The American US$18 trillion debt – a Rube Goldberg machine
This article is in response to many who have asked in this Society blog, as well as in Filipino internet chatter, why is the Pnoy administration taking on foreign loans instead of in local currency which the govt can repay simply by printing peso because it has the ability to print since it has monetary sovereignty. Why can’t the Philippines govt do what the US are doing? Why are we even paying taxes when there is actually no need? This can best be answered by understanding the US debt. To demystify the US debt, I’ll walk you through some boring economics, money, and banking matters and keeping an eye on world events. Once the mist is cleared, it is apparent this huge debt is leading the US and the world to a financial Armageddon. In closing, I left un-mentioned the glaring question of how exposed is the Philippines and what has been done so far.
A Rube Goldberg machine is a contraption, invention, device or apparatus that is deliberately over-engineered to perform a simple task in a complicated fashion (wikipedia)
The US public debt is a Rube Goldberg machine designed to make it difficult for most people to see the truth of the situation. The public debates on debt ceiling and deficit spending pan the camera away from the simple truth that debts need to be repaid.
America is in a catch 22 situation. It has a mountain of federal debts (US$18 trillion) and is in a period of sluggish growth and high unemployment. To reduce the debts, they need to cut government spending, but to spur growth they need to put more liquidity into the market by means such as government deficit spending and quantitative easing (increasing the currency supply by buying back treasury bonds).
Deficit spending is when a government spends more than its revenue. Governments do this all the time for various reasons – get urgent projects going, part of fiscal policy to spur growth etc. Obviously, it means the government needs to borrow and the debt repaid over time.
There is a school of thought that says a country that has monetary sovereignty (one that has the sole legitimate right to print its own currency without restraint) will always be able to repay all its debts in the currency the issuance of which it has the sole right. No less than ex-Fed Chairmen Alan Greenspan and Ben Bernake have been known to say that the US can never go bankrupt because it prints its own currency. This idea is fundamentally flawed and there will come a day of reckoning.
Economics 101:
Economics lurk in the background, so a bit of knowledge is helpful. If you don’t know much about economics, don’t worry, neither do I. Forget the supply side or demand side explanation, I’ll just work on the common sense side.
(a) Classical theory – Adam Smith (1723-1790) – free-market capitalism; government totally hands-off; price is a function of supply and demand thus resources will be used efficiently; the economy goes through regular cycles of ups and downs.
(b) Keynesian theory — John Keynes (1883-1946) – during prolonged economic downturn, government spending can stabilize the economy; understand that inflation impacts employment and that interest and money supply impacts inflation.
(c) Collectivism theory (communism) — Karl Marx (1818-1883) – capitalism is exploitation; government handles central planning; economy is a partnership of government and workers.
The use of fiat money (1971) generated some post-Keynesian ideas:
(d) Monetarist theory—Milton Friedman (1980’s) — changes in the money supply are the most significant determinants of the rate of economic growth and the behavior of the economy.
(e) Modern Monetary Theory – the 2010 Warren Mosler’s book “Seven Deadly Innocent Frauds of Economic Policy” more or less conceptualized the MMT thinking. His ideas dealt with fiscal policy during recession, basically:
1. Massive deficit spending until unemployment falls.
2. Govt can spend infinitely because it can easily print currency to pay off debts in that currency.
3. All debt passed on to future generations will never be burdensome, since they will consume whatever is produced.
4. There is no need for taxation other than for the purpose of creating demand for the currency.
5. Inflation is a non-factor since the government has the complete ability to constantly expand the money supply and guarantee consumption and growth.
It is paradoxical that democratic capitalist countries boast of economies that are free and open but actually have fiscal and monetary policies that are collectivist in nature, in the hands of central banks.
Economics is not an exact science. We have been very wrong before – communism caused untold misery to millions of people for a hundred years. MMT is absolutely seductive because it implies the notion that money is for free. It is the ideology that has been driving American monetary policy in the last 40 plus years and has brought the country to a US$18 trillion public debt.
The monetary system:
1. Gold-standard – Since the beginning of the 20th century, all currencies were pegged to gold. Thus currency conversion was at fixed rates. Under this standard, government must buy and hoard gold before it can print any additional currency and the government guarantees anyone who hands over each currency will get a certain stated amount of physical gold. Then came WW1 and WW2. European countries went bankrupt and suffered hyper-inflation. Their production had been for the war effort. America participated in both wars only at the tail end so it was able to produce consumer goods. These goods were exported to Europe which paid for it in gold. After WW2, Europe had no gold, America held 2/3 of the world’s gold. The gold-standard collapsed.
2. Bretton Wood – To bring stability to world trade, the Bretton Woods agreement was signed in 1944. Only the US currency was pegged to gold, all other currencies were pegged to dollar. Thus all foreign-exchange rates move in sync. US currency then became the most internationally traded currency and the Fed became the world’s central banker. This system survived till 1971.
3. Fiat currency – Involvement in the Korean and Vietnam wars caused severe inflation in the US in ‘50s/’60s. This forced America to secretly print currency in excess of its gold hoard. America reneged on its obligation under Bretton Woods Agreement! In mid 1960s, a suspicious French President de Gaulle cashed in for physical gold which was soon followed by other countries. This was done by central banks which converted their US$ reserve holdings for its value in physical gold. (Private holders can’t do this). America shipped out large sums of gold, but it became apparent that it cannot honour its guarantee. In 1971 President Nixon declared America will abandon the gold standard. Thus most currencies became fiat currencies (one which is not pegged to anything) and the world engaged in troublesome floating exchange rates.
As with economic theories, monetary system has evolved over the years. In the last 120 years, the world has seen a change of monetary system every 30/40 years. History has shown that these systems started off well, offered a period of stability, then cracks and fissures occur, and the system implodes. Will the US$ 18 trillion debt herald a change? Who can foresee the future of digital or crypto currencies like Bitcoin, Neucoin and whatever.
Some things about money:
Money
Initially, barter was a way of life. You exchange 20 coconuts for a fish. That was cumbersome. So they found a common medium of exchange. This has to be something rare, otherwise it becomes meaningless. So they used pieces of gold or silver. Now, these are rare metals and they have intrinsic value which means the medium itself has a value. But each piece of the metal is different from another in value because of different weight. That’s troublesome. So they made it into coins, each piece same weight. Now the medium is fungible, means one silver coin in your wallet is the same as the one in my pocket. The first civilization to do that was Athens back in about 680 BC. That was a medium which is portable, durable, divisible, fungible, and had intrinsic value.
Today, we do not have actual money. The gold coins and the silver coins have fallen out of use.
Currency
Instead, today we have government issued tokens – the notes and coins. These are not money because they have no intrinsic value. In addition, in the modern world, we settle mostly by cheques or bank transfers. So the credit balances in banking a/cs are stored values. We call these notes and coins and bank a/c balances together as currency.
Currency serves the function of money as – a unit of account, a medium of exchange, a store of value, and a standard of deferred payment. Elsewhere, the term “money” has been used interchangeably as currency.
Bank reserves
To ensure that banks have sufficient liquidity to meet their day-to-day obligations to depositors, they are required to maintain certain assets classified as reserves. There are 2 basic ways:-
Reserve Ratio – most central banks use this. Banks maintain a reserve a/c at the central bank and the balance in this a/c must be at the required % of their deposit liabilities. Eg if the ratio is 10%, and they have $100 deposit funds, they can only lend out $90 and keep $10 in their reserve a/c at central bank.
Liquidity ratio — some central banks use this, such as the Fed and Bank of England. This is a more detailed and complicated way. Banks must always have certain % of their deposit liabilities in certain specifically allowed assets.
Currency creation:
The currency in the economy is created in a number of ways :-
1. Printing the token – This is a planned and controlled act. Government prints to replace old currency notes, or to inject additional notes into the system. For a fiat currency, when the govt prints additional tokens it is creating currency out of no-where. Treasury prints $100 and transfers it to the Fed (US ‘central bank’) who will debit ‘vault cash’ and credit ‘currency’. The currency a/c is a liability because the $ notes & coins are like govt IOUs to holders.
2. The process of bank credit expansion – Imagine you have newly issued $100 notes and you deposit that into your bank a/c. The bank deposits $10 into their reserve a/c with the Fed and lends out $90. Borrower takes the $90 and pays someone who then deposit with his own bank. Bank B then put $9 into their reserve a/c at the Fed and lends out $81. This process is repeated over and over again. If the bank reserve ratio is 10%, the initial deposit of $100 notes will end up with total bank deposit of $1,000, thus expanding money supply (base currency) to $1,100, comprising of 100 in notes and 1,000 electronic currency. This process is called bank credit expansion (Americans call it fractional banking) and it is very important because it affects the currency supply. The multiplier effect depends on the reserve ratio thus the central bank can control currency supply by lowering or increasing the reserve requirements.
Note: The above is a simple illustration where the reserve ratio is 10%. (Philippines is 20%). For countries that use liquidity assets instead of a simple ratio, the credit expansion works basically the same way.
3. The rise of credit cards — Now here is the crazy part which I bet you don’t realize. And this goes right up the face of MMT which says households are different from government in that we as private individuals cannot print money. Each time you use a credit card, you are actually “printing” currency. You are making a deficit spending. Out of no-where, without any cash, you swipe your credit card and the vendor’s a/c is credited, which is similar to the latter making a bank deposit, and so the amount of your consumption initiates a bank credit expansion. In other words, you spend $100 and create $900 electronic currency. But you now have a debt of $100 which, too bad, you have to monetize in due course.
By the end of 2015, US credit card debt is estimated to be $900 billion. That gives you an idea of how powerful an instrument of currency creation it really is.
4. When the Fed buys back T-bonds (fancy word is quantitative easing) they are pushing currency out into the economy. Banks that sold the bonds now hold currency in their Fed a/c. If they lend them out it starts another round of bank credit expansion.
Supply of currency
“Base currency” is the total sum of currency in the system. It comprises of all the tokens printed and all the credit balances in banking a/cs (savings, fixed and current a/cs). The “currency in circulation” is simply base currency less the reserve a/cs of the banks held in the central bank, less notes and coins in bank vaults. In all countries, the notes and coins represent only a small part of the aggregate currency in circulation, the banking a/cs form the bulk.
Managing the supply of currency is key to a stable economy. Too much of it chasing the same level of goods and services increase the price level, that is, inflation sets in and value of currency falls, or to put it in another way, the purchasing power of currency depreciates. Printing without limit results in hyper-inflation. Eg Weimar Republic – in 1919 a loaf of bread cost 100 billion Papiermark. Supply of currency must be relative to the Gross Domestic Product (the total goods and services produced). In other words, the MMT notion of free money is a fallacy. The idea that a govt can spend itself out of a recession because it has monetary sovereignty, ie it can print its own currency, is a fallacy.
OK, we have the basics out of the way. Now we go into the more interesting aspects.
The almighty US currency:
The US$ has maintained its position as the world’s most used currency since WW2. Of the total currencies in the world, 60% is US$. Its pre-eminence was due to (a) its role under the Bretton Woods system, (b) it is the world’s largest economy, (c) oil is traded in US$, and (d) it is the largest creditor country.
Here is the unique thing about the US currency. It has a huge external economy. Of the total US currency in circulation, about 50% is offshore.
Central banks everywhere hold substantial amounts of US currency reserves.
Overseas institutions (banks/ central banker/financial institutions/ corporations/high networth individuals) hold substantial sums of US Treasury bonds in either investing or trading portfolios.
Massive US currency loans (sovereign and corporate) are poured into overseas economies
Massive US aid to various parts of the world also sucked away US currency overseas.
A humongous sum of petrodollars is circulating in the international oil industry. In the oil business, financial muscles are required in activities like drilling, production, refining and transportation. It is estimated US$9 trillion are required to drive the oil trade.
Massive international trade is conducted in US$ everyday, especially crude oil (90 million barrels sold each day)
It is not the military prowess that makes the US powerful. They lost the Vietnam war, did not do that well in Korea, have successes in Afghanistan and Iraq but can not hold the ground. It is this financial power of the almighty US currency that makes the US great. This financial might over the past few decades has lulled the US govt into an entrenched belief that they can simply create debt and not having to pay for it. In reality, the US has been living off the wealth of future generations.
The question is, will a flight from US currency ever happen? It is increasingly clear that it’s no longer a question of ‘if’ but ‘when’. Two scenarios will play out. (1) A helicopter dumping of this vast holding of US currency by the external economy will drown the US economy in hyperinflation. (2) It’s debt instrument, the Treasury bonds, will no longer have a world market, with serious ramifications for it’s debt management.
Woolly-woolly world of currency:
Currency notes and coins may be carried by travelers all over the world, but the main bulk of the currency supply, the bank account balances or electronic currency, never leave the country of issue. Not many people understand this.
Example 1
Shell Manila buys crude oil from Aramco, Jeddah.
Shell’s bank is PNB Manila, Aramco’s bank is Citi Jeddah
PNB’s NY correspondent is BOA NY, Citi’s NY correspondent is Citi NY
Shell does a FX deal (sell Php buy US$) with PNB. PNB debits the Shell Php a/c , credits BOA NY US$ a/c and sends a payment instruction to BOA NY via SWIFT (secured payment system). BOA NY debits PNB US$ a/c, credits Fed a/c and makes a Chips payment (clearing house mechanism) to Citi NY favour Citi Jeddah for credit Aramco. The Fed credits Citi NY, debits BOA NY. Citi NY then debits Fed a/c, credits Citi Jeddah. Over in Saudi Arabia, Citi Jeddah then debits Citi NY and credits Aramco US$ a/c.
The accounting entries are actually more complicated than that (because of the clearing house medium). This is just the gist. The point is that all US$ settlements are cleared between NY banks in the Fed. Every transaction ends up with the Fed debiting one NY bank and crediting another. In short, the Fed moves US$ funds from one bank to another electronically.
Example 2
Chinabank Beijing buys T-bonds at an auction. Their NY agent is BOA NY. Let’s say they have a lot of US$ in their a/c with BOA NY, so they don’t need to purchase US$ for RMB.
China bank debits Securities a/c, credits BOA NY US$ a/c and instructs BOA NY to pay US Treasury. BOA NY debits Chinabank a/c and credits Fed a/c and makes Chips payment favour US Treasury. Feds Debit BOA NY a/c, credits US Treasury a/c.
Same thing here. The Fed simply moves US$ funds from one bank to another, in this case to the Treasury a/c.
Chempo’s Law #1: Every transaction of a currency anywhere in the world ends up with the central bank of that currency moving funds from one bank a/c to another bank a/c simply by book entries done electronically
Treasury Bonds:
Sometimes a govt, through a relevant agency, may borrow for special projects. These are sovereign loans and conducted as any normal corporate loans. In the case of the US, there are no such federal loans. Let’s leave it out of this discussion here.
US Treasury borrows by issuing treasury bills or bonds which are debt instruments, in simple terms, IOUs. There may be variations, but let’s keep it simply as T-Bonds. Banks, financial institutions, retirement funds, securities traders, corporations, foreign central banks, individuals, etc, buy T-bonds for trading, investment, parking excess funds, interest rate risk management or foreign currency reserve management. The US T-bond market is extremely massive with a huge network of dealers and brokers. Average daily turnover is as high as US$500 billion.
When Treasury Dept auctions off T-bonds, buyers pay for them by crediting the Treasury Dept’s a/c at the Fed. With funds now at their Fed a/c, Treasury Dept pays off suppliers, or transfers funds to other govt depts. or agencies. To redeem the bonds on maturity, Treasury Dept pays off bond holders by writing a cheque on their Fed a/c.
The total public debt of the US is basically the outstanding Treasury Bonds. It is now about US$18.5 trillion and it increases by the seconds due to interest. http://www.usdebtclock.org/
Rolling over Treasury Bonds
Here’s a major misconception – Many of those who bought into the idea govt debt can be extinguished simply by printing currency take it in the literal sense. That’s really laughable. To print the US18 trillion, they will either run out of printers or the paper to print on. Even if they actually print $ notes and pay off the debts, a McDonald’s meal may then cost US$10,000 or what?
Mossler, Fed Chairmen Greenspan and Bernake, all say don’t worry about the debt, as long as the debt is in US$, the US will not go bankrupt because of its ability to print the currency. What they meant is, when Treasury Bonds mature, they simply issue new ones as replacement. The funds from the new issues to be used to pay off matured bonds. Nothing happens, just ownership changing hands and funds moved from one a/c to another in the Feds books. Chempo’s Law #1 applies again. By the sleight of hand, one debt is paid off, and the debt level remains the same.
Here’s another mis-conception. Many people think that to replace the old debt, you need a bigger new debt because you need to cover the interest. That’s why when matured T-bonds are retired with new ones, the debts will keep piling up because of the interest. That’s utter rubbish. The coupons or interest are payable regularly, every 3/6 months. The interest servicing part is already worked into the budget. Only the principal sum gets replaced. The debts pile up because of funding budget deficits.
Here’s the eye-popping part. The US govt does not see T-bonds as debts. They view it as something similar to capital in a corporation which does not normally get paid off (except in a capital reduction scheme). Since 1791 when T- bonds were first used, the US Treasury has never repaid the aggregate sum. The principal sum has always been rolled-over in the past 224 years. Even in budget surplus years during President Clinton’s time, there was no extinction of debt. The US calls this in the fanciful financial term rolling-over of debt instrument, in the real world we call this a ponzi scheme.
So the US will continue to play the game. Issue replacement T-bonds to retire matured ones and issue new T-bonds to fund the budget deficits. Congress will continue to raise the debt ceiling. That’s why some Americans say the debt ceiling is a meaningless thing. They can continue to do this because the US currency is Almighty. The primary and secondary markets for its T-bills are unbelievably enormous.
What if foreigners dispose T-bonds
The US has no fear of foreign T-bond holders cashing out. Remember Chempo’s Law #1? Nothing happens when they cash out. Just funds moved from one bank a/c to another in the Fed’s books. The bond holders now have $ sitting in their bank a/cs. They have 2 options:
(a) Buy US assets
(b) Dispose of the $ and convert to another currency, eg sell $ and buy Euro.
Either option, Chempo’s Law #1 still applies. The $ simply ends up in somebody else’s hands, but still remain in a US bank’s a/c at the Fed. This leads us to another law:
Chempo’s Law #2: Every currency that has been created into existence remains in the system, it never goes away. (We’re talking of electronic currency here, tokens do get burnt or lost.)
So now whoever bought those $ would have to invest them. They buy US assets, or if they want the best zero risk asset in the world with a decent return, guess what they buy — US Treasury bonds. That’s why the US is not worried.
But it’s not so simple as the MMT crowd want us to believe. When foreign holders dump T-bonds, the trillions of $ is bound to impact asset prices and $ value. Furthermore, if the trillion $ are poured into assets, it will simply generate another round of bank credit expansion. A helicopter dump of T-bonds by foreigners will create asset bubbles, impact the value of $, increase currency supply and cause serious inflation.
The supply of currency re-visited:
A look at the currency supply chart of US currency shows steady and gentle growth before 1971 and after that, a very steep rise. This is the same for most currencies of the industrialized and developed countries. Don’t worry about M0, M1, M2, M3 – These are just different levels of grouping of currency types. Just understand that M1 is the notes and coins in circulation, M2 notes & coins + all those banking a/c balances less banks’ reserves at the Fed but excluding M3. Feds no longer publish data for M3 which is banks’ Fed reserve a/cs, time deposits higher than $100,000 and institutional money market deposits.
The chart shows M2 started moving up in the 1980s from below $2T in 1980 to more than $12T by 2015.
We need to answer 2 questions :
(a) Why did it increase so much? – Economies expanded dramatically after WW2 and new technological products (computers, mobile phones etc) have been the driver of a high consumerism spree. But the real culprit is fiat money after 1971 and deficit spending. This notion of free money let the genie out of the bottle. All the major currencies in the world showed the same trend..
(b) How come there was no inflation? The GDP was $29T in 1980 and $51T in 2014 – an increase of 75%, whilst M2 increased by 600%. By all logic, there should have been severe inflation. Some MMT proponents gloat at this fact – where is the severe inflation over the last few decades?. There were some bumps in ‘60s-‘70s but since Paul Volcker tamed inflation in the ‘80s, inflation from 1983-2014 averaged only 2.5% which sent the wrong message that printing money does no harm to the economy. The reason for no inflation was because the increase in currency supply did not go into consumer goods but was sucked up by :
The huge offshore economy of the dollar. The oil market alone is staggering. Current world trade for crude oil is about 90mm barrels per day average 33B brls per annum. At today’s price of $65pb, that’s a massive $2.1 trillion sucked up by the oil economy in a year.
Huge sums of the currency supply went to fund the US housing, equities and derivatives markets. This caused asset prices to rise to astronomical heights. Cheap currency created all those asset bubbles which eventually crashed — the 1987 stock market crash, 1998 hedge fund bubble, the 2000 dot.com burst, 2006 housing bubble, 2007 sub-prime bubble, 2008 stock market crash.
The great deception:
Deficit budgeting is spending today the wealth of future generations. Using Treasury bonds to securitise federal debts and then creating a huge primary and secondary market for these securities is great financial ingenuity. Can you see how they are making debts into a profitable business. Rolling over matured Treasury bonds facilitated political expediency for deficit budgeting without worrying for debt repayment. The pure simple truth is that all debts need to be repaid. It is inconceivable that great and wise people in US government do not understand what they are doing. Of course they do. They have been gaming the system for decades. They have created a Rube Goldberg machine so that most citizens cannot see the real picture.
This great deception rests on one mandatory requirement – the continual and increasing demand for the US currency. Bretton Woods started this demand and the US learnt to game the system. After 1971 when US abandoned the gold standard, a new way had to be found to perpetuate the demand for US currency. The US signed a deal with Saudi Arabia wherein in exchange for American arms and guarantee that Israel will never attack them, Saudi Arabia will price crude oil in US$. Welcome to the world of Petrodollars and long live the US$.
As long as the demand for US currency continues, the great deception flourishes. The US announced recently it will continue with deficit spending. It can roll over its T-bonds and increase its public debt to infinity so long as there is an international role for the $ and confidence remains.
The demise of the $:
Unfortunately for the US, the rest of the world sees the approaching financial turmoil and have made moves to marginalize the $. Evidence the following recent developments in the last 5 years :-
Countries sign up bi-lateral pacts to either use each other’s currencies for their trade or to arrange $ swap facilities — eg China & Russia, China & Japan, India & Japan, China & Brazil, China & Euro Central Bank, Korea & Indonesia, New Zealand &China, and many others.
African countries banned use of $ (penalty for using US$ in Zambia is jail time)
Countries repatriating gold — Venezuela got their gold back from UK, Germany increased gold repatriation from 150MT to 300 MT from Fed NY (having problems with this).
Tremendous increase in the purchase of physical gold by governments – eg Russia and China
Oil sales transacted in other currencies – eg Iraq, Egypt, between China and Russia.
State of Utah – gold is now legal tender
Singapore – tax on gold trading is lifted
Reducing US$ holdings – China is no longer the biggest foreign holder of T-bonds
China is increasingly trying to use gold as a reference for Yuan valuation.
SUCRE (Sistema Uniario de Compensacion Regional) – set-up in 2010 for some Latin American grouping to promote regional trade by-passing the use of $.
Increasingly, countries in the world are trying to hedge themselves by avoiding the use of $. This is a rising trend and getting more pronounced in the last 5 years. Latest Nov 9, China and Switzerland agreed for direct conversion between Yuan and Swiss Franc. Before this, Yuan can only convert directly with US$, Euro, British Sterling, Yen, A$ and NZ$. What does this mean? China is slowly internationalizing their currency. President Xi said not too long ago that the role of the $ as the international currency is past. China has made a proposal to the IMF to replace the US$ with the Yuan as the currency for international settlement. All these are not political moves, but diminishing confidence in the US$.
It is an undeniable fact – the US currency is getting marginalized. The bandwagon is picking up more passengers and speed each day.
The blame game:
In the last few decades, Americans abandoned their might in manufacturing consumer and capital goods that the world wants. Americans abandoned maintaining their infrastructure which are either crumbling or out of date. Roads, elevated skyways, bridges, electrical grids, gas pipes, airports, city buses, trains etc, are no longer first world standard. Center for American Progress estimated that $129 billion more per year over the next 10 years is needed to maintain the infrastructure.
Instead, they went into financial engineering. It was a time of high finance and greed, the Gordon Geckos and his “Greed is good”. Derivatives are created for almost anything you can think of. Some of these products are funded, some are of nominal values, meaning no funds exchange hands until the end date when profits or losses, or interest, change hands, such as interest rate swaps. Nobody really knows how big the derivatives market is and how much is trading (gambling), how much is hedging. The Bank for International Settlements estimated this in 2014 at $710 trillion. Wall Street is the biggest casino in the world today.
The great builders of the past have been replaced by a new breed of financial geniuses and vast amount of wealth have changed hands. The group of people who created the financial problems for the country is the same one running the financial engines of the country and managing monetary policies. The Federal Reserve System comprises of 12 Federal Reserve Banks in different states, each owned by a consortium of US banks. These 12 banks appoint representatives to the Federal Reserve Board (Fed) and the chairman is appointed by the President. The Fed is the pseudo central bank of the US, but it is not a government agency. Conflict of interest is the concern, and this is seen in the way the Fed’s nominal function as lender of last resort and maintaining price stability has interspersed with running a massive T-bonds market in which board members’ banks are primary participants, and to the way it has bailed out failed financial institutions time and again. The Fed is actually a banking cartel and in light of the exposes of the way LIBOR has been manipulated in London, it is naive not to expect the board members’ insider knowledge of sensitive information has never been shared with their own banks.
One would have thought that lessons have been learnt in those asset bubbles, but obviously no. There is now something famously called the “Greenspan put”. (In options trading, a ‘put’ is an option to sell assets at an agreed price on or before a particular date.) Players now know that if you are “too big to fail”, there is a “Greenspan put”, a Feds safety net for you. When Long Term Credit Management collapsed in 1998 it was leveraged up to $128 billion. The Feds arranged a $3.6 B bailout. In the sub-prime fiasco, the Feds bailed out Bear Sterns – $29B, Fannie Mae and Freddie Mac – Feds poured in $200B and guarantees $100B, AIG – Feds guaranteed $85B. In the 2008 crisis, Feds poured in or guaranteed an estimated $16T. All these are tax-payers money. Whilst fat cats got out of jail free, and some remunerated themselves tens of millions of dollars for almost bankrupting their banks, the poor men who scrounged for years to save a hundred dollars find their fixed deposits earning interest at almost zero %.
Conclusion:
The US has defaulted on its promise of gold convertibility once. It is defaulting on its debt obligation by the hocus-pocus rolling over of Treasury bonds. The huge public debt debacle is brought about by irresponsible budget and monetary management. The world is not waiting to be driven over the financial abyss and has made moves to marginalize the use of US$ as an international currency. Over the next 2 years, these moves will become more evident. Can the US pull out another rabbit from its hat like 1971?.
Will it be a slow transitioning to another international currency or will it lead to a panic. Either way, the US has no choice but to default or face inflation as the vast sum of offshore US currency come home to roost. If the US goes into high inflation, the rest of the world will suffer as the biggest economy in the world goes into a tailspin.
Those with no wealth need not fear. Those with great wealth will be concerned not with growth but wealth maintenance. To pre-empt readers flooding me with free financial consultation requests, Iet me sign off with these wise words:
“The most important thing about money is to maintain its stability … You have to choose between trusting the natural stability of gold and the honesty and intelligence of members of the government. With due respect for these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold.” (George Bernard Shaw)
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The Society of Honor by Joe America 
chempo,
I’ve always fantasized about moving to Brazil and just wearing Speedos all day long—- with this article, now I think i’ll have to seriously plan this move. I’m printing this article out, questions in coming. Very informative, Thanks!
I think I’ll go sell Speedos
@Chempo..please make correction…Venezuela not Valenzuela…
Done. Thanks. Hope Mayor Gatchalian is forgiving. Used to be associated with some projects in Valenzuela, so you can understand the typo.
Great analysis Joe. Nailed it and Chempo’s Law is rock-solid. This is also a refresher read, I am enlightened with the carousel of $ in terms with oil.
This is exactly one of the reasons why blockchain technology is currently ongoing and the trend of the IoT(Internet of Things) trying to gain market momentum.
People with high ambition will read this and start to question why they have to be an employee on a job that its primary function is to juuust literally index price data and fundamental data. When they can compete and trade money internationally? Getting a battle scar on trading and win like Barry Johnson or Ernie Chan. This is one of the real deal if you want to sharpen your mind.
Thought about the increased research and funding in automating econometric tasks such as sentiment analyses, Kalman filter, Bollinger band and Hurst exponent ‘rithms.
Chempo wrote the article, and I’m glad you found it enlightening.
Deja vu…like I was transported back to my beloved university listening to my macro economic professor!
hahaha but you must admit this is better than statistics.
That’s true…Why don’t you write about Statistics in relation to the probabilities on surveys of the presidentialbles…that would be an interesting read thou…
Chempo, thank you for this great read,you carried a powerful torch in this article, this inspired me to think about purchasing a license for MATLAB or to experiment with Julia lang.
Thank you Chivas. Hey you go ahead and inflate your mind with MATLAB Julia…me, I’m still struggling with dbase4
Error. I rushed to read the content.
Fantastic read. Will have to read a second time tomorrow to let it sink in.
And what about the interaction with the real economy of the goods and services hidden behind currencies. Is the marketization of more and more spheres of live linked to this Ponzi scheme?
*******
So fantastic I did not understand 3/4 of it… and that’s being optimistic.
*****
This is rather complicated and needs further studies, the little I understood from it made me anxious of the future of world finance and its consequences to ordinary people worldwide. The US citizens are very patriotic people, I hope they will heed the signs of the times and make the necessary analysis to come up with concrete solutions.
We live in such global integration and interdependence that any crisis in a single nation affects most of the other nations as well. The Greek problem is the latest example. The Thai problem hit the region including the Philippines so severely that we woke up one morning up to find out that our currency has lost more than 25% of its purchasing power. Almost all of the economic gains of the Ramos government evaporated in thin air, the rising tiger failed to rise, aggravated by the next regimes’ plunder of the country’s coffers,
Edgar, its all good…so long as the 1/4 you understood was the part that was not questionable 😀
******
Ahaha! I am not even sure of that!
*****
Good luck with the dollar doomsday scenario. The US is still the lone economic and military superpower. Bar none. Not even China. The US dollar is the gold standard. You predict its demise to be replaced by what? Chinese Yuan? Excuse me but I have to laugh hard on that one.
If the US dollar will collapse and the US as a country is reduced into a whimpering dysfunctional republic, then the entire human civilization will collapse with it. We’ll have a Mad Max world of chaos and anarchy. The rest of the world still looks to the US for its values and ideals of governance. Sure, it’s been perverted and hijacked by some elements lately but I don’t see why that will be impossible to rectify.
Now to the specifics of your article…
1. It’s amazing that though you seem to understand the dynamics of financial transactions you then suspend your rational faculties when it comes to the $18 trillion US debt. Paying off that debt is as simple as debiting specific bondholders’ account at the Fed and crediting their checking account on private banks of their choice. It is as simple as moving numbers in the Fed’s computer. No taxes, no borrowing, no rollover needed. That is how monetarily sovereign gov’t pay off its debt when that debt is denominated in its own unit of account.
Remember that those are interest bearing instruments. Will the Chinese decide to cash out and forego the income from interests? Maybe, maybe not. But if they do, so what. They will have lots of dollars in their hands, so what? Will it collapse the value of the dollar? Will it collapse the US economy? Don’t think so.
2. On credit cards as individual money creation… Individuals don’t get to issue their own credit cards. The amount you’re allowed to spend on that credit card is a loan from your bank. Your bank issues the credit card. Your bank is creating the money. And you are suppose to pay it back.
3. On the great deception. You said : “The pure simple truth is that all debts need to be repaid.”
Okay. I agree with that. Where is the deception?
This will do for my quibbles for now. Thanks for the article.
“You predict its demise to be replaced by what? Chinese Yuan?” … I predict nothing. I just mentioned the moves many countries are making so they reduce their reliance on using the $ for trade. The lesser their need for $, the less $ foreign reserves their central banks will carry. All these with implications for the US economy.
“If the US dollar will collapse and the US as a country is reduced into a whimpering dysfunctional republic, then the entire human civilization will collapse with it” …. That is the gist of the article. But not to the extent of civilization collapsing…. just economies suffering.
1. “Paying off that debt is as simple as debiting specific bondholders’ account at the Fed and crediting their checking account on private banks of their choice” —
U got the debits and credits wrong and an outcome not in line with reality. Let’s walk through a REAL transaction. Imagine Bangko Sentral has treasury bonds that matured. BS’ NY correspondent is City NY. Let’s say the US Treasury’s banker is BOA NY. BS will send instruction to the securities depository house (the one keeping custody of BS’ securities) to release the bonds and indicate payments to their a/c at BOA NY. US Treasury will instruct BOA NY to pay to Citi NY favour BS Manila. Settlement will be at the Feds which will debit BOA NY and credit Citi NY. Yes it’s electronic bookkeeping entries at the Fed. But pray tell me, will BOA NY just pay out millions of dollars on behalf of US Treasury just like that? They will call up the Treasury and say MR SECRETARY, BUT YOU DON’T HAVE FUNDS IN YOUR A/C WITH US”. The Treasury has no funds. That’s why they need to issue a replacement bond, sell it out and get money into their BOA a/c so that they can pay Bangko Sentral. If the Treasury has funds in BOA NY, then of course the call to the Secretary is un-necessary. If that is the case, what transpired? A matured bond really got paid — there is nothing free. Funds passed from Treasury to Banbgko Sentral. It’s not just electronic entries, funds actually changed hands.
“Will the Chinese decide to cash out and forego the income from interests?” … You obviously do not the nature of treasury bonds. In the above example, the funds matured. In this Chinese case, you are talking about disposing before maturity. Means the Chinese sell it in the securities market. When you sell securities, there is a price which is determined by several factors, one of which is you interest accrued. The seller does not forefo interest accrued. The seller makes a profit or loss depending on the interest rate movements.If the Chinese dump treasury bond holdings, some $1.3 trillion, what do you think? But they are not stupid. They will dispose slowly so as not to depress the price. What do u think is the impact of additional $1.3T in the US economy.
2. Banks issue credit cards, we spend it. This is different from a loan. If Bank A give you a loan they debit Loans a/c, and credit your current a/c. This credit to the current a/c increases the bank’s deposit a/c thus increase money supply M2. That’s normal credit expansion.
For a credit card, there is no addition to their deposits base, nothing. The just give you a card. When you spend, Bank A debit your current a/c (overdraft) which actually reduces money supply because deposits go down. But because you swipe your card, the vendors a/c at Bank B is credited, the bank’s deposit goes up and money supply goes up, cancelling the reduction caused by Bank A. Net-net, no change in M2. But now, Bank 2 lends it out to Mr Ongpin and what they do? Debit Loans a/c and credit Ongpin’s current a/c, M2 goes up and credit expansion continues.
If you can’t see that that swiping the credit card creates money out of nothing, there is nothing further I can say.
3. The deception? That there is no worry about the debt bankrupting the US.
“Let’s say the US Treasury’s banker is BOA NY….They will call up the Treasury and say MR SECRETARY, BUT YOU DON’T HAVE FUNDS IN YOUR A/C WITH US.”
Nope, the US Treasury’s banker is the Fed itself. The Treasury has accounts at the Fed. Bondholders have accounts at the Fed. You might want to call that their savings account. When bonds mature, all the Fed does is instruct bondholders private banker to increase the numbers on bondholders’ checking account. The Treasury doesn’t have any funds at BofA precisely because it doesn’t keep an account at BofA.
The Federal Reserve System, through the Reserve Banks, performs various services for the U.S. Treasury and other government, quasi-government, and international agencies. Each year, billions of dollars are deposited to and withdrawn by various government agencies from operating accounts in the U.S. Treasury held by the Federal Reserve Banks.
The Federal Reserve Banks also issue and redeem instruments of the public debt, such as savings bonds and Treasury securities. They have certain responsibilities for allotment and delivery of government securities and for wire transfer of securities. In addition, the Reserve Banks make periodic payments of interest on outstanding obligations of the U.S. Treasury, federal agencies, and government-sponsored corporations.
http://www.federalreserve.gov/pubs/frseries/frseri3.htm
@ Micha
“Let’s say the US Treasury’s banker is BOA NY….They will call up the Treasury and say MR SECRETARY, BUT YOU DON’T HAVE FUNDS IN YOUR A/C WITH US.”
BOA a/c is just an illustration. If the Treasury uses their Fed a/c directly, the same telephone call will be made to the Secretary by the Fed. The Fed is a privately owned bank, remember that. It would help if you read up the link RHiro gave us in Joe’s Banking blog , the one one central bank independence from govt.
Treasury’s a/c is on the liabilities side of the Fed’s balance sheet. Try debiting that a/c with $18 trillion and see what happends to the Reserve Banks.
Micha, your para one really reflects your lack of understanding of debits and credits. And you are taking literarily taking electronic as nothing but keyboard strokes. There is real transfer of funds moving from one person to another through their bankers. The Fed cannot move funds from Treasury’s a/c to another bank’s a/c because the former has no funds there. If there are funds, there is no debt issue in the first place.
Just a couple of quick comments, chempo. I commend you on venturing on writing on such a complicated and monumental topic, many points I would question given time, but on the whole quite controversial and interesting for the many useful concepts it does introduce.
For the moment though, let me say I have great difficulty with your idea of considering issuance of bank credit cards as private money creation in the same way as banks create money through the fractional reserve deposit and loan process. Perhaps the difficulty here is maybe clarifying the difference between credit and debit cards which are very much used here. Debit cards is an electronic way of issuing a check to tap ones existing deposit and checking account so no money is being created. Credit cards as the name implies is the extension of a line of credit by the bank, a standby loian facility. The establishment of a credit card account and issuance of the card, does not by itself create money, either in stock or circulation nor an asset or liability as the fractional reserve process does. The actual use of the card is a borrowing against the facility and it is just like any private loan which in my own opinion does not create money either.
@ Calipman
We are talking credit cards only.
Lets look at M2 as the money supply. One of the composition is the aggregate banking deposits, agreed? If you follow the debits and credits in credit card transactions you will see why I say money is created.
(1) When you get a credit card from Bank A, they open a current a/c for you. Nothing to do with M2.
