Tag Archives: Reserve currency

The Global Economy is about to Crash

As stated in the EconoTwist’s New Years Eve comment; we are in for a long period of economic stagnation and financial turmoil – perhaps as long as two more decades. Well, now the prominent analyst Satyajit Das with the eurointelligence.com has arrived at the same conclusion.  In his latest article he compares the state of the global economy with the one of an airplane that is about to stall and crash.

“The eerie sound of the stick shaker can sometime be heard on cockpit voice recordings of doomed flights just before they crash. The global economy’s control stick is shaking violently.”

Satyajit Daz

“Powered flight requires air to flow smoothly over the wing at a certain speed. Erratic or slow air flow can cause a plane to stall. Most modern aircraft are fitted with a “stick shaker” – a mechanical device that rapidly and noisily vibrates the control yoke or “stick” of an aircraft to warn the pilot of an imminent stall. The global economy too needs air flow -smooth, steady and strong growth. Unfortunately, the global economy’s stick shaker is vibrating violently,” Mr. Daz writes.

The proximate cause of recent volatility is the down grading of the credit rating US (irrelevant) and the continuation of Europe’s debt problems (relevant). The deeper cause is the realization that future growth will be low and the lack of policy options.

Satyajit Das

In 2008, panicked governments and central banks injected massive amounts of money into the economy, in the form of government spending, tax concessions, ultra low interest rates and “non-conventional” monetary strategies – code for printing money. The actions did stave off the Great Depression 2.0 temporarily, converting it into a deep recession –the US economy shrank by 8.9% in 2008.

As individuals and companies reduced debt as banks cut off the supply of credit, governments increased their borrowing propping up demand to keep the game going for a little longer. The actions bought time. But policy makers did not use the time to prepare the global economy for an orderly reduction of debt. There was little attempt to address structural problems, such as persistent trade imbalances between China and the US or within Europe or the role of the US dollar as the global reserve currency.

Governments gambled on a return to growth and inflation, solving all the problems. That bet has failed.

(Source: Societe Generale)

Patient Zero…

Greece was always going to be Patient Zero in the global sovereign crisis, highlighting deep-seated problems in public finances of developed nations. While the deep economic contraction was a factor, government financial problems were structural. Much of the build-up in government debt had taken place before the crisis as a result of spending financed by increased borrowing.

Like individuals and companies, governments did not always use borrowed money for productive purposes, fuelling consumption and making poor investments. Realising that many European governments had too much debt that couldn’t be repaid, investors pushed up the cost of borrowing and then cut of access to funding.

Instead of treating the situation as a solvency problem and reducing the debt to sustainable levels, stronger countries within the European Union banded together to lend the distressed countries the money they needed. Within a period of about 12 months, Greece, Ireland and Portugal needed bailouts totaling just under Euro 400 billion. Many European banks, exposed to these borrowers, also lost access to commercial funding becoming reliant on European Central Bank (“ECB”) loans. The need to guarantee the weaker countries inevitably increased the liabilities of the stronger countries, weakening them.

Greece, Ireland and Portugal will need debt restructuring. Spain and Italy are now firmly in the sights of markets. The bailout strategy cannot continue without affecting the creditworthiness of France and Germany. In the absence of continuing bailout, the European banking system, including the ECB itself, is vulnerable and will need capital from governments – economic catch 22!

Going Viral…

The sovereign debt problem is global. The US. Japan and others also owe more than they can repay.

The recent rating downgrade of the US should not distract from the real issue – the quantum of US government debt and the ongoing ability to finance America. US government debt currently totals over $14 trillion.

Commentator David Rosenberg passionately described the problem: “In the past three years…we had the U.S. public debt explode by $5 trillion— the country is 244 years old and over one-third of the national debt has been created in just the past three years. Incredible. The U.S. government now spends $1.60 in goods and services for every dollar it is taking in with respect to revenues which is unheard of — this ratio never got much above $1.20, not even during the previous severe economic setbacks in the early 1980s and early 1990s.

America has been able to run large budget and balance of payments deficits because it had no problems in finding investors in US treasury securities because of the special status of the US dollar are a global reserve currency. In recent years, the Federal Reserve itself also purchased around 70% of issues, under its quantitative easing programs. As foreign investors, especially China, become increasingly skeptical about the ability of the US to get its economy into order, the ability of America to finance itself is not assured.

