That is what Credit Default Swaps are for. Banks will take out 'insurance' (CDS) on their loans and shift the loans from the liability column to the asset column. A simple example: The bank loans out $250,000 for a mortgage, secured by the property. The bank then takes out a CDS on the loan to guarantee against default. Since there is no 'risk' to repayment of the loan, they can then remove the loan from the liability column. The bank still holds the title to the property, so they then have a $250,000 asset on the books from which they can make new loans, minus the reserve portion. Repeat over and over until you have leveraged the original deposit many times, I think around 12 to 1 for commercial banks.
The world has more debt than it has income
- Thread starter Cyperium
- Start date
Billy T,
I am not going to take the time to respond to all your distortions and hype, but will take a couple of your examples to illustrate your flawed logic.
The SEC's board of commissioners must be represented by both political parties. By law, no more than three of the five seats can belong to the political party in power. Allen Stanford made huge political contributions, mostly to the Democratic party of which he was a member, but to both Obama and McCain's presidential campaigns. Stanford was hugged by Nancy Pelosi and publically thanked by Bill Clinton at the Democratic National Convention for his financial support. Maybe the 'order' came down from Nancy Pelosi?
QUOTE]
Correction, the SEC has no rule that each party must be represented. There is a rule that no more than three of its five members can be from the same party.
Director terms are staggered. A term expires each year and the president appoints a director each year. George II was in office eight years. How long does it take to appoint a majority of SEC directors? You do the math. The SEC is a George II SEC.
Given how loose party memberships are in the US, the restriction on three members from the same party is virtually meaningless.
http://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commission#Chairs_and_commissioners
All well and good, if the CDS were worth the paper they were written on. So when the loans failed and the the CDS (insurance) failed because the were booked as zero risk and therefore not reserved....pretty damn stupid if not criminal.
joepistole,
A president appoints the commissioners, which then must be approved by the Senate. The Senate can also recommend people for the seats, as Harry Reid recommended the two Democratic seats on the SEC to Bush.
Correction, the SEC seats are commissioners, not 'directors'.
A president appoints the commissioners, which then must be approved by the Senate. The Senate can also recommend people for the seats, as Harry Reid recommended the two Democratic seats on the SEC to Bush.So, Bush didn't have any control over the SEC's politics, given how loose party memberships are??
I knew we could agree on something! Except, the taxpayer has been making good on the Credit Default Swap payouts. Everybody from Goldman Sachs to smaller regional banks have been collecting payouts, via AIG as the big insurer. And CDSs are still unregulated. A draft law to regulate credit default swaps was introduced in congress in Jan. 2009, but I don't think anything has passed yet. The draft would make it mandatory that the buyer of the protection owned, or at least had exposure to, the asset specified. The bill would also set up a central clearing house that swaps must go through to keep track of them. Credit Default Swaps would still not be eliminated, they are a huge, huge market in the tens of trillions of dollars, larger even than Wall Street.
Thanks, but I am still confused. Both you and Joepistole know and understand the details much better than I do. Some of my problems with what you tell me are:
(1) Main problem is that to make the second loan (mortgage) the bank must have actual cash to give to borrower #2. I have been assuming that it why a secondary market in which they can sell mortgage #1 must exist. I do not see how either buying an insurance policy that mortgage 1 will be paid on time OR making some accounting shift on the bank's books produces the second $250,000 to give out to borrower #2. - I may have too simple an understanding of all this but the second $250,000 has to come from somewhere, not insurance, not moving entries around on the banks books. The place it comes from, which I call the "secondary market," will want something in exchange for supplying the second $250,000 - That is why they get ownership of the first mortgage.
(2) A more minor problem is that I do not understand why the mortgage would be a liability to the bank and then become an asset when back by insurance. The real backing of it is the house. The firm that issued the credit default swap can fail, but the house will be there (or the fire insurance payment). The mortgage is a liability to the home owner, not the bank. The mortgage is always an asset of the banks as soon as the borrower signed on the dotted line. – It can be sold. To my simple POV, what you are telling me makes no sense.
