chris Christie and a once-unthinkable setback for the state’s powerful public employee unions.

How did they get away with that?

...
US to Tap Oil Reserves, Release 30 Million Barrels
ABC News 24/06/11

Oil prices plummeted after the U.S. and other nations announced the release of 60 million barrels from strategic energy reserves in a bid to boost the global economy and stem supply shortages. Oil finally settled at $91.02, down $4.39 (5 percent) in New York trading today, a price last seen in February of this year. The decision to release oil from the Strategic Petroleum Oil Reserves clearly shocked the market. U.S stock markets were also spooked by the oil announcement. The Dow closed down 60 points but recovered from the worst of its lows as Reuters reported that Greece has reached an agreement with the EU and IMF on five-year austerity plan.

The reserves have been tapped for emergency reasons only twice – after hurricane Katrina in 2005 and in 1991 after the first Gulf war.

How long are they going to keep that up for then?

 

[ymu]

World's wealthiest people now richer than before the credit crunch

No surprises there then ...

Generally, HNWIs are most concentrated in the US, Japan and Germany: 53% of the world's most wealthy live in one of those three countries, but it is Asian-Pacific countries where the ranks of the rich are swelling fastest. For the first time last year the region surpassed Europe in terms of HNWI individuals.

This scale of wealth of the richest people in Asia Pacific – fuelled by the fast-growing economies in China and India – is now threatening to overtake North America, where the value of the wealth rose more slowly – 9% – to reach $11.6tn.

The richest people in the Asia-Pacific region have also fared better since the crisis. Their wealth is now up 14.1% since 2007 while individuals in North America and Europe are yet to recoup the losses they suffered during the banking crisis.

Britain is lagging behind in the league of affluence – it has not yet enjoyed a return to pre-crisis levels of wealth as sluggish economic growth holds back prospects. The growth in the number of rich individuals in the UK was among the slowest in the top 10 nations, showing a 1.4% rise to 454,000 and remaining below the 495,000 recorded in 2007.

The report said that while the UK stock market rose almost 30% and GDP grew 1.3% – after contracting by 4.9% in 2009 – the fortunes of the rich were held back by falling house prices and the rise in unemployment. Their prospects might improve next year, however. "Construction spending for the 2012 London Olympics is expected to help propel the economy and the housing market recovery," the report said.

The 1.4% rise in the number of rich people in Britain compares with a 7.2% rise in Germany and 8.3% in the US – where there are 3.1m HNWIs – and the 3.4% rise in France.

Gotta be some rich people cracking in a Keynesian direction soon, surely.

Interesting numbers there. 11 million people worldwide with ready cash of $1m. 7 billion people, so 0.15%.

 

[deke t lefel]

It will be ironic if its the Chinese Communist Party that ends up bailing out Capitalism.

what.... that state communism is more efficient at extracting surplus value from the worker than capitalism?

 

[BigTom]

http://www.theatlanticwire.com/global/2011/07/moodys-slashes-portugal-debt-junk/39592/

Moody's downgrade Portugal to junk status.. they'll have to have another bailout or default now for sure. not good news for portugal who will probably end up in debt to the EU/IMF for a generation or more. Guess the move to austerity measures 6 months or so ago didn't sort out their problems (though like greece, the portugese economy has been weak for a long time before 2008 I think).
Not sure what I'd do in their position - default the debt, probably meaning pulling out of the euro, and start again from scratch I reckon.

 

[Divisive Cotton]

There's an interesting File on 4 here about the complexities of much of modern financial trading: http://www.bbc.co.uk/programmes/b0128q7z

In the wake of the financial disaster, policy makers and regulators around the world pledged to make banking safer and more transparent. But the reality, many experts claim, is proving very different.

For this edition of File on 4, Michael Robinson investigates some of the apparently straightforward financial products banks now offer and uncovers disturbing complexity.

 

[Sunray]

I see today that they are heading to accepting the inevitable that Greece will default, that bond holders are going to have to accept some of the losses.

I cannot see how this can be avoided, all they are appear to be doing at the moment is to stave off collapse now, for it to just get worse tomorrow. At some point either the house of cards will come down for them or they let it fall in as controlled a way as possible.

 

[toblerone3]

I see today that they are heading to accepting the inevitable that Greece will default, that bond holders are going to have to accept some of the losses.

I cannot see how this can be avoided, all they are appear to be doing at the moment is to stave off collapse now, for it to just get worse tomorrow. At some point either the house of cards will come down for them or they let it fall in as controlled a way as possible.

Or delaying debt repayments may allow other parts of the world and european economies to recover enough to carry the basket cases onwards for long enough. Who knows? No-one really.

 

[teahead]

With the US likely to move towards capital controls it seems like Europe's headed for big trouble imho.

 

[Giles]

It would be better in the end for this whole mountain of debt piled onto more debt to collapse, then people can start trading with honest money (gold coins or something) afterwards.

Giles..

 

[camouflage]

Oh no, you're not another gold-fanatic are you?

The Aztecs called the stuff "god-shit", I think that term puts it well in its place.

At the end of the day; notional value is notional.

 

[Sunray]

I've been reading a bit more and now expect the Greek government to wait till some unexpected time and do an Argentina. The will smash the Euro as it currently stands, if they do I can't see Portugal and Ireland standing idly by and perhaps will follow suit.

Over time I think the Euro will be stronger as a result unless the resulting debt defaults cause a European depression.

 

[ymu]

Time to tell the non-domestic creditors to suck it up. And by that, I mean all of us, not just PIIGS. Bye bye profiteers. Shame the gamble didn't work out, eh lads. Ah well. Some you win, some you lose. Don't let the door hit you on the arse on the way out.

 

[Giles]

Something has to give.

You can't "help" someone who is in debt over their head by lending them loads more money (at higher interest) just so they can pay the next few instalments on the original loans!

Giles..

 

[Dr Jon]

Return of the Gold Standard as world order unravels

...and wot did Gordon Brown do with our gold...?

 

[Giles]

Not only did the one-eyed scottish idiot sell the gold at the bottom of the market, he pre-announced his plans to sell it, which caused the market price to fall even further.......

D'oh!

Giles..

 

[ferrelhadley]

Return of the Gold Standard as world order unravels

...and wot did Gordon Brown do with our gold...?

You do realise dropping gold was one of the reasons the UK was able to get out of the great depression quicker than the US?

 

[gosub]

I've been reading a bit more and now expect the Greek government to wait till some unexpected time and do an Argentina. The will smash the Euro as it currently stands, if they do I can't see Portugal and Ireland standing idly by and perhaps will follow suit.

Over time I think the Euro will be stronger as a result unless the resulting debt defaults cause a European depression.

Only reason politicians have been pursuing the insane policy of proping up a country that can't afford to meet its debt payments by lending it more money, is because German and French banks can't afford the hit.