Japan’s government debt to Gross Domestic Product (“GDP”) is over 200%. Tax revenues are less than half its outgoings, the remainder must be borrowed. The world’s largest saving pool has allowed Japan to manage till now. An ageing population and a related slowing in its saving pool will make it increasingly difficult for Japan to finance itself in the future.

China’s headline debt to GDP ratio of 17% (around $1 trillion) is misleading. If local governments, its state controlled banks, state owned enterprise, and other government supported debt are included, then debt levels increase to 60% ($3.5 trillion), compared to America’s 93% of GDP. Some commentators argue that China’s real level of debt is far higher in reality, well above 100%.

At best, governments will cut spending or raise taxes to stabilize government debt as public-sector solvency becomes the priority. Reduction in government spending will slow growth, making the task of regaining control of government finances more difficult. This may require deeper cuts in governments spending and ever higher taxes, miring the developed world in low growth for a protracted period.

At worst, some governments overwhelmed by their debts will default, causing a major disruption in financial markets, perhaps setting off a deep global recession.

Unreal economies…

Government actions affected the financial economy far more than the real economy. Low interest rates boosted financial asset prices, while underlying economic activity remained weak.

Having shrunk by over 12% in 2008 and 2009, American output has yet to re-attain its 2007 peak. On a per-person basis, inflation-adjusted basis, output stands at virtually the same level as in the second quarter of 2005 – in effect America has stood still for six years. The same is true of many countries.

Given consumption is 60-70% of individual developed economies, unemployment, under employment and lack on income growth will reduce growth.

In the four years since the recession began, the US civilian working-age population has grown by about 3% but the economy has 5% fewer jobs — 6.8 million jobs. The real unemployment rate – people without work, people involuntarily working part time, people not looking for work because there is none to be found – is around 15-20% in the US. Long-term unemployment has left millions of people out of work with poor prospects of finding jobs.

Americans in work are generally working less and, adjusted for inflation, personal income is down, not counting payments from the government like unemployment benefits. American household income has declined since the recession began in December 2007, falling to $49,445 in 2010, a total 6.4% decline.

According to latest figures, the number of American families living in poverty rose 2.6 million to 46.2 million, the largest increase since Census began keeping records 52 years ago. Income falls were particularly large for the less well off.

In 2010, the bottom fifth of households that make $20,000 or less saw their incomes decline 3.8% after inflation.

Poor people, minorities were hit hardest. According to the National Women’s Law Center, the poverty rate for women climbed to 14.5% in 2010 from 13.9% in 2009, the highest level in 17 years. The extreme poverty rate for women jumped to an all-time high of 6.3% in 2010 from 5.9% in 2009. The poverty levels have reached the highest levels in over 15 years.

The same is true in Europe where the average official unemployment is above 10%. In many countries like Greece, Ireland, Portugal and Spain, unemployment is around 20%, youth unemployment is around 40-50%, as the economies have shrunk by 10-20%. Understandably, consumer spending is weak.

Key sectors, which employ workers, such as housing are frozen. In the US, housing starts are running around 400,000 to 600,000 units annually well below the level of the 1960s, down a staggering 70%+ from the peak and 50%+ from more normal levels.

With home prices down 35% from the peak and predicted to fall further, the Americans do not have a wealth buffer in housing equity to fall back on. Low interest rates and indifferent returns from investments mean that the ability of retirees to consume is also low. The same is true of many developed economies.

Emerging Problems….

After a sharp decline in economic activity in 2008, emerging nations – China, India, Brazil and Russia– recovered through massive domestic investment, aggressive expansion of domestic credit and, in some cases, strong commodity prices. They benefited from the stimulus packages of developed nations, which helped fuel exports. Money fleeing the developed world looking for higher returns and elusive growth provided cheap and easy capital. That cycle is coming to an end.

China provides an example of the problems. Over-investment in infrastructure produced short term growth but many of the projects are not economically viable and will drag down future growth. Many are funded by debt that is already creating bad debts within the banking system, requiring diversion of funds to bail out troubled institutions.

Tepid growth in the US and Europe, its two largest trading partners, will slow Chinese exports. China’s foreign exchange reserves, invested in US and European government bonds and denominated in dollars and Euros, are increasingly worthless, as they cannot be sold and, if held, will be paid back in sharply devalued currency with lower purchasing power.

Printing money as the US has done, devalues the dollar creates additional pressure on China. Strong capital flows overwhelm smaller markets creating destabilizing asset price bubbles.

