Scot Mcphee on Sat, 27 Dec 2008 01:06:27 +0100 (CET) |
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Re: <nettime> Dollar Shift: Chinese Pockets Filled as Americans Emptied |
On 26/12/2008, at 8:19 PM, Felix Stalder wrote: > [This is the last third of a NYT article about an issue I understand > less and less. Why are the Chinese continuing to buy US debt particularly > now that the yield is effectively zero? The short term logic is > understandable and well explained below. To keep the system going. But > what about the long term? Contrary to what this article suggests, I > doubt that this is going to last forever. But how is this going to > break? Through massive inflation and much higher interest rates? This is > all puzzling to me, even if I suspect this is a key piece of the puzzle. > Felix] Felix, Yes I read that article last night (my time) too. Several things spring to mind. In any crisis there is a 'flight to quality', in other words, people with cash seek to minimise exposure to risk. In a small crisis this might mean that smaller or risk-exposed companies suffer and large stable companies operating in sectors not regarded as affected (the sectors might vary according to the crisis). You will always find however that U.S. Government bond yields (effectively the interest rate the Government pays to borrow the money) fall. In *this* crisis however, nearly everything is suspect. Just about everything in the financial sector is seen as practically junk- quality. Any company that is carrying debt, especially short-term debt that has to refinanced soon, might fail to refinance that debt because the banks won't lend it, well, that's not a desirable scenario for investors either. US housing markets are toast. Companies that sell to consumers are struggling to find consumers. The 'Macquarie model' infrastructure investment funds turn out to be not such great investments. And who needs services in this market? If you're trade- exposed you might go down because international trade flows have plummeted with the looming recession (see the Baltic Shipping Index). If you're an energy producer the oil price is below $40 and falling. If you're a metals producer no-one needs anywhere near the volumes of steel or aluminium that you just geared up last year to pump out (and just this year the Chinese pumped billions of dollars buying a small piece of Rio Tinto and some other metals producers in order to stave off BHP's bid for RTZ, which BHP unceremoniously dumped last month, causing an already-falling and debt-laden RTZ to plummet and now the Chinese investment is not worth so much, they dropped quite a bundle on that little bit of national interest). OK, so equities are almost useless and commercial debt markets not worth the paper the debt is written on. OK you've got some hundreds of billions of dollars in cash sitting in a warehouse out the back. Consider that the money isn't actually held in cash. You have to put it somewhere - banks are too risky, equities and currency markets too volatile. So you 'fly to quality', and the ultimate quality is the guarantor of just about everything, the U.S. Government and it's system of bonds, notes and bills. The U.S. Government needs the money both to underwrite it's welfare program for failed investment bankers, and to start a Keynsian re-inflation of the thoroughly deflated U.S. domestic economy. The Chinese need to ensure that their principle consumer doesn't go broke. And it's not just Chinese money that's flooding in. The Gulf States are also sitting on large reserves and these have to be parked somewhere too. In fact the 'flight to quality' is so great, the amount of cash pouring into U.S. Government coffers so vast, that the 90 day T-bill pays practically nothing. In other words, "take my cash, I'm happy just to get it back". The money that the U.S. Federal Reserve pumps out to the banks pretty much goes straight to Government bonds. The U.S. Government is effectively printing money for itself. It's called 'Quantitative Easing', but you can just substitute 'Printing Money'. Will this end up with massive inflation and subsequently, huge interest rates as you ask? Perhaps. As the housing bubble burst and everything else around it crumbled to dust, a corresponding bubble has been created in the bond markets as the U.S. Government employed 'Quantitative Easing' to desperately re-inflate bank liquidity. Commercial paper is another story however, and usually measured by the "spread" between a Government bond and the target type of commercial bond or other debt instrument. These sorts of spreads between low-risk and high-risk investments have been skyrocketing recently, although in recent weeks most of these have backed off a little. Nonetheless, despite recent falls in LIBOR (London Inter-Bank Offered Rate, the rate that banks lend money to each other*), which indicates that surviving banks see each other as less of a risk, *volumes* have still be very low as most cash is now flowing to bond markets. The USA is hoovering up all the money. None of it sounds like it will end up prettily for anyone. * slightly more complex than that but effectively this is the case. # distributed via <nettime>: no commercial use without permission # <nettime> is a moderated mailing list for net criticism, # collaborative text filtering and cultural politics of the nets # more info: http://mail.kein.org/mailman/listinfo/nettime-l # archive: http://www.nettime.org contact: nettime@kein.org