2009 Economic Forecasts...what will happen, when?

[kmguru]

Here is a thought. Please do comment.

When you deposit money, say $10,000 in a Bank. The Bank can loan out $9000 on that money (with a 10% reserve). Correct?

I think the formula for the total deposits is D = A*(1/r) which turns out to be $100,000

So our imports are $2.1 Trillion in 2008, we are sending out that much money. If we would have kept it, that would have generated a total deposit of $20 Trillion. Would that have solved out economic crisis? And by the way the world got richer by $21 Trillion because that money would be in foreign banks - not necessarily in Dollars but other currencies.

Did I miss something here?

 

[CheskiChips]

I think so. You keep the 2.1 trillion, you loan out 21 trillion internally. What are you going to do as the fed...sell that debt + interest? That means you just have the people directly paying off the debts over time in individual loans. Either way, the money still ships overseas - it does have the benefit of minimizing the risk for us. It'd be a poor investment, imagine, we consolidate a large sector of debt - sell it to China for the value of our current debt + interest, and then China's left with the same amount of owned debt...only re consolidated in our favor. Then America tells all of its individual borrowers, "Hey don't worry about it, we're going to call off that debt" even though it's not really theirs, and boom China's out 21 trillion dollars.

Nobody would buy the debt, because they wouldn't have any clear legal options for enforcement.

 

[Billy T]

... I think the formula for the total deposits is D = A*(1/r) which turns out to be $100,000

So our imports are $2.1 Trillion in 2008, we are sending out that much money. If we would have kept it, that would have generated a total deposit of $20 Trillion. Would that have solved out economic crisis? And by the way the world got richer by $21 Trillion because that money would be in foreign banks - not necessarily in Dollars but other currencies.

Did I miss something here?

A couple of things, I think.

First is the fact that the times 10 multiplication only comes when bank A lends out $9K to Joe 1 and Joe 1 does not just go out an spend it, but deposits it in bank B (or if he does spend it to Tom, who spend to Dick, who spends to Harry, but Harry deposits it in bank B). Then bank B lends $8.1K ... which gets deposited in bank C ..... etc.

Unfortunately, banks are not lending - they judge the borrowers are not as safe an investment as buying US treasury notes & bonds. Thus the multiplier is unity, not 10.

What is happening is the FED is "pushing on a string." I.e. the FED creates $100K in bank A's account, then bank A buys $100K of 2 year treasury notes.* The FED is also buying Treasury paper (that is in fact how the $100K that went to bank A was created - I.e. the FED has a Treasury paper that promises to pay 100K on its books.) - The government hoped that the banks would lend, but they are not. The 100K started as Treasury paper and ends up as Bank A's claim on the Treasury without doing zilch to stimulate the economy! In fact, the 22 largest "bail-out" banks (and few other financial institutions that can lend) are actually lending ~10% LESS now than they did at start of 2008 (pre crisis)! Banks have become more cautious - only will lend to those who clearly do not need to borrow.
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Secondly:
The 10 reserve against all forms of "demand deposits" is a US rule. In Brazil the reserve requirement is 50% so the multiplier here is on two. (Why Brazil's banks are very strong - not one with more than one office even came close to failing. (There were a few tiny community single bank offices that needed help for bigger banks when the crisis hit because their depositorS took their money out and deposited it in national banks. - Often these tiny banks became a branch of the national bank that aided them cope with the local run on deposits.) Thus the Banking industry in Brazil has become fewer and bigger banks in the last few years but there are still several dozen large ones.

One of the reasons why bank loans in Brazil carry a high interest rate is that the 50% of deposit with the government pays little (OR No?) interest - I.e. the difference on what they pay for deposits and charge for loans must be at least twice what it would be if the reserve requirement were zero. In fact they charge 3 or 4 times more than what they pay (or more)** and are the most profitable banks in the world, as well as the most solid.

