this is genius

Credit Suisse are using illiquid assets to pay bonuses.

So if these things are really worth the paper they are written on, then the workers get paid off, otherwise, too bad. Very, cathartic.

Facts/Trends, US Current Account and Global Currency Imbalances

US Current Account:
Reagan Years : ca. 4+% of GDP
2000: 4% of GDP
2004: 5% of GDP
2008: 7% of GDP

US borrows short and lends long

It's debt position is made more sustainable because it is the world reserve currency.

a. Its foreign assets are in foreign currency while its liabilities are in US Dollars.
Thus, a 1% depreciation of the USD will improve its asset position by $50 billion dollars

b. Its assets yield more than it pays out on its liabilities


So, if these deficits are unsustainable, private actors should underweight US$ in their portfolios.

However, Dooley, Folkerts and Landau argue that the current situation is sustainable.

US deficit is funded by reinvestment of East Asian surpluses into US Treasuries.

Thus, despite ballooning budget deficit, there is a net reduction of stock in T-bills. This depresses yields by an estimated 1%.

China foreign exchange reserves: $1.9 trillion
Japan's foreign exchange reserves : $0.9 trillion
2008 US budget deficit : $454.8 billion (CBO)
Stock of treasuries held by public: $5 trillion (end 2007)
of which : stock held by foreign governments: http://www.treas.gov/tic/mfh.txt
of which: China $600 billion, Japan $500 billion
Total : $3 trillion
Net: $2 trillion in private hands.

this is the beautiful bit from dooley:
"there is no limit on the ability or willingness of the japanese authorities to create yen to stem a buying-in of their currency"
there is no cost or pain to them, especially since they are in a deflationary economy. if they manage inflate their economy, then it's monetary stimulus, at the same time, if they depreciate the yen, they have a net gain on their position

china might face that constraint. it can fund from its CA surplus.

so, equilibrium. textbook considerations imply diversifying away from us$. however, this threatens the us$ peg and their export oriented growth model, make them acquire gross reserves at a faster rate, which are against their interests.


next: what disrupts this equilibrium?

1 comment:

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