LEFT OF DAYTON

Monetary Crisis Bigger than Dayton…Saving the City?? | August 11, 2007

Two articles today which point to much larger economic issues that will inevitably impact life in the Valley of the Miami’s…I make no claim to being anymore astute on Monetary Policy than the average guy on the street, but the link here is clear. Montgomery County has one of the highest home foreclosure rates in the country, impacting hundreds, if not thousands of Valley residents. Unstable home mortgages are a fundamental and underlying crack in the economic dike and the question may well be whether the crack can be fixed without major pain. The question to  ask on a local level is what our County and City officials doing to prepare for and address before it becomes overwhelming.

Next week I plan to ask some of those officials what they are going to do. In the meantime read and educate yourself>>>

First  Paul Craig Roberts gives a follow up to his article  about being “In the Hole to China” which I posted yesterday >>>>

China’s “Nuclear Option” is real

By Paul Craig Roberts

08/11/07 “ICH‘ — — Twenty-four hours after I reported China’s announcement that China, not the Federal Reserve, controls US interest rates by its decision to purchase, hold, or dump US Treasury bonds, the news of the announcement appeared in sanitized and unthreatening form in a few US news sources.

The Washington Post found an economics professor at the University of Wisconsin to provide reassurances that it was “not really a credible threat” that China would intervene in currency or bond markets in any way that could hurt the dollar’s value or raise US interest rates, because China would hurt its own pocketbook by such actions.

US Treasury Secretary Henry Paulson, just back from Beijing, where he gave China orders to raise the value of the Chinese yuan “without delay,” dismissed the Chinese announcement as “frankly absurd.”

Both the professor and the Treasury Secretary are greatly mistaken.

First, understand that the announcement was not made by a minister or vice minister of the government. The Chinese government is inclined to have important announcements come from research organizations that work closely with the government. This announcement came from two such organizations. A high official of the Development Research Center, an organization with cabinet rank, let it be known that US financial stability was too dependent on China’s financing of US red ink for the US to be giving China orders. An official at the Chinese Academy of Social Sciences pointed out that the reserve currency status of the US dollar was dependent on China’s good will as America’s lender.

What the two officials said is completely true. It is something that some of us have known for a long time. What is different is that China publicly called attention to Washington’s dependence on China’s good will. By doing so, China signaled that it was not going to be bullied or pushed around.

The Chinese made no threats. To the contrary, one of the officials said, “China doesn’t want any undesirable phenomenon in the global financial order.” The Chinese message is different. The message is that Washington does not have hegemony over Chinese policy, and if matters go from push to shove, Washington can expect financial turmoil.

Paulson can talk tough, but the Treasury has no foreign currencies with which to redeem its debt. The way the Treasury pays off the bonds that come due is by selling new bonds, a hard sell in a falling market deserted by the largest buyer.

Paulson found solace in his observation that the large Chinese holdings of US Treasuries comprise only “one day’s trading volume in Treasuries.” This is a meaningless comparison. If the supply suddenly doubled, does Paulson think the price of Treasuries would not fall and the interest rate not rise? If Paulson believes that US interest rates are independent of China’s purchases and holdings of Treasuries, Bush had better quickly find himself a new Treasury Secretary.

Now let’s examine the University of Wisconsin economist’s opinion that China cannot exercise its power because it would result in losses on its dollar holdings. It is true that if China were to bring any significant percentage of its holdings to market, or even cease to purchase new Treasury issues, the prices of bonds would decline, and China’s remaining holdings would be worth less. The question, however, is whether this is of any consequence to China, and, if it is, whether this cost is greater or lesser than avoiding the cost that Washington is seeking to impose on China.

American economists make a mistake in their reasoning when they assume that China needs large reserves of foreign exchange. China does not need foreign exchange reserves for the usual reasons of supporting its currency’s value and paying its trade bills. China does not allow its currency to be traded in currency markets. Indeed, there is not enough yuan available to trade. Speculators, betting on the eventual rise of the yuan’s value, are trying to capture future gains by trading “virtual yuan.” The other reason is that China does not have foreign trade deficits, and does not need reserves in other currencies with which to pay its bills. Indeed, if China had creditors, the creditors would be pleased to be paid in yuan as the currency is thought to be undervalued.