(2) You spend 100 pesos. When you swipe the credit cards 2 things happened at 2 banks:
(a) Bank A: They debit your current a/c — aggregate bank deposits reduced.
(b) Bank B (merchant’s banker) : They credit the merchant’s current a/c — aggregate bank deposit increased.
NET-NET no change in aggregate bak deposits — thus no change in M2.
(c) Bank B lends out to Ongpin 90 pesos (assume reserve ratio is 10%) — Bank B debits a ‘Loan to Ongpin’ and credits Ongpin’s current a/c —- aggregate deposits increase by 90, thus M2 increase.
(d) Ongpin spends 90 pesos at a shop. Shopkeeper banks in the money into Bank C. Bank C lends out 81 pesos ….and so on, repeating the money creation steps of (c).
Fractional banking through credit card spending is almost the same as via depositing of new notes issued with one exception. In the iteration of the fractions, the credit card way has one less step because you did not start with a 100 deposit, but rather a 100 debit. That’s why in my article illustration, a spending of 100 ends with money creation of 900 and not 1,000.
Keep you eye on the deposit a/cs and the money creation becomes obvious.
1.”If the Chinese dump treasury bond holdings, some $1.3 trillion, what do you think… is the impact of additional $1.3T in the US economy?”
If the Chinese decide to spend it all in the US, that would be additional $1.3 trillion in US GDP.
2.”The deception? That there is no worry about the debt bankrupting the US.”
No, it won’t bankrupt the US. If you think of so-called debt as savings of private entities, then you will see the light.
If you open a savings deposit account at, say, Banco de Oro, will Banco de Oro have any trouble giving you back your money when you need it? Will those savings deposits bankrupt Banco de Oro?
Think of the US Federal gov’t as Banco de Oro that accepts savings deposit. Most people call it debt and they are appalled at the sheer size of it.
Since when have we considered savings of private entities appalling/horrifying?
Most of the US debt is owed to the American public, investors and institutions.
This video was done in 2009 when the US owed China 25% of its total debt. It still answers question #1 though US owes less to China now.
Juana Pilipinas, nice presentation (circle) however there are some hidden facts (Belgium’s 13%)
We know that Belgium didn’t have any money to buy $141 billion worth of bonds over a three month period. That sum comes to 29% of the Belgium GDP. So, they don’t have a surplus in their budget that is 29% of their GDP, and they don’t have trade or current account surplus in that amount. In fact, everything is in the red. Their budget deficit is in the red, and their trade and current accounts are in the red. So, Belgium didn’t have the money, and yet, they managed to pick up $141.2 billion in U.S. Treasuries over a three month period. So, where did they get the money?”
The only source for that kind of money would have been the Federal Reserve. The Federal Reserve thought it needed to hide the fact it was buying $141 billion in bonds over a three month period when it was officially reducing or tapering the quantitative easing down to $65 billion. It didn’t want to have to admit it was really purchasing $112 billion a month, almost double the announced purchases.
The Fed had to buy the bonds in order to protect its interest rate policy. But, if it outright bought them and this was known, then it starts to interfere with the ‘tapering’ that it promised to do because all of a sudden it’s not ‘tapering,’ at least not for those three months. It signals somebody is unloading Treasuries, and that could stampede others. What it indicates is they are not feeling all that confident that the dollar is on such a sound footing, or the U.S. financial system is on all that much sound footing that they can openly step in and take up that type of purchase.”
Why is the unsustainable being sustained?
http://usdebt.kleptocracy.us/
“If the Chinese decide to spend it all in the US, that would be additional $1.3 trillion in US GDP”
Explain how the GDP can go up if they buy some old houses or land or Equities.
“No, it won’t bankrupt the US. If you think of so-called debt as savings of private entities, then you will see the light”
Micha, the twain never will meet. Debt is debits, Savings are credits..
“If you open a savings deposit account at, say, Banco de Oro, will Banco de Oro have any trouble giving you back your money when you need it? Will those savings deposits bankrupt Banco de Oro?”
Ask Bangko Sentral why they close down Banco Filipino. Don’t tell me it’s politics.
below is an article why the yuan would not replace the dollar as the reserve currency
http://www.wallstreetdaily.com/2015/11/03/yuan-u-s-dollar-reserve-currency/
Over the last several years, gurus and pundits have been predicting that the U.S. dollar will collapse. Many of these “experts” believe that the greenback will soon be replaced by the Chinese yuan as the world’s leading reserve currency.
And instead of admitting that they were just plain wrong, they keep beating the drum of pessimism and despair.
Meanwhile, I’ve been a consistent dollar bull and China skeptic, and I believe the yuan has no chance of replacing the dollar.
The Dollar Still Reigns Supreme
As you can see from the chart below from KKR & Co. L.P., the dollar rally that began in 2011 is 43 months old and the last extended bull market for the greenback lasted almost twice as long.
1980, 1995, 2011 Dollar Rallies
The currency game is a relative game.
America certainly has significant financial challenges that need to be dealt with, but it offers many attributes that make the dollar the premier reserve currency of the world.
Attributes such as political stability, deep and broad liquidity, vibrant capital markets, openness, and free convertibility and acceptance of the U.S. dollar worldwide more than offset our debt issue.
China Falls Short
For my friends at the IMF who are considering adding the Chinese yuan to the SDR basket, thereby indirectly recognizing it as a reserve currency: Don’t do it.
On the issue of liquidity, the Chinese yuan is a long way from being convertible across the board.
Chinese exporters who receive U.S. dollars are forced to turn them over to the central bank (this is how China built its $4 trillion in reserves). Citizens can’t take it out of the country. And it isn’t accepted as legal tender anywhere outside of China.
And it’s going to be a long time before China allows its currency to freely float, because the whole system is built on tightly controlling the yuan’s value. If the yuan strengthened 15% in six months, millions of exporters – already on razor-thin margins – would go bust.
In addition, China’s weaknesses as a global safe haven are glaringly obvious. For example, all of its strategic industries are firmly in state hands and its judicial system is anything but independent.
There’s also significant political risk. China’s decision-making process is anything but transparent. In addition, its more aggressive posture regarding territorial disputes with Japan and some Southeast Asian nations is a bit disquieting.
To highlight all of this, let me tell you a story I heard from a friend about Myanmar, a country that’s very close to China both economically and politically.
Apparently, the Myanmar central bank has canceled foreign-exchange licenses issued to thousands of businesses including hotels, restaurants, and supermarkets in a bid to curb the growing use of U.S. dollars in the economy as the domestic currency, the kyat, has lost considerable value.
This move came three weeks before Myanmar holds elections on November 8. Businesses will have to give up their licenses and will no longer be able to trade in U.S. dollars.
Clearly, the preference of many businesses to accept the dollar over the local currency or the yuan speaks volumes about the dollar’s enduring acceptance.
Why “Strong Dollar, Strong Country” Is More Than a Slogan
Economic history indicates that no country has ever achieved greatness, nor maintained it, by debasing its currency.
Have you ever heard of a country in deep economic trouble because of a strong currency? The value of a nation’s currency is a reflection of the perceived value of the country in the global marketplace.
Which is why I believe a strong and stable dollar policy enhances U.S. competitiveness, job growth, standard of living, capital investment, share prices, and our ability to finance our public debt.
I’ll admit that a weaker U.S. dollar would make it easier for U.S. exporters to sell their goods and services overseas, but this is offset by several factors:
A weaker dollar translates into a cut in the real spending power of American consumers; in effect, a reduction in real income.
A weaker dollar also diminishes the role of the dollar as the world’s reserve currency. Why should investors and central banks around the world invest in U.S. assets when its value is steadily declining?
During a time when the American consumer is cutting back, attracting international capital investment by private companies will be crucial in financing innovation, entrepreneurship, and badly needed infrastructure, which will help spur economic growth and employment.
With interest rates at or near zero, we need every incentive possible to attract the capital necessary to finance our public debt and infrastructure needs.
A weak dollar also undermines American jobs and industry since American companies would have an incentive to borrow in dollars and use the proceeds to invest in overseas plants and equipment. A weakening dollar encourages capital outflows.
Lastly, a weaker dollar is inflationary, since it increases the cost of imports. Just look back to the U.S. economy during the 1970s – ugly stagflation and markets going sideways year after year.
The value of a nation’s currency is a true reflection of the market value of the country in the global marketplace. And maintaining the value of the U.S. dollar is in the national interest, as well as the best interests of American consumers, businesses, and investors.
Here is another link that states 4 reasons why the yuan wont replace the dollar
http://financesonline.com/4-reasons-why-yuan-wont-replace-dollar-as-reserve-currency/
Thank you, librarian-in-chief. 🙂
You are welcome! 😎
Disclosure : I don’t like the Chinese at all. I don’t like their culture. I don’t like Chinese music. I hate Chinese movies. I hate Chinese melodramas. I hate dragons, and kung-fu and feng-shui. I suspect that Chinese food is laced with vetsin (MSG).
I hate Chinese bullying. I hate their dishonest communist gov’t.
In other words, I don’t like China at all.
I’ve been meaning to say this here and Joe could delete this comment if he thinks it’s inappropriate.
Fuck China!
but I like Kung Fu films,Chinese food..in music pinoys are more in to K pop and Korean drama
I’m willing to change my mind on Chinese food kung sigurado na walang Ajinomoto.
https://www.nlm.nih.gov/medlineplus/ency/article/001126.htm
they say it is not because of msg. that is even worse, it is fear of the unknown.
oh that was about chinese restaurant syndrome
What is the fear of the unknown?
Let me guess. Dinurog na buto ng namayapang kaluluwa?
I mean if it is not MSG, what is the reason besides psychosomatic of having allergies and feeling terrible after eating in s Chinese restaurant called Chinese restaurant syndrome?
Seems like honest expression to me. I share the view about the government, but not the Chinese people I’ve known (like my first ex-wife). I like the dim sum and eating slippery peanuts with chopsticks and the vases, and a few other things, but that is quibbling.
” … eating slippery peanuts with chopsticks.” 🙂
Try eating soft tofu with chopsticks.
But hey, it’s fun to eat with chopsticks at an over-crowded round table. Where else can you eat and have your ears picked at the same time.
Tofu is a “piece of cake”, one applies absolutely the gentlest pressure in the middle of the cake and moves slowly but gracefully toward the mouth. One also wears a bib.
I like their dimsum, their mooncakes and tikoy…and their green veggies …bokchoy…my sister’s mother in law is really kind, thoughtful and a good woman, my brother in law is the best, and his brothers and sisters are all wonderful. I enjoyed my two weeks stay in Hongkong because of their hospitality.
My employers are Chinese and they have been generous to me and the rest of their work force. My immediate boss is so kind hearted that he is willing to let an employee who is about to leave the company to avail of a company loan though he is not and will never qualify to do so. The HRD warned him that this particular employee could leave without paying in full, but he says, never mind, he needs the money very badly, the company can afford it, and if it will establish a bad precedent, he will pay any unpaid loan that will still be in the books after the employee leaves. He really pitied the man who was not able to meet the standard set by the company so cannot be made a regular employee.
I think each country has its own share of good and not so good citizens, even a sprinkling of evil ones. I don’t like MRP when he generalizes too much, and I think that should apply to everyone.
Hi Mary, I guess what Micha is referring to is mainland Chinese for example her statement “…their dishonest government…”. Mainland Chinese have different attitude and behaviour compared to the HKG Chinese. Even HKG Chinese would like to be differentiated from their brothers up north and they rather be called Hongkongers than Chinese. There is so much animosity between them particularly with the central government (Beijing) even before the Umbrella revolution. Been to the city near the border only twice but I don’t feel safe there. Even expat friends on official trip said that China is overrated.
I can understand Micha’s view. Central government is not direct and forthright their use of euphuism to drive home a point leaves a lot of gray area for them to twist what they mean. Take their interpretation of the universal suffrage provision in the British- Sino Declaration.
True there are good and bad people everywhere. But had a number of not so good encounters with them even with my travels abroad like queue jumping when you are an inch away from the person in front of you, or allowing children to poo or pee when they cannot find a toilet. When one thinks what they went through before they get to where they are now, you wil understand why they behave the way they do.
Noted with thanks, Waray Waray.
The few Mainland Chinese that I have met here in the office at Global City are well mannered, soft spoken, courteous even. My sister has been telling me of stories of how her husband’s relatives in the Mainland China are her friends and confidantes, they love to swap stories of raising their children (they are wild with her twin boys) and taking care of their old relatives. They love and appreciate her, maybe because she speaks their language well (Mandarin) and she is a bubbly person, easy to get along with.
I see your point, though. My sister has also told stories of how bad mannered are the other people of the mainland who cross Hong Kong to shop or just to tour the place. She avoids the KCR and other trains as they are filled with them as she is uncomfortable with their rude chatters and untidy habits of just throwing their garbage anywhere they like.
Woh there’s a lot of hate in one comment.
There’s a lot of stuff there I don’t like, but I don’t hate.
Karl, for every link that says US debt is not a problem, you can easily link those that say it’s gonna blow.
You can check out historically, all those bubbles that I listed….how many said it won’t happen and how many said it will. Doomsayers were few, because nobody wants to stop a party going on. In fact, Lehman Brothers’ top derivative trader warned his boss of the sub-prime bubble, his boss sacked him
Anyway, your links to yuan and china is hitting the wrong snake. It’s not about yuan and china, it’s about the US debt..
yes I could do ten for each,being the librarian.Maybe I am hitting “the snake in the eagle’s shadow”,starring Jackie Chan.
I have never said the yuan will replace the $. It’s what they are trying to do. I totally agree all those negatives about China and the world cannot rely on yuan. That makes the US debt even more troubling. Because there is no replacement in sight.
MY prediction is that many countries will make bilateral arrangements for S swaps, thus by-passing the $. And also they will continue to buy up gold. Even the US itself has started to hoard gold. Better grab some before other countries grab all.
The underlying issue is demand for $ will drop, there is no running away.
Hahaha…let them hoard gold all they want. I’d be more than happy to keep their dollars if they don’t want it anymore.
As I have said before, the garbage dump,with all its e-waste has miore gold than fort knox and China has been extracting gold from them.
Karl,
From November 2013 through January 2014 Belgium with a GDP of $480 billion purchased $141.2 billion of US Treasury bonds. Somehow Belgium came up with enough money to allocate during a 3-month period 29 percent of its annual GDP to the purchase of US Treasury bonds.
Certainly Belgium did not have a budget surplus of $141.2 billion. Was Belgium running a trade surplus during a 3-month period equal to 29 percent of Belgium GDP?
No, Belgium’s trade and current accounts are in deficit.
Did Belgium’s central bank print $141.2 billion worth of euros in order to make the purchase?
No, Belgium is a member of the euro system, and its central bank cannot increase the money supply.
So where did the $141.2 billion come from?
There is only one source. The money came from the US Federal Reserve, and the purchase was laundered through Belgium in order to hide the fact that actual Federal Reserve bond purchases during November 2013 through January 2014 were $112 billion per month.
In other words, during those 3 months there was a sharp rise in bond purchases by the Fed. The Fed’s actual bond purchases for those three months are $27 billion per month above the original $85 billion monthly purchase and $47 billion above the official $65 billion monthly purchase at that time. (In March 2014, official QE was tapered to $55 billion per month and to $45 billion for May.)
Why did the Federal Reserve have to purchase so many bonds above the announced amounts and why did the Fed have to launder and hide the purchase?
Some country or countries, unknown at this time, for reasons we do not know dumped $104 billion in Treasuries in one week.
Another curious aspect of the sale and purchase laundered through Belgium is that the sale was not executed and cleared via the Fed’s own National Book-Entry System (NBES), which was designed to facilitate the sale and ownership transfer of securities for Fed custodial customers. Instead, The foreign owner(s) of the Treasuries removed them from the Federal Reserve’s custodial holdings and sold them through the Euroclear securities clearing system, which is based in Brussels, Belgium.
We do not know why or who. We know that there was a withdrawal, a sale, a drop in the Federal Reserve’s “Securities held in Custody for Foreign Official and International Accounts,” an inexplicable rise in Belgium’s holdings, and then the bonds reappear in the Federal Reserve’s custodial accounts.
What are the reasons for this deception by the Federal Reserve?
The Fed realized that its policy of Quantitative Easing initiated in order to support the balance sheets of “banks too big to fail” and to lower the Treasury’s borrowing cost was putting pressure on the US dollar’s value. Tapering was a way of reassuring holders of dollars and dollar-denominated financial instruments that the Fed was going to reduce and eventually end the printing of new dollars with which to support financial markets.The image of foreign governments bailing out of Treasuries could unsettle the markets that the Fed was attempting to sooth by tapering.
A hundred billion dollar sale of US Treasuries is a big sale. If the seller was a big holder of Treasuries, the sale could signal the bond market that a big holder might be selling Treasuries in large chunks. The Fed would want to keep the fact and identity of such a seller secret in order to avoid a stampede out of Treasuries. Such a stampede would raise interest rates, collapse US financial markets, and raise the cost of financing the US debt. To avoid the rise in interest rates, the Fed would have to accept the risk to the dollar of purchasing all the bonds. This would be a no-win situation for the Fed, because a large increase in QE would unsettle the market for US dollars.
Washington’s power ultimately rests on the dollar as world reserve currency. This privilege, attained at Bretton Woods following World War 2, allows the US to pay its bills by issuing debt. The world currency role also gives the US the power to cut countries out of the international payments system and to impose sanctions.
As impelled as the Fed is to protect the large banks that sit on the board of directors of the NY Fed, the Fed has to protect the dollar. That the Fed believed that it could not buy the bonds outright but needed to disguise its purchase by laundering it through Belgium suggests that the Fed is concerned that the world is losing confidence in the dollar.
If the world loses confidence in the dollar, the cost of living in the US would rise sharply as the dollar drops in value. Economic hardship and poverty would worsen. Political instability would rise.
If the dollar lost substantial value, the dollar would lose its reserve currency status. Washington would not be able to issue new debt or new dollars in order to pay its bills.
Its wars and hundreds of overseas military bases could not be financed.
The withdrawal from unsustainable empire would begin. The rest of the world would see this as the silver lining in the collapse of the international monetary system brought on by the hubris and arrogance of Washington.
Are you still sure that the USD is still in so a good shape ?
No I am not sure.As I have told Chempo. I can find as many articles that says that the dollar is in bad shape.
here is one
http://www.financialsense.com/contributors/jim-rickards/death-of-money-interview-part-2
Karl, Just try to understand what happened in Belgium.
So, why is the unsustainable being sustained? To keep his grip on the world ?
The coming of the NWO will soon be apparent as the solution to the unsustainable.
I think that green shade refers to Federal Reserve and not Belgium.
Yup. Belgium owned 2.1% of the debt in 2014.
caliphman,
The shade doesn’t matter, Belgium purchased $141.2 billion of US Treasury bonds.
It is quite clear that Belgium itself is not the buyer, you get the picture.
You know things are bad when America has to secretly buy bonds from itself under assumed names to keep the farce going and the money rolling in.
karl,
If China and Russia start dumping more US bonds, what will happen.
If Belgium had to buy them for the Fed means that no other country wanted (or could buy) them.
I would start worrying about US future.
ok This should matter to me because am part Belgian, my great grandfather from my mother side is from Belgium. But lookung at the PH we have 80 billion reserves, does that mean the US owes us as much?
what adds to the confusion is how can we afford to lend when we are a net borrower with 7 trillion PHP debt?
Karl — if Bangko Sentral holds $80b foreign currency reserves, it’s just your assets, and it can go puff. But if Bangko Sentral holds $80b Treasury bonds, then the US owes Philippines that much.
Thanks Chempo,
i sort of have an idea when RHiro asked about it.Albeit hypothetically.
I’m sorry chempo. I’m sure you really meant well in crafting this article but this is much ado about nothing. In essence, the article is, alas and behold, the Rube Goldberg itself.
Did you noticed that in the current American political landscape, obsession with debt and deficits has significantly faded into the background? Choice topics today are actually terrorism, immigration, and Donald Duck.
Of course Republican inflationistas, debt hawks, and bond bandits are still making some noise but Paul Krugman is having a field day ridiculing their dense stubbornness in his NYT articles and blog. And Paul Ryan, the flip-flopping House Speaker is caught between the devil and the deep blue sea on whether to shut down or not to shut down the gov’t again. You are correct, America might just as well be brought down by these Republican crazies.
Assuming of course that super K (Krugman) doesn’t fight back. 🙂
The topic for the last 48 hours was Paris, not the romantic one.
Better the Republicans than the Liberals who have gone too far to the left. Have u read of a popular university where 911 Rememmberance Day will no longer be held cause it’s insensitive to their Muslim students? http://newsfoxes.com/2015/11/islamic-takeover-popular-university-announces-911-remembrance-day-will-now-be-banned-to-appease-certain-students/
I presume you are speaking economically. Socially, the Republicans have gone too far to the right when they want to apply a “Christian” test to refugees from Syria, or not let them in altogether.
It’s all economics here Joe.
An anti Obama article but it supports your blog post.It says obama presidency will end up with 20 trillion national debt.
http://www.washingtontimes.com/news/2015/nov/1/obama-presidency-to-end-with-20-trillion-national-/?page=all
The Washington Times (aka The Moonie Times) is Washington, D.C.’s newspaper which perpetually plays second fiddle to the Washington Post. The Times has lost money ever since its inception in 1982.
Why do they keep publishing? Mainly because it is owned by the Unification Church, which has pumped over $1.7 billion into the paper to keep it afloat. Although much of the early Times staff came from the defunct Washington Star, the paper’s board of directors are all members of the Unification Church and the staff undergoes occasional purges, resignations, and faction fights over the direction of the paper. No less an authority than the Rev. Moon himself has proclaimed the Times a “gift” to America to thank the U.S. for fighting Communism in Korea, or something like that. In 2002 Rev. Moon outdid himself by proclaiming he established the Times “in response to heaven’s direction” and that “The Washington Times will become the instrument in spreading the truth about God to the world.”
The editorial slant of the Washington Times is notably conservative and partisan in favor of the Republican Party. On occasion, they do some bang-up investigative journalism and muckraking, sometimes on other conservative groups which the Moonies are involved in intramural feuds with. Usually though, the Times is a quaint bore, ever pining for a return to the glory days of the 1850s or 1920s, and Ronald Reagan’s befuddled dreams of reactionary radicalism.
The paper promotes all sorts of wingnut idiocies curiosities, including various pseudosciences (creationism, anti-environmentalism, global warming denial, false claims about abortion and abstinence-only sex education) and bigotry (homophobia, transphobia, Islamophobia, anti-secularism).
http://rationalwiki.org/wiki/The_Washington_Times
maybe you don’t have a problem with the wall sreet journal.
below is an article about what the 17 trillion dollar national debt means for the us economy.
http://blogs.wsj.com/economics/2015/02/01/qa-what-the-18-trillion-national-debt-means-for-the-u-s-economy/
The only person who sees the danger in Congress is Ron Paul.
Ron Paul retired from congress in 2013. The son, Rand, is a presidential candidate. Both are libertarian gold bugs predicting dollar collapse since several decades ago that keeps on not happening. Both are inflationistas. Both thinks the Fed needs to be abolished. Both have been frequent targets of Paul Krugman’s ridicule.
https://www.washingtonpost.com/blogs/monkey-cage/wp/2015/09/30/this-explains-whats-wrong-with-paul-krugmans-explanation-for-how-the-fed-sets-policy/
of course there are guys who say that Paul Krugman is wrong.
and those who say that he us absolutely right
http://www.breitbart.com/big-government/2015/08/24/paul-krugman-says-debt-is-good-worldwide-markets-crash/
wow, understanding modern imperialism in one sitting
haha, gone are the conquistadors, the Brits etc. Only 3 left standing.
In boxing matches where Brits are involved, They still sing Hail Britania king of the waves.
I’d welcome someone doing the same thing for the leftist point of view, on how their economy would function. Indeed, I’d pay for it if I had a budget. All I hear is sloganeering.
Could you be more specific? You mean Marx, Lenin, Stalin, Mao, Current Chinese Communists, Scandinavian socialists, German SPD or Christian Democrats, Krugman…? Or only the Philippine blend of dinosaurs, crooks and idealists?
It’s funny to see the SPD and the CDU in this spectrum. The CDU are very much like American Democrats with some Republican touches while the SPD goes from center-left to left (especially in the East where they are in coalition with the PDS = Democratic Socialists, the reformed wing of the former East German Communist party) and then you have the Greens who represent around 10% of the population over here… the Pirate Party which represents Internet direct democracy may yet bounce back and get stronger. The 5% minimum you have to have to get into the federal parliament (3% for state parliaments) prevents nuisance and lunatic fringe parties from becoming strong too quickly. Not voting the President or Chancellor directly may be a good thing here as well.
Nothing like US Republicans here in the mainstream… the “Republikaner” are Tea Party types up to Neo-Nazis, so is the anti-Islamic PEGIDA movement… the Bavarian CSU is the most right-wing of all mainstream parties, but with a strong social touch. Law-and-order politician Beckstein is very Catholic but has a lot of support from Turkish-Bavarian conservative Muslims and speaks to them often – now conservative Catholics and conservative Muslims of the non-radical variety have similar value systems after all…
Inclusive growth, social enterpreneurship and sustainability – these are all things even the Makati business people realize now, but similar ideas coming from Europe and in practice there already are something they would have laughed at or ignored 20 years ago…
Filipinos tend to orient themselves too much towards figures of authority that are all from abroad – be they classic Catholicism (Pope Francis was needed to milden that in the Philippines), American ideas about how to run economies (it took new insights reaching America to milden that) or Islamic ideas (MNLF – Libyan-style Islamic socialism, MILF – Afghanistan and Bosnia veterans played a huge role, Abu Sayyaf – Al-Qaeda influence) or Communist ideas (Hukbahalap – classical Stalinism, NDF/NPA – Maoistic thinking)…
Own thinking is rare in the Philippines… Walden Bello is one of the few thinking leftists, Bam Aquino is a thinking liberal just like Noynoy, Tagle is a thinking Catholic, so there is hope, but most Filipinos are still unthinking copycats… hell where is MRP I need you now!
But I for my part have always been a free thinker, no Pope and no Caliph, no Professor to tell me how I draw my own conclusions. Cogito ergo sum plus Pinoy deskarte to fill the gap.
Rafael Alunan is a thinking Filipino nationalist and rightist… I respect him too while I do not respect Miriam Santiago. Filipino universities will have to leave their dogmatism to churn out true thinkers and not parrots. The only dogmatism I accept is dog love by Heneral Will.
Of course the Society of Honor represents a dangerous breeding ground for free thinking.
Chempo, thanks. Some thoughts on the whole matter, unorganized for further discussion…
1) even precious metals are not a guarantee against inflation. The value of money depends on supply vs. demand – money of any kind versus tradeable goods and services. Silver used to be more valuable than gold, the word “argent” for money and silver in French attests to this. But the Spanish found silver in Potosi, Bolivia, and extracted enormously from this mine to pay for the galleon trade, yes, the one going via Manila. In 1750 China had a huge inflation – too much silver. Already decadent because of the Manchus, China was to further slide back – Opium Wars, occupation by European powers, USA and Japan… and that inflation was a major factor in decline.
2) there have always been regional reserve currencies – the Euro is definitely one. Many non-Euro neighbors have Euro reserves, in Romania prices for big-ticket stuff like cars are in €. The Deutsche Mark was the Euro’s predecessor, more stable in fact than the Euro, M1 and M2 were monitored to tightly regulate money supply. The ECB in Frankfurt uses similar rules to those the Deutsche Bundesbank used, but the Greeks and others gamed the system, causing the present crisis among other things. Bonds are one solution, but it is effectively borrowing money. The Big Mac Index (price of a Big Mac or a Menu, take your choice) shows inflation has gone up.
3) Other countries absorbing excess money do keep inflation down, that is very true. Switzerland absorbed a lot of excess Euros in the past few years, they had an interest in doing so to keep their own products low-priced enough for their neighboring export markets. At some point it was too much and the Swiss let go of the Euro, and inflation has gone up even more since then since they are no longer absorbing excess Euros. But Euros losing value actually means that products from the Eurozone are becoming cheaper – while our salaries over here are effectively less now in terms of what they can buy. Better have more exports than Switzerland which is in a crisis now…
4) People and regions always have made do, found their own mediums of exchange in crisis. Pirates in the Carribean used Mexican silver pesos or pieces of eight – the accuracy of their mintage made them perfect currency, and they could be split into eight parts for easy changing. Bosnia used Deutsche Mark – many worked in Germany and had that currency at home in their drawers – during the civil war, now their currency is the convertible marka, the successor of that…
5) Areas that have a sufficiently large and self-sufficient market can survive a total crash much more easily than those that depend too much on the outside. Europe could survive with some frictions, it can produce nearly everything by itself. Areas like Austria or Bavaria have enough water, crops as well as hydroelectric and nuclear power to survive a total breakdown of order, probably there would be a kind of command economy for a while, focused on mainly survival. Overpopulated areas with insufficient order would be candidates for anarchy, fighting, fleeing…
Aside from regional economic zones like the EU, regional defense alliances like NATO stabilize places, help the USA – which is the only somewhat civilized superpower among three – take the load. An EATO with Japan, Philippines, Vietnam, Indonesia, India, South Korea, Australia, New Zealand, USA, Canada against China is an idea, also to guard the USA against a Donald Trump becoming President and trying to solve internal problems by starting an all-out war with China where the Philippines would be the main victim… contain China like Russia was contained, better.
In the long run, the entire world will have to focus on sustainability and inclusive growth more. Money isn’t real, it is a medium of exchange and finally cannot be eaten. But I do know some people who have Swiss francs in their flower pots as an emergency reserve. The stability of a currency also depends on the stability of the country or area issuing it. American may become unstable – Obama like Noynoy has tried to stabilize it, but a Presidential system is inherently volatile if the consensus within the population is no longer there. Switzerland is a stable direct and parliamentary democracy, and in case of crisis they will close their borders and mobilize their reserves. Swiss banks were trusted for a reason over the centuries. A breakdown of the American empire would be similar to the breakdown of the Roman empire… life would go on, but there would be chaos in many places until things rearrange in new ways. Whatever happens, decline or breakdown or whatever, only countries with astute leaders and antifragile societies will prevail…
http://www.europeaninstitute.org/index.php/193-european-affairs/ea-february-2014/1847-the-euro-at-age-15-is-it-a-reserve-currency-yet
Finally, a reserve currency must be regarded as a “store of value,” usually measured by its purchasing power in terms of the holder’s own currency. If it is not, central banks and other international investors will not hold that currency for a significant time and it will not be a reserve currency. In 1944, the Bretton Woods agreement codified these standards and made the dollar the official reserve currency of the new international monetary system that replaced the gold standard that had failed after WW I.
Despite the Euro-zone crisis, the euro remains the second largest reserve currency, as demonstrated by the 145 central banks reporting to the IMF their official foreign exchange reserves. Each quarter, the IMF estimates the “Currency Composition of Official Foreign Exchange Reserves (COFER)” as shown in the table (Fig. 1) below. [2][3] Of the “allocated reserves” (those whose currency denomination is identified) totaling $6 trillion, the EUR accounted for 24% vs. 61% for the USD.
https://en.wikipedia.org/wiki/International_status_and_usage_of_the_euro – a lot of countries use Euro for foreign trade, and a lot of African currencies are pegged to it, and…
In 2009, Russia’s foreign reserves in euro exceed dollar reserves for the first time; Russia held 47.5% (up from 42% in 2008) in euro and 41.5% (down from 47%) in dollar leading the Central Bank of Russia to announce the euro had become the reserve currency of Russia.[56] The usage of the euro is particularly strong in eastern Europe, not surprisingly in those that have joined the EU, with 54.8% of all loans in Bulgaria, and 85.2% in Latvia before Eurozone accession, being issued in euro rather than the local currencies.
I agree that the most credible challenge to dollar dominance is the euro. It’s doubtful though that the current set up of monetary union absent full political integration could put the euro house in order. Plus, Britain is not on board, deciding to keep its pound sterling instead. It remains to be seen if Germany centered policy will work for the rest in the periphery. Many see it as disguised German imperialism.
The flight to Euro is not a ‘pull’ factor, but rather a ‘push’ from $. As I have tried to show in the article, there is a move towards marginalising the $.
The zones of influence of $ and € show that the world is not centered on one global currency anymore, and that is a good thing in this situation. The Euro is hardly less stable than the $, in fact the GDP of the Euro zone matches that of the United States.
Russia having its foreign currency reserves mainly in Euro points to “petro-Euros” I think, Europe gets a lot of its oil and natural gas from Russia, the cold Emirate.
“A breakdown of the American empire would be similar to the breakdown of the Roman empire… life would go on, but there would be chaos in many places until things rearrange in new ways.”
Exactly, man. We’ll basically just turn into Canada, I like Canada.
🙂
Ireneo — as usual, good to see your historical and geographical perspectives
(1) Orignal money in its precious metal form has intrinsic value. Thus of course it is subject to supply and demand. Inflation has always been the root cause for an empire’s decline since Athens which was the first to use coinage back in 680BC. Inflation has been the curse of mankind for 2,000 years. It’s the same beast tasked to central bankers to control in the modern world.
(2) Euros — it’s increasing being used for international settlement. I don’t think it’s a matter of choice. There is’nt much other currency that you can use. Euro has’nt demonstrated the stability and strength that the $ had in past decades. Going forward, it’s difficult to see Euro supplanting the $’s role.
(3) Any country using their foreign reserves to protect the value of their currency can only do so much. George Sorros had demonstrated this clearly — nobody is big enough to go against the open market.
(5) Agreed your observation. Big is good in this case. “Overpopulated areas with insufficient order would be candidates for anarchy, fighting, fleeing…” — spells peril for Philippines in that situation?
chempo,
Unlike Micha I’m not as offended of this Doomsday scenario— I’ve always preferred worst case scenario, or use of the 10th man doctrine, when discussing problems. Doomsday scenarios from a cultural perspective, I think I can wrap my mind around. But Doomsday scenarios coupled with economics or theoretical physics stuff (like when they collided particles at CERN), that just blows my mind.
So your article—I know it’s more complicated, and you’ve simplified just enough for us—blows my mind. The whole time I was reading it last night, in between posting pictures in Joe’s Tale of Two Photos, I was sweating bullets. Then I read this, “Those with no wealth need not fear”—- so I was like, chemp, you should’ve led with that, save me all that worrying (I’m the austerity guy, remember).
I think when speaking of this impending American decline (whether or not it’ll happen who knows), there’s an assumption by those in the 3rd world that Americans will just crumble, because we’re so used to luxury and consumerism as our purpose in life. Though I think this is the majority of Americans now,
the underlying culture that brought about American greatness— one embodied by the likes of Pres. Teddy Roosevelt (loud) and John Muir (quiet)— has always been the embrace of hardship. So economic collapse or not, America will always bounce right back. So positivistic spin here, based on personal experience.
My issue, and I know you’re writing from a Singaporean perspective here, is when this economic Doomsday is politicized, ie. by FOX News (fear) and the State of Utah (politics)— it’s fear politics. Which brings us back to when Gen. Smedley Butler disclosed a coup attempt against FDR in the 30s. Those capitalist forces might have lost in the 30s, but after WWII, they became the military-industrial complex. The same guys driving fear politics here now.
And from the looks of it in your article, the same guys responsible for “the great deception”. Ever since NAFTA and what we thought were “American” companies abandoned us, more Americans have caught on to their game, have either opted out completely or forming democratic companies and doing away with board or directors. Which brings us back to INCLUSIVITY vs. EXCLUSIVITY.
Every war or conflict I’ve studied (there’s still much to learn) I’ve always compared it to the Pelopennesian Wars, Spartans (exclusivity) vs. Athenians (inclusivity). Sadly, through out American history, we’ve been more like Sparta than Athens, though our heart & minds are Athenian. So the forces of exclusivity represented by multi-national corporations and big moneyed individuals or families have coopted the American system,
though they’ve made a show of puppetry in American politics, the regular Joe can see their scheming in conservative media like FOX News, FOX Business, and now thanks to Donald Trump, through his campaign (also Bernie Sanders’, but Trump’s carry more weight because it’s expressed from the inside of this game).
Which brings us back to this, “Those with no wealth need not fear”, if the wealthy are the ones that’ll be most affected by all this, Why are they the most engaged in this Doomsday economic collapse scenario? Like I said, in Joe’s a Tale of Two Photos, every other commercial on FOX is for Gold.
That’s my question.
p.s.—- I don’t share Micha‘s hatred for the Chinese, I’m more of a Kissinger when it comes to the Chinese.
I love Chinese food, culture, history, women (especially the ones towards Mongolia & Khazakstan), and since visiting the Philippines, MSG.
When you get drunk in the Philippines you usually end a drunken night over soup in some street stall who’s open specifically for this purpose— to provide hot soup to drunken, late-night, early-morning, revelers. While sipping my soup (somewhat still drunk), I craved for an omelette (raw eggs was used in the soup). So requested an omelette, the cook made it as ordered, I saw him make it—nothing amazing, just a regular omelette. Here you go, sir. Took one bite, and I was like, HOLY CRAP, that’s the BEST omelette I ever tasted!!!!! So I asked What’s your secret? He showed what looked like a salt shaker, and I was like, yeah Salt— but that doesn’t explain it. And my buddy, finally explained, that’s not salt dumbass that’s MSG. Growing up in California, you see NO MSG signs everywhere (especially Asian restaurants), I never really knew what it was, I was just glad they were conscientious enough to inform us, they didn’t use it.
I have no idea why it was banned in the first place, but MSG is goooooooooooooooooooood— addicting almost. So the Chinese are OK, in my book, chempo. Though I know that they like to use lead in their products, so I don’t buy Made in China stuff, but my personal worry of them stops there. In geo-politics, we just need them to see reason, and not fulfill Luttwak’s reading of them, that’s why I tend to sound pro-Chinese.
*******
1. Economics?
2. Sorry, I have to laugh.
3. Everyone is pontificating, so certain they have got it right.
4. And, yes, when I read one side, I am convinced. And then when I read the other side, I am equally persuaded.
5. Clearly, economics is not a science. I do not think we should be using the term “law.” We should instead use “theorem?”
6. Clearly also, money is a fascinating subject. It attains the intricacy and complexity of objects and forces in quantum physics.
6.1. Objects and forces. This is appropriate because it seems that money is both matter and energy. One can see it, hold it, store it, and one can see what it produces. And it can produce things — like cars and houses — but also emotions — like envy and love.