Perhaps you will tell me where the second $250,000 the bank gives to borrower #2 comes from?
I accuse GWB of a lot of things, but not that he restrained the SEC for either personal gain from crooks like Madoff or Stanford, OR for the donations the Republican party might receive, so you are way off base here in the attempt to "turn the tables."
IMHO, GWB, and most Republicans are sincere (or at least were, prior to it all blowing up in their face and destroying their party) in their belief that the best government is the one that regulates ("interferes" they would say) with the market place the least. I.e. they did genuinely believe that the markets could and would regulate themselves better than the government could. That belief in the superior ability of the market to self regulated is why GWB's SEC was restrained and the laws were not enforced. Many of the more intelligent Republican have now learned this belief that the markets self regulate better than government can is false.
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I may be wrong, but thought that the SEC's higher ups served "at the pleasure of the POTUS," as part of his (or her) administration. I understand that they must be confirmed (by the Senate only I think) but once in office the POTUS can discharge them. I.e. they do not have fixed term like the FED's higher ups not lifetime terms like the Supreme Court. Am I wrong? If I am at what level below them can the POTUS fire them?
GHB, father of GWB, also told the SEC to archive the investigation of the strange stock behavior of his son's oil company. (Hicks was driving the share price up of GWB's oil company so rapidly that the SEC's computers automatically flagged it for investigation. Hicks was buying the nearly worthless stock of company going bankrupt as a legal way to thank GWB for the political favors he received, but I forget now if the "favors" were (1)Gov. GWB turning the administration of Texas University endowment fund over to Hicks to manage and cancelling the prior requirement of public disclosure about how the endowment was invested Or (2) The (miss)use of the Texas's emanate domain laws to force the owners of the stadium site to sell it for the newly formed Texas Rangers ball club. - I think the former as GWB paid for less than a 1% interest in the Texas Rangers but was given 10% more at no cost to GWB after the site was acquired. GWB has been a terrible failure at everything he has ever done, except getting elected or appointed to office, ducking combat service and getting money from rich friends, including the Saudi royal family, to make himself ~a billionaire.)
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“Either cuts in spending or increases in taxes will be necessary to stabilize the fiscal situation,” Bernanke said in response to a question. “The Federal Reserve will not monetize the debt.”
From: http://www.bloomberg.com/apps/news?pid=20601087&sid=ahrOZ.gd85yc
He failed to add:
"And if you believe that, I have a bridge in Brooklynn I will sell you cheap."
From: http://www.bloomberg.com/apps/news?pid=20601087&sid=ahrOZ.gd85yc
He failed to add:
"And if you believe that, I have a bridge in Brooklynn I will sell you cheap."
Carcano
Valued Senior Member
They wont have to monetize the newly created virtual money *IF* the financial sector makes a full recovery.
Economist discovers new species in Michigan:
Detroitosaurus wrecks
The decline and fall of General Motors
From the cover article (One economic example of why health care reform was needed years ago but the main reason is to have heather Americans with longer life expectancies, as 44 other countries do, most with socalized medicine and its lower per capita cost. - Due mainly to people getting earlier care and preventative medicine as it is already paid for in their taxes, not out of pocket.):
"... if successive administrations had dealt with America’s expensive and inadequate health care—a problem with which Barack Obama is now wrestling the cost of those union demands would have been far lower. None of GM’s competitors has had to shoulder costs per worker anything like as heavy: until an agreement in 2007 with the union, each car in Detroit carried about $1,400 in extra pension and health-care costs compared with the foreign-owned competitors in America. ..."
"... At present, there’s enough capacity globally to make 90m vehicles a year, but demand is little more than 60m in good economic times. Even as the big global manufacturers have been building new factories in emerging markets, {Billy T: China with "trickle down" tax relief for the already wealthy. W.Buffetts 10% ownership of BYD motor's factory, etc.} governments in slow-growing rich-world markets have been bribing them to keep capacity open there. ..."