Thirdly:
Even if the times 10 chain of redeposit’s were working (A to B to C ...etc) There is no reason why any banks in the chain need be outside of the US. Thus, I do not understand why you and CheskiChips seem to be assuming this. Money goes out of the US rapidly now for two main reasons:
(1) The carry trade - E.g. borrow in US and deposit in Brazilian bank.
(2) Fear of dollar falling and recognition that in the long run gold is a poor investment - It pays not interest and cost to safely store - but Brazilian bank deposit is compounding interest at ~8% / year and the currency is growing stronger against the dollar because Brazil has positive trade surplus and rapidly growing domestic market (now about 88% of GDP, which is growing at >5% annually now. - Projections for 4Q09 are ~9% GDP growth - may even beat China!) Thus far in 2009 the Brazilian Real has grown 35.2% stronger against the falling dollar. - Too much as it is hurting export of manufactured goods. Why last month Brazil put a 2% tax on foreign funds entering or leaving Brazil.

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* This FED and Banks both buying Treasury paper is large part of why it is selling well and interest rates are exceptionally low. The "velocity of money" is extremely low - why the "money supply" (money circulation, M2, I think it is called) is less now than pre-crisis despite at least 1.4 Trillion more dollars being in existence.

**On automatic short term loans that cover a check without funds, the annualized interest rate is about 150%! Many other loans have very high rates. Brazilian banks also have dozens of different "fees" which I avoid by keep about 10,000 USD in my interest earning account.

 

[kmguru]

I was trying to figure out what is the economic benefit to the local society if company A exports a Billion dollars worth of high tech products overseas? Is it one to one or x times the export value. Because all the people, suppliers etc in the supply chain earn money and spend in the society - the circulation of money effect.

 

[kmguru]

Saw on the net:

"By purposely undervaluing their currency, China has been able to make its exports artificially cheap, while at the same time placing a huge, invisible tariff on American products. "

Question is: If it is such a good thing for China, what is preventing U.S. to do the same - undervalue the Dollar?

 

[nirakar]

Here is a thought. Please do comment.

When you deposit money, say $10,000 in a Bank. The Bank can loan out $9000 on that money (with a 10% reserve). Correct?

I think the formula for the total deposits is D = A*(1/r) which turns out to be $100,000

So our imports are $2.1 Trillion in 2008, we are sending out that much money. If we would have kept it, that would have generated a total deposit of $20 Trillion. Would that have solved out economic crisis? And by the way the world got richer by $21 Trillion because that money would be in foreign banks - not necessarily in Dollars but other currencies.

Did I miss something here?

Yes, you need to think Balance of Payments rather than trade deficit or imports. We sent the money out for imports and lost those deposits but the money came right back and bought financial assets which became American bank deposits for the sellers of the inancial assets. Even in the case of government bond sales the chines/Walmart money becomes a bank deposit for US government employees, corporate and personal welfare recipients and government contractors.

 

[kmguru]

We sent the money out for imports and lost those deposits but the money came right back and bought financial assets

Does money really come back immidiately? Like if we buy oil from Russia, how much dollar come back to us and how much goes to China, Japan etc who sell products to the Russians?

 

[nirakar]

Does money really come back immidiately? Like if we buy oil from Russia, how much dollar come back to us and how much goes to China, Japan etc who sell products to the Russians?

No it does not come back immediately in a literal sense because money take convoluted routes. Sometimes the money could comeback before the money leaves. The investment inflows and outflows are really a separate stream of money that have a timing of their own partially independent from the balance of trade.

I may be missing something but my perhaps over oversimpliflied understanding is that imbalances in the balance of payments rather immediately show up as changes in the exchange rates for nations that have floating currencies and later show up as changes in the currency black markets for nations with pegged currencies.

Last fall 2008 during the [ unwinding of the dollar carry trade/ bursting of the commodities & emerging markets bull run/ hedge fund redemption wave /flight to safety of the dollar/ currency manipulation/ stock market crash] I believe the USA had a balance of payments surplus.

As far as I know only the dollars that nations keep for the purpose of trading with each other in dollars stay outside the US banks as dollars.

The Dollar and Yen carry trades are huge.

From: http://www.nationalbanken.dk/C1256BE9004F6416/side/Monetary_Review_2008_4_Quarter/$file/kap01.htm

 

[Billy T]

... The Dollar and Yen carry trades are huge.
...

Yes, and Japanese, US efforts to stimulate their economies with cheap printing press money flooding out into more responsible nations (Ones that never got themselves into such an overextened, high-leverage, positions that their financial systems were tipping into depression without this govenment spending) are starting to fight back against the damage the US & Japan are doing to their economies (Brazil and Tiawan being the leaders) but others will soon act in self defense too:

"... Asian policy makers are studying capital controls to limit “hot money” inflows that may stoke asset bubbles and force their currencies to appreciate.