6.2. But money seems to be more than matter and energy. Einstein proved that matter and energy are equivalent. And the law of conservation of energy states that “energy can neither be created nor destroyed, but can change from one form to another.”
6.3. But from the discussions, we can see that money can be created and can be destroyed. As to creation, it can be created ex nihilo (from nothing) and ex materia (from something). As to destruction, it can be ad nihilo (to nothing). Like when billions are wiped out from the stock market.
6.4. Speaking of which, economics can never be a science because it is subject to irrationality. Take confidence for example which is having faith. Having confidence results in a bull market whereas the loss of confidence results in a bear market. There can be security and panic in the market.
7. As for me, I have a feeling of security when I have some money in my pocket, where it physically exists as “tokens”, and in my bank account where it virtually exists as binary electrons. There is a certain comfort in not having to worry too much about subsistence. Then one has the luxury of being concerned about existence, how to live life rather than how to support it. Yes, money can improve the quality of my life materially but it cannot improve it spiritually. (If you can say that it can improve it spiritually by allowing me to contribute to charity then that’s wrong. For me that would be spiritual materialism.)
8. Just remember money can be a force for good or a force for evil. Money, unlike contraception, can be corruption.
*****
You speak beautiful, kemo sabe ☺
You speak beautiful, kemo sabe ☺ Musn’t forget to say gidday, mate ☺
*******
Ah, g’day, milady. I envy you your weather there — 17 degrees compared to 27 degrees here. I feel like a cat on a hot tin roof.
*****
27 degrees is tolerable, sir edgar…last summer, it was 33 degrees with heat index of 40 degrees here. I pity the construction workers with only their eyes visible (for protection) and those doing messengerial jobs, in and out of airconditioned premises and scorching sun respectively in the course of their jobs.
Edgar espousing his brand of philosophical economics when I hardly understand basic economics in the first place.
4. That’s the yin and yang of things. If you stand in the middle and let the white and black dots spin around you, you can’t see anything.
5. LAW: a statement of fact, deduced from observation, to the effect that a particular natural or scientific phenomenon always occurs if certain conditions are present.
THEOREM : a general proposition not self-evident but proved by a chain of reasoning; a truth established by means of accepted truths.
Chempo’s Law #1 and #2 — I’ll still go for law. Can’t be theorem — Micha’s does not accept the truth.
6.3 The physical notes and coins can be destroyed. The electrons can’t. When stock market is wiped out, wealth is wiped out, the electrons remain, but in different hands.
6-8. Always appreciate your philosophical view of things.
*******
Sorry to detract from the important goings-on with my “philosophical” view.
5. “LAW: a statement of fact, deduced from observation, to the effect that a particular natural or scientific phenomenon always occurs if certain conditions are present.
5.1. Chempo’s laws are about currency. Is currency a natural or scientific phenomenon? I have heard that money grows on trees but I have yet to see a money tree.
5.2. Both laws pertain to electronics. What happened before monetary transactions were recorded and manipulated “electronically?”
5.3. The fact that Micha does not accept the laws means that theorem is the more appropriate term. The laws, as used above, are part of a general theory about currency. A theory is “a supposition or a system of ideas intended to explain something”.
6.3. Edgar: “As to destruction, it can be ad nihilo (to nothing). Like when billions are wiped out from the stock market.”
Chempo: “When stock market is wiped out, wealth is wiped out, the electrons remain, but in different hands.”
6.3.1. That the wealth is wiped out is precisely my point. The wealth is not transferred to different hands. It disappears. Poof.
6.3.2. Virtually, the wealth has disappeared as well. Physically, it is true that the electrons in the computer medium on which the data was stored remain. But in updating the data, the new data would have been stored in another location on the computer medium. Computer updates do not occur “in place.” So the new data would have been recorded in an unused area of the computer medium, in other sector(s) of the source unit or in other sector(s) of another unit. The original location of the data may still contain the original data but would be eventually overwritten by new data. Therefore, the original electrons will assume a different configuration of 1’s and 0’s… and will no longer represent the original wealth.
Pedantic? Yes, perhaps absurdly so… and trivial.
*****
(5) Chempo’s Law #1&2 are still laws unless the SC rules otherwise. Because they are not based on suppositions but mathemathical truths. They are no theorems because theorems are based on accepted truths, which Micha does not accept.
(6) Wealth is different from money supply the electronic balances in banking a/cs. Equitiy values get wiped out,yes, but has nothing to do with banking deposits.
*******
5. I am using your definition of the term “law”, and your use of the term does not fit your definition. I was proposing “theorem” as an alternative… but if it does not fit, then another term should be used. I dont know — principle?
6. My point was that wealth gets wiped out. I was talking about money as wealth. You shifted to electrons and now to money supply.
6.1. But even so… does not the aggregate in money supply as recorded in bank accounts ever diminish? I can understand that a subtraction from one account gets recorded as an addition into another account. But does the overall aggregate move only in an upward direction?
What is the impact of inflation on bank deposits? I can understand that the “equity” value would diminish and even be wiped out in such a case. Would not the money supply bubble burst at a future time in the case of hyperinflation? If there is a switch to another currency, then would not the original money supply been destroyed — physically and virtually?
One might say that switching the currency is conversion. Still in the conversion, the numerical value of the aggregate would have been diminished. And the new currency would have a new name and really not be the same as the old currency.
It is said that computers could not faithfully handle hyperinflation due to the “overflow” problem. I will understand that hyperinflation is an exceptional case to your laws.
*****
@ Edgar
5. Law, Theorem, Principle, my Word? — who cares, as long as you get the idea, I’ve communicated haha.
6. Electrons as to electronic money as to bank deposits as to money supply. A guy got his equity investments wiped out has nothing to do with bank deposits – thus no impact on money supply.
6.1 Notes and coins do get destroyed or lost never to be found. Electronic currency always remains, and like you say can be increased through fractional banking. The central bank can suck the money out of circulation by selling treasury bonds. The buying and selling of treasury bonds in the securities market is known as open market operation. Selling bonds sucks money into the central bank, buying pushes money out into the economy. Open Market Operation allows the central bank to manage money supply. When they sell bonds, money is taken out of the economy — aggregate deposits go down thus money supply go down. But the money does not dis-appear, as Micha would have you believe, it’s still in the system. Come maturity, the Treasury has to pay the central bank.
Take another real example. Bangko Sentral used the Special Deposit A/c (instead of bonds) to get trust funds to deposit money directly with BS thus sucking a lot of pesos out of the money supply. (Same effect as selling bonds). That was in ’90s because there was too much liquidity in the market. So money supply went down, but the money never went away, it’s in BS system, not in the market. Then 2013 BS decided it was time to stop the SDA facility, so Trust Funds withdrew their money and deposited with commercial banks.Thus money supply increased again.
If money go the way of banana republic, normally the denominations get bigger and bigger till ridiculous levels — the Weimar Republic printed denominations in billions. Juana mentioned the Marcos’ suitcases at Honolulo — they found newly printed peso notes with extremely big denominations, some with similar serial numbers — give you a hint what Marcos was planning for a bankrupt Philippines 1986. Next the country will see underground economy using possibly US$. Then new currencies. How they convert, I have no idea.
Overflow haha… never heard of this for a long time. But with today’s storage space I don’t think it’s a problem. I think numerical data fields can still accommodate billions/trillions/zillions? Have to ask Irineo.
******
Thanks.
5. Precision? Otherwise make use of the Humpty Dumpty dictionary.
6. Got the first part — somewhat. You are saying the money supply may contract but the money is “parked” somewhere.
6.1. I believe hyperinflation conversion is an exception to your “law.” However, if exceptions are recognized beforehand, they do not invalidate the general law.
6.2. Overflow does not depend on the availability of storage. It depends on how large the currency fields — the number of bytes allocated — are defined. I am sure they make allowances nowadays for the larger computers. Not sure about ATMs and EFTPOS devices.
6.2.1. “The number 9,223,372,036,854,775,807, equivalent to the hexadecimal value 7FFF,FFFF,FFFF,FFFF16, is the maximum value for a 64-bit signed integer in computing.” Allowing for two decimal points — 92,233,720,368,547,758.07 — this would be in the order of quadrillions.
*****
5. We are at peace.
6. Yes, in a manner of speaking.
6.1 Ok I grant u that.
6.2 I see your point on ATM etc. I can imagine the Qs at ATMS. Imagine Amount required and you go click click click 10 times, and then oh shit, what was the amount again?
6.2.1 I have headache just looking at your numbers. Overflowed my brain.
@Edgar, Kolega, we must explain things to laymen in simple, pictorial terms:
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Irineo, I’ve seen this before. Thanks for the memories! On second thought, maybe not this memory.
*****
“1. Economics?
2. Sorry, I have to laugh.
3. Everyone is pontificating, so certain they have got it right.
4. And, yes, when I read one side, I am convinced. And then when I read the other side, I am equally persuaded.
5. Clearly, economics is not a science.”
edgar
https://en.wikipedia.org/wiki/Social_science#Economics
No, I don’t think Economics is a Science (ala Physics, Biology, etc.), that’s why it’s a Social Science—- though I liken it more to Religious Studies and religion itself, than say Psychology or Anthropology.
I don’t laugh as much when reading or listening about Economics & Finance, as I do when in discussion about Religion or other superstitions, only because Religion can’t bite me in the behind, but this subject can—- though I doubt my interest will be piqued to the point of “You are wrong and I am right!!!!” certainties, as evidenced by caliphman (chempo) and Micha’ s exchange in 3 threads now.
Though I can play the part of certainty in religious or cultural comparisons. But even when I play this game I know I can be on the wrong side.
The business of Economics and the subset of that, Finance, is clearly not a science— more like art, because the concept of creation and creativity plays a bigger role than in the social or hard sciences.
You are right, IRRATIONALITY, plays a big role. The science aspect in this lies in the predictability of people. Hence the word MANIPULATION is constantly present in the subject, and that’s at every level. This is the reason con-artists get to do what they do, I’m talking about street cons as well as those in the commanding heights— hence my question to chempo.
And that’s the answer NO ONE KNOWS. All certainties go out the window.
Make no mistake, man, this subject is religion to me— but me becoming a victim of a Paris-style attack, is less likely than me getting run over by some guy who got fired turned to the bottle because his company went under because of creative destruction happening in that particular industry because higher up the food chain another set of board of directors decided they should move to one mode of something and not the other— IRRATIONALITY, MANIPULATION & NO ONE KNOWS converge to one drunk driver (doesn’t even have to be drunk, can be distracted) hitting me—- and I’m not even covering the car industry in this little illustration.
Paris-style attacks are easier to understand, hence get more air time— A—->B. The scheming in the latter example is A—->3—–>D—–>2—–>B . At least I can point to the verse in the Qur’an where their action is justified, I can only sue the guy that hit me, factors 3, D & 2 get a pass.
Before it was religion that provided the IRRATIONALITY, MANIPULATION & NO ONE KNOWS. At least, when religion was involved there were clear sense of morality (though some not so moral)— ie. the slave trade in the Indian Ocean, and eventually the slave trade in the Atlantic were stopped because of Protestants.
We go back to moral, immoral vs. amoral.
So my question to you, edgar, if you have to choose between Economics (“market forces”) and Religion (“divine mandates”) to dictate people’s choices, which is better? Which is the lesser of two evils? And is it possible to tame religion enough, where it can actually serve a public good (instead of harm), in bringing goods & services to people?
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”…If you have to choose between Economics (“market forces”) and Religion (“divine mandates”) to dictate people’s choices, which is better? Which is the lesser of two evils? And is it possible to tame religion enough, where it can actually serve a public good (instead of harm), in bringing goods & services to people?
1. My initial choice was Economics. But first let me examine the questions.
1.1. First, I object to the term “dictate” in the first question. True, there is an element of duress in both areas, in obtaining physical security (subsistence) for Economics and psychological security for Religion. But man is a free agent. He can choose how to subsist and in what to believe.
1.2. Second, I reject the notion in the second question that this is a choice of the lesser of two evils. Both areas are natural features of the human milieu, and neither is inherently evil.
1.3. And third, I will bypass the third and last question as it is too complicated.
2. The first question can be answered at two levels – the individual and collective.
2.1. At the individual level, a man can exist without Religion. In our societies, a man cannot exist without Economic participation. Even begging is an economic activity. However in some Eastern societies, Buddhist monks can devote themselves to Religion and survive with their begging bowls.
2.2. At the collective level, men can also exist without Religion. But they cannot exist without Economic participation. Both of these statements have been proved by the Communist experiments in the USSR and in China.
3. Let me note the similarity between the high priests of Economics and Religion. Both demonstrate an excess of arrogance.
3.1. The commonality springs from two factors:
3.1.1. The perception that they alone possess an understanding of the intermeshing of the cogs in the machine, of the inner workings of the universe.
3.1.2. The belief that they are the mediators of Life (or Wealth) and Death (or Poverty).
3.2. The high priests of Religion merely refer to themselves as the Messengers of God. But the high priests of Economics refer to themselves as Masters of the Universe, no doubt a higher designation.
4. Digression: As a comparison:
4.1. Marines do not mediate between Life and Death, but their duty may involve the infliction of Death to protect Life. They are aware of, if not intimately familiar with, the fleetingness of life. As a result they live in the moment. Which is why perhaps marines are inordinately horny.
4.2. Computer people also do not mediate between Life and Death. Their pride — not arrogance, mind you — stems from their realization of native intelligence. But their pride is constantly humbled by their experiences of bugs in their code, of the ghost in the machine, of systems failures and of Murphy’s Law. By the way, some computer people are also horny because of their love for binaries.
5. Where was I? Oh, yes, the third question which I intended not to answer.
5.1. All I can say is that men, in the pursuit of physical and psychological security, should observe and practice a code of secular morality. As to Economics, the code should mainly consist in men NOT taking undue advantage of their fellowmen in their economic dealings. As to Religion, the code should mainly consist in men NOT imposing their religious beliefs on others. The “taming of religion” lies in the simple realization and acknowledgement of the truth of pluralism.
6. Lastly, I will note that as organized religion withers and as individual consciousness grows, the questions relating to the primary aspects of life – birth, gender, marriage, divorce, and death – are increasingly moving into, and being settled within, the domain of individual volition. More and more people are becoming pro-choice, pro-divorce, pro-same sex marriage, and pro-euthanasia. True, the movements ebb and flow, but the waves of enlightenment continue to swell and pound against the seawall of religious prejudice.
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A lot of this money stuff is similar to gambling (stocks) and Ponzi schemes (derivatives).
And Wall Street can be very much like a casino, a place for the pros and big sharks…
@ Lcpl
“…the point of “You are wrong and I am right!!!!” certainties, as evidenced by caliphman (chempo) and Micha’ s exchange…”
Where it comes to pure economics, I’m a layman. I have basic ideas, but I’m open. I read and listen but rationalise based on common sense. But when it comes to debits and credits (a lot of my exchanges with Micha)….I’m pretty sure I know what it’s all about. It’s not science, it’s not social….it’s man made actions, it’s certainties.
“… if you have to choose between Economics (“market forces”) and Religion (“divine mandates”) to dictate people’s choices, which is better? Which is the lesser of two evils?”
Lance my problem with ‘divine mandate’ is that we only get fiats from an exchange mechanism like Abu Bakr al-Baghdadi or a guru. I rather find my own way in the markets.
“But when it comes to debits and credits (a lot of my exchanges with Micha)….I’m pretty sure I know what it’s all about. It’s not science, it’s not social….it’s man made actions, it’s certainties.”
That part I agree with you, chempo.
Every car I’ve bought I bought 2nd/3rd hand, in cash. If I live in the city, I make sure I take public transport— this is my preferred mode of transport. I don’t own a credit card, though my debit card I can use as credit, which I sometimes do, then pay it off right away.
I’ve never been in a high enough position to assume the role of budgeting, but if I were placed in such a role, that same values that I have of paying in cash or paying credit right away, I’ll apply. So when people talk about debt, deficit, about borrowing money and not paying, etc. it doesn’t jive with how I understand money & values.
And I agree with you, man, that’s not science—- don’t buy something you can’t pay for, and always pay what you owe, it’s common sense. Whether it’s here and now, or 500 years ago, I’d still apply these same principles in my dealings with others.
“Lance my problem with ‘divine mandate’ is that we only get fiats from an exchange mechanism like Abu Bakr al-Baghdadi or a guru. I rather find my own way in the markets.”
chempo,
This one, I was hoping you could connect to the question I asked of you, right below re better system. I think we’re both non-religious folk, by divine mandate i’m looking for a more moral way of conducting business— since most people equate morality with the divine, I just figured this is the only way. But if you have a better system that answers or provides solution to this moral quandary in economics, I’d love to hear it.
“Which is why perhaps marines are inordinately horny.” Not just Marines… but your insight is very correct. I know a former French foreign legionary who is always after chicks…
But it is documented that civilians in war zones can be very horny as well. Fleeting life…
People from war zones can also be pretty crazy… experience with refugees bears it out.
Duterte, a product of a war zone, seems to be losing control every day one looks…
“some computer people are also horny because of their love for binaries” not really.
Dealing with machines so often makes one value the flesh even more.
OK some geeks just eat a lot to savor Epicurean delights.
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Ahaha! In part, I was referring to the binaries of man and woman, linggam and yoni, ying and yang, and buttocks and boobs!
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Excellent answers, edgar, as always! Marine=horny, “the fleetingness of life”, makes a lot of sense, but mainly I do it here to titillate karl (tangentially, to get a rise out of JP and mercedes).
I agree w/ you on war zone screwing-around, Ireneo, many a divorce in the military come from war-zone hooking-up—not just military but civilians out there.
I talked to a Mango plantation care-taker once who was setting controlled fires here and there across his field, and I figure it was insect repellant…. nope, turns out if you smoke Mango trees, the trees think they are being set ablaze, so produce more flowers a couple weeks later— they do this as defense mechanism. More flowers=more Mangoes.
Are you guys familiar with this?
Hi Lance,
“Americans will just crumble, because we’re so used to luxury and consumerism…” I don’t think US will crumble. It will suffer some pain and get over it. Americans have this resilience and creativity. But I guess there will be some changes to the way you guys do things. If I’m not mistaken, either in the constitution, or a written memo by one of the earlier great presidents — there was mentioned that ‘no administration will spend beyond it’s generation’ Whoever said that had foreseen this US debt problem. As you have studied history, I’m sure you are aware a major cause in the fall of an empire is ‘used to luxury and consumerism’ which inevitably bring about inflation leading to the fall. The first civilisation that used coinage money, Athens, succumbed due to same ‘consumerism’ which together with the Pelopennesian Wars created hyperinflation.
“…if the wealthy are the ones that’ll be most affected by all this, Why are they the most engaged in this Doomsday economic collapse scenario?…”
What an excellent question. I dunno. Perhaps their game was play along, then hedge yourself, then let it fall. These are mighty personalities with mighty resources who are often the guys behind the scenes orchestrating all those world events with ulterior motives and we minions reading from the media can’t connect the dots. Think skull and bones, illuminati, freemasons….haha
Msg is more Japanese. Chinese use that too but not crazy like Japanese. I have always avoided Made in China products too. Lead is one reason, but generally you can’t trust them in the foodstuff. Chinese medicine is fine so long as it’s not manufactured ones. The one and only Chinese manufactured medicinal product that I take is something called ‘po chai pills’ — never leave home without it (for gastro-intestinal problems, it’s super relief when you eat something real bad). But Chinese herbal products I never discount them. I have seen lives saved by these, including cancer patients.
Lance, always appreciated your unique view of things. Your exclusivity/inclusivity is a great lesson.
“Lance, always appreciated your unique view of things. Your exclusivity/inclusivity is a great lesson.”
This article, coupled with Joe’s series-to-be on banking and Micha’s, plus you guys’ interaction in the comment threads have helped me with a better understanding of all this, chempo.
“I dunno. Perhaps their game was play along, then hedge yourself, then let it fall.”
But that worries me a lot, man, especially since you have been in this field for awhile now. My question is,
Is there a better system, ie. take away the board of director concept, more tangible/less intangibles, etc. that we can institute that will mitigate this “I dunno”? Can there be a “Third Way”, and what would that way look like, if we had to build it from scratch? You as a banker, knowing how the system works, what would you do to re-create a stronger, more fair, system?
https://joeam.com/2015/11/19/demystifying-the-american-us18-trillion-debt/#comment-148312 – my suggestion is something like this…
Finally the great limiting factor for all economic progress is the environment. Possibly the currency of the future should be issued by a Jedi-type priesthood that monitors the limits of the global environment, and lives on Easter Island, the prime example of how conflict and plunder of natural resources destroyed a great culture. We cannot go back to living naturally, but we should try to stop acting as if we were gods, and find back to respect for our planet before it is too late.
“Possibly the currency of the future should be issued by a Jedi-type priesthood that monitors the limits of the global environment”
I like this idea, man. Before there was the Untouchables and Eliot Ness, before LAPD’s Gangster Squad, there was Gen. Smedley Butler and his crew (taking leave from the Marines) to fix Philadelphia. High ranking Marines took leave in the 30s to clean up local police departments. I think it’s feasible, though this sentiment comes to mind,
“We cannot go back to living naturally, but we should try to stop acting as if we were gods, and find back to respect for our planet before it is too late.”
Ireneo,
When I saw “Interstellar”, I’ve always believed that science was gonna save us—finding out about the unknowns type thinking– I left that movie saddened that instead of living naturally, we’ve continued to act like gods, and instead of back to respect for our planet, we’re now willing to completely abandon it. Like Economics, there’s Scientism, and can also be coopted by amoral forces– pretending they’re not anchored to anything.
For the Philippines, I say everyone move in with Aeta families or Badjao families in their elements and learn a thing or two about balance/connection with nature. The rebuild from the ground up, mind you those peoples are fast disappearing so some sort of national effort needs to be undertaken to save all the different ways to use bamboo, to hunt, trap, track; all the different ways to do that underwater– all that knowledge needs to be saved.
http://www.riversnetwork.org/rbo/index.php/component/k2/item/3418-a-success-story-of-river-restoration-the-isar-plan-project-in-munich – this is my favorite river, the Isar near Munich, now “renaturized” in its flow… one of the greatest and most grounding experiences I ever had was boating down this river whose name means “the torrential one” in old Celtic… with a mountain ranger reserve officer who served in Afghanistan and called the river “his creek”… a “River Runs Through It” kind of experience, being in the real world again… at the end of the day I was tired, but it helped bring me back to my true center…
I admire the way people over here, in Alpine regions of Europe, balance using technology where it is useful and living traditionally… the Swiss are even more masters of that than the Bavarians or Austrians. But it is a Germanic thing to be careful about too much progress, the Amish are a living example – some allow cars, some don’t depending on their ministers. In Lord of the Rings Mordor is the industrial place, the Shire is quaint and old-fashioned…
The Swiss base their concept of national defense on the original meaning of the Second Amendment – every grown man who has done military service has a rifle at home and knows where to go in case certain code words come in the radio or on TV… and they have protected their own agricultural production to such an extent that they would still be able to feed themselves in the worst case. And they preserve their various dialects and languages, in every canton, with the national languages plus English for interoperability. Smart folks.
Exactly, man. In the Philippines river systems and sewage are synonymous. I like this picture, is this the norm now over there, or was this Photoshopped?
Don’t know about that, there are some river cleaning projects in the Philippines though…
One of the most successful cleaning project worldwide was this one… http://www.konstanz-magazin.de/Englisch/lakeconstance.php
About 4 million persons get their drinking-water from Lake Constance. And today the quality of the water is good. But it wasn’t always so. In the 1970s there were problems with to many algae. Fertilization in agriculture and a lack of water purification plants were the reasons for the polluted water. 1972 the federal German government classified Lake Constance as “strongly polluted”. Then, in the 1970s purification plants were built. 1981 the German parliament introduced limits on phosphate in detergents. Since the 1980s the quality of Lake Constance’s water steadily improved and is quite good today.
I also drink water directly from the tap here in Munich, which has successfully resisted privatization of water supply, getting its water straight from the Mangfall river valley.
Berlin has privatized water supply and the water is bad – strange that the biggest players both in bottled water and privatized water supply are French, makes me think conspiracy… if the water from the tap is not that good, you need to buy bottled water, and I don’t… 🙂
“makes me think conspiracy… if the water from the tap is not that good, you need to buy bottled water, and I don’t…”
Sort of like how street kids collect empty plastic bottles in the 3rd world, then fill ’em up with tap water, then “re-seal” bottle-cap with Crazy Glue-type glue for that fake snap. Irony and/or genius, all because of that like snap when opening the bottle, the water tastes extra good and extra safe. MANIPULATION, IRRATIONALITY & IGNORANCE being bliss.
They sell “Acqua Monaco” to hipsters that are slowly gentrifying the slaughterhouse district of Munich (Monaco di Baviera in Italian)… natural mineral water from the Munich gravel plains is on the label.. but what I suspect is that it’s just tap water and they aren’t even lying.
Just like an old pimp’s pub which used to be feared just 10-15 years ago is now a hipster place… the baseball bat which used to be “the law” in that pub still lies there, but with a baseball glove and a baseball so as to conform to recent laws forbidding it as a weapon and making it pass as sports equipment… or the former strip club where truckers dealing in contraband went to get some, now hipsters get free drinks if one of the strips at the pole…
That’s some weird marketing right there, man. The first that comes to mind is that sexy bikini bottom, then a highway, then a dog, then clouds, and what looks like just random bubbles. Over here, bottled water always somehow get connected to nature, though it all comes from tap,
We cleaned up the Singapore River back in 2004. It was quite a mess, now we have the river is alive with fishes. Picture shows Alkaff bridge across the river. The bridge was specially painted by Filipino artist Pacita Abad when she was in late stage cancer. She passed away shortly.
….
This YouTube video is 30 minutes long but it is very educational. It is the economic history of the US from its inception to the recent recession in 2008:
Another animated video. This time a short one, explaining US deficit and debt:
P.S. >>> RE: The Kennedy assassination theory mentioned in the first video. The link below debunked the conspiracy theory:
http://www.publiceye.org/conspire/flaherty/flaherty9.html
The Kennedy assasination conspiracy theory is like the electronic currency, it never goes away. It’s one of my fascinations.
This particular link debunks on the Executive Order 11,110 theory. Many others still out there.
Even cartoons say bottom line is, the debts are a problem. A lot of humans still in denial mood.
The US debt is now 110% of GDP.
Retirement pension funds, social securities — they all have savings. Where do they save? US treasury bonds. The Treasury owes about $3 trillion to these funds. The question is how is the govt going to repay these debts to these funds. When they talk of deficit spending for retirement and social aids, they imply that the govt is coming out of their defcicit budget to cover these expenses. But in reality, these funds already got their savings which the govt has used up. See the double talk there? The deception.
As I have mentioned previously, I do not put any stock on any view forecasting the demise of the US dollar’s unique and principal role as the standard transaction and preferred reserve currency of choice. The two main factors purportedly responsible for this demise is the growing size of the US government’s public debt and the increasing talk and the threat of China, Russia and a few other countries with large foreign currency reserves invested primariy in dollars, most in US government bonds financing Obama’s annual multi-trillion dollar deficits.
Most of these doomsayers should be taking a look at comparable public debt levels in developed economies as a per cent of GDP. Most developed countries range from as low as 40% to as much as a high of 240% in Japan. The US is around 110% which is moderate whereas Grece, Spain, Portugal and other economies are at crisis or near crisis start around 130% and higher. That its debt is relatively moderate is even more true because of the dollar’s role as principal transaction and reserve currency. Another key recent development reducing the risk of a dollar demise is that China and Russia have already shifted significant currency reserves out of dollars and US government bonds. In fact the largest foreign holder now is Japan, a geopolitical ally, and private US public bond purchasers have increased their purchases and have more than compensated from China and Russia staying away from the bond auctions. Finally, there is a turning point in the long standing Fed QE and low interest rate policy as a result of resurgent economic growth and employment recovery which should exert long term upward influences on the US dollar.
These observations present the case for a strong dollar ,which while it is good news, have no significant relevance to the Philippines, whose peso is much unlike the dollar. Even if the prognosis was for the demise and devaluation of the dollar, the lack of hedging mechanisms to short the dollar or the lack of acceptance of the peso or securities denominated in it make such speculations not actionable and ultimately inutile.
Caliphman — you’re the man.
A very learned (see this is the first time I use learned in English — past tense of learn is learnt, not learned. My ‘learned’ here means scholastic, intelligent) response to the crux of the article. From your various comments elsewhere, it is pretty obvious you’re the Jedi here as far as economics is concerned
In banking reviews of country risks debt-to-GDP level threshold is mostly 70%. Japan is a unique situation of 240% and still surviving. (I really like to dig into this and understand why). US is 110% and still managing. That is precisely the point. $6 trillion of the debts are financed by foreigners. At the moment it is apparent there is sufficient private capital within US to absorb foreign dumping of the T bonds. It is left to be seen how far this domestic support can go, especially when the Fed stops quantitative easing and start raising interest rates. When interest rate rises, bond prices go down.
Thanks for last para. Noted. I have no idea of the peso environment.
Almost $3 trillion of the debts are from US social securities and retirement funds. US demographics in 2014 show 27.1% over the age of 55. I like to hear your take on how serious the situation is. Do you think they need further debt to cover this debt?
Chempo, they have extended the solvency of these prorams by delaying retirement age from 60 to 62 to 65 and optionally 67. Delays to 70 and 72 is probably in the cards.
By the way, according to Turner Adair in the blog video link Micha posted in a previous blog, the MMT proposal he espouses is for the government to issue to the central bank non-redeemable non-interest bearing with no maturity of course. That would solve the problem of repayment and any interest carry burden. But then again, one asks, in what sense can it still be considered debt? But then that is the MMT point, its a costless alternative to classic debt-financed deficit spending.
Thanks Calipman.
So they are like Spore govt — always shifting the goal post of the retirement age. Perhaps with valid reasons — health has improved, and people retire later.
Yes I have read about that. In securities market they call this perpetual bonds. So it will be sovereign perpetual bonds. Back in ’80s/’90s there were lots of financial engineering. Corporate perpetual bonds was one of them. I don’t think that really took off, but I can’t recall the reasons for that.
Perpetual bonds or not, I’m sure the US will pull another rabbit out of it’s hat. As long as confidence remains with the $ — that’s the bottom line. Otherwise there will be problems. Remember there was a time some credit agencies were thinking of downgrading US credit rating.
Past tense of learn is ‘lerned”, as in, “I learned to read when I was six years old.” Not sure what “learnt” is but I suspect it is just incorrect English or possibly an acceptable but not preferable usage.
David,
Chempo is more comfortable using British English, since he is from Singapore.
http://www.oxforddictionaries.com/words/learnt-vs-learned
Haha David, ‘learnt’ is Brits English for past tense of learn. Same as ‘burnt’ for burn etc. Americans use ‘learned’ instead of ‘learnt’.
So when it comes to ‘a learned person’, I know what the Brits meant, but I don’t know what Americans meant.
Even Brits are confused with American English and I think vice versa. Was with a British friend in NYC once and she said it’s rather funny she can’t sometimes understand what people in NYC mean. And to think they Americans and British mother tongue is English.
A confusingf thing is “storeys” and “floors”. Brit’s 1st ‘storey’ is US’ 2nd ‘floor’
caliphman,
“whereas Grece, Spain, Portugal and other economies are at crisis or near crisis start around 130% and higher”
Don’t compare them to the US, they are in the EU, means they have to follow the rules and obligations set by it and can’t print money.
Your comparison is totally wrong.
caliphman
“China and Russia staying away from the bond auctions”
Who are the new players “Belgium” a cover as nobody wants to buy back US bonds ?
caliphman
“increasing talk and the threat of China, Russia”
For your understanding, what means threat.
caliphman
caliphman,
Out off topic but just to enlighten you on China exclusion zone:
It is based on Taiping island which is the only natural island in the chain to have freshwater and therefore categorized as “land”. this is important because only land can project EEZ… the reclaim islands lies within the EEZ of Taiping island which make what China is doing “legal” even if it is confrontation… what China is really doing, it is creating a shield around Taiping as it would be impossible to patrol the EEZ solely from Taiping. the EEZ does not change with the addition of these island, that is not the purpose of creating them… it is interesting to note that china had never claim 12nm for those island. those are actually what US claim China is claiming.
Instead the UNCLOS actually do address reclaim land, that is they are entitled just 1nm around them. Essentially what US is doing is it is trying to confuse the world, of course China will protest, but they will not shoot at US ship until US ship enter what UNCLOS establish as outside the legal limit of freedom of navigation.
Lake, this is the wrong blog topic to discuss the UNCLOS issues before the Hague. Your points may be understandable to me but gobbledygook to everyone else.
caliphman,
i agree, however:
please explain me what ”and the increasing talk and the threat of China, Russia” has to do with US debts.
Any answer on Belgium’s involvement ?
Lake,
Josephivo here is Belgian, and he said that it might be China in disguise.
I read up on this and pundits are also thinking that it might be China.
http://qz.com/254104/is-china-disguising-itself-as-belgium-to-buy-us-government-bonds/
Here is a more updated article that confirms your worries.the previous article also confirms the russian involvement
http://www.zerohedge.com/news/2015-05-18/revealing-identity-mystery-belgian-buyer-us-treasurys
It was China…unless that’s what we were MEANT to believe!
Money is the only thing we all trust, Saudi Salafists, Europe’s Atheists, Chinese Communists, Bushmen and American Capitalists. This article gives us a taste of the manipulations going on to try to keep us believing in ever more complex constructions. Gone the collection of nice shells, the mining of gold, the creation of tangible goods, the identifiable value of services… only fiat currencies left. Where are we going?
We are ever more powerful, ever more complex but undecided of where to go. Depend on American monetary primacy, look for more independence? And then? What to achieve? To continue extinguishing more and more species at ever increasing speeds (except for the hunter gatherers in Australia 40,000 years ago, America 12,000 years ago, Madagascar 3000 rears ago)? Trying to slowly evaporate the oceans, starting by melting the glaciers? Or is a sudden apocalyptic nuclear end to all live to be preferred?
I have tried to find my way in the forest of great ideas discussed here. Unfortunately, I am still caught inside. In this one, I am taking refuge in two thoughts:
– Mark Twain’s advice on silence being a virtue — It is better to keep your mouth closed and let people think you are a fool than to open it and remove all doubt.
– Since I don’t have wealth; I am old besides — I need not fear. He he.
If there were an extreme situation like post-Yolanda, no electricity, everything wiped out, you would be valuable to compute everything, a skill most people have already lost.
The skills one has are something no inflation can devalue, only own disuse or neglect.
Irineo, I do try to reduce the probability of Alzheimer by brushing on my Arithmetic.
Off topic
Back at Raissa’s ranch, I find the two recent posts of @yvonne, a sometime blog contributor in the Society, interesting, particularly on the apparent BAITING of the three SC Justice-members of SET (especially Sr. Justice Antonio Carpio) into answering the comments,
– Of Poe on international law, UNCLOS, in the maritime case of the Philippines against China, on the one hand; and the Philippine Constitution as against International Convention on foundlings on the other hand — a non-sequitor really.
– Of Escudero — apparently acting in concert with Poe — asking the 3 SC Justices-members of SET in any deliberation before the SC on Poe’s DQ case to inhibit themselves.
Again shrewd political operators these two. They must have weighed the numbers in the SC and felt threatened.
Here are the numbers (reference: @YckiR post at Raissa’s):
PNOY APPOINTEES
1. CJ Maria Lourdes P.A. Sereno
2. Bienvenido L. Reyes
3. Estela Perlas-Bernabe
4. Marvic Leonen
5. Francis Jardeleza
6. Martin S. Villarama Jr. retiring Jan 16, 2016 (replacement to be appointed by Pres Aquino)
NON-PNOY APPOINTEES
7. Lucas Bersamin
8. Presbitero Velasco Jr.
9. Diosdado Peralta
10. Mariano del Castillo
11. Jose Perez
12. Jose Mendoza
SET SC JUSTICES-MEMBERS
13. Antonio T. Carpio
14. Teresita J. Leonardo-De Castro (GMA appointee)
15. Arturo D. Brion (GMA appointee)
That’s a possible 9-6 for DQ, (if the SET SC members will retain their “for DQ” vote…I truly hope so, let it be just Arroyo 6, not Arroyo 8….please.
Poe was a foundling to begin with, yes, but she is, was and is again a Filipino citizen courtesy of the international laws on foundlings which left the distinction of natural born or just plain citizens to the country where foundlings are found depending on their jus soli or jus sanguini policy. MY HUMBLE OPINION ONLY.
Take out the citizenship and residency issues against Poe, or if the SC will decide to dismiss the DQ case, I hope Poe will not get the majority/popular vote come May 16, with all the Marcos people surrounding her and supporting her, I fear she cannot independently decide for the good of the country if she wins… again, MY HUMBLE OPINION.
You have no idea what you are talking about, Mary. The UNHR Convention Article 2 specifies that the foundling parents are treated as citizens of the country where the child is found. Thats not a matter of opinion, its just international law.
Have we legislated it and submitted it as per requirement, if there’s no need for that, what kind of citizenship did they give the foundlings, irrespective of jus soli / jus snaguini followed by the country where the foundlings are found? Please provide links so I can be convinced, so I can have an idea what it is all about. All I know is what I read by non-legal commentators, so educate me, please.
Do we give weight more on international laws and not on our constitution?
Philippines courts give preference to the law of convenience or personal interests.
There was a not too recent civil case where 2 Philippines companies had a contract subject to arbitration in Singapore. Party A won in Spore, Party b cried baby to Philippines court, where party B won because the courts said Philippines contract must be arbitrated in Philippines. They simply tore up the commercial contract. There is no sanctity of contract here.
Thank you for hijacking the US debt topic so you can talk about Yvonnes CPM post about thr Poe Set case. If you want to understand the case better, I suggest you read CJ Pangani an’s analysis of the case rather than disrupt the topic.
Sure. I will dedicate myself to providng you the best legal education to fill in your ignorance of the law. You will also have my treatise complete with Supreme Court case citations just so you can be convinced and have your judicial ruling published in ChanRobles and all the legal journale. I hope that is suitable for you, your majesty? Hahaha
Thank you for your compliment, caliphman…you do enjoy your high perch of the LEARNED JURIST….so where are they? I have a never ending quench for knowledge and your ridicule and insult will not deter me…so where are they?
that should be thirst, not quench, Joe.. sorry….am enjoying this….