BTW the yield curve as reflected in difference between 10 and 2 year rates hit the highest ever slope this AM. Buyers do not want to go long term. Bloomberg reports today: "The U.S. is preparing to auction $35 billion in three-year notes, $19 billion in 10-year securities and $11 billion in 30- year bonds next week. " It will be interesting to see what rate is required to move the 30 year bonds. It may not be too bad (high) as pension plans need to balance their sure incomes against their known obligations, but they and perhaps some life insurance firms will be the only buyers, I predict. They do not care if the dollar is only worth 2 cents in 30 years, but the pensioners collecting a fixed amount from them surely will.
Detroitosaurus wrecks
The decline and fall of General Motors
From the cover article (One economic example of why health care reform was needed years ago but the main reason is to have heather Americans with longer life expectancies, as 44 other countries do, most with socalized medicine and its lower per capita cost. - Due mainly to people getting earlier care and preventative medicine as it is already paid for in their taxes, not out of pocket.):
"... if successive administrations had dealt with America’s expensive and inadequate health care—a problem with which Barack Obama is now wrestling the cost of those union demands would have been far lower. None of GM’s competitors has had to shoulder costs per worker anything like as heavy: until an agreement in 2007 with the union, each car in Detroit carried about $1,400 in extra pension and health-care costs compared with the foreign-owned competitors in America. ..."
"... At present, there’s enough capacity globally to make 90m vehicles a year, but demand is little more than 60m in good economic times. Even as the big global manufacturers have been building new factories in emerging markets, {Billy T: China with "trickle down" tax relief for the already wealthy. W.Buffetts 10% ownership of BYD motor's factory, etc.} governments in slow-growing rich-world markets have been bribing them to keep capacity open there. ..."
BTW the yield curve as reflected in difference between 10 and 2 year rates hit the highest ever slope this AM. Buyers do not want to go long term. Bloomberg reports today: "The U.S. is preparing to auction $35 billion in three-year notes, $19 billion in 10-year securities and $11 billion in 30- year bonds next week. " It will be interesting to see what rate is required to move the 30 year bonds. It may not be too bad (high) as pension plans need to balance their sure incomes against their known obligations, but they and perhaps some life insurance firms will be the only buyers, I predict. They do not care if the dollar is only worth 2 cents in 30 years, but the pensioners collecting a fixed amount from them surely will.
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Already early today:* “… the 10-year note yield rose to 3.84%, while the 2-year note yield advanced to 1.37%.” I.e. yield curve still rapidly growing steeper.
Even short term, people want more interest to give government their funds for two years (or less as this is mostly from prior issued bills.) This "wanting more" is mainly a "green shoots" effect as less fearful investors switch to equities etc. leaving fewer who will buy the treasury bills. The steeping of the yield curve is a more pure indicator that many expect the dollar to significantly loss value in the next few years or decade.
The rising interest rates are another factor in the dollar's recent strength. I.e. not only are countiries like Brazil buing dollars to keep their currencies from becoming too valuable too quickly (that hurts their exporters) but also foreigners are buying dollars to buy Treasuries with.
Quote from: https://wwws.ameritrade.com/cgi-bin/apps/Main
----------------
* Updated at 2:56 p.m in New York: 2 year at 1.41%, and the yield on the ten-year note rose to 3.89%. (Same source)
Even short term, people want more interest to give government their funds for two years (or less as this is mostly from prior issued bills.) This "wanting more" is mainly a "green shoots" effect as less fearful investors switch to equities etc. leaving fewer who will buy the treasury bills. The steeping of the yield curve is a more pure indicator that many expect the dollar to significantly loss value in the next few years or decade.
The rising interest rates are another factor in the dollar's recent strength. I.e. not only are countiries like Brazil buing dollars to keep their currencies from becoming too valuable too quickly (that hurts their exporters) but also foreigners are buying dollars to buy Treasuries with.
Quote from: https://wwws.ameritrade.com/cgi-bin/apps/Main
----------------
* Updated at 2:56 p.m in New York: 2 year at 1.41%, and the yield on the ten-year note rose to 3.89%. (Same source)
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Come now Billy, false modesty does not suit you.