Despite China’s support of the Treasury bond market, China’s large holdings of dollar-denominated financial instruments have been depreciating for some time as the dollar declines against other traded currencies, because people and central banks in other countries are either reducing their dollar holdings or ceasing to add to them. China’s dollar holdings reflect the creditor status China acquired when US corporations offshored their production to China. Reportedly, 70% of the goods on Wal-Mart’s shelves are made in China. China has gained technology and business knowhow from the US firms that have moved their plants to China. China has large coastal cities, choked with economic activity and traffic, that make America’s large cities look like country towns. China has raised about 300 million of its population into higher living standards, and is now focusing on developing a massive internal market some 4 to 5 times more populous than America’s.

The notion that China cannot exercise its power without losing its US markets is wrong. American consumers are as dependent on imports of manufactured goods from China as they are on imported oil. In addition, the profits of US brand name companies are dependent on the sale to Americans of the products that they make in China. The US cannot, in retaliation, block the import of goods and services from China without delivering a knock-out punch to US companies and US consumers. China has many markets and can afford to lose the US market easier than the US can afford to lose the American brand names on Wal-Mart’s shelves that are made in China. Indeed, the US is even dependent on China for advanced technology products. If truth be known, so much US production has been moved to China that many items on which consumers depend are no longer produced in America.

Now let’s consider the cost to China of dumping dollars or Treasuries compared to the cost that the US is trying to impose on China. If the latter is higher than the former, it pays China to exercise the “nuclear option” and dump the dollar.

The US wants China to revalue the yuan, that is, to make the dollar value of the yuan higher. Instead of a dollar being worth 8 yuan, for example, Washington wants the dollar to be worth only 5.5 yuan. Washington thinks that this would cause US exports to China to increase, as they would be cheaper for the Chinese, and for Chinese exports to the US to decline, as they would be more expensive. This would end, Washington thinks, the large trade deficit that the US has with China.

This way of thinking dates from pre-offshoring days. In former times, domestic and foreign-owned companies would compete for one another’s markets, and a country with a lower valued currency might gain an advantage. Today, however, about half of the so-called US imports from China are the offshored production of US companies for their American markets. The US companies produce in China, not because of the exchange rate, but because labor, regulatory, and harassment costs are so much lower in China. Moreover, many US firms have simply moved to China, and the cost of abandoning their new Chinese facilities and moving production back to the US would be very high.

When all these costs are considered, it is unclear how much China would have to revalue its currency in order to cancel its cost advantages and cause US firms to move enough of their production back to America to close the trade gap.

To understand the shortcomings of the statements by the Wisconsin professor and Treasury Secretary Paulson, consider that if China were to increase the value of the yuan by 30 percent, the value of China’s dollar holdings would decline by 30 percent. It would have the same effect on China’s pocketbook as dumping dollars and Treasuries in the markets.

Consider also, that as revaluation causes the yuan to move up in relation to the dollar (the reserve currency), it also causes the yuan to move up against every other traded currency. Thus, the Chinese cannot revalue as Paulson has ordered without making Chinese goods more expensive not merely to Americans but everywhere.

Compare this result with China dumping dollars. With the yuan pegged to the dollar, China can dump dollars without altering the exchange rate between the yuan and the dollar. As the dollar falls, the yuan falls with it. Goods and services produced in China do not become more expensive to Americans, and they become cheaper elsewhere. By dumping dollars, China expands its entry into other markets and accumulates more foreign currencies from trade surpluses.

Now consider the non-financial costs to China’s self-image and rising prestige of permitting the US government to set the value of its currency. America’s problems are of its own making, not China’s. A rising power such as China is likely to prove a reluctant scapegoat for America’s decades of abuse of its reserve currency status.