Excerpts from Atty. Sta. Maria’s article. I will compare this with what you will provide.
http://www.interaksyon.com/article/120411/mel-sta-maria–set-decision-on-poes-citizenship–unsettling-rather-than-comforting
The credentials of these justices who voted for Poe’s disqualificationare impeccable. Associate Justice Teresita De Castro has been a magistrate for 18 years, attended the University of the Philippines as a consistent honor student in law. She was one of the two SC justices who convicted, when they were still justices in the antigraft court Sandiganbayan, a popular President of the Republic – someone who won the election by a landslide – for committing plunder. That was no ordinary feat.
The SET Chairperson, Senior Associate Justice Antonio Carpio, could have been Chief Justice of the Philippines. He has been a consistent nominee. That in itself tells us so much of his superior capability to grasp and resolve legal complexities. He graduated valedictorian cum laude of his University of the Philippines’ 1975 law class. Before becoming a magistrate, his reputation as a practicing lawyer was already well-known.
Last but not the least is Associate Justice Arturo Brion. Undeniably, he has the best credentials among the sitting justices now in the Supreme Court ( and that includes the Chief Justice). He graduated cum laude and valedictorian of his 1974 law class at the Ateneo de Manila School of Law. He placed number one topnotcher in the bar examinations of the same year. He obtained a Master of Laws degree from the prestigious Osgoode Hall Law School of York University in Toronto, Canada. Prior to being appointed to the Supreme Court, he was a well- known labor lawyer in the private sector, a law professor, member of the Batasan Pambansa, Labor undersecretary, Foreign Affairs undersecretary and associate justice of the Court of Appeals. His perceptive ability to navigate legal problems is undisputed
This is a case where I would have preferred a division of the votes of those learned in the law, namely Supreme Court Associate Justices Antonio Carpio, Teresita de Castro and Arturo Brion. In that way, at least, I am assured that I will be reading well-written opposing views of people who have, many times over, interpreted the Constitution.
These three justices breathe and live the law. And yet they lost – to politicians – on a legal issue.
Mary Grace, now it is my turn to thank you for that link to Mel Sta. Maria’s article on the SET decision on Poe’s case. A well-written short piece.
Sir NH, I spent my day today reading the link provided by Dave (while in the parlor) re the dissenting opinion of SC Justice Brion, all of 66 pages complete with appropriate footnotes, cases, background and even transcripts of the 1934 constitutional convention that framed the 1935 Constitution as they tackled the matter of foundlings, even the HRET case of the natural born Filipino Citizen Bengzon who was also naturalized citizen of another country, the RA on reacquisition of citizenship, the various international laws on foundlings…That was an eye opener for me, quite educational. It’s quite unfortunate that the Senator members of the SET did not pick the SC Justices’ brains to be guided accordingly.
*******
The Brion Opinion is comprehensive and leaves no stone unturned.
What I would like to see is a contra legal opinion that addresses the same points and ably rebuts each point in turn. I believe we are unlikely to see one.
*****
I really dont care where you pick up your erroneous legal information. But if you have to spout it out as gospel truth, please check its veracity so the bext person who parrots it does not also come across as an ignorant wanna be legal expert as well.
am waiting for your links…. and you are providing insults and insults… give…TEACHER, the student is waiting
Mary, has that bucket of the much-appreciated popcorn from edgar arrived by internet yet? If so kindly save me handful. 🙂
In honor of our resident Chinoy and human calculator NHerrera… pansit for everybody:
In honor of our Ilocanos, philosopher Edgar Lores and wise man Manong Sonny, pakbet.
Looks like everybody is a bit hungry, so some food before discussion continues…
Irineo, thanks for a taste of that pansit. I liked that pakbet too. I even like pa-paitan.
I need a refill, sir NH…after reading Atty. Sta. Maria’s article, I realized that we cannot rely on our Senators to decide on purely legal matters as JUDGES…that is, when one of them is involved. I should have known when no one wanted to head or even be a member of the Senate Ethics Committee.
@Mary Grace, this is what Justice Brion said in his dissenting opinion. They will inhibit when Grace’s case reaches the SC for review.
All 3 will inhibit? Then there is a possibilty that we could bid good bye to the jus sanguini rule and let presumptions be the order of the day instead of the definite constitutional based reasoning. What I am anxious about is that once more, the SC will set a judicial jurisprudence on this matter. God, please don’t let that happen.
That sounds more like an ‘ad’ to head out to Raissa’s and check out an off-topic post by a non-lawyer regular there with a reputation for demonizing poe and offering pseudo-legal but usually mistaken legal opinions. Whats the matter, not enough audience for the CPM Poe bashing frenzy to share with? Thanks for your opinion on that juicy post in the other blog site but if you have not noticed, this is the one non-political serious economics blog among a ton of political articles in this blogsite that your CPM plug makes absolutely no sense to peddle.
I agree. The current blog is a serious one on economics. My apologies to chempo and Joe.
I TREMBLE AT THE SERIOUS ECONOMIC CONSEQUENCE.
Sir NH, I appreciate your postings and sharing on important current political matters. We are learning a lot on varied articles published here but we must not lose sight of the fact that we need to be involved and aware of every little thing that is happening in the political arena. Yvonne’s open letter is a gem, I saw it too. Thanks you for the update.
Welcome. I thought you, among others here, may appreciate that in case you miss it.
I missed it, with FB and the tax deadline distractions. Appreciate your thoughtfulness, sir NH.
http://newsinfo.inquirer.net/741117/grace-poe-stretches-lead-in-survey
In that case, they might appreciate this too in case they missed it.
I posted the information earlier on November 19, 2015 at 11:10 am on the Two Photos blog of Joe. I wrote there:
“The Philippine Star — Pulse: Grace 39%, Binay 24%, Mar 21%”
Late ka na…already shared by our sir NH.
@ NHerrera –No economic consequences of any sort, never fear.
My temper does not inflate easily.
🙂
Your entire thesis is wrong since the fact of having high debt levels is not the end of U.S. dominance.. The U.S. has had high debt levels before…The Fed is getting ready to normalize interest rates….Kindly look at the debt service of interest that the U.S.is paying as % of GDP…1.5%
.http://www.theatlantic.com/business/archive/2012/11/the-long-story-of-us-debt-from-1790-to-2011-in-1-little-chart/265185/
https://research.stlouisfed.org/fred2/series/FYOIGDA188S
You must be a Trump supporter as your version of the facts is fast and loose…
Please note that the federal government collects taxes from income and entitlement taxes for social security and medicare…
https://www.treasury.gov/ticdata/Publish/mfh.txt
The greatest threat to U.S. fiscal policy is the ever rising costs of health care. Not the debt per se….
China’s exposure to U.S.debt is less than 10%….
No country is forced to buy U.S. debt….China could sell their holdings in the financial markets forcing prices to drop…But what will they do with the cash????They are a lot smarter than that…
They simply leverage their financial assets to get more hard assets…China is a land based power on the largest island in the world…Eurasia…They are moving to develop infrastructure inland to Europe…
The U.S. has finally awaken to the fact that they have an equal power rising and getting stronger…
http://www.forbes.com/sites/mikepatton/2014/09/29/the-seven-most-indebted-nations/
What is so bad in having high debt levels… According to Forbes magazine, Singapore has higher debt levels than the U.S.
http://www.nytimes.com/2015/11/22/books/review/chicagonomics-and-economics-rules.html?partner=rss&emc=rss&_r=0
Even the reference to Adam Smith in the above post is totally wrong…
It is really sad that almost no one has a rudimentary understanding of finance economics…
The problems in the international fiance system is due to the fact that the U.S.A wants to maintain imperial control of the international payment system…
Keynes had warned that no one country should have the power to issue the international medium of exchange…Economies do not exist in a vacuum.. They are mostly influenced by power relations of the big guys…
I would like to direct everyone to secure a copy of the October 3, 2015 issue of The Economist…
The writers described the U.S. Dollar as Dominant and Dangerous…The man leading in the presidential polls in the U.S. is calling for anti-globalization, zenophobia and racism…
R.Hiro,
if this all isn’t bad why Belgium is used ?
I do not understand your query as to Belgium? Each country on the list has different fundamentals…
Belgium means Belgium clearinghouse. Impossible it would be Belgian money, more than 20,000$ per Belgian, children included. As the transfers are anonymous, the speculation is that it is either Chinese or European Central Bank money.
Poker playing for the advanced in the largest casino of the world. And all is interconnected, interest rates, exchange rates, exports and growth rates. Chinese are good at it, they love gambling, even with the West Philippine sea.
How long can the USA prop up worthless wall-street paper assets by covering bad bets with FED FIAT? Probably forever. Will some thing give? Probably not.
Only when people start getting hurt does shit happen. Right now the FED just keeps bailing every body out in secret, the off BUDGET now must be in the 100’s of TRILLIONS, but who the fuck cares, it will never be paid back, its all accounting fraud.
Once the CHINESE have unloaded all the toxic US paper, and then once the CHINESE & RUSSIANS refuse to accept FED-FIAT, … then the SHIT will hit the fan.
Right now the Chinese/Russians can take FED-FIAT and BUY GOLD, … how long will this last? Until the fat woman sings.
josephivo,
Long and short of this is we have no idea who bought these, who owns these, only where they are purchased and being held. Nothing to stop the Fed or ESF or whatever to buy all the Treasury’s they want with free money and hold them in China or Japan or Belgium to attribute them to “foreigners” rather than Fed??? If this is 10% right, be very very afraid of the dollar.
What makes more sense,
that the Fed ran (runs) a secondary QE program (perhaps equal to the on-books QE…perhaps double) through foreign financial centers of the world through countries like Ireland, Belgium, Norway, Taiwan, UK, HK, Russia, etc, etc. to maintain the US Treasury bid / yield and these purchases are “attributed” in the nation where they are purchased (not to purchaser)
ie, who believes that Russia increased their holdings from $8 B in Jan ’07 to $140 B today??? Make sense???
ie, how bout China increasing from $400 B in ’07 to $1.268 T now in US Treasury debt???
ie, how about Norway who held $0 in June ’07 now holding $97 B in Treasury debt??? Make sense???
ie, Ireland held $10 B in ’07…now holds $125 B??? Make sense???
And on and on…
OR
These countries love american debt that yields nothing, will be paid back in inflated dollars, and ties them to a dollar based global system they are trying to move away from??? Since ’08 they have all supposedly massively increased their holdings for somebody???
These nations are de-dollarizing asap via removing dollar trading (particularly China/ Russia), talking dollar down, but strangely their attributed holdings only go up…perhaps they really are moving away and we only see the facade of dollar stabiliteeeee’
The biggest “red flag” in this is the Fed tapering. The Fed were buying all medium term Notes / all Bonds (up to their 70% limit) but on their stated exit from QE, “Foreigners” who own $5 T+ (double the Fed’s holdings) would have seen rates would be rising and prices falling…if they were “investors” they would have been selling. The Fed would have known they could never taper without a rate shock. But no selling…no yields to the moon. These “foreigners” are not “investors”.
When the US needs alredy such cheap and obvious tricks, then the end is maybe not anymore far.
These cloak and dagger stuff just adds confusion to an already confusing scene. Seems pretty obvious some deception going on, but with connivance of who and why.
“Chinese are good at it, they love gambling, even with the West Philippine sea”
What gambling “sea”? Does their 9 dot map said this ?
China’s exclusion zone:
It is based on Taiping island which is the only natural island in the chain to have freshwater and therefore categorized as “land”. This is important because only land can project EEZ… the reclaim islands lies within the EEZ of Taiping island which make what China is doing “legal” even if it is confrontation… what China is really doing, it is creating a shield around Taiping as it would be impossible to patrol the EEZ solely from Taiping. the EEZ does not change with the addition of these island, that is not the purpose of creating them… it is interesting to note that china had never claim 12nm for those island. those are actually what US claim China is claiming.
Essentially what US is doing is it is trying to confuse the world.
It is a momentous mistake to think that the US-China tensions in the South China Sea are primarily a US-China bi-lateral problem without global consequences.
“What is so bad in having high debt levels… According to Forbes magazine, Singapore has higher debt levels than the U.S.”
So I guess 1986 debts created by Marcos was no big deal. Cory was handed a robust economy. When you apply for a car mortgage loan, the first thing they check is your debt level. Generally, 70% debt to GDP ratio is the red line for country risk evaluation, but there are exceptions like US, Japan and Singapore. For US, it’s as I have analysed here. Japan and Singapore there are special reasons. Japan I do admit my knowledge is limited, but Singapore I can explain, but it’s lenghty so I’ll leave it out here, just surfice there are special reasons for the high debt level.
“Even the reference to Adam Smith in the above post is totally wrong… ”
Nothing to do with me.
“It is really sad that almost no one has a rudimentary understanding of finance economics… ”
Nobody here profess to be an expert in anything. We publish something we deem to be of interest here. We appreciate comments that add to our understanding of things. There is no shame to have said something wrong if someone else manages to show us a better way of looking at things. There is no pride cometh before a fall here.
“The problems in the international fiance system is due to the fact that the U.S.A wants to maintain imperial control of the international payment system…”
I do share this sentiment with you, although I am in no position to say whether that’s for the better or not. I would say that the ‘imperial’ system helped made the world go arround. But I think the recent US economic sanction against Russia has made both Russia and China realise the dangers of this ‘imperialism’.
https://joeam.com/2015/11/19/demystifying-the-american-us18-trillion-debt/#comment-148477 – in the terms of the analogy I have used below…
Could it be that the USA as the “casino owners” – or as guardians of global finance since after WW2- are playing riskier than they should now?
And this weakness is being capitalized upon by two high rollers (Russia and China) who also happen to be really vicious gangsters?
Irineo, I think the ‘casino’ has gotten so huge and complex. approaching rocket science, that nobody really understands the damn place. I’ll liken it to the Shouk Al-Manakh crisis.
“The Souk Al-Manakh stock market crash was the 1982 stock market crash of Kuwait’s unofficial stock market, the Souk Al-Manakh. The Al-Manakh market was housed in an air-conditioned parking garage that had formerly been a camel trading venue, and specialized in highly speculative and unregulated non-Kuwaiti companies. At its peak, its market capitalization was the third highest in the world, behind only the U.S. and Japan, and ahead of the U.K. and France”….Wikipedia
They were even trading in stocks of paper companies. Some companies only existed in the Company Registrar’s record. A case of to much wealth chasing after too few ‘listed’ companies in a very small economy.
In the ’80s when I was there in Kuwait City, they were in the midst of clearing up the mess. I heard tales first hand. The govt came up with a final solution….govt will pay-off all those who lost under US$5mm. After pouring in hundreds of millions, the scheme stopped abruptly. They had no idea at all what was the extent of total indebtedness. Trading was completely un-regulated and they had a funny messed up system of the same stocks being sold to multiple parties and pledged several times over. When the music stopped, nobody knew who owed who what and who should get paid first.
I presume the almost qualifier in your post is because you are one of the exceptions. You perhaps can offer up anything in support of such humility?
Yes I am an exception as to having a rudimentary understanding of financial economics…
Nation states cannot go bankrupt like corporations…They have land and people…Governments can have liquidity problems…The Philippine Republic you may recall defaulted on its interest payments in 1983 and was declared in default…Did the country disappear? Or did the country take in more debt???? The latter off course is the answer…Jobo debt notes paid 30-430% per anum…Remember when!!!!!
Chempo said that oil is priced in dollars. So what???? Euros, pounds, yen, swiss francs, RMB’s can be exchanged in the forex markets for dollars in any commodity exchange worldwide…
I had an earlier posting which is undergoing the regulatory process of this blog…One thing Chempo has not answered is this…
Why are countries of the world continuing to buy dollar assets including Treasuries?
Nobody is forcing them to do this…Why are U.S. T-Bill rates so very low? If a brilliant guy like Chempo says that the dollar is worthless why do individuals and corporations continually to invest in dollar denominated assets?
“The rise of credit cards — Now here is the crazy part which I bet you don’t realize. And this goes right up the face of MMT which says households are different from government in that we as private individuals cannot print money. Each time you use a credit card, you are actually “printing” currency. You are making a deficit spending. Out of no-where, without any cash, you swipe your credit card and the vendor’s a/c is credited, which is similar to the latter making a bank deposit, and so the amount of your consumption initiates a bank credit expansion. In other words, you spend $100 and create $900 electronic currency. But you now have a debt of $100 which, too bad, you have to monetize in due course.”
Valid Bank credit cards and vendors credit cards are simply IOU’s…Each individual signs a purchase slip to be paid for later…Individuals whose bank credit cards are banks clients..IOUs are eventually paid for..Please note that a postdated check an IOU…
M-I are checking accounts….Hence they are called demand deposits…If you have different types of assets with the bank and the bank grants you a credit line, It is due to the banks valuation of your assets…
Please note that there are credit limits for both….I am sure Mar Roxas has a Platinum card issued by a foreign bank…no credit limit….
Banks have both business and personal financial histories of their client’s assets…
In today’s modern societies wealth is measured using monetary valuations……
Obviously in nominal terms the U.S.is still the largest economy in the world in nominal terms. But what is the value of the total capital assets in the U.S. and the total value of the capital assets held by U.S. citizens, both juridical and human overseas?..These assets keep the U.S. economy going. The U.S. had a debt to GDP total of over 100% after the Second World War…Today it has the same problem… So what????
Bain and Capital has come out with a valuation of total global financials assets at $500 trillion…
“How come there was no inflation? The GDP was $29T in 1980 and $51T in 2014 – an increase of 75%, whilst M2 increased by 600%. By all logic, there should have been severe inflation. Some MMT proponents gloat at this fact – where is the severe inflation over the last few decades?. There were some bumps in ‘60s-‘70s but since Paul Volcker tamed inflation in the ‘80s, inflation from 1983-2014 averaged only 2.5% which sent the wrong message that printing money does no harm to the economy. The reason for no inflation was because the increase in currency supply did not go into consumer goods but was sucked up by :”
U.S. nominal GDP is approximately 18 trillion…Where did the figures for U.S. GDP come from in 1980 and 2014? Totally wrong…I have explained the high inflation in the U.SA. in the 80’s already…Rise in oil prices in 1972 induced a wage price spiral upward… Volker destroyed inflation by inducing a recession…High interest rates…
“Economics is not an exact science. We have been very wrong before – communism caused untold misery to millions of people for a hundred years. MMT is absolutely seductive because it implies the notion that money is for free. It is the ideology that has been driving American monetary policy in the last 40 plus years and has brought the country to a US$18 trillion public debt.
MMT is a thesis of monetizing deficit spending of the government with new money…
The U.S. has been financing fiscal deficits with debt….The two are contradictory…
You talk about a countries debt what about the monetary valuation of a country’s assets???
You sound more like a economics history professor more than a student of financial economics, RHiro. Your post was more interesting for its timeline of major economic events than any insights ir analysis of why events happened and whats applicable to the present situation. But still worth reading. Thank you.
“Nation states cannot go bankrupt like corporations…: ”
Bankrupt is a state of being unable to pay outstanding debts as it falls due. Nobody is saying that a country will be treated like an individual or corporation when it goes bankrupt. Many countries have been in this state before and ways have been devised for them to get out of the shit hole.The fact is that countries can and do go bankrupt.
“..oil is priced in dollars. So what?”
It creates a huge external economy for the $ and keeps huge chunks of $ floating internationally instead of being used to buy up US goods and services and exerting inflationary pressures on US economy. That currencies are easily convertible in the foreign exchange market has nothing to do with this.
“Why are countries of the world continuing to buy dollar assets including Treasuries?…”
The answers are self-explanatory in the article.
“The rise of credit cards…”
The debit/credit cards are simply paraphernalia that enables the card system, nothing like checks or treasury bonds which can be likened to IOUs. Your introduction of asset valuation has nothing to do with the issue on hand, which is the creation of money through fractional banking as a result of credit card spending.
“U.S. nominal GDP is approximately 18 trillion….Volker destroyed inflation by inducing a recession…High interest rates…”
Inflation in late ’60s and early ’70s came from Korean war, Vietnam war, and yes, oil price hikes. LBJ refused to increase Fed rates which was what Volcker wanted. To achieve his objectives without crossing LBJ, Volcker forced down money supply, and that forced interest rates in the markets to rise.
“You talk about a countries debt what about the monetary valuation of a country’s assets???”
Sounds like a nice topic, but it’s not the issue this article was trying to relate.
If I recall correctly, you brought up Japan’s humongous savings rate in the context of its decade long deflation, omitting to mention its even more gargantuan government public debt and huge deficit spending program.
So much for any attempt to make Japan a poster boy for non-Keynesian macroeconomic policies.
Once again I beg your indulgence to wait for postings i have \made undergoing the approval process. The problems in Japan is unique to Japan. They are essentially running out of people… They will eventually have to do partial defaults on their debts.
RHiro, take your time. Not sure I would describe Japan’s aging population problem as running out of population. I also would balk at your partial default scenario, Japan bond ratings are better if not the same as the US. As you may know, they carry zero interest rate and US one will be rising. So you can see why to me a default scenario is counterintuitive, and I cannot comprehend what a partial default id. Id that like being half pregnant?
Why is the Pnoy administration taking on foreign loans instead of in local currency which the govt can repay simply by printing peso because it has the ability to print since it has monetary sovereignty?
Actually the Aquino administration has been reducing debts denominated in foreign currencies. The external debt-to-GDP ratio was 38.4% in 2009. By Jun 2015, the ratio was 25.7%. This was a good move since the peso has devalued.
Thanks for pointing that out. Yes the Pnoy admin debt situation seems pretty good. Too bad the massa will never understand this sort of things.
Whether decreasing foreign debt in relation to exchange rate movements (and also interest rates) is a good move or not is a matter of observation in a time frame Looking back at another time time frame, it might not seem so good. But of course, decisions and action were meant for a specific time frame, so within that, we can make fair judgement.
So why cant we do it in the philippines?? We are choking each other.. We should develop our infrastructures at least after the projects are done like nice roads bridges , power plants , hospitals, industrial zones , livable communities , they cannot foreclosed it anymore?? Lets develop the countryside in a good way,to bring value to our lands And everything will stay.. They cannot take away those things from us..
Just vote wisely, that’s all I can say.
From what I have read, infrastructure projects are already in various stages, from drawing boards, bidding, negotiation with affected land owners, funding (with local private partnership build and operate schemes), etc, etc…it’s being addressed now.
Numbers That matter:
https://research.stlouisfed.org/fred2/series/FYOIGDA188S
http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=longtermrate
Please note the interest rates for ten years and 20years..
Chempo and Caliphman why would rational people accept these low interest rates if the U.S. economy is falling down?
https://www.treasury.gov/ticdata/Publish/mfh.txt
Why would the Philippine bother to lend Uncle Sam $40 billion at lower rates of interest?
Are we under the pain of sanctions if we do not keep our reserves in U.S. treasuries?
Chempo, Micha and Caliphman please respond…$40 billion x Php 47 === Php 1.88 trillion
http://www.bloombergview.com/articles/2015-11-17/japan-is-locked-in-a-struggle-to-spark-inflation
http://www.bloombergview.com/articles/2014-09-24/japan-s-debt-trap
Caliphman what do you do if your own people are disappearing…
Has Zimbabwe disappeared from the face of the Earth?
What about Pan Am, TWA, Enron?
“Why would the Philippine bother to lend Uncle Sam $40 billion at lower rates of interest?”
I assume these are Bangko Sentral’s treasury bond holdings.
All central banks hold foreign reserves, in currencies or other liquid assets like treasury bonds. The purpose are varied, some are for strategic reasons, some for tactical reasons. But there are common reasons :
(1) To support the country’s extrnal trade. I have no idea what Philippines import numbers are, but most central banks hold in reserves at least 3 months import value.
(2) To meet short or long term payment obligations. To ensure liquidity, central banks normally carry in reserves 12 months ageing of their international liabilities.
(3) To retain liquidity capability for market intervention in times of volatility of the forex market
(4) To maintain purchasing value of the peso due to a continual depreciation of the currency caused by inflation.
(5) Asset/liability management reasons.
(6) To support the value of the printed peso notes generally. Fiat currencies are just a piece of paper.
The reason for placing reserves in Treasury bonds are — zero risk and very liquid because of the capital market efficencies.
Why do investors invest in Japanese bonds which gave zero interest rates? Why do some invesors invest in notes with negative interest rates?
They are simply warehousing their savings…No investment vehicles.. Safety especially if most are elderly or getting close to becoming elderly…
Well the answer is that in Japan, a nominal interest bond generates a real interest yield after factoring in deflation since the nominal principal is the same but prices of everything else have gone down.
Sounds absolutely logical. Same thing as the necessity for central bankers to build up foreign reserves to support fiat money whose value is affected by continual inflation (one of the reasons for reserves).
“Yet if the equilibrium interest rate is actually below 0 percent, then most holders of currency would rather suffer a guaranteed loss rather than lend their money out. This was prevalent during the depths of the Great Recession. In that case, even an interest rate of 0 percent would be contractionary rather than stimulative” CNBC
Firstly on negative nominal interest rates….
Three countries in the real world are now employing nominal negative interest rates…
They want to dis-incentivize and punish banks who are lending their excess cash reserves with the central bank…
Loosing a little is much better than ending in a deflationary or soon to be deflationary environment…
You see the reason banks are reluctant to lend is because in an environment of general price levels declining debts will become harder to pay since pricing power is disappearing which calls for cutting capacity and jobs which will end up with deflationary expectations..
More people will cut back spending and more capacity will be destroyed..Debts become harder to pay back..
William Buiter, the chief economist of Citigroup, has even suggested that we abolish cash and coin entirely and force people to use credit cards, debit cards and checking accounts.
Switzerland,Denmark and Sweden are employing negative nominal rates to discourage savings by charging storage fees and they are trying to debase the value of their currency against the Euro since the Euro has devalued against their currencies…
They want to use negative savings to drive out foreign investors and devalue their currency…
With Japan it is a matter of demographics…Japan is continuing in their process of monetizing debts… But seniors own 60% of Japanese savings.. Headline inflation, core inflation and relative inflation are realities that exist…
Spending patterns based on age differences matter a great deal in Japan…
Their savings rate has been on a downward trend fort he last few years. They will soon have to depend on foreign savings who will demand higher rates…From savings of 30% of GDP in the past , It has dropped to 2%
I am not sure if I read some where if you are a consultant with banks…
Central banks primary reason for existing is price stability…They manage inflationary and deflationary expectations..Today they are utilizing crazy tools to fight deflation…
No one would give investors advice to fight central banks…
Elderly people in Japan are saving for their retirement and death expenses…Their expectations of government help is cautious since they are aware of the huge debts and the need for government to increase taxes and cut benefits and probably default on some of its loans that come due .
Japan has been importing foreign nurses/caregivers and now maids…They also want to push a higher labor participation rate for women.
http://www.japantoday.com/category/kuchikomi/view/japan-in-2030-a-country-from-which-families-have-disappeared
There’s a lot here that’s not exactly pertinent to my article. But interesting, thanks for the references. I have read about some of these stuff before but never really tried to seriously understand it. Worth going back for a second look.
http://www.bloomberg.com/news/articles/2013-06-25/abe-recovery-pits-graduate-jobs-against-senior-savings
http://inflationdata.com/articles/historical-inflation-rates-japan-1971-2014/
For everyone’s information…
For the Caliphman who appears to be an expert in financial economics..
http://inflationdata.com/articles/inflation-cpi-consumer-price-index-1930-1939/
Deflation rates in the U.S. during 1931-1939
This from someone with only a rudimentary understanding of the same…Kindly compare the same with Japans deflationary period..
http://www.theatlantic.com/business/archive/2012/11/the-long-story-of-us-debt-from-1790-to-2011-in-1-little-chart/265185/
Short History of U.S. debt…
History of U.S.current and Real GDP
http://www.bea.gov/national/index.htm Please note figures….Real numbers are net of inflation
And your point or question is???
Sorry but I have no idea what you are talking about, RHiro.
Has any country worth mentioning apart from Weimar’s Germany, Hungary and Zimbabwe praticed MMT that is monetizing fiscal deficits?
You mentioned that Japan was doing so…So far following the lead of the Fed and ECB they have been monetizing debt to fight deflation…
Chempo has claimed that the U.S.has been practicing MMT for over 40 years…But they have been borrowing to cover deficits…
Chempo should also be aware that the top income tax rate was 90% and this was reduced by Kennedy and subsequently by Reagan to 38%.
Spending for was and most of the cost of defending W.Europe and the wage price spiral caused by higher oil prices brought forth inflation…
http://www.bloombergview.com/articles/2012-08-20/how-volcker-launched-his-attack-on-inflation
http://www.bloombergview.com/articles/2012-08-21/how-volcker-created-a-gold-standard-without-gold
http://www.bloombergview.com/articles/2012-08-22/volcker-restored-fed-s-credibility-on-inflation
Must read on the experience of destroying inflationary expectations.
http://www.mof.go.jp/english/gallery/201405e.htm
http://www.bloomberg.com/news/articles/2015-02-24/japan-inc-s-cash-pile-fuels-record-overseas-deals-real-m-a
BJ creates new money so Japanese companies invest abroad…
Caliphman do you think Japan should start importing people…Mostly young women to create more babies.
http://www.bain.com/publications/articles/a-world-awash-in-money.aspx
Chempo financial assets will be worth almost One quadrillion by the year 2020…Which countries will own most of that..???.
Lake brought up the shadowy $141.2 billion purchase of Treasury bonds. There are a lot of private maneuvering going on of which we cannot connect the dots. All it shows is that the US debt situation is not a laughing matter as some would have us believe.
In my closing I alluded to gold, the last refuge when economics play havoc. Something very strange has been going on in the past few years. Focus on gold and it may provide us an idea on how the US debt will play out.
Every central bank in the world has been stocking up gold, especially Russia and China. US sanctions can have very punitive effect, as Iran has found out. The latest is Russia. For sure Russia and China have by now understood how they can be held to ransom by the $ and they won’t be dumb to take it sitting down.
The question is then why has there been no gold run. At this point, the US is still king because it has the largest hoard of gold in the world. China has a very low stockpile relative to its GDP. It is thus in a very vulnerable position. But China is the 2nd largest economy in the world, it’s US’ largest trading partner, and since the US wants to maintain the $ as the world’s currency, it has to keep China happy. There are some who say US derivatives are keeping the price of gold down at the moment, giving China the space to build up gold reserves to a healthier level relative to its GDP.
Chempo, the Republican party definitely believes the US public debt and the huge annual budget deficits are any laughing matter. On the other hand, there are too many chicken littles running around claiming the sky is falling. Well it may be drizzling but the sky will hold for a while until a replacement is found. But that replacement wont be a return to gold and its defunct era of fixed exchange rates. If there was one insight that Milton Friedman and the Chicago University monetarists contributed that made it dominant in macroeconomic thinking, it was the idea that world economies should not tie the supply of money and the price of their currency to the physical supply of gold and the regime of fixed exchange rates. The insight had much great value because as he explained in his bestselling opus “Free to Choose” , a country would be free to increase its money supply and thereby stimulate growth depending on economic needs and not based on it
https://en.wikipedia.org/wiki/Fredmund_Malik – I am more of a fan of Malik’s wholistic approach, because economic needs are not everything… as josephivo writes often quality of life and environmental concerns are also important not just growth for its own sake, and the new buzzwords of today like sustainability and inclusive growth show the limits of the neoliberal stuff… Friedman was like many neoliberal theorists a tenured professor who did not have to live out the consequences of his theories, which are IMHO as much a creed as Marxism was… Freedom of choice is grand if you are in a position to choose… but tell that to old people in Eastern Europe whose daughters spread their legs in Western Europe to pay their parent’s medical bills and their sibling’s schooling.. because medical insurance was made neoliberal in total enthusiasm for progress, but those who grew up communist did not have the skills and/or capital to adjust to that… but the new generation is ruthlessly capitalist, and may even teach the USA and Western Europe something about competition..
From his wholistic, system-oriented standpoint, he criticizes pure shareholder value orientation and education programs in business administration that in his opinion mostly teach too limited views on economics and management.[4] He argues that applying the laws, models and methods of management cybernetics, enables an organization to function more effective- and efficiently. With this knowledge of cybernetics applied in any societal organization including the political sphere, he asserts that a “New World of Functioning” can be achieved that will benefit all society.
The Chinese paraded James Bond around like some dancing monkey on stage for Singles Day, this is so true in so many levels… (they are already schooling them, they took my hero, man, and made a mockery of him, who’s next Jason Borne?) “but the new generation is ruthlessly capitalist, and may even teach the USA and Western Europe something about competition.”
Who knows where Aaron Cross is going next, after the Bourne Legacy in Manila?
Quantum of Solace, an underrated James Bond movie, was about a Frenchman trying to make a killing out of water BTW…
Irineo, I am afraid I am unfaniliar with any of Malik’s writings to be able to respond to your comments. What I am saying about Milton Friedman pertains to his contributions to macroeconomic thinking and analysis for which he was awarded the Nobel Prize. To extend this to whatever political economic implications his theories or the mutant versions neoliberal monetarists have transformed his original work into does not make any sense to me and digresses from the points I was making in response to Chempo.
Since you brought up the topic of business school curriculums and shortcomings, I am partially a product of that process and what is being taught and how it is taught at the top schools is undergoing vast transformation. What is taught at Insead or the best schools in Spain while top notch is not the same approach or content Harvard, Stanford, MIT or Chicago is exposing doctorate or masters level students to so I would not generalize so easily with what is right or wrong with their pedagogical focus unless your author understands recent trends and developments in this area. Maybe he receives the same updates and annual giving solicitatinons from their deans my office receives but let me close this digression by saying the maximization of shareholder wealth was conceived in the early sixties a long long time ago and Friedman was an economics and not a business professor and his impact was not in his classroom but as an advisor to Reagan, Thatcher, and other Western world leaders on how their countries and central banks should manage their economies. And they listened to him at a time of uncertainty after the abandonment of the gold srandard and fixed exchange rates.
https://en.wikipedia.org/wiki/Joseph_Stiglitz could be seen as an example of how thought is changing in economics… he is highly critical of the IMF and helped Greece in its crisis – Merkel’s way of dealing with Greece was very similar to many IMF measures globally.
BTW Malik is a highly reputable management professor and management consultant, so his impact is in business as well – St. Gallen where he teaches is in Switzerland and I have some business associates who studied with him. Personally I am more of a fan of an approach that is sustainable and inclusive – quality of life is IMHO better for a larger number of people in Europe than in the USA, especially in the USA after Reaganomics was applied.
Globalization and its Discontents was a book by Stiglitz that I read and was impressed by. Don’t really see myself as more than an informed and curious layman, with a smattering of economics knowledge from Adam Smith through David Ricardo up to Stiglitz and RHiro.. Josephivo obviously has economic or consulting background as well and named a few other critics of orthodox neoliberalism as well… and one more interesting digression is that Greenspan was an avid follower of Ayn Rand and her objectivism, a questionable belief…
…it’s gold reserves sufficiency to support more money and the fixed exchange rate. A return to that era would be like reverting back to the age of transistors and vacuum tubes, a time when fiscal discipline was imposed on fiscal and monetary policies were tied to the gold standard and fixed currency rates. I doubt that China with its government obsession for control would favor such a return to the past.
@ Caliphman
So voting for Republicans means money is for free? They might as well put that up as their slogan. They can probably reform their tax system easily.
I’m not that little chicken. I just see dark clouds on the horizon. I believe only acorns will fall on the US and they will sweep that away. But there will be some troubled times for sure.
With all due respects to Milton Friedman, I wonder what his thinking would be like if he had the advantage of seeing all these economic and monetary developments in the past few decades. Does it bear out his original thingking, I wonder.
Chempo, I meant to say the US public debt and huge annual budget IS NO laughing matter. Sorry about that. But because of Republican fiscal conservatism, the government was continually under threat of shutting down because the Republican Congress refused to pass budgets with those continuing deficits. The neoKeynesian were and still are in Obama and Democrats economic pilot seat.
If you were to read only one work of Friedman, Free to Choose is a very good choice. Just like a Little History of Time is the one book of time for British mathematical prodigy Stephen Hawkings. Friedman’s genius was not peering into the future but explaining that a market economy where private individuals and corporations were free to choose without unnecessary government regulation or supervision led to the best outcomes. As a monetarist, and after his monumenral research on the relationship of money supply and the US economy, he concluded the most important role of the government and the Fed was to assure the money supply was always continuously adequate to stimulate economic recovery or growth. His historical research was governent
frequently erred in using monetary and fiscal policy at the wrong times and direction in trying to actively manage its boom and bust cycles. Again the lesser government intervention, the better. To tag his economics philosophy and its offshoots as being liberal seems very strange and to trace MMT to his economic DNA is to believe a Great Dane and a teacup chihuaua can be bred together.
Friedman neglected in his academic theory that many people are NOT that free to choose. I also read that book and it is wonderful if the playing field is truly level. But the reality is that it is not, and in the USA Reaganomics et al. have made it less level.
Now who is not free to choose:
1) those that do not have educational capital
2) those that do not have the social capital
3) those that are sick or malnourished
Total freedom for the economy leads to a Monopoly situation very quickly, where MSMEs are crushed and the fat cats who have the gold go by the golden rule – whoever has the gold makes the rules… and sustainability is neglected in addition to inclusive growth.
The Philippines under GMA was an example of how total freedom applied in a situation where not everybody could equally avail of it lead to havoc, Aquino has been fixing some aspects of it by CCT, Pantawid Pamilya, K-12 and better PNP… because it sucks if you do no have the money to buy private security or live behind a gated community and are constantly threatened by criminality coming from true opportunities that are missing – sometimes neoliberalism a la Friedman, Hayek etc. is simply Social Darwinism 2.0. Possibly the Philippine entitled could even be the first to apply GATTACA, cementing their position by genetic selection… but it is already like that a little, the poor are “defective”… Sorry this is just an informed layman applying common sense and logic to observations.
So tell me, is that a general political criticism of a society under a market versus a socialist economy?
I think there is a broad spectrum of economies between neoliberal and North Korean…
Germany today is not fully a free market economy by neoliberal criteria.. zoning laws limit where malls are to be built, preventing disruption by small businesses going broke in inner cities. Taxi businesses are licensed and a certain professionalism is demanded, so Uber had a hard time and had to adjust, and also make sure VAT is paid by all drivers. America is very good for some – the money class, but it is also the Brazil of the North for many. Finally what I am saying is the Friedman, Hayek and Co. had their points, just like Marx had his points. But theoreticians often fail to factor in the bad sides of human nature.