Commodities traded in dollars increase in price creating inflation. Domestic inflation forces higher interest rates, slowing down the economy. The high proportion of spending on food and energy in emerging countries means a higher proportion of income is needed for essentials, reducing disposable income and creates wage pressures. These factors all choke off growth.

While improving American competitiveness and reducing its outstanding debt, a policy of devaluation of the US dollar may trigger trade and currency wars. There are already accusations of protectionism, currency manipulation and unfair competition. Many emerging markets have already implemented capital controls. These will be strengthened and supplemented by other measures such as trade sanctions. Even the Swiss National Bank recently announced moves to stop the flow of money into Swiss Francs seeking a safe haven, crimping growth and Switzerland’s exporter’s ability to compete.

Currency intervention may trigger tit-for-tat retaliation, reminiscent of the trade wars of the 1930s and will retard global growth.

Exit Via The Japanese Door …

Current concerns, most readily observable in wild gyrations of equity prices, are driven by the identified concerns but also the lack of credible policy options.

The most likely outcome is a protracted period of low, slow growth, analogous to Japan’s Ushinawareta Jūnen – the lost decade – or two. The best case is a slow decline in living standards and wealth as the excesses of the past are paid for.

The risk of instability is very high; a more violent correction and a breakdown in markets like 2008 or worse are possible. Frequent bouts of panic and volatility as the global economy deleverages –reduces debt- are likely. Problems created gradually over more than the last three decades can only be corrected slowly and painfully.

The eerie sound of the stick shaker can sometime be heard on cockpit voice recordings of doomed flights just before they crash. The global economy’s control stick is shaking violently. It remains to be seen whether the economic pilots can regain control and land the flight safely or whether it ends in a crash.

By Satyajit Das

Former Wall Street trader Satyajit Das is author of Extreme Money: The Masters of the Universe and the Cult of Risk (August 2011).

This post is syndicated by www.eurointelligence.com

Other post’s by Satyajit Das:

Related by the EconoTwist’s:


Filed under International Econnomic Politics, Laws and Regulations, National Economic Politics

Report: Offshore Banking Needs To Be Revisited

A new report by the Monetary and Economic Department of the Bank for International Settlements, economists argue that the offshore banking system needs to be revisited. Offshore accounts can be beneficial for the emerging markets economies, but pose a threat to financial stability in the home countries. However, its possible to manage these risks, the BIS economists says.

“Expansion of central bank balance sheets amid fiscal expansion in the world’s major economies has, in some views, called into question the major currencies’ reliability as stores of value.”

Dong He/Robert McCauley

The offshore markets intermediate a large chunk of financial transactions in major reserve currencies such as the US dollar. McCauley and He argue that the emerging market economies who are interested in seeing some international use of their currencies, offshore markets can help to increase the recognition and acceptance of the currency, while still allowing the authorities to retain a measure of control over the pace of capital account liberalization.

However, the development of offshore markets could pose risks to monetary and financial stability in the home economy which need to be prudently managed, the two economists points out.

Adding: “The experience of the Federal Reserve and of the authorities of the other major reserve currency economies in dealing with the euro markets shows that policy options are available for managing such risks.”

Securing The Dollar Dominance

According to the report, a significant portion of the international use of major reserve currencies, such as the US dollar, takes place offshore.

In particular, when non-US residents use the US dollar to settle trade and make investments, they do not transact onshore through banks and in financial markets in the United States.

Rather, they concentrate their transactions in international financial centers such as the euro-dollar market in London.

“In fact, one may argue that, without the offshore markets, the US dollar would not have attained the dominant position in international trade and payments that it occupies today,” the report says.

“We show that non-US residents reveal a strong preference for doing their dollar business outside the United States. That is, they tend to deposit US dollars in banks abroad and to buy US dollar bonds issued by non-residents outside the United States (and probably to hold them in European depositories as well).”

Need For Clearing Arrangement

Judging from the US dollar, global investors prefer to transact in a particular currency through the offshore markets.

Non-US residents, private and official alike, keep the bulk of their US dollar deposits outside the United States and invest disproportionately in US dollar bonds issued by non-US residents.