Officials from India, South Korea and Indonesia are among those expressing concern over overseas capital stoking stock and real estate prices. Indonesia’s central bank is “seriously” studying a limit on inflows to short-term bills ... Taiwan last week banned international investors from placing funds in time deposits. ... Policy makers are concerned that stronger currencies will stymie the potential rebound in exports and encourage capital inflows that may spur inflation and undermine financial stability.

“If Asian central banks act on these concerns, it will have important implications for currencies in the region and may slow or put a break on the sharp appreciation trend that has been in place,” said Mitul Kotecha, head of global foreign- exchange strategy at Calyon in Hong Kong.

Eight of 10 Asian currencies tracked by Bloomberg have strengthened against the U.S. dollar this year, led by the Indonesian rupiah, South Korean won and Indian rupee. Housing prices in some Asian nations are rising, while the region’s stock markets have surged in the past six months. ...
In Hong Kong, capital inflows are fueling investment in real estate and equities, driving up the city’s benchmark Hang Seng Index 57 percent this year. Residential property prices climbed 28 percent, according to Centaline Property Agency Ltd.

The MSCI Asia Pacific Index has climbed 66 percent since March amid signs the global economy is recovering from its worst slowdown since World War II. The measure is valued at 22 times estimated earnings for this year, more than twice the level 12 months ago. ...

“These economies could of course raise interest rates to contain inflation and increases in asset prices,” {Austrailia has} Hong Kong Monetary Authority Chief Executive Norman Chan said yesterday. “But the fear is that once interest rates are raised the carry trade will become even more active, attracting even more fund inflows. Asian economies are therefore facing a dilemma.”

Brazil last month was among the first to take steps to combat speculative inflows. Its government announced Oct. 19 a 2 percent tax on foreign purchases of fixed-income securities and stocks.*

India may take steps to slow capital inflows if foreign investment surges, Finance Secretary Ashok Chawla said yesterday. Policy makers may set a limit on the amount of money that local companies can borrow from abroad, the Economic Times reported, citing a Finance Ministry official it didn’t name.

Foreign funds purchased a net 732.5 billion rupees ($15.77 billion) of Indian stocks this year, after being net sellers in 2008, sending the rupee 4.7 percent higher and hurting sales at exporters including Gokaldas Exports Ltd.

South Korea may discuss measures to address the U.S. dollar carry trade that is causing its currency to strengthen, Kim Jong Chang, governor of the Financial Supervisory Service, said yesterday. Government agencies plan to hold talks on what can be done on the issue, Kim said.

Taiwan central bank Governor Perng Fai-nan on Oct. 14 expressed concern foreign investors have about NT$500 billion ($15.5 billion) in Taiwan dollar accounts, five times more than what the central bank considers acceptable. ... The island’s decision to implement capital controls may have had some effect. Taiwan has seen a decline in speculative capital from overseas, with the amount falling to NT$350 billion from about NT$400 billion a month earlier, Perng said yesterday.

The Federal Reserve’s policy of keeping interest rates near zero is fueling the wave of speculative capital that may cause the next global crisis, Hong Kong’s Chief Executive Donald Tsang said Nov. 13. ...”

From: http://www.bloomberg.com/apps/news?pid=20601087&sid=aXJZJUKXcM3A&pos=1

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*As this made Brazilian IPOs move to NYSX etc. just today the government put a 1.5% tax on IPOs that do move out of Brazil. The local stock market was very upset to be at a competive disadvantage.

 

[Billy T]

US Bank failures now are 130. I doubt it will work here as an interactive graph but here is map showing where the failures have been:

At the original site below, you can get indivudual state data by placing the pointer over the state. If that does not work here, See map here:

http://money.cnn.com/2009/12/04/news/economy/bank_failure/index.htm (Then click on map to make it bigger)

Also get data on FDIC etc. and there are other interesting charts to view - one with sub charts telling what is getting better and what is getting worse. Here is one on monthly job losses that support idea that Obama is doing well (steadly grew worse under GWB thru January2009 and then began to improve).

There are 7 more charts - worth looking at site IMHO.