More examples, now with regard to the privatization orthodoxy of neoliberalism.
1) Rail privatization
1a) Britain fully privatized. There are often delays and a lot of accidents/malfunctions.
1b) Germany partly privatized. More delays, service and coverage has gone down.
1c) Switzerland – no privatization. Train service covers the whole country on time.
2) Water privatization
2a) Berlin privatized water. The quality of tap water has declined, prices have risen.
2b) Munich – no privatization. Perfect tap water, I drink it, and it does not cost much.
What works is Stadtwerke München – a fully municipal-owned city utility run as a private GmbH (like Limited) which takes care of all public transport, electricity delivery and water, plus heating for some and municipal swimming pools as a spin-off of the heating plants.
Stadtwerke München together with other municipal utilities over here owns M-Net, which laid fiber-optics to every home within Munich city limits. Very good for MSMEs over here.
Thats the same old tired social injustice arguments levied against market and capital economies in general, and not to Friedman’s writings on it. I think you must not have noticed my statement about my views being limited to macroeconomics and not to ideas about socio-political problems that crop up with with each system. Thats because the blog topic is already quite complicated and difficult as it is without vastly expanding the scope of this discussion. We can discuss whether society is better off under a command versus market economy but that will have to be in another blog article perhaos written by you?
Tired? Nope, real. And besides the choice is not a command versus market economy. There is a whole spectrum of possibilities. Now if you don’t want to extend this discussion, then don’t answer my postings. None of us two is the moderator here in this blog.
Besides, it is relevant – because irresponsible American fiscal policies are making life harder for a large part of the world population. Good thing the dollar is not the only currency around as a reserve nowadays. The crises the Euro has pale in comparison to the stuff chempo has written about. European Continental policies are also market-oriented, but more geared towards general prosperity, not just to make a few people on Wall Street rich while the rest slave it off and many live as trailer trash or in ghettos.
Haha one missing word and see what happens. OK re your para one, understood.
Of course I know a bit of Milton, but never read the book. Thanks, sure worth looking up.
Just how are the social injustices under the gradiations between a free market and socialist economies relevant to the explaining the genesis and consequences of the $18 trillion public debt? Sure its Joe’s blog and his call to keep comments on topic which is typically his custom here. I am here at Joe’s blog because of that and don’t have to read about anti-Poe diatribes or the epic of Gilgamesh because the poster is impassioned about it even if the discussion is mainly about something else. Not to say that your comments are not valid even if nothing new. It really deserves its own article or a series because the main complaint against the economic successes in the Philippines, the US, and the EEC is that it leaves even the middle and under classes behind. But as I have said its a huge and right now an out of topic subject to tackle and I won’t indulge in deference to Joe and chempo who wrote this article so people can understand US public debt causes and concepts.
Some short answers:
1. To call for being on-topic is Joe’s prerogative alone, and not that of a relative newbie.
2. Frequent and “senior” posters (MRP) are given latitude by “customary law”.
3. Some drift is tolerated if the topic is contiguous to the main topic.
As to the topic itself:
a) you started with Friedman and I gave my opinion about him including that stuff.
b) you mentioned Reagan and Thatcher – their policies ruined US and UK middle classes.
c) chempo mentioned it as a threat to the global financial system, and I see that as well.
d) therefore the blindness and doctrinaire attitude of neoliberals is VERY relevant here.
e) implicitly calling everybody who is not for that a communist is not really productive.
Your talking down to “non-experts” is IMHO not the customary tone in this Society.
—————————————————————————————————–
Besides, your interpretation of the topic is IMHO very narrow, Herr Dr. Caliphman.
chempo describes the way the US manages its money as a danger to global stability.
It can destroy entire countries – well the Euro also has destroyed a lot of things, to be fair.
—————————————————————————————————–
Now instead of deriding people who see possible dangers as “Chicken Little”. why not:
i) tell us how the crises chempo has described in his article can be avoided in the future?
ii) help us understand the topic better, if you are a true expert, you can explain it simply.
Getting personal now, arent we? I have known Joe at CPM way before you started coming here as PIE and before you setup your own blogsite because you wanted to do as you wish. If anyone is behaving as an expert in anything and everything, its usually the one who unleashes the most verbiage on whatever subject mosty because its usually unfocused and meanders off on a tangent mainly because its what he wants to write about and not what others may have dropped by to hear. Not that you apparenty care. Having said this, I find this subthread stupid and tiresome, so I am out of it but knowing you, you always insist on the last word, so have at it, Irineo.
I am not an expert… I am a seeker of knowledge who thinks loud a bit too often… but that has improved and is improving continously, so PIE does not count anymore. Plus many here now appreciate my way of paying forward my own learning process by explaining.
Teach and Learn, Learn and Teach is my adage. Thinking of it as pasikat or epal is a malicious interpretation. Now you are invited to comment on my comprehensive summary which is on-topic below, or not. But I am sure chempo will, in case he deems it relevant. Possibly my dumbed-down, possibly inaccurate interpretation could be more useful to the entire community here than what you or RHiro (who has improved) are bringing forth, which to many could just be Greek – or Latin. Pax vobiscum, et cum spiritu tuo. Amen. 🙂
Can somebody explain Bitcoin and its equivalents in all this? Has it a future or is it a virtual casino?
I never thought that bitcoins are scary.
IMF chief : Banks shouldn’t fear bitcoin.
http://www.coindesk.com/imf-chief-banks-bitcoin-blockchain/
Paging Chempo or anyone, do you know anything about cryptocurrency and bitcoin? All I can do is google,but joseph can do that too.
http://www.breakingout.net/money/will-bitcoin-become-a-major-currency-in-the-future/
Sorry Karl, I have absolutely no idea about this.
ok just hoping you would have
Got a feeling Gian might.
https://en.wikipedia.org/wiki/Yap#Stone_money – an interesting form of Pacific island currency:
Yap is known for its stone money, known as Rai: large doughnut-shaped, carved disks of (usually) calcite, up to 4 m (12 ft) in diameter (most are much smaller). The smallest can be as little as 3.5 centimetres (1.4 in) in diameter.[4] There are five major types of moneys: Mmbul, Gaw, Fe’ or Rai, Yar, and Reng, this last being only 0.3 m (1 ft) in diameter. Many of them were brought from other islands, as far as New Guinea, but most came in ancient times from Palau. Their value is based on both the stone’s size and its history. Historically the Yapese valued the disks because the material looks like quartz, and these were the shiniest objects around. Eventually the stones became legal tender and were even mandatory in some payments.[5]
The value of the stones was kept high due to the difficulty and hazards involved in obtaining them. To quarry the stones, Yapese adventurers had to sail to distant islands and deal with local inhabitants who were sometimes hostile. Once quarried, the disks had to be transported back to Yap on rafts towed behind sail-driven canoes. The scarcity of the disks, and the effort and peril required to get them, made them valuable to the Yapese.
Bitcoins are also in limited supply, because the algorithm that creates them limits it automatically.
Finally the great limiting factor for all economic progress is the environment. Possibly the currency of the future should be issued by a Jedi-type priesthood that monitors the limits of the global environment, and lives on Easter Island, the prime example of how conflict and plunder of natural resources destroyed a great culture. We cannot go back to living naturally, but we should try to stop acting as if we were gods, and find back to respect for our planet before it is too late.
http://www.eco-action.org/dt/eisland.html – the lessons of Easter Island:
Easter Island is one of the most remote inhabited places on earth. Only some 150 square miles in area, it lies in the Pacific Ocean, 2,000 miles off the west coast of South America and 1250 miles from the nearest inhabitable land of Pitcairn Island. At its peak the population was only about 7,000. Yet despite its superficial insignificance, the history of Easter Island is a grim warning to the world…
The Easter Islanders’ solution to the problem of transport provides the key to the subsequent fate of their whole society. Lacking any draught animals they had to rely on human power to drag the statues across the island using tree trunks as rollers. The population of the island grew steadily from the original small group in the fifth century to about 7,000 at its peak in 1550. Over time the number of clan groups would have increased and also the competition between them. By the sixteenth century hundreds of ahu had been constructed and with them over 600 of the huge stone statues. Then, when the society was at its peak, it suddenly collapsed leaving over half the statues only partially completed around Rano Raraku quarry. The cause of the collapse and the key to understanding the `mysteries’ of Easter Island was massive environmental degradation brought on by deforestation of the whole island.
Now the Philippines is also an Austronesian society like that of Easter island. Clan groups with rivalries rule it, and deforestation is a major issue…
Who knows if in a few hundred years, only ancestral statues will remain on the islands?
After 1600 Easter Island society went into decline and regressed to ever more primitive conditions. Without trees, and so without canoes, the islanders were trapped in their remote home, unable to escape the consequences of their self-inflicted, environmental collapse. The social and cultural impact of deforestation was equally important. The inability to erect any more statues must have had a devastating effect on the belief systems and social organisation and called into question the foundations on which that complex society had been built. There were increasing conflicts over diminishing resources resulting in a state of almost permanent warfare. Slavery became common and as the amount of protein available fell the population turned to cannibalism. One of the main aims of warfare was to destroy the ahu of opposing clans. A few survived as burial places but most were abandoned. The magnificent stone statues, too massive to destroy, were pulled down. The first Europeans found only a few still standing when they arrived in the eighteenth century and all had been toppled by the 1830s. When they were asked by the visitors how the statues had been moved from the quarry, the primitive islanders could no longer remember what their ancestors had achieved and could only say that the huge figures had `walked’ across the island. The Europeans, seeing a treeless landscape, could think of no logical explanation either and were equally mystified.
Austronesians moved to the next island whenever they became too many on their own… the Easter Islanders had nowhere else left to go…
Filipinos also move out worldwide like their ancestors did who settled the Pacific.
“Austronesians moved to the next island whenever they became too many on their own… the Easter Islanders had nowhere else left to go…”
Are you familiar with these maps?
“We can show [from chicken DNA] that the trail heads back into the Philippines,” Cooper said. “We’re currently working on tracing it farther northward from there. However, we’re following a proxy, rather than the actual humans themselves.”
Among the intriguing indications that contact might have been made between Polynesians and the native peoples of South America was the supposed pre-Columbian presence of non-native chickens, allegedly introduced to the continent by seafarers from South Pacific islands. More evidence comes from the ubiquity of the sweet potato, a South American native, in the South Pacific—it was already widespread throughout the islands by the time James Cook sailed into the region in 1770.
Now it appears the chicken link, at least, may be severed, according to Alan Cooper, director of the Australian Centre for Ancient DNA.
http://news.nationalgeographic.com/news/2014/03/140318-polynesian-chickens-pacific-migration-america-science/
http://www.pilipino-express.com/history-a-culture/in-other-words/225-mexico-is-not-just-a-town-in-pampanga.html – some of this may have been from the galleon trade, some before:
Along with loads of silver, the galleons also brought supplies from America, such as horses, books and new kinds of plants and foods. Fruits and vegetables are probably the largest contributors of Latin American words to the Filipino vocabulary. It is estimated that there are about 250 Nahuatl words in the Filipino language. (See the chart below for some examples.)
Some Latin American foods became so popular that their Nahuatl names have entered languages around the world – xocolatl (chocolate), xitomatl (tomato), potatl (potato), ahuacamolli (guacamole) and mizquitl (mesquite). Even the name of the popular American chewing gum, Chiclets, is rooted in the Nahuatl word tzictli, which means “sticky”. And of course, corn or mais and tobacco were originally grown in the Americas. Their names can be traced back to the Arawak people of the Caribbean. Other fruits and vegetables such as the pineapple, the peanut, papaya, lima beans, cassava, chico/zapote and balimbing came from Central and South America, too.
It went the other way too:
Filipino mestizo merchants travelled on the ships, bringing with them bits of Filipino culture that are now a part of Mexican culture. Mango seedlings were brought to Mexico in 1779 and were later crossed with other varieties of mango to produce the so-called Manila mango, which is now the favourite variety in Mexico. In 2005 the Philippine government protested Mexico’s plans to patent the name as their own.
Filipino workers who were brought to Mexico to cultivate sugar cane and rice brought with them the popular palm wine called tuba, which is still sold along the streets and in markets of Mexico.
Even the traditional Filipino shirt, the Barong Tagalog has its counterpart in the Guayabera or Yucatan shirt of Mexico and Cuba, though where it originated is a matter of some debate. All three countries claim to have invented the design, which just further demonstrates the intertwined history of the Philippines and Latin America.
The book 1493 by Charles Mann proves that not one plant in the Filipino song “Bahay Kubo” is native, and that there were Filipino communities in Mexico City centuries ago, well-known for their Catholic processions… and even some Filipinos in Havana…
https://www.reddit.com/r/AskHistorians/comments/118ims/in_1493_charles_mann_makes_a_brief_mention_of/ – it gets even better… samurai:
Known collectively as chinos, Asian migrants spread slowly along the silver highway from Alcapulco to Mexico City, Puebla, and Veracruz. Indeed, the road was patrolled by them–Japanese samurai perhaps in particular. Katana swinging Japanese had helped suppress Chinese rebellions in Manila in 1603 and 1609. When Japan closed its borders to foreigners in the 1630s, Japanese expatriates were stranded wherever they were. Scores, perhaps hundreds, migrated to Mexico. Initially the viceroy had forbidden… chinos to carry weapons. The Spaniards made an exception for samurai, allowing them to wield their katanas and tantos to protect the silver shipments against the escaped-slaves-turned highwaymen in the hills…
They were Japanese Catholics who were hired to fight against the Dutch. They were driven out of Japan in the aftermath of the Shimabara Rebellion, in which the Dutch had helped the Tokugawa Shogunate defeat the Catholic rebels and marked the beginning of serious persecution of Catholics in Japan.
Yeah, man, those samurais, ronins, pirates, mercs are interesting, they supposedly made it all the way to Peru/Bolivia where much of the silver that China demanded was mined, Japanese prostitutes also plied their trade across the Pacific, https://en.wikipedia.org/wiki/Nanban_trade
I’ve always wondered how many African samurais Japan produced, after the Portuguese Jesuits & merchants brought them over,
“Japan is not a place one would usually associate with immigrants from Africa or the Caribbean. Yet in the late 16th century Japan’s most powerful warlord, Oda Nobunaga, had a black page who was not only a cultural curiosity but also served as Nobunaga’s bodyguard and was granted the prestigious rank of Samurai.
This was a time of incessant warfare as the Ashikaga Shogunate fell and Japan became a war-torn nation with each tribe vying for control of against rival warlords. During this time the key to supremacy lay in controlling the powerless Emperor in his court in Kyoto. In the mid 16th century this civil war was nearing its end with the arrival of the Europeans and their modern armaments, guns and cannons. With these new weapons Japan would be reunified by three warlords: Oda Nobunaga would begin the process; his successor Toyotomi Hideyoshi would complete unification and Tokugawa Ieyasu would consolidate it an bring in an unprecedented 250 years of peace.
Nobunaga is himself a very interesting character. Nobunaga began life as a rather minor provincial lord until he defeated a one of Japan’s most powerful warlords of the time, Imagawa Yoshimoto, at the battle of Okehazuma (1560). Within the next 20 years Nobunaga had conquered nearly a third of Japan. Nobunaga was not only a powerful warlord but a master of strategy who pioneered the use of guns in battle. At the Battle of Nagashino, in 1575, Nobunaga managed to compensate the slow reloading time of the arquebus (an early musket) by organising his gunmen in lines of three; when one line fired the rows behind would fire giving time for the first row to reload again and so on. It is argued that Nagashino was the first “modern” battle because of Nobunaga’s ingenuity.
Nobunaga was obsessed with all things Western besides their armour and armaments and is one of the first recorded Japanese men to have worn Western clothing, use tables and chairs, and drink wine from goblets. Although it is a well known fact that Nobunaga was an atheist, his affinity with Western ways and the subsequent presence of the Jesuit missionaries in his court provoked rumours that he had converted Christianity, a label that has generally stuck in popular culture (this image of belonging to a foreign religion complements his reputation as one of the bloodiest warlords in Japanese history). However, his curiosity in the Jesuit missionaries was piqued by a black slave from Mozambique (some sources say Congo) who was the page of the Italian Visitor (inspector) of the Jesuit missions in the East, Alessandro Valignano.
We do not know this slave’s actual name but the Japanese called him Yasuke (彌介), the reason for this name is unknown as it does not have a clear meaning and that it is most likely a “Japanization” of his actual name. He was apparently 6ft 2in and would have towered over the Japanese of the day. Nobunaga first heard of Yasuke when the news reached him in 1581 of the great crush that had occurred when Valignano had brought him to Kyoto where his skin colour and height attracted a huge crowd. Nobunaga ordered the Jesuit to bring Yasuke to his court so that he could see this sensation in the flesh. Upon seeing Yasuke Nobunaga allegedly ordered his stripped to the waist and scrubbed believing that his skin was painted. Japanese sources described Yasuke as “looking between the age of 24 or 25, black like an ox, healthy and good looking, and possessing the strength of 10 men.
Nobunaga was further intrigued by the fact that Yasuke could speak Japanese (albeit not perfectly) and ordered Valignano to leave Yasuke in his care when the Jesuit prepared to leave again. Yasuke became a permanent fixture in Nobunaga’s retinue, his size and strength acting as a deterrent to assassination not to mention a flavour of exoticism to accompany the warlord’s other Western possessions. Apparently Nobunaga became so fond of Yasuke that rumours abounded that the slave was going to be made a Daimyo (a Japanese land-owning lord). These rumours were proven wrong, however, Yasuke was given the honour of being made a member of the samurai class, a rare honour among foreigners.”
This is one of my favorite movies – Ghost Dog, the Way of the Samurai…
The father of novelist Alexandre Dumas BTW was half-black and a French count…
Napoleon hated General Dumas, possibly for being taller, and sidelined him…
“Napoleon hated General Dumas, possibly for being taller, and sidelined him…”
Probably because once you black, you never go back.
Dark Green Marines (black Marines) love Ghost Dog and the Last Dragon,
Yep, Napoleone Buonaparte was a Corsican after all, and they are incredibly racist to this day… and have their own kind of Mafia in France, very tightly and traditionally organized.
This 2009 movie – “A Prophet” is about an Arab Frenchman who makes his way up in prison serving the Corsicans as a middleman and assasin… it is steeped in references to the Koran, with the first man he murdered helping him find his way – Scarface in French…
Ireneo,
I’ve not heard of Charles Mann https://en.wikipedia.org/wiki/Charles_C._Mann , thanks— I’ll definitely check-out his works,
Who to believe ? Charles Mann, a journalist or Charles Darwin, a botanist ???? In-depth learning or mouthing ??????
Type away, uruguay ☺☺☺
Hey, I’m already telling all kinds of stuff to the Marines, right here. 🙂 🙂 🙂
Shouldn’t the apt comparison to Charles Darwin, be Alfred Wallace? 😉
“Popularizers” like Charles Mann and Malcolm Gladwell are essential for bringing the knowledge found in-depth by academics to interested laymen…
https://en.wikipedia.org/wiki/Jared_Diamond is an anthropologist and popularizer, with quite interesting books that add to knowledge of the human condition…
Diamond’s first popular book, The Third Chimpanzee: The Evolution and Future of the Human Animal (1991), examines human evolution and its relevance to the modern world, incorporating evidence from anthropology, evolutionary biology, genetics, ecology, and linguistics. The book traces how humans evolved to be so different from (other) animals, despite sharing over 98% of our DNA with our closest animal relatives, the chimpanzees. The book also examines the animal origins of language, art, agriculture, smoking and drug use, and other apparently uniquely human attributes. It was well received by critics and won the 1992 Rhône-Poulenc Prize for Science Books[13] and the Los Angeles Times Book Prize.[14]
His second and best known popular science book, Guns, Germs, and Steel: The Fates of Human Societies, was published in 1997. It asks why Eurasian peoples conquered or displaced Native Americans, Australians, and Africans, instead of vice versa. It argues that this outcome was not due to biological advantages of Eurasian peoples themselves but instead to features of the Eurasian continent, in particular, its high diversity of wild plant and animal species suitable for domestication and its east/west major axis that favored the spread of those domesticates, people, and technologies for long distances with little change in latitude. The first part of the book focuses on reasons why only a few species of wild plants and animals proved suitable for domestication. The second part discusses how local food production based on those domesticates led to the development of dense and stratified human populations, writing, centralized political organization, and epidemic infectious diseases. The third part compares the development of food production and of human societies among different continents and world regions. Guns, Germs, and Steel became an international best-seller, was translated into 33 languages, and received several awards, including a Pulitzer Prize, an Aventis Prize for Science Books[13] and the 1997 Phi Beta Kappa Award in Science.[15] A television documentary series based on the book was produced by the National Geographic Society in 2005.[16][17]…
Diamond’s next book, Collapse: How Societies Choose to Fail or Succeed, published in 2005, examines a range of past societies in an attempt to identify why they either collapsed or continued to thrive and considers what contemporary societies can learn from these historical examples. As in Guns, Germs, and Steel, he argues against explanations for the failure of past societies based primarily on cultural factors, instead focusing on ecology. Among the societies mentioned in the book are the Norse and Inuit of Greenland, the Maya, the Anasazi, the indigenous people of Rapa Nui (Easter Island), Japan, Haiti, the Dominican Republic, and modern Montana. The book concludes by asking why some societies make disastrous decisions, how big businesses affect the environment, what our principal environmental problems are today, and what individuals can do about those problems. Like Guns, Germs, and Steel, Collapse was translated into dozens of languages, became an international best-seller, and was the basis of a television documentary produced by the National Geographic Society.[18][19] It was also nominated for the Royal Society Prize for Science Books.[13]
There’s an argument for liberal arts education right there and then, in situ (classroom) not thru correspondencia . . . .
What school does not give us – and advances in thought – we can only gain through self-study. The more school has gifted us with discernment, the better we can deal with it. Total autodidacts go for conspiracy theories because they lack the capability to evaluate.
Off topic, a must read Dissenting Opinion of Justice Brion on the HRET/SET decision on GPL. Its a lengthy article but very very clear and concise that Grace Llamanzares should have been disqualified by the SET, and also includes the opinion/facts that Supreme Court must abandon precedent cases re acquisiton of philippines citizenship be considered a Natural Born pino(a)y’s.
http://www.interaksyon.com/article/120486/justice-brion-explains-his-dissenting-opinion-on-the-set-ruling-on-poe-dq-petition
slightly off-topic – LCPL_X, this lawyer suing Cebu Pacific may be the start of a Filipino ACLU…
Thanks, man! I’ll keep an eye on this—- very promising.
Hi Joe Am,How do you make out the decision by Sen. Bam Aquino, an LP stalwart, to vote in favor of Sen. Poe? It’s a puzzle when it was quite clear to the magistrates that she is not qualified to run! Hector A. Sanvictores email: hector_sanvictores@yahoo.com mobile no. 0921-9616803 From: The Society of Honor by Joe America To: hector_sanvictores@yahoo.com Sent: Thursday, November 19, 2015 3:01 PM Subject: [New post] The American US$18 trillion debt – a Rube Goldberg machine #yiv6095380419 a:hover {color:red;}#yiv6095380419 a {text-decoration:none;color:#0088cc;}#yiv6095380419 a.yiv6095380419primaryactionlink:link, #yiv6095380419 a.yiv6095380419primaryactionlink:visited {background-color:#2585B2;color:#fff;}#yiv6095380419 a.yiv6095380419primaryactionlink:hover, #yiv6095380419 a.yiv6095380419primaryactionlink:active {background-color:#11729E;color:#fff;}#yiv6095380419 WordPress.com | chempo posted: “This article is in response to many who have asked in this Society blog, as well as in Filipino internet chatter, why is the Pnoy administration taking on foreign loans instead of in local currency which the govt can repay simply by printing peso because ” | |
Putting things together from an economic layman’s point of view:
1) Around 60% of the world’s currency reserves are $, around 20% are in € now. Russia’s main reserve currency is now Euro, many European and African currencies are pegged to the Euro. Saudi Arabia’s currency is pegged to the $, like many Latin American currencies.
2) Both the $ and the € are in principle well-managed. The $ from what I now gather mainly monetarist, the € according to the Bundesbank postwar doctrine which was adopted wholesale by the ECB which is in Frankfurt and was meant to avoid Weimar Republic inflation at all costs.
3) Both the $ and the € have their risks. Both use bonds a lot, the € started resorting to this because of the Greek crisis. The USA has Petrodollars, much Russian € must be oil/gas-related.
4) Both IMF and ECB/Troika have resorted to harsh measures against debtor nations. World Bank measures and austerity measures against Greece have led to great suffering, but also to recovery like what is happening in Spain right now. Countries have been forced to restructure.
5) The GDP of the USA and the Eurozone are more or less equal. The latter has more production of its own, while the former has outsourced a lot. The Eurozone is however easier to attack from a military standpoint, while the USA is better able to defend its trading interests by aircraft carrier..
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This my present big picture, without having the full terminology and subject to correction. Plus:
A) Brazil, India, Russia, China wanted to put up their own kind of IMF to counter the US-led IMF.
B) China wants the yuan to become a major reserve currency. Their economic power including production and growing military power are leading them to demand a place in the power concert.
C) The yen, the pound sterling and the Swiss Franc are too small in terms of the areas they represent an the GDP they have to be more than a little bit of spice to add to the mix.
However, the following make A) and B) unlikely and not useful for the moment:
a) The USA and EU, for all economic competition, continue to be tightly connected allies.
b) Only the Fed and the ECB, each in their own way, are sophisticated enough in money matters.
c) The EU and the USA, each in their own way, treat partners as partners, not as vassals, which is what Russia, China and India do, each in their own way. Greece cheated on a major part of the Euro deal and had to be strong-armed to keep the Euro from disintegrating – a different story.
d) Russia, China and India are not yet truly modern economies like the EU and the USA. Russia is a cold Emirate with nuclear weapons. China is successful state capitalism, not much more. India?
e) The USA will not allow China to become the hegemon over East Asia. Just like it will not allow Russia to become the hegemon over Europe – but in Europe the EU/NATO is helping do the job, so Southeast Asia is the absolute zone of contention now. Thailand + Malaysia – pro-Chinese, Philippines + Vietnam – pro-USA, Singapore and Indonesia standoffish towards both I think, the rest I don’t really know. But economics and politics are always intertwined in the end.
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What could be the solution for the Philippines?
i) President Aquino is building partnerships as a pioneer. He raised the China issue at ASEAN.
ii) ASEAN integration is moving forward. EU and ASEAN have close ties and expert cooperation.
iii) A common currency between some ASEAN members might be an idea. Or start by pegging own currency to the probably most stable currency in the region, the Singapore Dollar. This discipline – effectively the times before the Euro were that way, with numerous European currencies pegged or floating within a self-imposed range towards the Deutsche Mark, then 1999 a number of currencies were pegged to an imaginary Euro which became real money in 2002.
What will the future hold for the world?
I) The dollar will remain the world’s primary currency for quite a while.
II) Regional alternatives like the Euro and a possible ASEAN Currency would help, provided the regions are economically well-integrated, the currencies managed professionally and the fiscal policies of individual states held to very strict rules – something the Euro Zone had to learn.
III) The GDP of ASEAN is around 1/3 of that of the Eurozone or the USA and growing. Both $/€ are too big to fail, their economic areas as well. To get there might be a worthy goal for ASEAN. Chinese GDP is only a bit more than twice the GDP of ASEAN, one should never forget that…
I must add this comment though:
1) it is the JOB of experts to translate their expertise in such a way that leaders and the informed public can understand things with some effort. Just like Joe’s lawyers in his old job knew how to translate legal stuff in such a way that Joe understood it, and I have to translate my computer stuff to managers and key users in such a way that they know more or less what is being done and can make informed decisions. Otherwise they are not useful.
2) Filipino experts often lack the capability to speak to informed laymen in a proper manner. The arrogance of the rich towards the poor and even the middle class is mirrored in the arrogance of the educated and expert towards the less educated and less expert, even towards those who are NOT ignorant. Such attitudes are pre-Renaissance and pre-Enlightenment, phases of cultural development large parts of the Philippines did not go through, having been ruled by the culturally and religiously backward Mexicans + Spanish.
3) Experts often fall into the trap, even in developed countries, of becoming high priests. But in developed countries an informed and bold public questions them. Renaissance, Lutheranism (don’t just follow what the priest says in his homily and listen to rest of the Latin mass without understanding, read the bible yourself!) and the Enlightenment are phases of cultural development people have internalized. They are not intimidated easily.
I loved a book about the history of economics by Paul Samuelson, noted economist BTW, who had the expertise to explain, and the humility and sense of service to explain it well. One of his major theses was that economic theories very much reflected the spirit of the respective times in which they were formulated. So in a way economics is part science, part belief. Well after all “credit” comes from “credere” which means to believe – that someone will pay that credit back to you. In a way all economy runs on some degree of trust…
Too specialized terminology is called “Fachchinesisch” in Germany – expert’s Chinese.
Specialists who do not understand anything beyond their expertise are called Fachidioten.
Expert idiots speaking expert Chinese are not useful for any public kind of discussion… 🙂
Irineo: thanks for talking in a language I can understand. And I appreciate the broader scope of the picture that you paint. I will try to integrate that — if I can — with the rest of the commentaries here and my other readings; best of luck to me, of course. Hahaha.
Just a short note of appreciation from a Non-Expert Chinese.
Welcome. 🙂 I just tried to pay forward what Edgar did for me in my “Reconstitute the Philippines” article – break it down and help others understand – for chempo.
Chempo did a great job of simplifying a very difficult subject matter for all of us here, but it is so complex that I understood only parts of it before.. so I am also paying forward my learning curve here… I often tuned out when topics like that are discussed on German TV, something always remains, but not having gone to school here in my first ten years is something I notice at that point, chempo has helped me connect some of the dots, finally.
Well, I can almost imagine one of your Chinese migrant ancestors to the Philippines doing similar numbers games like you do – with the most ancient of all computers, the abacus. 🙂
It is one of the challenges of our community that we all bring our respective backgrounds, and that we can learn a lot from one another, but it will not always be an easy process.
Those who know something have to try to break it down as simply as they can – not easy – and those who know less must be bold enough to ask. And those who understand first must help break things down for those who have not yet understood. Finally our learning process here can help the nation, which is going through the same collective learning process, but with significantly wider gaps between the learned and the unlearned.
Mar Roxas is trying to reach the less learned, but the gap is wide, and Leni bridges it. Enlightenment is reaching the Philippines, the Middle Ages may finally be over – hopefully.
https://www.ecb.europa.eu/press/key/date/2015/html/sp150213.en.html – back on topic.. some food for thought from the ECB:
The financial crisis has shown that price stability is not sufficient to guarantee financial stability. The financial cycle and the business cycle are not synchronised, implying that risks can emerge especially in the periods of “disconnect” between the two cycles. In the run-up to the financial crisis, imbalances were building-up while inflation was low and stable. At present, the search for yield phenomenon continues against the very low inflation, subdued growth and low interest rate environment.
Monetary policy aims at ensuring price stability in the market for goods and services. It should not be used to address pockets of instability in asset markets. This falls under the remit of macro-prudential policy, aimed at safeguarding stability of the financial system and containing systemic risk. At present, in advance economies, monetary policy needs to stabilise prices and to continue supporting real activity, while macro-prudential policy needs to tame the financial sector in asset market segments showing signs of exuberance or where imbalances could be forming.
Financial stability objectives can only be achieved with an effective macro-prudential policy. This requires policy interventions in a timely and bold manner, significantly affecting the normal behaviour of financial markets or financial institutions. This poses great challenges. First, measures would need to be admittedly intrusive, going well beyond the new capital and liquidity regulatory framework. Secondly, the macro-prudential tool-kit that has been legislated – including the one entrusted to the ECB/SSM – is not complete, it is centred on banks. Instruments would need to address other financial activities and institutions, notably pertaining to the steadily growing “shadow banking” sector. Advanced economies will only be able to ensure financial stability with effective macro-prudential policy interventions.
https://en.wikipedia.org/wiki/Macroprudential_regulation is an important term here:
The term macroprudential regulation characterizes the approach to financial regulation aimed to mitigate the risk of the financial system as a whole (or “systemic risk”). In the aftermath of the late-2000s financial crisis, there is a growing consensus among policymakers and economic researchers about the need to re-orient the regulatory framework towards a macroprudential perspective.
If I look at the statement from an educated layman’s point of view, the bond market and the Petrodollar as well as oil- and gas-Euro market (Russia) could be seen as a form of “shadow banking” – money not really accounted for in the M1, M2 etc. equations (M1 and M2 are something published in the financial section of any serious European newspaper, so I am familiar with these terms, and am thankful to chempo for simplifying their definitions).
Dependency on the dollar alone to exchange money between nations is also dangerous from how I have understood chempo’s article. Many countries are finding other, directer mechanisms. The Euro is one intra-Eurozone mechanism, even if de facto there were reserves of other currencies especially Deutsche Mark and Swiss Francs on the Continent, plus it is a mechanism that goes up to Eastern Europe, which used to have more stocks of “valuta” (still called like that) in $ before.
——————————————————————————————————————–
The first paragraph of the press release says a lot: price stability is not enough, because the financial cycle and the business cycle are not synchronized, crisis times are during disconnects.
This means both the old Bundesbank/ECB emphasis on price stability alone as well as MMT are wrong. The correct approach is probably a more situational one, and very difficult to calibrate.
https://en.wikipedia.org/wiki/Macroprudential_regulation#Macroprudential_tools – let’s have a look:
A large number of instruments have been proposed;[15] however, there is no agreement about which one should play the primary role in the implementation of macroprudential policy.
Most of these instruments are aimed to prevent the procyclicality of the financial system on the asset and liability sides, such as:
Cap on loan-to-value ratio and loan loss provisions
Cap on debt-to-income ratio
The following tools serve the same purpose, but additional specific functions have been attributed to them, as noted below:
Countercyclical capital requirement – to avoid excessive balance-sheet shrinkage from banks in trouble.
Cap on leverage (finance) – to limit asset growth by tying banks’ assets to their equity (finance).
Levy on non-core liabilities – to mitigate pricing distorsions that cause excessive asset growth.
Time-varying reserve requirement – as a means to control capital flows with prudential purposes, especially for emerging economies.
To prevent the accumulation of excessive short-term debt:
Liquidity coverage ratio
Liquidity risk charges that penalize short-term funding
Capital requirement surcharges proportional to size of maturity mismatch
Minimum haircut requirements on asset-backed securities
In addition, different types of contingent capital instruments (e.g., “contingent convertibles” and “capital insurance”) have been proposed to facilitate bank’s recapitalization in a crisis event.).
——————————————————————————————————————
Basel III is mentioned as an important aspect to implementing these tools, to reduce risks.
My simple understanding is that banks have to work less speculation and more substance.
Two examples:
https://en.wikipedia.org/wiki/Loan-to-value_ratio – if someone borrows $130,000 to purchase a house worth $150,000, the LTV ratio is $130,000 to $150,000 or $130,000/$150,000, or 87%. The remaining 13% represent the lender’s haircut, adding up to 100% and being covered from the borrower’s equity. The higher the LTV ratio, the riskier the loan is for a lender.
https://en.wikipedia.org/wiki/Debt-to-income_ratio – A debt income ratio (often abbreviated DTI) is the percentage of a consumer’s monthly gross income that goes toward paying debts. (Speaking precisely, DTIs often cover more than just debts; they can include principal, taxes, fees, and insurance premiums as well. Nevertheless, the term is a set phrase that serves as a convenient, well-understood shorthand.)
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de facto it is harder to get loans from banks since Basel II, and will be even harder with Basel III.
Banks will be limited as well… examples:
https://en.wikipedia.org/wiki/Capital_requirement – Capital requirement (also known as regulatory capital or capital adequacy) is the amount of capital a bank or other financial institution has to hold as required by its financial regulator. This is usually expressed as a capital adequacy ratio of equity that must be held as a percentage of risk-weighted assets. These requirements are put into place to ensure that these institutions do not take on excess leverage and become insolvent. Capital requirements govern the ratio of equity to debt, recorded on the liabilities and equity side of a firm’s balance sheet. They should not be confused with reserve requirements, which govern the assets side of a bank’s balance sheet—in particular, the proportion of its assets it must hold in cash or highly-liquid assets.
https://en.wikipedia.org/wiki/Leverage_%28finance%29 – In finance, leverage (sometimes referred to as gearing in the United Kingdom and Australia) is any technique to multiply gains and losses.[1] Most often it involves buying more of an asset by using borrowed funds, with the belief that the income from the asset or asset price appreciation will be more than the cost of borrowing. Almost always this involves the risk that borrowing costs will be larger than the income from the asset, or that the value of the asset will fall, leading to incurred losses.
Banks should basically gamble less and have more real money in reserve just in case, is my simple understanding of this, please correct me if I am wrong.
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chempo is getting at a further risk… the gambling done by countries themselves.
Greece gambled and lost, was bailed out by the other Euro countries and forced to skimp.
Now Greeks are often gamblers, as a former gambler I know this… and can be big tricksters.
What chempo is saying, I think, is that the US is playing a big gamble and Ponzi scheme as of now.
Las Vegas Chips or dollars are in circulation, but there is not enough real money (gold) as chips.
Now if enough of the whales in the casino decide to cash in many chips, the house will be broken.
Two big gangsters – China and Russia – say the casino owner (USA) is cheating and want to leave.
This analogy has the weakness that it does not include production and services – value created.
https://www.ecb.europa.eu/press/key/date/2015/html/sp150213.en.html – back on topic.. some food for thought from the ECB:
The financial crisis has shown that price stability is not sufficient to guarantee financial stability. The financial cycle and the business cycle are not synchronised, implying that risks can emerge especially in the periods of “disconnect” between the two cycles. In the run-up to the financial crisis, imbalances were building-up while inflation was low and stable. At present, the search for yield phenomenon continues against the very low inflation, subdued growth and low interest rate environment.
Monetary policy aims at ensuring price stability in the market for goods and services. It should not be used to address pockets of instability in asset markets. This falls under the remit of macro-prudential policy, aimed at safeguarding stability of the financial system and containing systemic risk. At present, in advance economies, monetary policy needs to stabilise prices and to continue supporting real activity, while macro-prudential policy needs to tame the financial sector in asset market segments showing signs of exuberance or where imbalances could be forming.