“The payment flows associated with these accounts and investments ultimately pass through bank accounts in the United States, just as payment flows associated with non-bank financial intermediaries in the United States ultimately pass through banks in the United States. While the US authorities put in place capital controls from the late 1960’s until the early 1970’s, they never impeded the flow of payments through US banks to allow the settlement of offshore trade and investment transactions. Offshore markets in a currency can flourish if offshore financial institutions are able to maintain and to access freely clearing balances in the currency with onshore banks. In other words, non-resident convertibility of the currency is allowed at least for overseas banks. Once this condition is met, both long and short positions in the currency can be built up offshore even without a wholesale liberalization of capital account controls by the onshore country authorities. If offshore banks do not have free access to clearing banks kept with onshore banks, then offshore markets can still exist, though in a more limited fashion, through non-deliverable contracts,” Dong He and Robert McCauley writes.

Threat To Stability

The development of offshore markets in a given currency poses several challenges to a central bank’s responsibility for maintaining monetary stability.

An offshore market in a given currency can increase the difficulty of defining and controlling the money supply in that currency. Equally, an offshore market in a given currency can pose a challenge to measuring and controlling bank credit.

“Offshore activity in the currency might also affect the shape of the yield curve or the exchange rate. If the central bank sets the overnight (or some other short-term) rate with a view to targeting inflation and growth, then policymakers would have to factor these effects into their inflation forecasts and set the short-term interest rate appropriately.”

Manageable Risk

The BIS economists makes the following concluding statements:

* “For emerging market economies that are interested in seeing a larger share of their international balance sheets denominated in their own currencies, offshore markets can help to increase the recognition and acceptance of the currency among exporters, importers, investors and borrowers outside the country. This process can begin (but not end) while substantial capital controls are still in place, allowing the authorities to retain a measure of control over the pace of capital account liberalization.”

* “The development of offshore markets could pose risks to monetary and financial stability in the home economy which need to be prudently managed. The experience of the Federal Reserve and of the authorities of the other major reserve currency economies in dealing with the euro markets shows that policy options are available for managing such risks. The lesson to be learnt is that the home authorities need to be alert to such risks, and factor in the additional influence of offshore markets on domestic monetary conditions and financial risks when making monetary and financial policies.”

* “Would the global financial system benefit from a wider array of internationalized currencies with offshore markets? The offshore dollar markets described in the first part of this paper, dominated by non-US banks, issuers and investors, have limited the rents flowing to the United States from the global use of the dollar, at least by comparison with the heyday of sterling. So the issue may be less distributional and more whether greater pluralism in international finance is conducive to global financial stability. The long-standing arguments regarding the stability of leadership/hegemony, on the one hand, and pluralism, on the other, need to be revisited in the light of the experience with the dollar shortage during the financial crisis.”

Here’s a copy of the full report.

Related by the Econotwist:

Flight to Mystery

Texas Billionaires Charged With Fraud

A Black Market of Bank Information

Drug Money Saved Banks from Collaps



Filed under International Econnomic Politics, National Economic Politics

The Evaporation of The Dollar

The Dollar is taking another dive monday, and economists can no longer see a bottom for the worlds reserve currency. The latest update from Federal Reserve shows that the $920 bn of money in cirkulation now is backed by the FEDs holdings of $997 bn in toxic assets, taken from the banking system. That means that the real value of american dollars probably is close to zero. But the market kicks the dollar substansial higher, together with stocks and several commodities. Gold reach a prise of $1170 pr ounce.

“The exeeded tax credit program for first time home buyers does not provide evidence of recovery in the housing market, on the countary, it shows that the market still needs life support.”

(Article in Norwegian)   


Dollaren er praktisk talt verdiløs. Reservene i Federal Reserve som skal garantere for dollarens verdi består nå i hovedsak av uomsettelige, verdiløse gjeldspapirer. Men markedet sender både dollarkursen, gullprisen og aksjekursene kraftig opp.


Ved å se nærmere på den oppdaterte oversikten fra Federal Reserve som ble offentliggjort fredag, viser det seg at verdiene som sentralbanken holder som garanti for verdien av den amerikanske dollaren nå i hovedsak består av råtne gjeldspapirer som er overtatt fra de kriserammede bankene.

Disse verdipapirene har falt dramatisk i verdi siden finanskrisen startet høsten 2008, det er fremdeles ikke mulig å vurdere hva de egentlig er verdt, de er i praksis uomsettelige og dermed også i praksis verdiløse.

Den totale mengden av amerikansk valuta i sirkulasjon er omtrent 920 milliarder dollar – sentralbankens beholdning av MBS (Mortgage-backed Securities) og lignende er på cirka 997 milliarder dollar.

