Saving the (international) dollar

A money view of the commodity bubble

Today’s Financial Times articles:  Currencies:  Strength in Reserve (Feb 8, 2011), Long-term investors shun Treasuries sale (Feb 8, 2011), Fuelling corn’s relentless rise back toward record levels (Feb 10, 2011)

Calls for a new Bretton Woods, a grand international monetary realignment away from the dollar, have come to little, so says the FT.   No alternative national currency is a plausible contender, given the “Triffin dilemma”, and potential supranational contenders such as the IMF’s SDR or gold have their own drawbacks. Read more

CDS Deja Vu

Speculation, stabilizing or destabilizing?

Today’s Financial Times articles: US muni smackdown (Feb 2, 2011), Wall St looks to boost market in US muni CDS (Feb 6, 2011)

“Muni veterans are from Mars, Meredith Whitney is from Venus,” so says Lex, commenting on the wide divergence in current views about the future of the US municipal bond market. Whitney sees a coming wave of defaults; veterans see municipal debt/income ratios far below those that sovereign states routinely bear.

Lex frames the divergence as a matter of political judgment. Municipalities have made promises to bond investors, but they have also made promises to public sector unions in the form of wage and pension contracts. When the numbers do not add up, which promises will wind up being honored and which breached?

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A Money View of the FCIC Report: Part Two

Saving the (International) Dollar

Financial Times articles being discussed: NY Fed to Expand Reverse Repo Requirements (Feb 1), Fed passes China in Treasury holdings (Feb 2)

The dissenters to the FCIC Report quite rightly emphasize the global character of the crisis, but they draw the wrong conclusions. What they miss is the global character of the shadow banking system, the collapse of which caused the crisis. (Chapter 7 is clear on this; “an ocean of money” was invested in commercial paper and repo, used to fund purchase of mortgage-backed securities.

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A Money View of the FCIC Report: Part One

When the survival constraint bites

Financial Times article being discussed:  US Panel’s Report Reflects Partisan Rift (Jan 30, 2011)

If you can’t roll your funding as it comes due, you are dead. That is what Hyman Minsky called “the survival constraint."

From this point of view, the crisis looks like a series of ratchet steps down into the abyss, as the survival constraint shifted from one player to another—fail or bail? —until essentially the entire financial system was on life support provided by the only entity that does not face a survival constraint, the Fed. 

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Inside Job II

And the nomination for best Perp Walk goes to...

Today’s Financial Times’ articles: “Goldman president warns on bank rules” (Jan 26), “Financial crisis report to blame Wall Street” (Jan 26), “US Crisis Inquiry Points to Widespread Failures” (Jan 27)

Now comes the Financial Crisis Inquiry Commission report, the sequel to Oscar nominee “Inside Job”, the movie. Once again, all the players are here. Once again, a morality tale: “lax risk management, distortive bonuses, predatory lending, and insufficient regulation.” Once again, essentially a sub-prime credit fuelled housing bubble story, with leverage and derivatives as a putative amplification mechanism.

But wait. Read more

Inside Job

And the nominees for Best Documentary are…

Today’s Financial Times articles: “Popcorn and Wine at ‘Inside Job’” (Jan 15, 2011) “Hollywood’s Credit Crunched” (Oct 9, 2010)

If you haven’t seen “Inside Job”, you must. As an analysis of the crisis, it just scratches the surface, but even those scratches do immense public service by arousing us to dig deeper and find out more.

It is a beautifully made film, and that is no small part of its appeal. The soaring opening sequence on Iceland tells you immediately that you are in the hands of an artist, and by the time the camera zooms in on Manhattan, you are hooked. Suspending disbelief, you give yourself over to the magic of the theater.

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G2 Trade Balance Explained

It is all about promises to pay in the future.

Today’s Financial Times articles: Obama toughens China line (Jan 20, 2011), A Strategy to Straddle the Planet (Jan 17, 2011)

Everyone knows that China sells more to the rest of the world than it buys, and that the US buys more from the rest of the world than it sells. All the debate is about what these facts mean, where they come from and where they are going.

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China and the International Dollar

Before the dollar there was the pound, and after the dollar there will be something else.

Today’s Financial Times' articles: “Hu questions future role of US dollar”, “Why 'Top Dollar' Still Runs the World” and “Renminbi rolls out” (all January 16, 2011)

The problem we face today, as so often in matters financial, is that no one knows the future, that many futures are possible, and that the actual future is quite likely to be something not currently on anyone’s list of possibilities. In such a circumstance, we are well-advised to lower our sights, and to try instead to make sense of the present, to understand the current forces that are shaping the future we are unable to see.

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Can CDS be exchange traded?

Today’s Financial Times article: Report to highlight alleged conflicts of interest in Goldman’s dealings (Jan 12, 2011), Goldman’s pieties insult our intelligence (Jan 13, 2011)

In the second article, Sebastian Mallaby reminds us: “After one vain attempt to explain market making at a belligerent Senate hearing, Goldman’s boss, Lloyd Blankfein, gave up.” Let’s try to do better than Blankfein was able.

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The New Federal Reserve

GFC Finance as War Finance

Today’s Financial Times article: The strange death of the technocracy (Jan 5, 2011)

The editors write:

“Perhaps the most important development of the financial and economic crisis is that technocrats are losing control over policy debates to the populists….The Fed is perhaps the obvious target. The insurrectionists object to the notion of fiat (or government-made) money. On both left and right there is fundamental opposition to the coupling of private banking with the federal government that managed the entire response to the financial crisis"

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