Financial stability objectives can only be achieved with an effective macro-prudential policy. This requires policy interventions in a timely and bold manner, significantly affecting the normal behaviour of financial markets or financial institutions. This poses great challenges. First, measures would need to be admittedly intrusive, going well beyond the new capital and liquidity regulatory framework. Secondly, the macro-prudential tool-kit that has been legislated – including the one entrusted to the ECB/SSM – is not complete, it is centred on banks. Instruments would need to address other financial activities and institutions, notably pertaining to the steadily growing “shadow banking” sector. Advanced economies will only be able to ensure financial stability with effective macro-prudential policy interventions.
https://en.wikipedia.org/wiki/Macroprudential_regulation is an important term here:
The term macroprudential regulation characterizes the approach to financial regulation aimed to mitigate the risk of the financial system as a whole (or “systemic risk”). In the aftermath of the late-2000s financial crisis, there is a growing consensus among policymakers and economic researchers about the need to re-orient the regulatory framework towards a macroprudential perspective.
If I look at the statement from an educated layman’s point of view, the bond market and the Petrodollar as well as oil- and gas-Euro market (Russia) could be seen as a form of “shadow banking” – money not really accounted for in the M1, M2 etc. equations (M1 and M2 are something published in the financial section of any serious European newspaper, so I am familiar with these terms, and am thankful to chempo for simplifying their definitions).
Dependency on the dollar alone to exchange money between nations is also dangerous from how I have understood chempo’s article. Many countries are finding other, directer mechanisms. The Euro is one intra-Eurozone mechanism, even if de facto there were reserves of other currencies especially Deutsche Mark and Swiss Francs on the Continent, plus it is a mechanism that goes up to Eastern Europe, which used to have more stocks of “valuta” (still called like that) in $ before.
——————————————————————————————————————–
The first paragraph of the press release says a lot: price stability is not enough, because the financial cycle and the business cycle are not synchronized, crisis times are during disconnects.
This means both the old Bundesbank/ECB emphasis on price stability alone as well as MMT are wrong. The correct approach is probably a more situational one, and very difficult to calibrate.
https://en.wikipedia.org/wiki/Macroprudential_regulation#Macroprudential_tools – let’s have a look:
A large number of instruments have been proposed;[15] however, there is no agreement about which one should play the primary role in the implementation of macroprudential policy.
Most of these instruments are aimed to prevent the procyclicality of the financial system on the asset and liability sides, such as:
Cap on loan-to-value ratio and loan loss provisions
Cap on debt-to-income ratio
The following tools serve the same purpose, but additional specific functions have been attributed to them, as noted below:
Countercyclical capital requirement – to avoid excessive balance-sheet shrinkage from banks in trouble.
Cap on leverage (finance) – to limit asset growth by tying banks’ assets to their equity (finance).
Levy on non-core liabilities – to mitigate pricing distorsions that cause excessive asset growth.
Time-varying reserve requirement – as a means to control capital flows with prudential purposes, especially for emerging economies.
To prevent the accumulation of excessive short-term debt:
Liquidity coverage ratio
Liquidity risk charges that penalize short-term funding
Capital requirement surcharges proportional to size of maturity mismatch
Minimum haircut requirements on asset-backed securities
In addition, different types of contingent capital instruments (e.g., “contingent convertibles” and “capital insurance”) have been proposed to facilitate bank’s recapitalization in a crisis event.).
——————————————————————————————————————
Basel III is mentioned as an important aspect to implementing these tools, to reduce risks.
My simple understanding is that banks have to work less speculation and more substance.
Two examples:
Loan-to-value ratio – if someone borrows $130,000 to purchase a house worth $150,000, the LTV ratio is $130,000 to $150,000 or $130,000/$150,000, or 87%. The remaining 13% represent the lender’s haircut, adding up to 100% and being covered from the borrower’s equity. The higher the LTV ratio, the riskier the loan is for a lender.
Debt-to-income_ratio – A debt income ratio (often abbreviated DTI) is the percentage of a consumer’s monthly gross income that goes toward paying debts. (Speaking precisely, DTIs often cover more than just debts; they can include principal, taxes, fees, and insurance premiums as well. Nevertheless, the term is a set phrase that serves as a convenient, well-understood shorthand.)
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de facto it is harder to get loans from banks since Basel II, and will be even harder with Basel III.
Banks will be limited as well… examples:
Capital requirement (also known as regulatory capital or capital adequacy) is the amount of capital a bank or other financial institution has to hold as required by its financial regulator. This is usually expressed as a capital adequacy ratio of equity that must be held as a percentage of risk-weighted assets. These requirements are put into place to ensure that these institutions do not take on excess leverage and become insolvent. Capital requirements govern the ratio of equity to debt, recorded on the liabilities and equity side of a firm’s balance sheet. They should not be confused with reserve requirements, which govern the assets side of a bank’s balance sheet—in particular, the proportion of its assets it must hold in cash or highly-liquid assets.
In finance, leverage (sometimes referred to as gearing in the United Kingdom and Australia) is any technique to multiply gains and losses.[1] Most often it involves buying more of an asset by using borrowed funds, with the belief that the income from the asset or asset price appreciation will be more than the cost of borrowing. Almost always this involves the risk that borrowing costs will be larger than the income from the asset, or that the value of the asset will fall, leading to incurred losses.
Banks should basically gamble less and have more real money in reserve just in case, is my simple understanding of this, please correct me if I am wrong.
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chempo is getting at a further risk… the gambling done by countries themselves.
Greece gambled and lost, was bailed out by the other Euro countries and forced to skimp.
Now Greeks are often gamblers, as a former gambler I know this… and can be big tricksters.
What chempo is saying, I think, is that the US is playing a big gamble and Ponzi scheme as of now.
Las Vegas Chips or dollars are in circulation, but there is not enough real money (gold) as chips.
Now if enough of the whales in the casino decide to cash in many chips, the house will be broken.
Two big gangsters – China and Russia – say the casino owner (USA) is cheating and want to leave.
This analogy has the weakness that it does not include production and services – value created.
https://www.ecb.europa.eu/press/key/date/2015/html/sp150213.en.html – back on topic.. some food for thought from the ECB:
The financial crisis has shown that price stability is not sufficient to guarantee financial stability. The financial cycle and the business cycle are not synchronised, implying that risks can emerge especially in the periods of “disconnect” between the two cycles. In the run-up to the financial crisis, imbalances were building-up while inflation was low and stable. At present, the search for yield phenomenon continues against the very low inflation, subdued growth and low interest rate environment.
Monetary policy aims at ensuring price stability in the market for goods and services. It should not be used to address pockets of instability in asset markets. This falls under the remit of macro-prudential policy, aimed at safeguarding stability of the financial system and containing systemic risk. At present, in advance economies, monetary policy needs to stabilise prices and to continue supporting real activity, while macro-prudential policy needs to tame the financial sector in asset market segments showing signs of exuberance or where imbalances could be forming.
Financial stability objectives can only be achieved with an effective macro-prudential policy. This requires policy interventions in a timely and bold manner, significantly affecting the normal behaviour of financial markets or financial institutions. This poses great challenges. First, measures would need to be admittedly intrusive, going well beyond the new capital and liquidity regulatory framework. Secondly, the macro-prudential tool-kit that has been legislated – including the one entrusted to the ECB/SSM – is not complete, it is centred on banks. Instruments would need to address other financial activities and institutions, notably pertaining to the steadily growing “shadow banking” sector. Advanced economies will only be able to ensure financial stability with effective macro-prudential policy interventions.
https://en.wikipedia.org/wiki/Macroprudential_regulation is an important term here:
The term macroprudential regulation characterizes the approach to financial regulation aimed to mitigate the risk of the financial system as a whole (or “systemic risk”). In the aftermath of the late-2000s financial crisis, there is a growing consensus among policymakers and economic researchers about the need to re-orient the regulatory framework towards a macroprudential perspective.
If I look at the statement from an educated layman’s point of view, the bond market and the Petrodollar as well as oil- and gas-Euro market (Russia) could be seen as a form of “shadow banking” – money not really accounted for in the M1, M2 etc. equations (M1 and M2 are something published in the financial section of any serious European newspaper, so I am familiar with these terms, and am thankful to chempo for simplifying their definitions).
Dependency on the dollar alone to exchange money between nations is also dangerous from how I have understood chempo’s article. Many countries are finding other, directer mechanisms. The Euro is one intra-Eurozone mechanism, even if de facto there were reserves of other currencies especially Deutsche Mark and Swiss Francs on the Continent, plus it is a mechanism that goes up to Eastern Europe, which used to have more stocks of “valuta” (still called like that) in $ before.
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The first paragraph of the press release says a lot: price stability is not enough, because the financial cycle and the business cycle are not synchronized, crisis times are during disconnects.
This means both the old Bundesbank/ECB emphasis on price stability alone as well as MMT are wrong. The correct approach is probably a more situational one, and very difficult to calibrate.
Let’s have a look at some macroprudential regulation tools:
A large number of instruments have been proposed;[15] however, there is no agreement about which one should play the primary role in the implementation of macroprudential policy.
Most of these instruments are aimed to prevent the procyclicality of the financial system on the asset and liability sides, such as:
Cap on loan-to-value ratio and loan loss provisions
Cap on debt-to-income ratio
The following tools serve the same purpose, but additional specific functions have been attributed to them, as noted below:
Countercyclical capital requirement – to avoid excessive balance-sheet shrinkage from banks in trouble.
Cap on leverage (finance) – to limit asset growth by tying banks’ assets to their equity (finance).
Levy on non-core liabilities – to mitigate pricing distorsions that cause excessive asset growth.
Time-varying reserve requirement – as a means to control capital flows with prudential purposes, especially for emerging economies.
To prevent the accumulation of excessive short-term debt:
Liquidity coverage ratio
Liquidity risk charges that penalize short-term funding
Capital requirement surcharges proportional to size of maturity mismatch
Minimum haircut requirements on asset-backed securities
In addition, different types of contingent capital instruments (e.g., “contingent convertibles” and “capital insurance”) have been proposed to facilitate bank’s recapitalization in a crisis event.).
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Basel III is mentioned as an important aspect to implementing these tools, to reduce risks.
My simple understanding is that banks have to work less speculation and more substance.
Two examples:
Loan-to-value ratio – if someone borrows $130,000 to purchase a house worth $150,000, the LTV ratio is $130,000 to $150,000 or $130,000/$150,000, or 87%. The remaining 13% represent the lender’s haircut, adding up to 100% and being covered from the borrower’s equity. The higher the LTV ratio, the riskier the loan is for a lender.
Debt-to-income_ratio – A debt income ratio (often abbreviated DTI) is the percentage of a consumer’s monthly gross income that goes toward paying debts. (Speaking precisely, DTIs often cover more than just debts; they can include principal, taxes, fees, and insurance premiums as well. Nevertheless, the term is a set phrase that serves as a convenient, well-understood shorthand.)
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de facto it is harder to get loans from banks since Basel II, and will be even harder with Basel III.
Banks will be limited as well… examples:
Capital requirement (also known as regulatory capital or capital adequacy) is the amount of capital a bank or other financial institution has to hold as required by its financial regulator. This is usually expressed as a capital adequacy ratio of equity that must be held as a percentage of risk-weighted assets. These requirements are put into place to ensure that these institutions do not take on excess leverage and become insolvent. Capital requirements govern the ratio of equity to debt, recorded on the liabilities and equity side of a firm’s balance sheet. They should not be confused with reserve requirements, which govern the assets side of a bank’s balance sheet—in particular, the proportion of its assets it must hold in cash or highly-liquid assets.
In finance, leverage (sometimes referred to as gearing in the United Kingdom and Australia) is any technique to multiply gains and losses.[1] Most often it involves buying more of an asset by using borrowed funds, with the belief that the income from the asset or asset price appreciation will be more than the cost of borrowing. Almost always this involves the risk that borrowing costs will be larger than the income from the asset, or that the value of the asset will fall, leading to incurred losses.
Banks should basically gamble less and have more real money in reserve just in case, is my simple understanding of this, please correct me if I am wrong.
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chempo is getting at a further risk… the gambling done by countries themselves.
Greece gambled and lost, was bailed out by the other Euro countries and forced to skimp.
Now Greeks are often gamblers, as a former gambler I know this… and can be big tricksters.
What chempo is saying, I think, is that the US is playing a big gamble and Ponzi scheme as of now.
Las Vegas Chips or dollars are in circulation, but there is not enough real money (gold) as chips.
Now if enough of the whales in the casino decide to cash in many chips, the house will be broken.
Two big gangsters – China and Russia – say the casino owner (USA) is cheating and want to leave.
This analogy has the weakness that it does not include production and services – value created.
http://www.federalreserve.gov/econresdata/ifdp/2015/files/ifdp1139.pdf – an interesting paper from the Fed about ECB bond purchases, with the interesting conclusion on page 43 that the Fed guys are genuinely surprised that selling bonds worked in Europe.
On page 6 there is an indication that a lot of capital fled Europe during the crisis into US bonds… probably the Belgian purchase could have been one manifestation of this.
In the conclusion they also suspected that the confidence of European governments was very important in making SMP (the bond program) work. Which proves that it is all about trust after all. The possible crisis of the dollar is about Russia and especially China undermining trust in the $.
The reality also clearly shown in the source is that the Fed is more transparent about market interventions than the ECB is. So central banking can be done in a more and in a less open way, I doubt that a yuan issued by the Chinese would be more trustworthy than the US dollar or Euro.
It would be like playing with a casino owner in Macau who makes his own plastic chips – forget it. China is playing a Poe/Escudero like role in international financial markets towards the USA which is the most Daang Matuwid player of all – harping on weaknesses but their alternative is worse.. 😦
https://books.google.de/books?id=1VMiAQAAQBAJ&pg=PA111&lpg=PA111&dq=fed+ecb+coordination&source=bl&ots=m8oX0mHT4F&sig=yFaMXV94_3A80OPPCjD0R35Pr4o&hl=de&sa=X&ved=0ahUKEwja7-CNtKLJAhXEJg8KHY7fALI4ChDoAQhIMAU#v=onepage&q=fed%20ecb%20coordination&f=false – this source mentions a new global currency, preferably defined by the G20 and the IMF, as the solution for the ominous role of the dollar in many global financial crises like Asia in 1997…
http://www.brookings.edu/~/media/Research/Files/Reports/2013/08/g20-central-banks-monetary-policy/TT20-united-kingdom_subacchi.pdf?la=en – the English suggest more coordination – something already de facto and ad hoc happening between Fed, ECB and Bank of England
Where do we go from here? As monetary policy will eventually roll back, the question is how coordination can be achieved to ensure an orderly exit and to avoid that domestic policies in systemically important countries—in this specific case the U.S., the U.K., the eurozone and Japan—generate negative spillovers on, and systemic risks for the rest of the world. The Fed’s announcement in late June that it will begin to phase out QE has rattled financial markets in Europe. In early July, the Fed almost reversed its message to calm the markets. It has been a powerful reminder of how much disruption changes in U.S. interest rates can create. A sharp adjustment in bond and equity prices in response to a change in market sentiment could
significantly jeopardize financial stability…
As the world economy, through banking and finance, has become more interconnected and thus more complex, we need a policy framework to manage this complexity and to account for the spillovers or the negative externalities that a country’s policies may generate on another country. This is the key lesson we learned from the global financial crisis. Risks to the world economy and global financial stability have therefore increased and have become systemic.
Growth continues to be elusive in many developed countries and the goal of “strong, balanced and sustainable growth” pledged by the G-20 in 2009 remains an empty promise. More action is necessary to channel the existing, risk-creating liquidity towards the real economy. Short-term speculative capital flows need to be curbed while long-term public and private investment, that create productive assets, need to be encouraged. We need to rethink monetary policy within a more coordinated and integrated framework where the impact of spillovers is assessed, action is sequenced and measures are consistent with fiscal policy and the agenda for growth. Most of all, we need active cooperation to rebalance the world economy, and to achieve changes in relative absorption between deficit and surplus countries, and changes in relative prices between deficit and surplus countries.
What the British are saying, in their unsurpassably diplomatic way, is that there is too much gambling going on in the world economy, and that money must be channeled into more real production to save the world from even worse crisis. And that coordination is needed for this.
My personal observation is that there have always been new boom countries coming up and then busting quickly in the past 20 years. Looks like a lot of speculation and gambling going on.
Euphoria in boom countries and industries followed by what happens when gamblers lose… 😦
https://books.google.de/books?id=xCjugnWuLmYC&pg=PT378&lpg=PT378&dq=receding+role+of+dollar+internationally&source=bl&ots=lL3QKNxlWv&sig=kchhVzB96EahtYfspRsaKTAUazU&hl=de&sa=X&ved=0ahUKEwiSlYDYt6LJAhVDdg8KHReTDe0Q6AEIVTAG#v=onepage&q=receding%20role%20of%20dollar%20internationally&f=false – this source basically reiterates the two alternatives I mentioned:
1) several reserve currencies worldwide, but with the caveat the coordination is needed to avoid moves by one central bank – Fed, ECB or whoever else – that cause disruptions for the rest. By this criteria, forget the yuan for the moment, the Chinese are not able to cooperate with anyone.
2) one global currency – the IMF has a virtual currency already, but how to get the G-20 to agree and how to run the governing body? The Euro experience shows how difficult it is and how many factors play a role, if the Euro with an EU behind it was difficult, how much more a global currency?
Page 353 also mentions that before Bretton Woods, the Bank of England was the lender of last resort. Very interesting. Because a global standard seems to need an Empire to back it up, and the United States effectively took over the imperial role from the English after 1945.
Page 337 also mentions that economic power has diffused. The US had 50% of global GDP when GATT was started and has only 20% of global GDP now. Central and South America have less than 10%, Europe over 20%, Africa only about 2%, Middle East 6%, Asia without China about 20%, China around 10%, Russia just 3%, but ASEAN only 2% with the most in Indonesia, my first figures were wrong… India 6%, Japan 7%, South Korea 1.5%.. so ASEAN is in trouble it seems…
https://en.wikipedia.org/wiki/World_distribution_of_wealth
Now let me try a NHerrera-style number game here… India+Japan+South Korea+ASEAN is 17.5% of the worlds GDP – in addition to the EATO defense organization which would include the USA, Canada, Australia and New Zealand, an East Asian common currency?
Start with a central bank that handles currency swaps only between the nations, then deepen it into a common currency, apply lessons learned from the Eurozone, get both FED and ECB to advise and to build a global tripartite coordination mechanism.. with the goal of stabilizing the economic future of East Asia against China for a longer time… just like an EATO would stabilize the security of East Asia against China… face the challenge.
Passivity will mean China dictating the economic future of East Asia, and its security…
A global currency is a long way off, so regional currencies run by the more modern countries with a critical mass of the world’s GDP – almost 60%, coordinating closely…
USA no longer has 50% of world GDP like before, so it’s currency logically cannot have the same role as then. The alternative is a rising China, not yet tamed by global rules, neither in finance nor in politics, just taking over the show over there. The ECB and the Fed will not have enough clout worldwide to contain that with just 40% of world GDP… turbulences that will be financial market Yolandas might destroy modern global trade.
Russia and China stockpiling gold makes even more sense if one looks at the bigger picture now.
Gold is only for those who have no faith in fiat currency, in the chips issued by many casinos…
Russia and China may be looking to break the global financial system – and establish their own.
This fits in with their general agressivity and disrespect for all forms of international agreements.
Neither Europe nor East Asia will want a world run basically by these two antisocial powers.
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Aquino building partnerships, which Joe mentioned as leadership, makes even more sense now.
Who knows, top analysts at DFA may have looked at things for him and made similar conclusions.
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The keystone of East Asia is the Philippines, if it falls to China, everything else crumbles…
And if East Asia falls apart, the world will be nothing like we used to know until now…
Obama’s refocussing on Asia-Pacific makes even more sense in this light, I must say.
Am mighty glad that US President Obama is doing just that – refocusing on Asia-Pacific. There is a need to maintain financial and economic stability not only locally but worldwide, not doing that will be to self destruct.
Irineo,
1) Russia and China may be looking = your assumption
2) their general agressivity = a claim isn’t an aggression
Note: also that neither Vietnam, the Philippines nor China has sent any official EEZ claims to UN yet, so none is violating any EEZs.
3) Neither Europe nor East Asia will want a world run basically by these two antisocial powers = your assumption that they will run
4) disrespect for all forms of international agreements.
please explain what “ALL” includes, also WTO participation ? or is this just to impress ?
If your thoughts and handling are based on your assumptions, good luck.
My observations: China’s rise is a fact, and yet instead of addressing it and figuring out how everyone can best work together for the future, the US and the anti-China crowd just loudly proclaim China to be “a threat” and any actions it takes as “belligerence.” all based on assumptions.
Lake, would you be so kind as to indicate your nationality, place or residence, and why you have an interest in the Philippines? You have come onto scene much as recent Chinese trolls have, suddenly, articulately, while criticizing the US and defending China. Please share a little background so we know what you are about.
Thank you.
Joe,
“Note: also that neither Vietnam, the Philippines nor China has sent any official EEZ claims to UN yet, so none is violating any EEZs.’, = isn’t defending China
Irineo has lot of your assumption = pointing out his assumptions = isn’t defending China
“addressing it and figuring out how everyone can best work together for the future” = isn’t defending China
Not assumptions, facts that show Russia and China are working similarly.
China is building islands and structures and claiming the area is theirs.
Russia simply occupied Crimea and Eastern Ukraine with unmarked troops.
Russian internet trolls in Europe work similarly to Chinese trolls in the Philippines.
Modernized Leninist agitation and propaganda plus force and bluster as approaches.
As I said, I would be interested in knowing your nationality, location and interest in the Philippines.
Off topic:
I am definitely happy our worst possible candidate is by far better than this guy:
In Birmingham, Alabama, today, Donald Trump called for surveillance of Islamic mosques that, in his view, could pose terrorist threats. “I want surveillance of certain mosques,” Trump told a raucous and applauding crowd, adding “I will absolutely take [a] database on the people coming in from Syria.” He then rejected calls to resettle Syrian refuges on U.S. soil. “If we can’t stop it — but we are going to if I win — they’re going back.” When a black protester shouted “black lives matter,” Trump yelled “get the hell out of here.” At least a half-dozen white Trump supporters then shoved and punched the protester, and a woman kicked him while he was on the ground.
Some commentators mistakenly view Trump’s campaign as built on entertainment, like a reality TV show. The truth is his campaign is built on fear and hate. The leading Republican candidate for the presidency of the United States is bringing out the worst in America at a time when we need the best. Like other demagogues throughout history who have used bigotry to gain power, Trump has no shame and no decency.
What do you think?
He probably wants to revive the brown shirts too . . .
gian,
There’s actually Muslims that agree w/ him on this— “certain mosques”.
The German Verfassungsschutz (Federal Agency for Constitutional Protection, basically the domestic intelligence service) probably already observes certain mosques…
Their yearly report is a summary made publicly available, the more comprehensive version is submitted to security committees in Parliament from which the ex-Communists are still excluded – which is a good thing. Pages 20-25 of the report are about Islamism.
Click to access annual-report-2014-summary.pdf
Page 32 is about Chinese espionage…
Page 36 is about Scientology.
http://itlaw.wikia.com/wiki/National_Cyber_Response_Centre – this is the German way of dealing with cybersecurity, established in 2011… LCPL_X this was one of your topics also.
The German National Cyber Response Centre (Nationales Cyber-Abwehrzentrum) (NCAZ) reports to the Federal Office for Information Security (BSI) and cooperates directly with the Federal Office for the Protection of the Constitution (BfV) and the Federal Office of Civil Protection and Disaster Assistance (BBK). The Federal Criminal Police Office (BKA), the Federal Police (BPOL), the Customs Criminological Office (ZKA), the Federal Intelligence Service (BND), the Bundeswehr and authorities supervising critical infrastructure operators all participate in this centre within the framework of their statutory tasks and powers.
The main task of the NCAZ is the transfer of information, i.e., information sharing on weaknesses of IT products, vulnerabilities, forms of attacks and profiles of perpetrators and coordination by a cyber security council under the responsibility of the Beauftragten der Bundesregierung für Informationstechnik (CIO Bund) — the Federal Government Commissioner for Information Technology.
Irineo,
Doesn’t everyone spy ?
The former U.S. intelligence contractor Edward Snowden has leaked documents that purportedly show that the U.S. National Security Agency has spied on Chinese companies such as Huawei Technologies.
German politicians reacted angrily on Wednesday to news of a suspected U.S. spy in the defense ministry, which came days after the arrest of a German foreign intelligence agency worker as a suspected CIA informant.
WikiLeaks: France Leads Russia, China in Industrial Spying in Europe
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So what is your point ? That only China is spying ?
Of course everybody spies… the German BND bribed Swiss bank employees to get at data of German tax evaders, the so-called Tax CD which probably was several DVDs.
Five countries do not spy against each other – US, Canada, UK, Australia, New Zealand. They are basically the Anglo-Saxon empire of today, the so-called “Five Eyes”.
But one cannot place all countries in the same category. An Anglo-Saxon Empire is more committed to democratic values and equal opportunities, all in all, than anyone else.
Espionage by the US against Germany does not cause Germany to leave the alliance or work more closely with Russia, because they know the difference in values.
Now if the Americans are often smooth operators, the French often even more, Russia and China are real gangsters, so on guards against them more in the global jungle.
Irineo,
Thief’s are thief’s whatever their background is. You seems to have good ones and bad ones.
If they suits the system, they are the good ones, if not they bad. That’s what you are saying.
As long as the international world remains a jungle, you have to make a choice.
Occasional bandits like the USA are better than thugs like China and Russia.
Abu Bakr al Baghdadi the Caliph of ISIS was a religious scholar and one of the many Iraqis who fought against the Americans in Iraq. He was arrested in Feb 2004 and detained in Camp Bucca, near Fallujah, Iraq. This was a hell camp, at one time holding 20,000 Iraqi prisoners who were very violent and difficult to edcuate and de-radicalise. When Abu Bakr came, he reverted to his imam role and started teaching religion at the prison. Slowly he seemed to calm the camp prisoners down, to the extent the Americans thought he did a great job and was eventually deemed a non threat and was released. The truth was the the seeds of ISIS geminated there in Camp Bucca. Abu Bakr indoctrinated the camp population and in a couple of years, he had 20,000 followers. It was here that he developed his grand plans and elevated his position in that scheme of things When he got out of prison, he was no longer an imam.
Lee Kuan Yew said, to go after the terrorists, go after the Queen Bee. And the queen bees are all in the mosques. And that’s what we did in Spore, we went after all the Islamic religious leaders. But not in dawn raids or anything like that. We brought them into the mainstream, made sure they share the country’s aspiration, understand their roles as religious leaders. Most importantly, we made sure the madrasahs, their religious schools, have curriculums that are in line with our national ones. So they churn out students with religious knowledge AND skillsets that lend them jobs like anybody else. Unlike madrasahs all over the world which churn out masters in Koran and nothing else. Another thing is, we monitor visiting clerics. Ain’t no way one of those imams from Pakistan can come into Spore mosques and give us shit.
The root problem lies in the mosques. Leaders all over the world are too polite to talk about that. The world has a lot to learn from Singapore in this respect. It’s not chest thumping, but I truly belief the Singapore approach is is something worth replicating.
Your example is an interesting addition to this article by josephivo regarding Mindanao:
https://joeam.com/2015/03/11/bbl-yes-but-peace-in-mindanao-will-be-won-or-lost-in-the-mosques/
and of course there will be an article about Philippine Islam this evening by LCPL_X.
chempo.
The root problem lies in invading Iraq the rest just follows.
@Lake, please see my note elsewhere: https://joeam.com/2015/11/19/demystifying-the-american-us18-trillion-debt/#comment-148545
The root problem is wahhabism, whether Iraq was invaded or not.
Gian, josephivo
Both correct to an extent. I think the 2% is up for scrutiny. Go into provinces in Malaysia and Indonesia, it’s entire a different picture. The 2% probably for city youths.
I agree that Singapore is a leader and could be the blue print in how to handle relgions/churches in the modern world. I just think that the customs/laws in other countries, the Philippines included, prevent an application of the lessons learned from your country.
But times are changing, off all radicalized youth only 2% found their inspiration in a mosque, the majority on internet or through recruiters and friends.
Wow would love NHerrera’s take on how Duterte’s running affects everyone’s numbers:
Here it is Gian. A dime a dozen commentary.
THE DUTERTE EFFECT AND THE BASTA FACTOR — SOME QUALITATIVES
1. Duterte’s previous survey numbers and others who are not running for the President went mainly to Poe and some to Binay and Santiago.
2. With Duterte’s likely entry into the fray, he may reclaim his old number of 15% and likely add some more from the numbers of those not running for the President.
3. Likely, as a consequence, that Poe will shed a considerable amount from her recent PA numbers, probably going back to her previous 26% number. Likely, too that Binay will shed a few percentage points and Roxas gain some percentage points.
4. With the new kid in block (after December Comelec deadline on substitution) and the paawa effect of Poe’s campaign losing its shine; the SC heat on her DQ case; and Duterte hitting Poe; and the highly volatile nature of preferences in this land of ours, the configuration of the numbers may likely undergo a big change.
5. The Duterte Effect and the Basta Factor — “basta kay Duterte kami”; “matapang siya at tunay na Filipino;” are things to reckon with. The movie — if it is a movie — will likely be titled DUTERTE RISING. Cayetano’s numbers, too, if Duterte enters the fray, will have his numbers rising, chipping away Escudero’s numbers.
6. The politicial scene after the Comelec deadline on substitution in December will thus be a different scene altogether.
7. As I said in the beginning: a dime a dozen sort of thinking. I am trying to do a numbers analysis but it is less than half-baked yet.
Thank you very much
Can anyone give me a backgrounder on derivatives first the crisis,then how come it exceed the world gdp.thanks
Then joseph and my hanging question on bitcoin. Thanks
http://www.wired.com/tag/bitcoin/
Karl, I’ll try to answer your question on derivatives later.
thanks, so my double post by accident has a purpose.Irineo gave the textbook answer,you will give me the common sense version.,
@ Karl — simple explanation on derivatives.
1. Derivatives are financial products (in the form of contracts or securities) derived from prices based on other real products. For example equities. The real products are the stocks traded on the stock exchange. Derivatives from equities are – stock options, stock warrants, equity return swaps, single stock future & contract for difference. You can basically take one real product and create a derivative for that product, or they can split various aspects of that product and create various derivatives, such as in the equities example. This is called slicing the product. Obviously, derivatives valuation are affected by price movements of the underlying assets.
2. What are the types of derivatives out there — can’t list here, there are simply way too many. Every conceivable product has derivatives — from commodities rice coffee, corns etc, oil, properties, etc. If they can package the air we breathe, there will be a derivative on air.
3. What is the purpose — (a) Hedging – in the Yolanda example Irineo mentioned; (b)Trading — the instrument lends itself easily to trading in secondary markets. Trading or gambling is a necessary evil as it ensures liquidity to the market which is very crucial; (c) Leveraging — It allows people who take a position on the price of a product to make more money than he would if he just traded on the actual product.
4. What is the problem dealing with these products —
(a) It can get really complicated. Software engineering has facilitated traders to spot profit windows in split seconds and enter the market. But the backroom management and boardrooms have serious problems understanding the risks and valuation. That’s how Baring Bros collapsed.
(b) If it’s complicated for those playing the game, imagine what it’s like for the regulators. Central bankers are usually a few steps behind the players.
(c) Another problem is a lot of these derivatives are structured in such a way that its risks are inter-connected such that a serious failure in some place can have a domino effect, such as the sub-prime bubble.
5. One important thing to appreciate is that some derivatives are monetised some are not. Put it another way, some are in the balance sheet, some are off-balance sheet. Sub-prime mortgages are monetised, you paid for it. Interest rate swaps are off-balance sheet — you have a nominal placement (deposit with someone eg based on 3 month LIBOR) and an acceptance (deposit by someone eg based on 6 month LIBOR). On interest refix dates, you pay/receive only the interest. Some derivatives are monetised at the end date, and some only requires monetising the profits or losses, or interests.
Now the $600 trillion worth of derivatives I mentioned in the article (with caveat) and RHiro also mentioned (without caveat). The caveat is — what is this $600 trillion ? — how much are monetised derivatives, and how much are off-balance sheet items? This is a serious caveat because you want to understand how much of that $600 trillion represents actual capital tied up in derivatives.
6. “… how come it exceed the world gdp…” .. GREED & TOO MUCH MONEY SUPPLY
Derivatives have noble objectives — to serve as a means for people who want to minimise risks. But Wall Street gambles on anything that moves. Financial institutions — banks, hedge funds, pension funds, etc are always chasing higher yields. What’s the new game in town? In the case of those non-monetised derivatives, it’s easy to loose your head. In the hedge fund buble, Long Term Credit Bank alone was leveraged $128 billion.
7. Hope this gives you a reasonable idea.If you really want to understand derivatives, you need to look at each one individually. They are complicated.
Thanks again Chempo.
8. Karl I forgot one more point to make it complete — Parties and Forms:
Derivatives are contracted between 2 parties. Some are done through exchanges — stock /commodities exchanges etc (in which case of course you deal through the house, not directly with another party), some you buy/sell securities with a counterparty, some by drawing up contracts, some done easily via phone, electronic comm followed up by written confirmation. You can appreciate the varieties.
I appreciate it.
Can I ask a question on why the derivatives exceeded the world gdp?and a followup on my hanging question on bitcoin.thanks.
http://beginnersinvest.about.com/od/stocksoptionswarrants/a/what-is-a-derivative.htm
Although derivatives can help make the economy function by reducing risk for farmers, oil companies, startup employees, and more, left unchecked, they can introduce “systematic risk”. Only a handful of firms represent a massive portion of the total derivatives traded in the world meaning that if one of them went bankrupt, it could lead to a daisy-chain effect that caused all of the others to fail, wiping out the entire financial system.
The failure of Lehman Brothers nearly caused this to happen during the Credit Crisis and would have succeeded had it not been for the extraordinary intervention by the Federal Reserve, Treasury, FDIC, and other government agencies.
Derivatives, simply put, are a sophisticated form of gambling.
Farmers in the heartland are responsible for a lot of derivatives in the United States. They often want to lock in a price for their crops in order to protect their harvest and calculate the profits they’ll make each season. They work with special brokers or companies to sell futures contracts on commodities exchanges. These contracts allow them to sell crops they haven’t yet grown or which are not yet ready for harvest at a predetermined price. The value of these contracts (what the farmer gets paid) depends on what the underlying commodity does over the period of the futures contract.
Now imagine somebody was crazy enough to make a futures contract for the harvest in Leyte in 2013, before Yolanda came. The farmers would be happy because they could use the money to rebuild, but the company that made the futures contract might go broke because they don’t really have the money, they were speculating on selling the crop, even if it were only 80% of the value they promised they only lose 20% but they are not ready to lose 100%…
Startup investors demand around 30% profit from companies they seed, because the risk of startups failing is immensely high… so those that strike gold have to make it big quickly.
Those that fail have contracts that force them to work as consultants and pay the money back to the startup investors. OK, better than the alleged Chinese Triad system of restaurant financing. First failure OK, second failure try harder, third failure you’re gone.
Thanks a lot,sorry for the double post
The focus is more on the “block chain”, a distributed database where bitcoin is largely implemented. Utilizing that, you can issue your own currency, your own coupons, your own permission policies and your own rules. Etherum project is active,where you can experiment about it.
Thanks Chivas,
slow clap to President Aquino, SC Justice Carpio, DFA Secretary Del Rosario:
We reaffirm the importance of maintaining peace and stability, ensuring maritime security and safety, and freedom of navigation including in and over-flight above the South China Sea. We reaffirm the collective commitments contained in the Declaration of the Conduct of Parties in the South China Sea (DOC) to ensure the resolution of disputes by peaceful means in accordance with universally recognised principles of international law, including the 1982 United Nations Convention on the Law of the Sea (UNCLOS) and the relevant regulations, standards and recommended practices of the International Maritime Organisation (IMO) and the International Civil Aviation Organisation (ICAO), without resorting to the threat or use of force and while exercising self-restraint in the conduct of activities. We support ASEAN-China on-going efforts to fully and effectively implement the DOC in its entirety, and to work toward the expeditious conclusion of an effective Code of Conduct (COC).
https://www.whitehouse.gov/the-press-office/2015/11/21/joint-statement-asean-us-strategic-partnership
https://www.census.gov/foreign-trade/balance/c5700.html
Why all this talk of conspiracy theories about China’s treasury holdings???I have provided a link showing the trade deficits with China from 1985 till the present times from the U.S. census department. This went into China’s calculation for their balance of payments equation..
Their trade surplus plus their positive FDI numbers make for the total of their forex reserves of almost $4 trillion..
To keep the U.S. as a prime customer they lent back a large part of their surplus to the U.S. economy to maintain their trade surplus..
http://useconomy.about.com/od/GDP-by-Year/a/US-GDP-History.htm
It is also wise to look at the rate of growth of U.S. GDP in nominal terms…It looks to double in a little over 20 years…The rate of growth of debt accumulation is slowing down so the
ratio of debt to GDP will once again improve…
The international payment system is already broken as the world is looking to a better alternative…
China will soon be included in the SDR basket of the IMF…The SDR may replace the dollar as the dominant currency in the future.
For the students like me, here is a factsheet on SDRs
http://www.imf.org/external/np/exr/facts/sdr.htm
Here is a great link provided by Karl that goes in-depth to explain the petrodollar.
http://ftmdaily.com/preparing-for-the-collapse-of-the-petrodollar-system/
As RHiro pointed out, there is no such thing as pure economics — it’s always politico-economics. This link provides troubling thoughts on what actually goes on behind the scenes in world events. Of course it’s the writers assessment and opinion, but it bears reasoning.
Non-believers of my ‘doomsday’ scenario should read up this link.
Note a coincidence — the writer and I used the same printing machine, origin from another website.
http://www.cnbc.com/2015/07/17/the-worlds-biggest-sovereign-wealth-funds.html
I am attaching a link to the top ten sovereign wealth funds of the planet.. Please note that there is no more petrodollar since the rise of the Euro and off course China…
Also please note the governments of Saudi Arabia, Qatar, Abu Dhabi and Norway are in the list.. The rest are China related including Singapore..
The need for the petro dollar disappeared with the rise of the Euro and the fall of the S.Union…
The Breton Woods System became the de facto international policeman of the worlds financial payment system controlled by G-1….