Tallene fremkommer ved å sammenligne den amerikanske pengemengden. “Money Base”, (og ved å substraktere valuta i sirkulasjon fra FEDs reservebalanse), med sentralbankens beholdning av diverse råtne verdipapirer som myndighetene har fått i bytte fra bankene mot krisehjelp og garantier.

(FED oversikt; H.3, H.4.1)

“Et bilde er verdt mer enn tusen Krugman-kommentarer”, skriver finansbloggen Zero Hedge som har laget denne grafen.


(Klikk her for et større bilde)


En utypisk dag

Men dollarkursen styrker seg markert mandag – i hvert fall først på dagen – i løpet av ettermiddagen har den falt noe tilbake

Dollarindeksen (DXY) er opp 0,11 prosent. Dollaren er styrket overfor de fleste ledende valutaer.

Men dagen har også vært preget av stor volatilitet.

Siden mars i år har aksjer og råvarer konsekvent beveget seg i motsatt retning av dollaren, men mandag blir mønsteret delvis brutt.

Det er store forskjeller i hvordan råvareprisene har gått.



Særlig i USD/JPY-forholdet har det vært store svingninger mandag.

High Frequency Forvirring?

Oljeprisen er svakt ned, mens gullprisen gikk først fra 1150 til 1170 dollar per unse før den falt tilbake rundt 1160.

Kaffeprisen steg for første gang på tre dagen, mens prisen på kakao stupte.

Kontrakter på bomull hoppet til det høyeste nivået på 16 måneder, men appelsinjuice-prisen dundret ned.

Aksjemarkedet spratt opp om lag 1,3 prosent og holdt seg der ut dagen.

Det skal godt gjøres å forklare alle mekanismene som har vært i sving i dag, men det kan ikke utelukkes at det er den algoritmiske handelen som har skapt forvirring i markedet. 

Godt nytt?

Hovedforklaringen på oppgangen i aksjemarkedet mandag forklares i stor grad med en kraftig økning i salget av brukte boliger.

Ifølge National Association of Realtors økte boligsalget i USA med 10,1 prosent i oktober, mot en forventet økning på litt over 2 prosent.

Påfallende mange analytikere som uttaler seg i mediene hevder dette er et tegn på en kraftig bedring i boligmarkedet.

Det er nok en litt prematur konklusjon.

Obama-administrasjonen fornyet for kort tid siden ordningen med skatterabatt for førstegangskjøpere av bolig.

Ordningen skulle etter planen vært avviklet for en måned siden.

Det at subsidieringen av boligmarkedet forlenges er ikke et tegn på bedring, tvert i mot, det er et signal om at markedet fremdeles trenger “kunstig åndedrett” for å overleve.

Det samme gjelder for uttalelsene til FED-sjefen i Chicago om at sentralbanken kan komme til å holde på 0-renten kanskje så lenge som til slutten av 2011.

Aksjemarkedet reagerte positivt, men det betyr i realiteten at situasjonen i amerikansk økonomi er mer alvorlig enn først antatt.


Overnevnte kan være en meget mulig forklaring på at gullprisen gikk over 1170 dollar per unse mandag formiddag.

Men det er trolig andre faktorer som spiller inn her også.

Det faktum at sentralbanker og nasjoner – med nærmest ubegrenset kjøpekraft – har begynt å hamstre gull bringer spekulantene på banen.

I gull, som i oljemarkedet, er det meste som omsettes egentlig bare papirer, kontrakter og avtaler.

Det er relativt lite som beveger seg rent fysisk.

Hvor stor del av den voldsomme prisstigningen på gull som skyldes reell etterspørsel og hvor mye som skyldes kortsiktig spekulasjon med kontrakter kan ikke vites med sikkerhet.

Gull er tradisjonellt ansett som en forsikring mot sterk inflasjon, deflasjon, geopolitiske konflikter, sosial uro, etc.

Ikke som en investeringsklasse. Men dette er kanskje i ferd med å endre seg. 

De tekniske indikatorne gir sprikende signaler mandag.

Relative Strength Index:


RSI dalte det meste av dagen til den nådde underkjøpt territorium. Det utløste en kraftig reaksjon opp til over 70 poeng, for så å sette kursen ned igjen.

On-balance Volume:


OBV-indikatoren viser at selgerne er aktive i gullmarkedet.

Momentum Indicator:


Momentum i gullmarkedet har vært fallende mandag.


Force Index:


Force-indeksen viser – i motsetning til momentum-indikatoren – en stigende tendens og har gått fra å være negativ til positiv.

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Filed under International Econnomic Politics, National Economic Politics