Economists and government officials believe that a rise in consumer prices by 30 percent is good if it results from yuan revaluation, but that it would be terrible, even beyond the pale, if the same 30 percent rise in consumer prices resulted from a tariff put on goods made in China. The hard pressed American consumer would be hit equally hard either way. It is paradoxical that Washington is putting pressure on China to raise US consumer prices, while blaming China for harming Americans. As is usually the case, the harm we suffer is inflicted by Washington.

Article originally posted at

http://www.informationclearinghouse.info/article18154.htm

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The second article comes from this mornings NY Times and addresses the impact of the mortgage crisis on the the global marketplace>>>>>>>>>>>>>

Central Banks Intervene

to Calm Volatile Markets

 

Patrick Andrade for The New York Times

By VIKAS BAJAJ

Published: August 11, 2007

Central banks around the world acted in unison yesterday to calm nervous financial markets by providing an infusion of cash to the system. But stocks still fell sharply in Asia and Europe, and in early trading in New York, before they recovered and closed essentially flat for the day on Wall Street.

 

 

 

 

Enlarge This Image

Mauricio Lima/Agence France-Presse — Getty Images

Traders in Brazil negotiating in the pit. Global stock markets fell for a second day running with investors dumping shares on fears of a widening economic crisis caused by a global credit crunch.

 

Enlarge This Image

Wally Santana/Associated Press

Mortgage debt problems are roiling the global economy. Above, watching the markets in Taipei.

As in recent weeks, the markets moved in wild swings — sharp drops were followed by steep gains and vice versa — underscoring the uncertainty. Investors weighed concerns that losses in the American mortgage market would deepen and spread against their faith in the ability of a strong global economy to withstand additional shocks.

Hoping to provide some comfort that there is ample cash available, the Federal Reserve made its largest intervention since the markets reopened Sept. 19, 2001, in the wake of the terrorist attacks. The central bank injected $38 billion into the financial system on top of the $24 billion it put in on Thursday.

The intervention steadied the markets — at least for the day. The Standard & Poor’s 500-stock index closed at 1,453.64, a gain of 0.55 point, and the Dow Jones industrial average closed down 31.14 points, to 13,239.54. For the week, the Dow was up 0.4 percent, the S.& P. 500 rose 1.4 percent and the Nasdaq was up 1.3 percent.

The question that remains is just how exposed the financial system and the economy are to losses in the credit markets and the increase in borrowing costs. The answer will set the agenda at the Federal Reserve, which finds itself confronting its first major financial crisis under the leadership of Ben S. Bernanke, who took over last year.

The Fed will be guided by its assessment of how much do banks, hedge funds, pension funds and others stand to lose and whether consumers and businesses will be able to stomach higher interest rates and stricter loan underwriting.

“There are a lot of risks in front of us,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “Financial crises, in the past, when not accompanied with a recession have been good for the markets.”

But, she added, “if the economic landscape deteriorates much from here, then we are going to have to suffer through a more difficult market period.”

That debate, Ms. Sonders and others agree, will not be resolved anytime soon, which suggests that markets will remain choppy as information about failing hedge funds and mortgage companies dribbles out.

Investor anxiety has been so heightened in recent weeks that days of stability have been shattered by the first sign of trouble tied to the debt markets.

Volatility, as measured by one popular index of options trading, has surged to its highest levels in more than four years, though it remains far lower than it was early this decade and in the late 1990s.

The financial sector has been among the most volatile — stocks there fell by as much as 1.7 percent during the day, only to climb as much as 1.1 percent before closing little changed.

Shares of Countrywide Financial, the nation’s largest mortgage lender, and Washington Mutual, the sixth-biggest lender, opened sharply lower after both companies said they were facing a harder time selling loans and could potentially have problems raising money.

While those stocks recovered much of their losses for the day, they are both down significantly for the year.

A common pattern has been a surge in trading late in the afternoon, around 3 p.m., that has often sent stocks higher, as it did yesterday — though on some days, like Thursday, the move has been just as sharp on the downside.

Richard X. Bove, an analyst at Punk Ziegel & Company, noted the trend in a recent note to investors and suggested that the reason was strong buying from portfolios that use computer models to buy and sell quickly, a practice known as program trading, or a foreign source like the investment arm of the Chinese government.