From your link, I like to quote something from the Hongkong Fund — this puts paid conclusively to Micha’s contention about ‘no problems’ with printing money for fiat currencies. Although fiat currencies are not pegged to anything, reserves are still required to support its value:
“The Exchange Fund’s primary objective…is to affect, either directly or indirectly, the exchange value of the currency of Hong Kong,” the fund says on its website.
“..petro dollar disappeared….” please show me an exchange where petrol is quoted in non-$. $ is being marginalised, but it is presently still the petrodollar. But that will all change in the very short term — that’s my view.
Bretton Woods — I like your G-1 haha
Please note that HK has pegged its currency to the U.S. dollar.. It has no central bank but has a Central Monetary Authority..Paper currency is issued by private banks…
Hence to support the hard peg to the dollar, the HK monetary authority accumulated dollars to support the peg… Their SWF manages the dollar reserves since no central bank…
Their forex policy has been hard peg with fully open capital account controls…Hence their interest rate tracks the Fed and U.S. treasuries…They are in a de facto common currency with the U.S.
How can one talk monetary policy if one is not familiar with the forex policy which is at the heart of monetary policy…
Partly the reason why the oil producing nations raised oil prices in the 70’s was the de-facto devaluation of the dollar vs major European and Japanese currencies…
Breton Woods fixed exchange rate systems was breaking down…Oil priced in dollars but these dollars bought less from Europe and Japan…
Hence the Israeli -Palestinian conflict gave the Shah of Iran the impetus for the major price rise.
Once the Cold War ended there was only one international payment system in place…Breton Woods…
In 1985 the U.S. again devalued their currency vs. Japan and Germany…
In 1989 the Breton Woods twins called for the liberalization of capital accounts…Saudi Arabia also went through the process of nationalizing their oil industry…
The oil producing economies then began to invest their surplus earnings in pound assets and DM assets apart from U.S. assets and emerging market assets. Saudi Arabia bought a share of Petron…They started to diversify their forex earnings and also started to invest internally…
The UAE, Qatar, Kuwait, Saudi Arabia started their diversification into Euro assets, Pound assets, etc.
When the Euro was introduced it became simpler. Then off course China….
The following currencies are reserve currencies…U.S. Dollar, Pound, Yen, Swiss franc. Euro…
U.S. dollar leads simply because they are the largest open economy in the world…
Saudi Arabia also stared investing in China’s refinery business.
Oil producing countries also directly infuse their earnings into their budgets for domestic spending…
http://www.bloomberg.com/news/articles/2015-08-25/saudi-arabia-said-to-seek-advice-on-budget-cuts-after-oil-s-rout-idrana9e
“How can one talk monetary policy if one is not familiar with the forex policy which is at the heart of monetary policy…”
This is just an article on my views on the US debt, with a caveat at the very beginning of the essay that it’s not coming from an economist. It’s not a professorial dissectation nor an attempt at one upmanship, which is apparently your approach in all your comments. One does not go arround goggling some fine points and try to put across as your original, just so to show you at the most brilliant. If you are so smart in monetary matters, do you know of PECUNIX. Of course not unless you go google. If you have some good points, we are all most willing to learn and appreciate.
There are hundreds of currencies in the world so don’t boast your supreme knowledge after you have goggled them. As for HK$, with its pegging to US$, of course the more reason for it to carry reserves in the $. It remains a fiat currency in that it is not pegged to any commodity. Therefore my humble comments remain valid.
“…in the 70’s was the de-facto devaluation of the dollar vs major European and Japanese currencies…”
“In 1985 the U.S. again devalued their currency vs. Japan and Germany…”
It amazes me that you can’t distinguish currency depreciation from currency devaluation. How do you devalue floating exchange rates?
“The following currencies are reserve currencies…U.S. Dollar, Pound, Yen, Swiss franc. Euro…”
You speak of these as if there is such a thing as THE reserve currencies. Most countries hold these currencies as reserve currencies simply because they are the most traded in the world that underlies world trade and they are easily convertible. If Philippines were my number one trading partner, I’ll make sure I hold some peso reserves.
“Once the Cold War ended there was only one international payment system in place…Breton Woods…”
Cold war ended in the 1990’s thanks to Gobachev.
“Hence the Israeli -Palestinian conflict gave the Shah of Iran the impetus for the major price rise….”
The Middle East conflicts as background to the rise in oil prices was Isreal vs a host of Arab countries — in the 6-Day War and the Yom Kippur War — it’s not the Isreali-Palestinian conflicts. The oil prices rose as a result of a few converging events, dominated by Saudi Arabia being the largest oil producer. Oil supply was controlled by OPEC with initiated an embargo to punish Isreal (and pro-Isreal countries), and also the tussle between ME oil producing countries and the western oil production cartels which held a strangle hold over the Arabs for decades.
“The oil producing economies then began to invest their surplus earnings in pound assets and DM assets apart from U.S. assets and emerging market assets…”
The initial years after oil prices shoot for the skies, the oil producing countries in the M.E. were flooded with dollars. Most we parked with European banks. That was a time when these countries were swamped with western investment bankers. Soon they diversified into toher major currencies and assets, as well as emerging markets…WHY??? Because their own economies were too small. Then the began to build their own economies. And then they became more sophisticated, that’s when sovereign funds began.
Chempo required reading for us in university:
The International Money game by Robert Aliber.
Latest authoritative book was by Barry Eichengreen, “An Exhorbitant Privilege”
Read up on the Plaza Accords 1985, Smithsonian Agreement and the Jamaica Agreement of 1972..
When the U.S. government during these periods demanded that Japan and Germany revalue their currencies in 1972. That meant a depreciation of the U.S. currency vs the same…
In 1985 once again the U.S. government once again requested that Japan revalue their currency. That revaluation resulted in the devaluation /depreciation by 50% of the U.S. dollar. That forced Japan to outsource a lot of production to S.E.Asia
When the Euro was born one needed . U.S.. 080cents to One Euro.. Euro grew stronger since it was running a trade surplus with the rest of the world The U.S. dollar depreciated/devalued to almost U.S. 1.60 to one Euro…
I know this very well since 1970 I have been involved in global trade and have seen the changes in prices due to currency revaluations and depreciation…
Please note that governments use currency exchange rates to cement their competitive advantages. Currency depreciation is a major tool to raise all tariffs without exception…
Once again during the Cold War the Russians controlled trade through the ruble…They had the Comecon…Yes I am familiar with trade with the Soviet bloc…
When you write on something based on your knowledge like I had earlier mentioned you deserve an A for effort…But you lack the understanding…
The command economy of the Soviet Union was coming apart…The U.S. dollar became overvalued when Volker raised rates and the price of oil collapsed.
Reagan ramped up defense spending in an effort to convince the Russians that a nuclear war was winnable…
They could no longer support their satellite states so Gorbachev attempted to win time to restructure the Russian economy. It was too late…Their economy crumbled and one by one the countries of the eastern bloc left.
Look during those days I had business associates who wanted to travel to Vladivostok get a hold of commodity assets..But it was too dangerous to go…
“When there is blood in the streets buy…”
If you do not understand capital account liberalization which was started in 1990 why speak at all..In 1989-1990 when the debt crisis hit U.S. government invited Prince Al Walleed to become the single largest stockholder of Citibank which was in danger of failing…Then the Brady debt restructuring plan came on…
During this period of low oil prices and after the Iran Iraq war Saddam Hussein invaded Kuwait since Kuwait reneged on their supposed promise to help Iraq pay for war costs…
China’s manufacturing miracle was still in the infant stages then…
The Euro was created to save transactions costs between members of the Eurozone.
It is based on a new fixed rate regime…
The new era of financial crisis was to begin…
Mexico, Russia, Asian, Brazil, Argentina, U.S.A., Europe, PIGS..
I find it troubling when a reader who does not write a blog takes to task someone who does. There are constructive ways to phrase criticisms, and I fear you never learned the art. I greatly appreciate Chempo’s blog and the discussion it provoked. That is why we are here. We are not here to pretend some perfection. I mean, you don’t have it either and if we went by your standards, no one would write anything lest you scowl at them.
You are the landlord and you have the power over this blog… That is why I told Chempo he gets an A for effort… But if his piece is full of errors, and I pointed it out, your comment above comes close to Trumpism..
.
If he somehow cannot get the nuances of the English language. when it comes to the contextual level of the discussion it may be due to the fact that breaking through to people on matters of money does assault the brain…
The existential nature of the beast has a lot to do with it…
“I know this very well since 1970 I have been involved in global trade and have seen the changes in prices due to currency revaluations and depreciation…”
Good for you that you have priviledged knowledge gained from this exposure. Without taking anything away from you, that is not to say the rest of us were leading our lives during this time with our eyes closed.
I acknowledge you have some specialist expertise but you are prone to dumbing down pieces of disparate info which Caliphman decribes as “timeline of major economic events”, nothing more.
For the few points related to this article, I’ll response:
“The U.S. dollar became overvalued when Volker raised rates and the price of oil collapsed….”
In it’s volatile history, the price of oil has never been affected by the value of the $. Price of oil has always been influenced by supply and demand. Volcker’s $ interest rate increase was from ’79-’81. Oil price movement during this time frame was :
– 1951-71 — prices moved with band of $15-18
– 1972-74 — Arab oil embargo against countries supporting Isreal in Yom Kippor War — prices shot to almost $60 — this was known as oil shock 1
-1978/79 Iran cuts production and exports during the Iranian Revolution and cancels contracts with US oil companies — drop in supply caused prices shot to $101 which was a knee jerk reaction to the oil shock in the market. This was oil shock 2
– 1980s — Demand response to the supply shocks pushes prices down. I don’t know where you were, but I remembered this period well. It was a remarkable period because it demonstrated that users could force prices down. Cars got smaller, countries use their oil stockpiles or reserves, we switched off street lights, etc etc.
– ’80s — Saudi Arabia increases production to regain market share — increased supply pushes price down to bottom out at $24 in 1986.
– 1990 — Iraq invade Kuwait — prices react and went up to $40.
“Currency depreciation is a major tool to raise all tariffs without exception…”
Currency depreciation is a double-edged sword. Price stability is the bedrock of good economics.
“Saddam Hussein invaded Kuwait since Kuwait reneged on their supposed promise to help Iraq pay for war costs…”
I wish the Iraq-Kuwait War could be so easily explained in one sentence. The real reasons we will probably never know and we can psycho-analyse till the cows come home. But ‘reneged’ is out of context. Kuwait and all the other small gulf states bankrolled Iraq with soft loans during the Iraq-Iran wars. After the war, Iraq refused to repay the loans and manufactured reasons to justify the invasion.
Higher interest rates making the dollar overvalued induces a recession. Oil prices tanked…Wala pang China then.
Click to access 2q83mill.pdf
1979-1982 U.S. slowdown…
http://www.economist.com/blogs/freeexchange/2010/03/volcker_recession
Fighting inflation by inducing a recession…In a recession aggregate demand drops unemployment rises…
Marcos signed a standby loan agreement with the IMF in 1982. You said you were around…
Handsome that is where banks got into trouble with recycling dollars from OPEC…Major banks were almost insolvent due to their lending to Latin America and the Philippines…
Citibank was selling Philippine debt paper for $0.30 cents on the dollar…Latin America far less…
OK thanks.
Ah yes, I remember Citi’s problems in Phils now.
There was also a landmark case regarding Citi Phils, I can’t remember what it was, but there was a landmark decision. That decision made the point that a branch in Philippines is deem as a separate entity from the head office. One would have thought that if a branch fails,depositors or creditors can have claims on the head office.
@chempo
You said, “… this puts paid conclusively to Micha’s contention about ‘no problems’ with printing money for fiat currencies. Although fiat currencies are not pegged to anything, reserves are still required to support its value.”
And where, pray tell, does the central bank gets its reserves? Let Stephanie Kelton explain:
“The Federal Reserve, like any bank, can acquire an asset simply by crediting a bank account. In other words, the bank pays by creating money. As Alan Greenspan explained, the Fed has an unlimited capacity to spend in US dollars. It can pay trillions of dollars with a single keystroke.”
And listen to the chief banker himself, Ben Bernanke:
“Now, you might ask the question, well, the Fed is going out and buying 2 trillion dollars of securities – how did we pay for that? And the answer is that we paid for those securities by crediting the bank accounts of the people who sold them to us…”
Please read up on Stephanie Kelton’s whole article here :
http://neweconomicperspectives.org/2012/03/where-did-the-federal-reserve-get-all-that-money.html
And Ben Bernanke’s video presentation here :
http://www.federalreserve.gov/newsevents/lectures/the-aftermath-of-the-crisis.htm
Hi Micha
Please Understand one thing Micha, Quantitative Easing is not a debt repayment. As I explained in the article, the US has never repaid its treasury bonds, they are mearely replaced by new issues. QE is part of open market operation performed by the Feds, not the US government. The Feds buy treasury bonds to push more liquidity into the market. Micha, don’t get lost in fancy wordspeak by Bernake or Stephanie Kelton, go to the basics and follow the debits and credits.
In the Feds book, they credit the banks that sold those treasury bonds (so banks got money in their Fed reserve a/cs that they can now lend out, thus increasing money supply). And pray, where will the Feds debit entry go to?. ANSWER: They debit to an asset a/c “Treasury Bonds” a/c. These are the bonds which have not yet matured, which the Feds have bought in the market. They hold this in their inventory which they can use in open market operation when they sell off bonds to reduce liquidity market. Meanwhile, the Fed holds these inventory, what does this asset represent? ANSWER: Debtes owed by the US government to the Feds. Go back up the earlier comments and see the pie chart supplied by Juana. OF THE US DEBT, 4.7% IS OWED TO THE FED. (Which the govt won’t repay on maturity as I explained in my article, the US Treasury will roll-over with new bond issues, get the funds from buyers, and pay-off the Fed.
Micha, if debts are simply paid off by ‘keystrokes’, then let me ask you a simple question:
Why are no other countries in the world that prints unrestrained, and they ‘keystroke’ off the debts?
Oh yeah, I forgot…there was Weimar, Zimbabwe, and Japanese did it in WW2 in Singapore, Malaya, North Borneo, Sarawak and Brunei.
@chempo
You asked again :
“Why are no other countries in the world that prints unrestrained, and they ‘keystroke’ off the debts?”
Answer :
Depends on the nature of their debt. If it’s a foreign debt (denominated in foreign currency), they can’t simply keystroke it because they are not sovereign on that currency. They can only keystroke domestic debt in their own currency. Remember that so-called debts are actually savings of private entities.
Seriously, Micha, we are talking about the same thing. Why are no other countries borrowing in their own currencies and simply printing away their domestic currency debts? Or lets put it in another way, basic book-keeping, if the central bank by keystroke credits the banks from whom they purchase the bonds, where do they debit to?
Now you’re shifting to QE again. I thought we’re talking about so-called sovereign debt? Bonds purchase is QE. See Bernanke’s explanation I supplied earlier.
And yes, I noticed that you’re invoking the Zimbabwe Weimar Republic bogeyman too.
As pointed out gazillion times already, MMT doesn’t deny the danger of inflation. Responsible spending and the combination of tax and interest rate adjustments are recommended available mechanisms to deal with that.
Not bogeyman Micha, great lessons from history.
Last para…OK haha, peace and seasons greetings.
If you’re learning from history then it should be obvious that the Zimbabwe Weimar Republic bogeyman is a non-sequitur for MMT prescription.
“What is so bad in having high debt levels… According to Forbes magazine, Singapore has higher debt levels than the U.S.”
RHiro raised this question on Spore debt and I’ll credit RHiro for the only one asking this as its pertinent to our understanding of the US debt.
The EU countries — Greece, Portugal & Italy — we all know the high debt levels are very bad for them.
The US — I explained in this article the external economy and the role of the $ is what’s keeping debt problems at bay in the US, but will come a day of reckoning.
The Japanese situation is unique but I am not well-informed to express an opinion.
The Singapore debt I can explain.
As it’s part of our learning of country debts, I like to explain the Spore situation for those who like to know why a seemingly well-managed economy can have such a high debt and whether it is also staring at doomsday.
(1) Singapore practices balanced budgeting:
We have no need to issue treasury bonds to borrow to finance expenditures. We have enjoyed healthy budget surpluses over many decades.
(2) Singapore debt are all domestic borrowings:
There is no external debt.
The debts are in 2 forms and for specific objectives not related to expenditures.
(a) Singapore Govt Securities (SGS + Tbills):
The objective is to develop the domestic bond (debt) market. As at 2011 SGS was S$79billion (Treasury bills S$59billion)
The principal objectives are:
i) build a liquid SGS market to provide a risk-free benchmark against which other private debt securities are priced off.
ii) foster the growth of an active secondary market both for cash transactions and derivatives, to enable efficient risk management.
iii) encourage issuers and investors, both domestic and international, to participate in and thereby help buid the local bond market
(b) Special Singapore Government Securities (SSGS)
We have a Central Provident Fund (CPF) which is a pension fund like the SSS. The CPF needs to invest their money. In order to protect citizens’ retirement funds, the govt issues SSGS for the CPF to invest in. These securities are guaranteed by the govt and earns interest pegged to what the CPF members’ earns in their retirement a/c.
In other words, the govt ‘borrows’ from the pension fund. These SSGS securitties are non-tradable issues. By law, the govt is not allowed to spend this money. In turn, the govt out-source the management of these funds primarily to 2 other govt investment agencies (who also manages our sovereign wealth funds), and I think some private investment corporations. In other words, the SSGS ‘debt’ are all accountable in a whole chest of assets under management. As at 2011, SSGS stock was S$216 billion.
You made this too complicated.
The US can print as much money as it wants because US debt is the store of value in the world. The markets accept this and that’s why US bonds have to pay almost no yield.
By the way, debts do not have to be repaid, they can simply be rolled over.
The Philippines can’t print debt in its own currency because no one wants Phil pesos in their SWF, pension funds, etc etc. So they are susceptible to currency shorting, and spikes in valuation leading inflation.
Thank you for your comments.
It is complicated and I was trying to unravel it.
Nobody says the US cannot print. You have not read the article or you did not understand. The US bonds has no yields now because of Fed’s current rate policy, which is likely to change soon as they have recently announced, coming on the heels of QE tapering. Nothing to do with “store of value”.
Your 3rd para, it is obvious you did not read the article. Please refer to the rolling over of treasury bonds.
Your last para — as my opening suggested, learning from the US debt explains questions asked about the peso. There is demand for $, no demand for peso.
Chempo should the Philippines mainly have monopoly control over the “printing of the peso” within its own territory…No other currency may be used ?
Don’t understand your question RHiro — put it another way, should the Philippines allow another country to print the peso?. If it’s cost effect, is there a problem to outsource the printing?
Peso is the legal tender in the country. That means vendors are legally bound to accept it in payment of their goods and services. Other people, especially tourists, often times try to use their country’s currency notes. These are not legal tender in Philippines. Vendors do accept these at their discretion and at a rate advantageous to them. Being non-legal tender in the country, vendors have the right to refuse to accept such foreign currencies.
The Philippines already repealed the Uniform Currency Act during the Ramos government as part of the dictates of the IMF/WB.
My question is this, should we go back to forex controls on capital accounts just like the PRC?
The highest degree of political sovereignty is disallowing the use of forex within the Philippine territory… Only the State is allowed to store dollars or any other reserve currency.
“..forex controls on capital accounts…” RHiro that’s outside my area of competency. My feeling is that what you want to do depends on which way you want to take the economy.
Last para — agreed. Although in reality, the hospitality industry everywhere in the world continues to accept foreign notes, expecially those from first world countries.
I will give you an example of why the Philippines is poor…We earn $25 billion from OFW remittances…We allegedly earn $20 billion from BPO service receipts…Last year our trade deficit was approximately $4 billion…. Our current account surplus should have been $40 billion annually…In 2014 over $10 billion left the country and we had a Balance of Payment deficit…
What happened to all the supposedly surplus dollars brought in by the BPO?
If there is a lesson to be learnt, let’s hear from you. I have no expertise on Philippines Balance of Payments.
Your question has an unnecessary smirk on the BPO benefits that manly in this blog has attributed to Mar. Let’s hear your thoughts on this.
Chempo what does Roxas have to do with the negative Balance of payments last year?
Why is the peso depreciating when we should have a surplus of dollars in the system due to the OFW and BPO incomes?
When the question is simple attack the question? My question revolves around capital accounts in the balance of payment equation…Current account is flexible to allow for retial payments
.
The world is living in financial times…Almost all governments are struggling to resolve the problems caused by unbridled financial capitalism…Binay, Poe and Roxas are all supporters of the staus quo…
Trickle up economics is a fact of life…
“What happened to all the supposedly surplus dollars brought in by the BPO?”
The DND have acquired some hardware to upgrade our defense capability and their cost are in $ currency. I wonder if that has already been factored in the equation.
That could be considered a dumb question, I have to admit I don’t know much about these things, I am asking so I could learn.
No problem… Based on BSP records…Our trade deficit was approximately $4 billion…That would mean for the year 2014 our import exceeded our exports of goods by $4 billion. That would mean that if the DOD imported weaponry it would be counted as imports…
Now our cash receipts from OFW fund flows inward and supposedly BPO revenues which will result in income flows amounting to $25 billion and $20 billion respectively…
After you deduct the trade deficit figures which are outbound payments we have a hefty $40 billion in surplus for the year..
The BSP reported that in the capital account around$10 billion left the country…
Where are all those surplus dollars?
“Where are all those surplus dollars?”
Lent out? I heard it once said that we are now a net lender, from previous net borrower.
My ignorance is showing, but if I didn’t ask, I would not learn.
I strongly suggest you read up on what current account and capital account is. The Philippines accounts are borderline since the BPO revenues as advertised are not showing up on official accounts of government
@ Mary Grace
Regarding the question “where did the $10b go?” in 2014.
RHiro raised the question, you followed up with your earnest enquiry, and he basically left you on a clift-hanger. I shall try to explain, as best as I can, to see if it makes sense to you.
A Balance of Payment (BOP) is a statement that shows a country’s transactions with the rest of the world over a certain time frame. It is divided into 3 main sections (A,B,C below), and for the year 2014, the Phils BOP was :
A – Current Account $12.65b net inflow
B – Capital Account $ 0.10b net inflow
C – Financial Account $10.08b net outflow
Net unclassified items $ -5.52b
Overall BOP $ -2.83b net outflow
Current Account (A) covers trade in goods, trade in services, primary income and secondary income. Some sectors go up, some go down, resulting in a net-net inflow of $12.65b in 2014. What you need to understand is that BPO and OFW remittances are already accounted for in this number. BPO revenue in 2014 was $15.6b and reported under Trade in services (under technical, trade-related and other business and computer services). OFW remittances in 2014 was $20.4b (recorded under secondary income).
Capital account (B) 6. covers capital transfers and acquisition and disposal of non-produced, non-financial assets between residents and nonresidents eg. machinery, aircraft carrier, etc
Financial Account (C) covers direct investments (long term), portfolio investments (short term — sometimes known as hot money), and other forms of investment. In 2014 there was a net-net outflow of $10.084b. (Is this what RHiro alluded to?) This was 4 times more than 2013. When this figure goes up or down does it mean good or bad? You need to study the details to understand them. The 2014 figure of net-net $10.084 outflow was due mainly to the following :
– Direct investments : net outflow was $789mm — means more Filipinos (individuals + corporations) bought into foreign equities + securities than foreigners bought into Philippines equities + debts
– Portfolio investments — net outflow of $2.5b due mainly to domestic banks and Bangko Sentral accquisition of foreign securities.
– Other investments — net outflow of $6.9b due mainly to (1) $4.1b increase of foreign currency deposits abroad by Phils banks and corporations, (2) $2.7 increase in net lending by domestic banks to overseas borrowers.
The final balance $2.83b represents changes in the central bank’s foreign currency reserves. Bangko Sentral’s Gross International Reserve was $83.1b in 2013 and $79.5b in 2014. So the difference should by $3.6b net outflow in 2014, I don’t understand why the BOP shows only $2.83b.
The net unclassified items figure of $-5.52b — no need to worry about this. It’s a balancing figure due to statistical errors in collection of all the data for (A) (B) and (C).
The reason I put this comment out is so you don’t loose sleep over it. Pnoy government did’nt divert $10b out of the country in 2014, there is no conspiracy here as RHiro seemed to suggest.
It would be nice if you put the source of your data as you have completely redefined the BOP accounts. There are only two parts of the BOP accounts. Current Account + Capital Account =BOP
http://www.manilatimes.net/2014-current-account-surplus-also-a-record/170750/
http://www.philstar.com/business/2015/07/04/1472934/trade-deficit-narrows-further-2014
Firstly this is for the year 2014
“The Philippines’ current account—a major component of the balance of payments—for full-year 2014 reached a record surplus of $12.6 billion as exports far outpaced imports and compensation for resident Filipino workers overseas increased, official data shows.”
“The country’s balance of trade in goods (BOT-G) registered a $3.296-billion deficit in 2014, based on the 2014 Foreign Trade Statistics of the Philippines released Wednesday.”
Based on your own unverified figures…OFW $20.6B +BPO $15.6B = $36B – Trade Deficit in goods
$ 3.2 B ==$32.8B current account surplus…
But for 2014 the BSP and you only quoted $12.6 B as the CA surplus…
I am using your unverified figures…
Now you have admitted that in the investment portion of the BOP or known as the Capital Account the BSP announced a deficit which you also mentioned…
DEFINITION of ‘Current Account’
“The difference between a nation’s savings and its investment. The current account is an important indicator about an economy’s health. It is defined as the sum of the balance of trade (goods and services exports less imports), net income from abroad and net current transfers. A positive current account balance indicates that the nation is a net lender to the rest of the world, while a negative current account balance indicates that it is a net borrower from the rest of the world. A current account surplus increases a nation’s net foreign assets by the amount of the surplus, and a current account deficit decreases it by that amount. The current account and the capital account are the two main components of a nation’s balance of payments.” Investopedia
DEFINITION of ‘Capital Account’
“A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public and private international investments flowing in and out of a country.” Investopedia
Based on Chempos supplied figures our CA surplus should be should be $32.B not $12.B..
No conspiracy here just reporting facts as reported by media and Chempo…
You see if there was a BOP deficit in 2014, that would mean the CA surplus was wiped out by investors moving cash out of the Philippine economy…
My question remains where are the dollars supposedly earned by the BPO
When one writes about banking one must one must have a rudimentary understanding of basic mathematics…
Why is the capital account important…Who should own the financial assets of a country… Outsiders or the citizens of the country?
“SHOW ME THE DOLLARS CHEMPO,” SHOW US THE DOLLARS….
WHERE DID IT ALL GO TO?
well why source from third party when the bsp has it:
Click to access TechnicalNotes_Sep15.pdf
http://www.bsp.gov.ph/statistics/efs_bop2.asp
Cheers.
Click to access TABLE%201%20%20Total%20Trade%20by%20Month%20and%20Year%20%202015%20-%202013_1.pdf
http://business.inquirer.net/196465/bpo-revenues-seen-to-overtake-remittances
The Inquirer piece stated that for 2014 OFW’s sent home $24.3 B.. While BPO revenues for the same year was $18.9B.. The first link clearly shows the cumulative goods trade deficit for 2014 as $3.296 billion…
Our simple math skills using the links above should be close to $40 billion Current Account surplus for 2014 . No where in the BSP data does it show this!!!!!!
All this noise about the BPO earning more than the OFW eventually cannot be supported anywhere…
The only logical answer is in the export of goods and services companies are keeping proceeds of their receipts abroad since the country no longer has current and capital account controls on forex.
Mr. Angulo, do you understand the mechanics of exporting and importing goods and services as this is strategically important to the lives of over 100 million pinoys as far as savings and the multiplication of the money supply?
Mr Hiro even a layman with an engineering degree can find it in the report please do read the report.
How come there is a discrepancy between the PSA report of trade in goods and the BSP report on page 140? Trade deficit end year 2014… Is it $3B of $15 B???
You must be a math whiz, and I wait breathlessly for your valued answer?
Is English your native or first language? Do you think in English???
http://business.inquirer.net/196465/bpo-revenues-seen-to-overtake-remittances
“SHOW ME THE DOLLARS CHEMPO,” SHOW US THE DOLLARS….
WHERE DID IT ALL GO TO?
If that news article were true we should be swimming in dollars and the peso should be getting stronger…
Kindly do the math….
Thanks, chempo for responding nicely to my query. I wouldn’t ask if I have the time to read up on those links or other sources to have an idea how the BSP or the Treasury does their accounting. I wish also (as Joe has frequently requested, that those links be summarized as we have unreliable internet connections)
My simple understanding of the dollar earnings from OFW and BPO is that those dollars do not stay at BSP or in the Treasury, they are in the banks where they were exchanged for pesos by the consumer oriented beneficiaries/relatives, the banks then make them available for businessmen who buy the dollars for their import /investment (outside the country) needs.
There’s also this alleged Binondo Central Bank allegedly controlled by Roberto Ongpin where dollars are allegedly sold, purchased and remitted outside the country daily…off the books?
Doesn’t the BSP have the police powers to raid these illegal money changers? Illegal capital outflow is not doing our country’s economy any good.
A Rhiro
Please refer to the definitive BSP report, the link as provided by Gian above. I would think the central bank knows more than the Filipino journalists.
Sorry the comments in this thread are not chronologically listed. Bit mixed up.
@ RHiro — the link provided by Gian re BSP report are self-explanatory. Let’s not go on a wild goose chase verifying every conflicting media report.
@ Mary Grace — the Balance of Payment is a statement that shows inflow and outflow of funds on a netted basis relating to economic transactions of Phils and the rest of the world in a given period. It’s central bank statistics, based on all those detailed and regular reports that various institutions submitted. Does not mean the funds actually flow into or out of the central bank directly. Eg remittances are between the remitter, bank intermediaries and the beneficiaries. Trade figures are from exporters, importers, and banking intermediaries. BPO would be between the companies, their principals and banking intermediaries. All has nothing to do with the central bank.
Re Binondo Central Bank — I have no idea whether it is still existing as a corporate entity or not. If it is, obviously it is illegal to use the very name BCB. My understanding is it was a Marcos end-day tactic post 1984 when the world was crashing down on Philippines. Nobody trusted the peso so everybody wanted to get hold of US$, which the rich and/or corrupt folks then send overseas to hide. It’s called capital flight. As I said before, Philippines is a treasure trove for anyone who want to write financial thriller novels. BCB would be one good read. What was Marcos, Ver, Roberto Ongpin’s roles, who profitted what.
@ RHiro
If you need further reading check out BSP Annual Report 2014 — what can be more definitive than this — http://www.bsp.gov.ph/downloads/publications/2014/annrep2014.pdf
Sorry Chempo but the data from the BSP page 140 is not definitive…
Pnoy the leader of the Daang Matuwid himself said so in his last SONA.. Smuggling is the silent user of the CA surplus…The BSP gets its data of Exports and imports from the PSA who collates data from the BOC…
Ever since the early 90’s the Philippine forex policy has been liberated…No law was passed…The BSP changed the rules on command of the IMF-WB.
Exporters can under invoice and also keep proceeds of their receipts abroad…Importers do the same…
http://blogs.wsj.com/economics/2014/04/15/smuggling-sparks-questions-about-philippine-trade-data/
http://www.manilatimes.net/smuggling-billions-lost-fpi-urges-a-solution/111127/
You see observers of the Philippine economy and not only myself strongly suspect that the data is incomplete as far as the CA accounts are concerned. ..
With forex liberalization and the bank secrecy law even the BSP is lost…
Just look at the peso… In 2012 till today… It is depreciating/devaluing…Thank goodness oil prices are low…
Look just one years trade surplus of the PRC with the U.S. almost equals the entire GDP of the Philippines…
Can you just imagine the size of those financial assets that produce those exports to the U.S.
But the U.S. pays for those imports with their own currency…
Ok…now it’s getting clearer…I’m trying to follow RHiro’s thinking as he keeps on asking you where are the dollars, show me the dollars, chempo
My being an accountant brings me to a formula that says, there is a balance surplus or deficit at the end of a previous year (2013), that will be the beginning balance for the next year (2014), to or from that figure will be added/deducted the net inflow and the net outflow for any given quarter, cumulatively and on a per quarter basis for comparative purposes.
When I prepare a report for the stockholders, I need to balance everything to my satisfaction, any resulting variance is being traced as to where it came from so proper internal control can be maintained. Bank accounts are reconciled to match with the FS, otherwise, I wouldn’t give the go ahead signal to close the books for a given accounting period.
@ Mary “Ok…now it’s getting clearer… ”
No, Mary, BOP figures are not cumulative. it shows the net in and out for the period for (A) (B) and (C). In oother words, it shows the movements during the period.
Eg (A) – Current Account $12.65b net inflow (Detailed reports will show line details of total $xxx came in, total $xxx went out during the year 2014, and the net was $12.65b came in).
In your financial statements for corporates, it is akin to the cashflow statement for the year. That’s the one where you take the ending balances-opening balances of each asset/liability accounts.
you can print all the peso you want (just like the Japanese did int WWII) but if nobody believes in them, its useless..
maybe if the Philippines or any nation have everything they have and don’t need the outside world, then they can print all the money as they please
but we cant even produce all the rice and food we need..
Here’s the thing DAgimas, if the Philippine national gov’t decide to print, say, Php20 million and use that money to pave the dusty pothole-filled road from Joe’s barangay to the munisipyo, will that stretch of road and the money that was used to improve it be useless?
“Words ought to be a little wild for they are the assault of thoughts on the unthinking.”
― John Maynard Keynes
That is why Chempo gets an A for effort…
In this country thinking is a difficult endeavor…
“The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. The process by which banks create money is so simple the mind is repelled. With something so important, a deeper mystery seems only decent.[58]”
– John Kenneth Galbraith writing in ‘Money: Whence it came, where it went’ (1975).
Good quote. I guess that about sums it up.
“Currency depreciation is a major tool to raise all tariffs without exception…”
Currency depreciation is a double-edged sword. Price stability is the bedrock of good economics.
Yes that is why the ECB, BJ, Central Banks of Switzerland, Denmark and Sweden are moving hard to depreciate their currencies….
Imports become expensive while their goods become cheaper in world markets…
Just dropped by to visit and I see the discussion dog here is still going in circles chasing its tail. It is indeed a complex and difficult subject but part of the confusion is commenters have different agendas and topics not necessary related which they wish to pursue. I took a brief recess here because someone wanted to turn the US public debt discussion to a basic critique of capitalist and free market economies and it lack of focus on social and class inequalities. Now at least the issues are tack on relevant aside from the ad hominem attacks which is always the case when egos are much larger compared to the mastery of the issues these egos bring to the table.
My own two cents is that I am coming to believe that MMT in the form that Turner Adair proposed it is technically feasible in very select situations as an alternative to financing government deficit via public debt. The main issue is it is whether it is desirable to do so in those situations where it is feasible. In the Weimar Republic and Zimbabwe, it may not have been but then maybe a reexamination based on what would have been the consequences if the next best alternative would have been chosen to? Is bankruptcy the cataclysm its feared to be or is it like for some countries and corporations the best way of starting anew?
Chempo’s explanation of Singapore’s high publiic debt leverage is very illuminating. There is a stigma associated with not living within ones means and borrowing so much to maintain an individual, corporation, or country’s standard of living. In fact part of the stigma here in the US is the accusation that future generations are saddled with backbreaking debt that must be paid off. This is beyond the bugaboo of runaway inflation, the fear of private borrowing being crowded out by public borrowing, the risk of public debt servicing costs becoming excessive, and all the other non-stigma but economic concerns against very high public debt levels being maintained or created. Clearly Singapore’s high debt leverage is not a concern on those fronts which is why its international credit bond ratings is generally at the same levels as US bond issues.
My own conclusion after reading the article and the relevant commentary posted here is that the 18 trillion dollar pubic debt is not as much of a problem as many people think, either to individuals like me who live andwork in the US but even much less as it relates to the Philippines.
*******
Caliphman, I still understand a little more than nada about the topic, but I am heartened by your re-evaluation of your stance. With such rational open-mindedness, I am led to believe there is hope in the world.
*****
And thank you for wrapping up my own battered thoughts nicely (battered by the arguments). I’m with you on this . . . 🙂
@caliphman
Your confusion stems from the fact that you do not distinguish the huge difference between a monetarily sovereign and non-monetarily sovereign entities.
Micha, please try and read my post again but carefully this time. You might realize nothing in it referred to any confusion on my part but to others this commentary. You might sound more knowledgeable about MMT if your points were in response to what someone said instead of just thrown out at anyone.
Well, congratulations then caliphman. I’m glad you have finally come to terms with the beautiful coherence of MMT. Now if we could make chempo see the light too and cure his confusion, we’d be making real progress towards economic enlightenment in this part of the blogosphere.
@ Caliphman
Thank you for your vote of confidence in the US debt. I’d rather you be right and I be wrong to spare us another financial turmoil, My ego can handle that.
What I would like to see is your views on why you think the US public debt is not much of a problem.
On Adair Turner’s proposition, it is basically as what Anatole Kaletsky calls an “emperor’s new clothes”. The old clothes to finance deficit budgets are helicopter dump of newly printed notes and debt securities. What Turner suggest is mere creative book-keeping given our modern world of electronic money.That’s all to it. Simply have the central bank debit a special asset a/c and credit the Treasury dept (govt) current a/c. Of course Turner was referring to the Bank of England, which is govt. In US, the Feds is not govt, so it’s entirely different. So Turner’s special asset a/c in the BOE will be a pepertual a/c that requires no valuation. Of course Turner’s mechanism can work, but it’s hardly a revelation. Any worthy book-keeper would have been able to devise it. That was my world for 40 years — creative book-keeping to handle an ever changing landscape of derivative products.
Turner’s mechanism is one up on the US in that there will be no debt overhang. But it is still basically akin to ‘printing’ currency. Money supply is of course increased and the issue of inflation is ever present. Turner is well aware of it and that’s why his caveat on political responsibilities as to qualitative and quantitative application of the proposed mechanism.
What I appreciate of Turner is his writings on derivatives in his ‘Shadow Banking’ papers. That is really a very intelligent take.
Chemo, the inflation risk is there if the money supply is dramatically expanded and it is chasing a comparatively fixed quantity of real goods and services. The point is creating it from issuing more debt burdens the government with a contractual obligation to pay interest and repay it and this is even more problematical if the debt ends up in private hands. It is overly simplistic to label MMT as no different from printing money or creating electronic debits or credits because there are accounting and legal regulations that come into play in order to render the MMT option technically feasible. And no, one would need more than a clever team of bookkeepers and lawyers to make it a workable alternative. Derivatives better have nothing to do with it , regardless of how brilliant Adair might be on the subject.
I understand what you are saying.
Is my reading correct that your view on the US debt is that you appreciate there is a real debt issue, meaning the obligation of repayment and not simply obliterating it by ‘keystroke’, but that you are comfortable in that it would not likely be played out into a serious inflationary scenario..
Chempo, I am no Paul Krugman or any US economics expert whose opinion is worth more than 2 cents. That question as to whether any level of US public debt should be a top economic and political concern here in the US or because of increased globalization anywhere else. Which brings us to the current crisis in the study of macroeconomics theories, the lack of an empirically supportable and conclusive answer to this and other key questions on recession/inflation/economic inequality/etc.
When all is said and done, I believe the current levrel of debt is still manageable. The real issue is the public, political, and global concern and outcry for the US to do something about it may seriously erode confidence if it approaches PIGS level and past it. Its the stigmas associated with this debt rather than whether its manageable that eill become the main problem.
Will the solution be an MMT or an equivalent keystroke procedure? Does a stent or a heart bypass offer a solution to a patient who keeps clogging his arteries because he does not make any lifestyle changes ?
@caliphman
Sigh. With comments like that it may have been premature for you to claim you’ve been cured of confusion.
Micha, you are obviosly projecting your confusion with MMT theory on to me. I never claimed any confusion with it so for you to say now that I am mistakenly saying I am cured of this earlier confusion is scene straight out of Alice in Wonderland. And no…I am not the Jabberwock and no, its not true he and Hyman Minsky concocted the founding ideas of MMT after the White Queen banished both inside her mirror.
@caliphman
Well, how do you explain this non-confusion :
“That question as to whether any level of US public debt should be a top economic and political concern here in the US or because of increased globalization anywhere else.”
Or this :
“The real issue is the public, political, and global concern and outcry for the US to do something about it may seriously erode confidence if it approaches PIGS level and past it. Its the stigmas associated with this debt rather than whether its manageable that eill become the main problem.”
And the clincher :
“Will the solution be an MMT or an equivalent keystroke procedure?”
What, pray tell, is the difference between MMT and an equivalent keystroke procedure?
What I find amusing is that the theorists, who can’t figure out amongst themselves which rules work and which do not, descend on honorable laymen to cast them as ignorant because they don’t subscribe to the theory which is in dispute. Nor can the theorists explain things in ordinary language, like using Edgar’s enumeration tactic, to educate the laymen. They prefer hiding in the clouds of elitist knowledge and dropping insults. I seldom engage with the theorists because it is futile. I read Chempo and Caliphman instead and know they are regular people, and smart enough to educate me.
Joe, there is always a place for theorists. I do have respect for their views even though my views may defer, and who the hell am I to say my view is the right one anyway haha. But being a layman and a practical man, I do sometimes find theorists not standing on real grounds.
In our discussions here and in your blog on Banking #1, there was something we touched on which illustrates my point. That is the one on new views on fractional banking. The traditional explanation is as what I laid out in this article. Many theorists, including very reputable ones of rather high standings, are poo-pooing away that old thinking. They came up with ‘new revelations’ about what actually transpired in real life banking about credit cycle leading the deposit cycle and the sourcing for reserve funding comes at the end.. But real bankers know what the credit cycle, where our sources of funds for loans, and how we take care of the reserve fundings all along. We all understand the traditional way of explaining the fractional banking is just a mathematical model to explain the process, that’s all. In every loan drawdown, we cannot actually identify the specific funds, it’s a mixture of capital, long term debenture stocks, money market lines and of course, our deposit base.
Oh, I love theorists, and even tried to be one at one time (mathematical), but found my mind could not stretch that far. Theorists push us mightily forward and E = mc squared. I just don’t like it when they insist on condescending to people who don’t have their wealth of education and knowledge. My theory is they don’t have to do that.
OK, Caliphman, I get your point.
Apologies as I’m late to the discussion here. My own take is the source of the problem is twofold;
1. Fiat currency (and by extension fractional reserve banking).
2. The US dollars’ role as the world reserve currency and by extension its role as the currency of choice in international transactions.
The 2nd part is being slowly addressed by other countries as pointed out in the article by bilateral agreements etc. The more insidious problem is the first one currency as an idea is divorced from physical reality and its value is based on faith alone. This is a very complex issue and alternatives like gold or bitcoin as reserve currency, energy (kwh not oil) as reserve etc. have their own issues and attendant consequences as well. If you read the history of fiat you will see it came about because of the problems of a gold based currency and fiat allowed the creation of an advanced global credit economy we have now. Changing/reforming the atatus quo will be very painful and would have far ranging consequences even if we go about it slowly and carefully. There are no easy short cuts but for what its worth I’m in favor of going to an energy-based currency that could have fractional reserve banking (but with very high capital ratios, even higher than what we have here in the Philippines) but at least grounded in the sciences with the value set by physical laws. At the very least it will help the economics and finance fields have a strong scientific foundation instead of the current mess we have now.
Thanks for dropping by.
We probably have not seen the end of the evolution of money.
The mess that you refer to is only in the US, and maybe a handful of other countries who followed the path of fiscal irresponsibility. Most other countries do get by with current monetary systems. Not perfect, but livable.
I agree money will continually evolve and hopefully to something more based on value that we all can agree upon and not imposed by a few that we all have to comply based on faith alone. The mess might be confined to the US for now but by virtue of it being the largest economy and more importantly the dollar being the currency for settling international transactions it has very real consequences to the world economy and to us by extension. It is actually our banking system which is ok for the moment as our monetary system is still at the mercy of capital inflows/outflows and currency risks which are all directly traceable to the dollar being the reserve currency. It is always instructive to remember that George Soros was able to short the GBP during the 80’s and for a moment there the UK government was at the mercy of a handful of hedge funds. I’m just really thankful that our BSP is run by competent people and we have managed to have a respectable credit standing despite our history.
You are referring to ‘Black Wednesday” the day in Sep 1992 when the British Sterling pound came crashing down. George Sorros shorted stg the same way he shorted thai baht in 1997. However the havoc the likes of George Sorros and hedge funds may cause, they actually have a role to play – they make the market more efficient.
My apologies you’re correct that was what I was referring to. I agree with the role hedge funds play in making the markets more efficient, I’m just worried about the cost to the governments who are powerless in situations like these in effect being held hostage by institutions, individuals even. They are in it to profit not necessarily to help the governments concerned. The capital markets are there for capital formation which means simplistically to allocate economic resources of the savers to needs of the borrowers with a corresponding fair profit in the form of interest to the savers for forgoing consumption and lending their assets (money). The problem is with fiat being printed and having no basis in physical law the market is being perverted by powerful economic players (e.g. institutional investors from the savers side, the US govt from the borrowers side and the bankers being the middlemen facilitating and underwriting everything) that its function of allocating resources to necessary and worthy endeavors is subordinated to the overriding need to profit. I just hope the present day trends of competing reserve currencies will continue to reduce the usd power and to level the playing field across nations, institutions and down to the individual level before transitioning to a currency based on physical reality without the attendant scarcity problems of gold while maintaining the present day advanced credit economy without the unnecessary complexity of financial engineering products and services. I am a realist and so I see the need for gradual transition and transformation to avoid turmoil but I don’t want a world mirroring what happened to Argentina being held hostage by a few predatory bondholders from paying interest payments and thereby defaulting and shut out of the markets. Granted Argentina has a checkered credit history but being willing to pay and being forced not to by a judge in SDNY? Our own history being subject to the IMF bears witness to the power of these players. I just hope we effect change without major war/s accompanying it since history has shown that almost all wars had economics/finance as the root cause.
“..a currency based on physical reality without the attendant scarcity problems of gold while maintaining the present day advanced credit economy…” whooa…when you find such a thing, let me know hahaha. Never the thriga shall meet.
I think many people take the assumption that fiat money means printed currency notes bot backed by anything. Whilst this is true in the sense there is no sovereign guarantee to exhcange the paper for anything, there is always the need for the central bank to hold foreign reserves. That’s more or less the backing for the currency.
Its a reasonable enough assumption for people. And as for foreign currency reserves as the backing for your currency? What are they but currency with no sovereign guarantee as well. Which brings us back to the usd and its guarantee ” full faith and credit of the US govt “. Meaning? The dollars’ value is whatever they want it to be since they have the power to mint it or from our side of the equation ” trust us that they have value that you and I believe in ” Asking for our faith. Hope they know what they are doing.
Yeah I know what you mean. Thus most countries are moving to a bigger basket of currency reserves, instead of primarily US$. Thus the yuan gaining more international acceptance. But I don’t have much faith in the Chinese yuan.
The Yuan is now included in the IMF’s basket of international reserve currencies. This move further internationalises the Yuan which means more trade will be Yuan based and reserves managers in various countries will move to increase their Yuan holdings.
http://www.bloomberg.com/news/articles/2015-12-01/asian-central-banks-welcome-yuan-s-imf-reserve-basket-inclusion.
chempo listen to Paul Krugman:
So the IMF has included the renminbi in the SDR, adding a world of hurt to newspaper reports; now everyone will have to deal with China’s awkward currency nomenclature. (As I understand it, you should use renminbi and yuan more or less as you use sterling and the pound; the RMB is the term for Chinese money in general, the yuan a denomination of its notes.) It’s a symbolic event — the first developing country to achieve that status. And if you ask me, it was a bit rushed: China is big, but it still has capital controls, so that its currency really isn’t freely negotiable the way the other currencies in the basket are.
But how much difference does this make for the real economy? Almost none.
That’s not what you usually hear. Today’s commentary by the usually excellent Neil Irwin compares the rise of the RMB to the gradual replacement of sterling by the dollar “as the predominant currency for global trade and finance.” He goes on to say that this development was a crucial piece of the nation’s rise to superpower status.
Actually, no, it wasn’t. America became a superpower because its economy was huge — by 1913 it was already about as big as the combined economies of Western Europe, and it was even more dominant after World War II. The international role of the dollar was at best a minor footnote to this story.
Ask yourself, what special privileges does being a reserve currency bring? People who don’t actually work in international monetary economics tend to make claims about America having a unique ability to run trade deficits, or to borrow in its own currency, or to extract large amounts of resources from other countries due to “exorbitant privilege,” but none of that is true. At most, the dollar’s special role might mean slightly lower borrowing costs — although there’s little evidence of that — and a de facto zero-interest loan from people holding currency — pieces of green paper with portraits of dead presidents — outside the country.
And it’s far from clear that China will get even these minor payoffs: putting the currency in the SDR should have very little bearing on the willingness of individuals to hold yuan in cash, or even to buy RMB-denominated bonds.
Maury Obstfeld had a nice survey of the SDR a few years back, which put things in perspective. Essentially, the SDR at present provides a limited credit line to countries that want to borrow reserves of actual currencies from other countries. He goes on:
“The basket valuation of the SDR is motivated by denominational convenience, and can be argued to be quite incidental (and inessential) to the main purposes.”
In other words, this not much more than a minor change in accounting, with trivial economic implications.
http://krugman.blogs.nytimes.com/2015/12/01/small-news-on-the-yuan/?module=BlogPost-Title&version=Blog%20Main&contentCollection=Opinion&action=Click&pgtype=Blogs®ion=Body
“China is big, but it still has capital controls, so that its currency really isn’t freely negotiable the way the other currencies in the basket are.”
Micha you are the foremost expert on money matters hereabouts..
Kindly explain and elucidate on what China’s capital controls are all about??????
Additional question, why is it not freely negotiable???? The RMB that is…
RHiro,
You are not quoting me, that is Paul Krugman’s piece. See the link below the post.
Micha why post something that you yourself do not understand…;You are the foremost expert here on monetary sovereignty and you do not understand capital controls????
Au contrare’, I very much understand the Krugman article. I posted it in response to chempo’s near exultation at the IMF approval of the renminbi to be included in SDR.
I have functional understanding of capital controls as well. What’s your problem?
Micha, we would like an explanation as your ongoing discussion with Chempo would not be necessary if you had elucidated on what capital controls mean?
What about controls make the PRC stand out??? At least MGG admitted her understanding of BOP.
Thanks Micha for the link
I do agree with some aspects of what Krugman said ….China is not ready.
But then again, you will see lots of US resistance to all moves that work towards marginalising the $. They have been known to discourage some nations in their bi-lateral packs.
On the other hand, many countries, especially Asean countries, welcome this move by IMF and central bankers are working on accquiring Yuan reserves, including Bangko Sentral.. see link .http://www.rappler.com/business/industries/210-capital-markets/114699-bsp-yuan-investments
I am not saying it’s good or bad, simply that these are moves that I explained in my article are underway.Saying my ‘exultation’ is too judgemental I think.
Our central bank most likely has euro, yen, and pound reserves too. Will the inclusion of renminbi in the basket marginalize the dollar? I don’t think so.
Come on Micha, am I that stupid to think the BSP’s accumulation of yuan will marginalise the $? Of course not. I”m only saying these are part of the moves that’s been going on in the past few years.
Uh, ok. I’m glad you’re not stupid to think including renminbi in the basket marginalizes the dollar.
To all concerned…
http://www.bloomberg.com/news/articles/2014-03-26/philippine-peso-s-slump-amid-surplus-stokes-smuggling-concerns
This was dated back in 2014… It was published by Bloomberg….Maybe our engineering expert, monetary expert and banking expert can explain away the huge discrepancies.
RHiro,
I am currently based in the US and I have not really been following the ins and outs of Philippine economic dysfunction and its attendant corruption. You, on the other hand, seem to be immersed in both its micro and macro details so why not explain what you goddam know already instead of asking other people.
Better yet, make a full blog article expose’ and submit it for Joe’s publication.
Yes RHiro.I had made a similar request. Do enlighten us all.Submit a blog article then wait for a week for it to appear.
Karl no need to write a blog..Let me give you an analogy… The City of Tacloban was literally destroyed by a major super typhoon..The local government facilities, private businesses including banks were destroyed. Almost everyone from government and the private sector were affected…
People were left with the cash on their persons… No normal process of trade was possible…
After a few days, grocery stores and other establishments were looted…The domestic system of payments was paralyzed…
In 1930 over half the banks in the U.S. closed down…The domestic system of payments collapsed…
In 2008 it happened in the wholesale sector of the financial system wherein the inter-bank market for funds stared to shut down. Banks started refusing to lend to one another…It spread internationally since financial flows were liberalized..Before the virus was to move to the retail and consumer sectors of the financial system, the Fed acted as the de facto Central Bank of the international payment system…
Yet this most important facet of modern living is left with the same people who caused the crisis…
Why not put this critical piece of modern life under the aegis of the U.N. rather then the United States?
It is about power and power relations among the BIGS. They rule the roost…
The rate according to yahoo finance that institutions are lending to the U.S. for five years is 1.70 %, for ten years 2.25% and for 30 years is 2.99%.
If the U.S. economy is in trouble because of all their debt why is there almost no risk premium in the interest rate they pay?
Good thing I clicked back on this topic.Even with some occassional complaining from me, I continue to appreciate the knowledge you impart.Waaay back from Ricky Carandang and Mlq3 days. I salute you RHiro.
Micha i raised a point about discrepancies in the Philippines BOP since it affects my life directly… The value of the dollar and the exchange rate have been part of my life since i started working…
I noticed the discrepancies and it was strange to see the peso get weaker in spite of all the dollars supposedly entering the country…
Naturally the issues raised in Chempo’s post gave me a chance to honestly inquire since the U.S. debt is directly linked to the budget deficits and the budget deficits directly linked to trade deficits.
The exhorbitant privilege of the U.S. dollar allows the U.S. to live beyond its means and depend on the savings of the world to prop up the standard of living of its people…
Trade deficits are a sure barometer of a lack of savings of a country…
If there was a neutral medium for exchange as an international payment all countries would not have to cheat their way to prosperity…
Breton Woods was a good idea gone very wrong… Have you ever heard of Bancor?
The dollars problem is a serious one for the world. the Chinese do not want to replace
the U.S. dollar as the main instrument for world trade…
That means they would have to run trade deficits and offer loans to the world… How does one get their hands on RMB. to the extent of the U.S. dollar that took generations.
Just look at the continuing trade deficits of the U.S. with the rest of the world…Yet still the dollar holds its value…
One of the key issues in the campaign for U.S. president is trade related… Trump and Sanders both came out swinging against the free trade agreements the U.S. had signed..
But it is really the fault of the U.S. They do not have forex problems since they own the currency their debts are tied to.
Their military might also gives the dollar the safe haven status that is now a curse…
As a store of value people make a free choice to keep their financial assets in dollars..
My bet is still on the euro since they will be forced to unite their political structures and their fiscal and banking systems akin to the U.S.
Their economy is already bigger then the U.S.
Globalization plus the higher level of the continuing industrial revolution, puts the whole world at the cusp of revolutionary change…
Financial capitalism took advantage of these new technologies but governments have been slow to react… Hence repeating financial crisis occurring repeatedly…
Just look at the Philippine government… Acting like a first world country with a third world budget…
The old problems of savings and lack of resources still at the core of its structural problems and no one is talking about it…
China will be slowly easing capital controls but we have to start doing it.
1. “I raised a point about discrepancies in the Philippines BOP since it affects my life directly… The value of the dollar and the exchange rate have been part of my life since i started working…”
Ok, so you’re a money trader. I just hope that personal stake doesn’t cloud the objectivity of your reasoning.
2. “I noticed the discrepancies and it was strange to see the peso get weaker in spite of all the dollars supposedly entering the country…”
Last time I checked we’re still a net importer. And smuggling is still a fact of life. Or so I heard.
3. “Naturally the issues raised in Chempo’s post gave me a chance to honestly inquire since the U.S. debt is directly linked to the budget deficits and the budget deficits directly linked to trade deficits.”
Check.
4. ‘The exhorbitant privilege of the U.S. dollar allows the U.S. to live beyond its means and depend on the savings of the world to prop up the standard of living of its people…”
I don’t see direct causality between savings of the world and the standard of living of Americans. Maybe you need to expound on this a little bit.
5. “Trade deficits are a sure barometer of a lack of savings of a country…”
If you’re specifically referring to the US, that doesn’t really matter. The US had been a perpetual net importer. If it stops buying goods from abroad, the rest of the world will be poorer.
6. “If there was a neutral medium for exchange as an international payment all countries would not have to cheat their way to prosperity. Breton Woods was a good idea gone very wrong… Have you ever heard of Bancor?”
Yup, JMK proposed it but was rejected at the BW conference.
7. “The dollars problem is a serious one for the world. the Chinese do not want to replace
the U.S. dollar as the main instrument for world trade…”
That figures.
8. “That means they would have to run trade deficits and offer loans to the world… How does one get their hands on RMB. to the extent of the U.S. dollar that took generations.”
Exactly. See #5.
9. “Just look at the continuing trade deficits of the U.S. with the rest of the world…Yet still the dollar holds its value…”
Correct.
10. “One of the key issues in the campaign for U.S. president is trade related… Trump and Sanders both came out swinging against the free trade agreements the U.S. had signed..”
Strange bedfellows, that.
11. “But it is really the fault of the U.S. They do not have forex problems since they own the currency their debts are tied to. Their military might also gives the dollar the safe haven status that is now a curse…As a store of value people make a free choice to keep their financial assets in dollars..”
A curse for the rest of the world, you mean.
12. “My bet is still on the euro since they will be forced to unite their political structures and their fiscal and banking systems akin to the U.S.”
I have nothing against the euro. I really wish the European project will work out fine. But I’m not seeing political integration on the horizon yet.
13. “Globalization plus the higher level of the continuing industrial revolution, puts the whole world at the cusp of revolutionary change…”
The revolution is here.
14. “Financial capitalism took advantage of these new technologies but governments have been slow to react… Hence repeating financial crisis occurring repeatedly…”
It can be reformed by re-introducing the Glass-Steagall Act.
15. “Just look at the Philippine government… Acting like a first world country with a third world budget…The old problems of savings and lack of resources still at the core of its structural problems and no one is talking about it…”
I do not worry about lack of savings for the Philippine gov’t. In fact, deficit spending is necessary to sustain growth. Countries like Singapore and Japan have resource constraint as well. We just have to learn maximally utilizing what we have.
16. “China will be slowly easing capital controls but we have to start doing it.”
In the aftermath of the 2008 crisis, even advanced economies adopted capital controls. The IMF had offered a toolkit to de-stigmatize capital controls.
I love your answers when it is patently clear that you do not have a clue on what capital controls entails and in particularly the Chinese model of capital controls…
Kindly point to one advanced economy on this planet mind you that has imposed capital controls.,..You may be aware of another one on another planet…
I am curious as to which advanced economy has banned the possession of foreign exchange by its citizens/residents within its own borders. Kindly point to the country that has ordered that all proceeds of foreign exchange export receipts be turned over to the State…
You obviously have a hard time grasping the context of the English language…
I am wracking my brain as to which of the G-7 countries has imposed capital controls…
Have you ever wondered why the United Nations Monetary and Financial Conference in 1944 carried the name of the U.N. but was never part of the United Nations in later years…
Malaysia imposed capital controls in 1997 in an attempt to prevent their exchange rate from collapsing…They went against the then IMF mindset…
India and China then due to their capital controls did not suffer.
I bet you do not even understand the process of how the inflow/outflow of dollars in the country affects the BOP and the rise or fall of central bank reserves under a liberalized open capital account or a closed one….
You are absolutely right in your statement that the Philippines need not depend on savings from the economy as government can run deficits without limits on size or time…
That there is a bat chit crazy statement…
RHiro, check up this links if you know how to read :
http://cointelegraph.com/news/11760/20_withholding_italy_announces_capital_controls_on_incoming_foreign_transfers
and this :
https://www.sovereignman.com/lifestyle-design/is-the-imf-now-recommending-capital-controls-8975/
There are degrees or variations a country could adopt to stem the flow, in and out, of capital. Spain, Italy, Greece, and others have, in one form or another, adopted capital controls after the 2008 crisis. It may not be as extensive as what China is imposing but these countries have nonetheless sanctioned the imposition of controls during the height of global recession.
And please tell me why the sovereign Philippine national gov’t need to depend on savings to sustain its ability to spend. It seems to me that after all this time you still don’t understand the huge difference between a monetarily sovereign and NON-monetarily sovereign entities.
Dear Dear Micah your comprehension level is really suspect when it comes to the English language as it pertains to your own postings…
Please call up President Maduro on your thesis as he has been funding his government with money newly printed. With all those oil reserves in the ground hyperinflation has crept in.
Please note the difference between fiscal withholding tax and bank holidays from capital controls…
Micha kept telling us that deficits are good.So what if there is an 18 Trillion dollar debt?
No problem today,what about tomorrow?
=====
“Debt service will continue to consume a larger portion of the federal budget, and we’ll be looking at gross interest payments on the national debt of close to $1 trillion [annually] by the time another decade passes,” Mr. Sepp said.
Annual net interest payments on the national debt are projected to rise from around $220 billion currently to $755 billion in 10 years. Policymakers in Washington have been fortunate to date because interest rates have been at historic lows for several years.
“Debt payments comprise 6 percent of all spending now, but will more than double to 13 percent in 2025,” said Demian Brady, The National Taxpayers Union Foundation’s director of research. The nonpartisan Congressional Budget Office “cites two main causal factors: an expected eventual rise in interest rates, and the continuing expansion of the federal debt.”
Supporters of the budget agreement point to structural reforms in entitlement programs, including a deal that will prevent a 20 percent across-the-board cut in Social Security Disability Insurance benefits for 11 million people next year.
But Mr. Sepp said it’s not clear whether the provision represents meaningful reform or another budget gimmick.
“The infusion of cash from the retirement portion of the [Social Security] program will carry disability insurance for several years before any of the major reforms to the program fully kick in,” he said. “Lawmakers are claiming that they stopped kicking the can down the road on [Social Security Disability Insurance] when they’ve really just kicked the can into another lane of the road.”
Fiscal conservatives say it doesn’t seem to matter which party controls the White House or Congress when it comes to spending increases.
“When I ran for office in 2010, the debt was an enormous issue and the debt was $10 trillion,” Mr. Paul said Friday on the Senate floor. “Some of us in the tea party were concerned because it had doubled in the [previous] eight years. It doubled from five [trillion dollars] to 10 under a Republican administration. And many of us were adamant that Republicans needed to do a better job. We had added new entitlement programs, we had added new spending, and the deficit got worse under Republicans. Now we’re under a Democrat president, and it’s set to double again.””
link for the exerpt.
http://www.washingtontimes.com/news/2015/nov/1/obama-presidency-to-end-with-20-trillion-national-/?page=all
karl the key issue is debt to capacity to pay. (.ctp)
the ctp will be determined by total domestic product and thus the resultant tax revenue for irs
so economic growth yielding more tax revenue will allow payment of debt.
no growth means a stuff up.
Stuff up means BS right?
Karl,
Our Micha is an intelligent girl. She just has very strong views on the monetary sovereignty thing.
A debt is a debt is a debt. No matter how strong economically the US is, there is a limit and a breaking point. The debt is increasing at exponential rate, it’s just a matter of time.
There is a conspiracy theory of what is know as “Globalists”. an exclusive club of super duper rich folks who are manipulating global events. Famously known as the Bilderberg Group they have their hands all over the world, creating warfacres, disasters, etc to promote their hidden agendas. One such agenda is to culminate in a single world currency possibly backed by gold. The theory is that to create, they first have to destroy what is existing. Thus the seemingly irresponsible mad spending to destroy US$. Meanwhile, the price of gold since the low of about US363 in 2000 has gone up by 240% today.
Micah’s “debt is good” sounds like Gordon Gecko’s “greed is good”. I understand what she meant to say is that govt goes into debt to expand the economy. Sure, we all go into debt to buy a house or a car, so debt is good in that sense. It’s all a matter of capabaility to service the debt. If you can service it, te debt is OK, if you can’t, it’s sheer irresponsibility.
Many thanks Chempo,let us see if they can get rid of the Dollar.
The monetarist theory advocates believe that countries with sovereign currencies, ie. the US, can avoid a crushing debt burden using a novel and therefore untested and tisky strategy. US government issues $20 trillion or less of perpetual and interest free bonds which are absorbed by the Federal Reserve who then holds onto them forevet.The bond proceeds are used to pay off the entire public debt or invested so that earnings and maturities on the investment portfolio match the debt burden on the $20 billion public debt. The Federal Reserve pays no interest ir principal on these special bonds so no debt service problem forever. What is wrong this picture? Althougjh I believe this proposed magic solution is hogwash, I will play devil’s advocate and answer those who question it in the event Micha is unable to.
Caliphman, I must first proclaim that I have not read the details of this perpetual bond thing. So I’m just playing by how it can proceed.
I suppose the Treasury issues these bonds and the Fed buys them up, so it’s all digital. The Fed simply debits the bond inventory a/c and credits the Treasury’s a/c. So yes by a stroke of the keyboard everything is solved. When the debts, in the form of Treasury bills, mature, the Treasury pays off the holders using the electronic cash that they now have in the Feds. Where do the money go to? The Feds simply debit Treasury’s a/c and credits another bank’s a/c for a/c of the holder who encashed the mature TBills. That money isn’t going to stay idle in the Feds for one single day. They will likely make it their way into the equities market or housing market, etc. The net impact is that the $20 trillion electronic money created by the perpetual bond eventually gets into the money supply with unimaginable pressure on inflation.
There is no running away from this debt problem.
Lets think about that for a moment. The current public debt is held by investors who are seeking a postive real return on their surplus cash or liquidity. When these investments in treasury securities are paid off, the vast majority of these investors will be sitting on liquid cash which they need to reinvest somehere. Its definitely not going to consumption of private goods or services which would be inflationary. I maintain these balances will be seeking equivalent investments of similar risk, the net effect of which would be to generally raise the price of government securities including those of the US, thereby lowering interest costs on traditional public debt. Recall that neither income nor wealth of US bond holders are being affected which would increase net demand and inflation. its just a significant investment portfolio adjustment that would be rapidly reallocated to their previous maturity and risk preferences for fixed income investments.
In the first instance, when the Fed credits the Treasury’s a/c to purchase the perpetual bonds, $20 trillions were “printed”. If this new money is kept in the Feds it does not increase money supply and thus no inflation. So if the market accepts some kind of mechanism that can continuously keep the new money in the Feds, then technically feasible, but in practice it won’t happen simply because every investor has different uses for their money.
Even assuming you are right, holders of matured Tbills seek to re-invest in other govt securities. They encash their matured Tbills and their cash goes back into the capital markets. To the extent that the money does not get into the real economy and markets like equities, housing, commodities, etc than asset prices are not pushed up. That I agree with you. But let’s look a bit into the details for further caveats.
I think we can see a clearer picture if we let a bean counter explain the debits and credits in the books of the Feds..
a). Feds purchase the perpetual bonds from Treasury — Feds will debit securities inventory a/c and credit Treasury’s reserve a/c.
b). Repayment of matured Tbills to bond holders — Feds will debit Treasury’s reserve a/c and credit the a/c of Bank A (the bond-holder’s banker).
c). If Bond holders re-invest in the primary market (purchase new securities issued by Treasury) — Feds will credit Treasury’s reserve a/c and debit Bank A’s Reserve a/c.
d). If Bond holders re-invest in the secondary market (purchase govt securities in the open market) — Feds will credit Reserve a/c of Bank B (banker of the seller of the securities) and debit Bank A’s reserve a/c.
If bond holders re-invest in the primary govt securities market, the money goes full cycle in (a) (b) (c) above. The money remains in the Fed system and does not get into the real economy or other asset markets like equities, housing, commodities, thus there is no inflation.
The caveat is Treasury has to keep the money idle at the Feds to continuosly fund this cycle. If the govt cannot keep their hands of the cookie jar and dips into this float to fund normal expenditures then the money gets out into the real economy causing inflation.
If bond holders re-invest in the secondary securities market, then the money moves from one bank a/c to another in the Fed system. In (d) above, Bank B ends up with the credits in their reserve a/c. As Bank B seeks to maximise their return on funds, the money will be used in their normal banking operations and end up in the real economy thus causing inflation. Not only will the $20 trillion cash add to the money supply, further bank credit expansion will create further expansion of the money supply. Disastrous inflationary pressure will be the outcome.
I am not sure if adding all that transaction detail results in clarifying instead of confusing the situation. Rather than losing the nonaccountants and nonbankers by my wading through the minutiae of debits and credits you have laid out, lets save that for later. Perhaps the simplest way of approaching this is to view the process as the US government refinancing its public debt as it does so all the time when its outstanding bills and bonds mature. What happens is the the bondholders get paid off and they reinvest the proceeds in either new issues or go to the secondary market for fixed income or even equity issues. No new money is created because what the government adds to the money supply is again soaked up when it reissues securities or reborrows from investors. What happens when the government only partially or does not replace any of its maturing bonds or bills? This is in effect what happens in the monetarist theory strategy entailing the government refinancing its $18-20 trillion public debt with noninterest bearing perpetual government bonds it asks the fed to hold on to. Does it in effect add new money to the economy which would fuel inflation if bondholders reinvest
…the repayments not into new US bond issues but instead into secondary market already issued government bonds or other securities? Not necessarily. What one would expect is because the supply of US government bills and bonds would have shrunk dramatically, these prices of these bonds would be bid up by investors causing interest rates to fall and even go negative. These would induce a spill over to private fixed income securities and cause equity markets to appreciate. In effect, the cost of funds for investors would fall significantly and investments to produce real goods and services would increase greatly as it would allow corporations and individuals to make money in projects that otherwise would not be sufficiently profitable.
To restate all this in simple economic terms, whatever new money is created by bondholders reinvesting funds in the secondary market should increase investments leading to the production of additional goods and services. This in turn would curb any inflationary effects because the increased money supply would be balanced by the growth in available goods and services. Moreover, any superflous money supply in the US would be invested or transferred overseas where yields would be higher after the fall in US fixed income rates.
The problem with doing a detailed accounting and funds flow analysis is that it misses the interrelationships and i teractions between financial markets and the world of real goods and services.
Caliphman
(Less we forget, we are discussing on the assumption bond holders re-invest in govt securities and not taking their money elsewhere).
The first part I agree — If the govt issues new Tbills to replace matured bills, no new money is created. So if investors of matured Tbills re-invest in these new Tbills, whether in primary or secondary market, it has no impact on inflation. This is what I described in the article as “rolling over” the Tbills. But if the Treasury issues ADDITIONAL bills to fund expenditure, there is money creation. So whether these additional bills are purchased in the primary market or secondary, money supply has increased. As to its impact on inflation, it is a matter of many other factors — quantum of the increase, the state of the economy etc. like you mentioned, increased economIC activity absorbing the increase in money supply.
The second part on perpetual bonds – new electronic money is credited in the form of Treasury’s reserve a/c at the FED. The money supply has gone up by $20 trillion. Whether this will impact prices and inflation depends on how Treasury manages these funds. If they remain in it’s entirety in the Feds, then the impact is NIL. If they get out into the financial markets, there will be impact. All banking transactions are eventually settled in the Feds books (the Feds moving funds from one a/c to another). The way to see if the $20 trillion ends up with the banks is to see if the money has moved from the Treasury’s reserve a/cs into banks a/cs in the FED’s books. I set out the nItty gritty of debits and credits to show :
– In primary market re-investment, the funds remain the Treasury’s reserve a/c – they remain in the FED, thus no impact on inflation.
– In secondary market re-investment, the funds move out of Treasury’s reserve a/c into the a/cs of financial institutions which means it gets into the banking environment. When this happens, the funds end up in the real economy, thus have an inflationary impact. All I’m saying is, if the $20 trillion newly created electronic gets into the banks, expect inflation. This will happen when bond holders of matured Tbills re-invest in secondary markets.
Supposing these $20 trillion gets into the real economy. Now I fully understand your reasoning – the funds create impetus of economic activity and growth. This is precisely the idea behind the quantitative easing policies. Would you reconsider your views in light of :
1. Quantitative easing has not worked so far as GDP growth is still laggard. It suggest liquidity is not the cure all of economic ills. There are other factors at work here.
2. History have seen that too much liquidity invariably drives money into non-consumer markets causing asset bubbles into boom and burst cycles. Just imagine what the $20 trillion can do to asset prices.
3. Driving the $20 trillion new money into overseas markets simply means the export of US inflation to foreign countries. It will mean the perils of petrol dollars all over again. Latin American countries and Philippines have still not fully recovered from damaging effects of petrol dollars.
The gist of my $18 trillion debt article is that it is too damn monster of a figure to go away without causing worldwide problems, much less to the US itself. And we are now talking $20 trillion !
Back to the perpetual bond idea. I still say theoretically it’s feasible, but only if the $20 trillion new money in the Treasury’s reserve a/c at the FED perpetually remains there. That requires two mandatory observations —
a. The Treasury cannot use the money for any other purpose other than to repay matured bonds.
b. Investors of matured bonds cannot re-invest in other assets other than replacement bonds issued by Treasury.
(a) is possible, (b) is impossible.
I am losing you somewhere in the complications which is perhaps why it is better first to go from the simple case and what we both agree on before adding in the link between financial and real world markets.
“The first part I agree — If the govt issues new Tbills to replace matured bills, no new money is created. So if investors of matured Tbills re-invest in these new Tbills, whether in primary or secondary market, it has no impact on inflation. This is what I described in the article as “rolling over” the Tbills.”
In your description of rolling over bond and refinancings, the bondholders end up with the same investment portfolio and the goverment the same public debt position, for example $1 trillion in investments and debt. As you put it, there is no inflation. In the case of the monetarist strategy using perpetual interest free bonds to refinance US public debt, it can also be viewed as a rollover with bondholders replacing the $1 trillion in maturing or refinanced investments in the secondary market and the government ending up with the same debt position except $1 trillion in debt never matures or adds to its debt interest burden. Hence it should be no inflation either
Your last para – I disagree, but it seems I could’nt convey my reasons across in previous comments. Let me explain differently.
1. In the rollover case — Treasury issues new bonds, receives money from the sales, then use this money to pay off matured bonds. Net impact – no change in money supply, hence no impact on inflation.
2. In perpetual bonds — Treasury issues the special pepertual bonds which are all absorbed by FEDs which pays Treasury by crediting, or putting funds electronically into their a/c at the FEDS. Thus new money is created. No impact on inflation so long as the new money remains in Treasury’s a/c at the FEDs.
3. When old bonds mature, Treasury use this new money to pay off the bond holders by writing a check on their a/c at FEDs. So the new money gets into the real economy thus impact inflation.
4. So now we are discussing what if bond holders re-invest in govt bonds which you said would not affect inflation. My view is that if bond holders purchase in the primary market then YES, no inflation. If they purchase in secondary market, there is inflation. How so?
5. In primary market, Treasury issues new bonds, so when investors purchase these new bonds, Treasury receives the money and deposits back into their a/c at the Fed. Thus the amount of the new money that was created by the issue of the perpetual bonds is restored back in the Treasury’s a/c at the FEDs. Thus no inflation.
6. In secondary market, the investor use the money they received from Treasury in step 4 (which is already out in the real economy) to purchase from some other bond seller. Thus the money remains out in the real economy, thus impact inflation.
“The first part I agree — If the govt issues new Tbills to replace matured bills, no new money is created. So if investors of matured Tbills re-invest in these new Tbills, whether in primary or secondary market, it has no impact on inflation”.
I do not have much time right now to make an extended response but for now , let me note that your most recent comment is more complete in that it elaborates on US goverment refinancings, you maintain there is an inflation effect now depending on whether investors reinvest maturing bills in the primary or secondary market, in the case where the government issues perpetual bonds to the Fed to retire public debt.
The simple no inflation explanation which you disgree with is to compare balance sheets of the investors and the government before and after the issuance of perpetual bonds. The balance sheets should essentialy remain the same for both. The government will have reduced public debt replaced by the perpetual bonds on the liability side but assets should not be affected. The investors as a whole should not have a cash or money increase because whatever is received from maturing investments is reinvested to maintain their portfolio.
I do follow your recent line of reasoning which goes beyond the simplified balance sheet model of the question at hand, which is more banking or funds flow view. But if I were a monetary theory advocate, I would also disagree based on the belief that no net new funds is created yhat remains in the system that would be inflationary. But an even more complete response addressing your points refining our earlier discussion will have to wait a while. Cheers!caliphman