“We are talking about such a sizable amount of buying and volume goes up and stocks react strongly one way or the other,” Mr. Bove said. “What I have trouble with is trying to figure out where it’s coming from.”

But he acknowledges that the pattern will probably not last long, because as sophisticated traders figure it out they will jump in on the other side to profit from the trades.

Using data from the New York Stock Exchange, Ms. Sonders of Charles Schwab estimates that program trading accounted for about 40 percent of all trades on the Big Board in recent days, up from the 30 percent range earlier this year.

“That’s why we are getting these swings, this is professional- to-professional trading,” she said. “This is money that has a time horizon measured in minutes.”

Indeed, there is evidence that the average individual investor has not been a big player in recent days.

Flows into mutual funds that specialize in American stocks were essentially flat for the week that ended on Wednesday, according to AMG Data Services. But investors put $36.2 billion into money market accounts, the largest weekly inflow this year. Investors often put cash into money market funds, which earn more than savings accounts, that they eventually plan to invest in the market.

It is not surprising that individuals are sitting on the sidelines, given the sharp moves in the market. Yesterday, for instance, all three major American indexes fell immediately after the opening bell, and at one point the Dow Jones industrial average was down 212 points. By noon, stocks were on the rebound and the indexes were briefly in positive territory, then declined. The Nasdaq finished at 2,544.89, down 11.60, or 0.4 percent.

“You can’t invest into a market that does that,” Mr. Bove said. “You have a better chance at making money on the craps table than in this market.”

Treasury prices were little changed yesterday. The 10-year note fell 9/32, to 99 18/32 and the yield, which moves in the opposite direction from the price, rose to 4.81 percent, from 4.77 percent on Thursday.

Earlier, stocks in Japan, Hong Kong and Australia dropped by more than 2.5 percent. The benchmark Kospi in South Korea fell 4.3 percent, the biggest decline since June 2004. Most major European indexes plunged by 3 percent or more.

In both Asia and Europe, fears about the American housing market prompted investors to sell assets and forced commercial banks to reel in credit lines.

Central banks around the work stepped up efforts to slow the losses. The Bank of Japan added liquidity for the first time since the market problems began.

The European Central Bank injected money into the system for a second day, adding another 61 billion euros ($84 billion), after providing 95 billion euros the day before. The Federal Reserve yesterday added $19 billion to the system through the purchase of mortgage-backed securities, then another $19 billion in three-day repurchase agreements.

In Washington, Treasury Secretary Henry M. Paulson Jr. spent the day in what his aides said was hourly contact with the Fed, other officials in the administration, finance ministries and regulators overseas and people on Wall Street — where until last year he had worked as an executive at Goldman Sachs.

“We’ve been in touch with our colleagues in other agencies and among the financial regulators and are monitoring the situation carefully,” said Michele Davis, the Treasury Department spokeswoman. “Beyond that, we are not commenting.”

As investors in Asia sold off assets considered relatively risky, like Philippine stocks, they bought those considered safer, like Japanese government bonds. Asian currencies like the Thai baht also retreated against the dollar and more liquid and stable currencies like the yen.

“Everyone’s been talking about a credit crunch, and not surprisingly it turned into one,” said Jan Lambregts, head of Asia research at Rabobank.

While Asian banks did not seem to be directly affected, he said, “the main problem is we don’t know who is bearing the losses, and that kind of uncertainty is creating the situation that we’re in right now.”

Wayne Arnold, Steve Weisman and Jeremy W. Peters contributed reporting.

 
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2 Comments »

  1. […] Monetary Crisis Bigger than Dayton?Saving the City?? Volatility, as measured by one popular index of options trading, has surged to its highest levels in more than four years, though it remains far lower than it was early this decade and in the late 1990s. … […]

    Pingback by Traffic Trades » Traffic Trades August 11, 2007 5:09 pm — August 11, 2007 @ 9:13 pm

  2. I’m putting down money that you’ll get a row full of blank stares.

    Comment by Drexel Dave — August 12, 2007 @ 1:28 pm


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61 Y/O VIET VET WORKING FROM THE LEFT OF CENTER

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