You know I am far from being well educated in economics. Pandamoni is a Wall Street banker, highly intelligent, but doesn't seem to relish correcting mistakes made by amateurs such as myself and others here. one_raven is (or at least was) a vice president at a large Atlanta bank, I inferred CitiBank. He seldom posts also.Sorry for taking so long to respond to your post, but I have had an eye problem that prevented me from spending much time at the computer screen.
Most of the banks transfers are not in the form of 'actual cash', but electronic transfers from their balance sheet. You know the physical cash in circulation is only a small percentage of the total money supply. Just as the banks do not keep cash on hand to offset all savings invested in the bank, they do not keep cash on hand to transfer to the seller of the house. They electronically transfer proceeds from their balance sheet to another banks balance sheet. No cash changes hand in the process.
OK, Billy, the following is my assetment of the situation, which could be wrong. The bank CAN sell the mortgage on the secondary market, most likely to then be packaged into a MBS or similiar. But most banks don't sell all their mortgages. That is where the Credit Default Swap comes into play at the individual bank level, in addition to the secondary market level. The bank can, and usually do, take out a CDS on the mortgages they hold. The mortgage is then considered to be 'protected', having no risk of a default causing them to lose money if the mortgage is not paid. The bank still holds the original mortgage as an asset on their balance sheet, as it represents real value (the property itself). They then transfer the liability for the mortgage 'off balance sheet', since it is not supposed to pose any risk of default. This gives the bank an additional asset, the value of the physical property, upon which they can borrow funds against from the money market. The bank can borrow money at a lower interest rate than the interest rate they charge consumers. The difference in the interest rates makes profit for the bank.
Think of it like the home owner that takes out a 'second mortgage' against the equity in his home. The financial institution that issues the second mortgage does not get ownership of the original mortgage, but a claim against the equity in the home. By taking out a CDS against the original loan, that increases the 'equity' the bank holds in the physical property, since that property is supposed to be free of default risk. Now Billy, explain to me how you think banks can 'leverage' their deposits by ratios of up to 12 to 1 without such methods?
The bank has a balance sheet, with assets on one side and liabilities on the other. A depost in a bank is an asset. When the bank loans out that money in the form of a mortgage, the 'electronic cash' is deducted from the asset side. The bank then has two entrys on its balance sheets, one 'asset' for the property value (not 'cash'), and one 'liability' representing potential loss (default) of electronic cash on the other side. The two entries balance each other on the books. By means of a CDS, that eliminates the liability since there is no possibility of a loss. This gives them a 'clean' real property against which they can borrow more money for lending on another mortgage. I am putting this in very simple terms, not considering reserve requirements for instance. By doing these Credit Default Swaps, the bank can leverage the same mortgage several times, making profits from the difference in their borrowing and lending rates. As I stated, I am no expert in these matters, but that is a simple explaination that may need to be corrected by someone more knowledgable. I won't even get into the more complex financial derivatives, but there are many of which I have little understanding of exactly how they work.
To 2inqusitive: Thanks, I do understand now how insurance against default (CDS) can create new money to lend out (by eliminating a liability on the books.)
Your answer to my (1) is fully correct but not needed. What was needed was for me to word my question better. By "actual cash" I did not mean to limit it to green dollar bills. "real money" would have been better but "assets in excess of liabilities" is what they really need to make a new loan. That they can get either by selling the mortgage #1 in some secondary market (and I prior to your post thought that was their only option. - Why in some recent post I claimed that in Canada there had to be some form of secondary market for newly issued mortgage)
I now, thanks to you, know that there is also the option of killing a liability via a CDS. I.e. it was real ignorance, not "false modesty" on my part.
How dare you accuse me of "false modesty"!! I can be as arrogant as any posting here.
I never under stood CDS as a way to gain new net assets - can see why they were popular, until some turned out not to be worth the paper they were written on. Thanks again.
Your answer to my (1) is fully correct but not needed. What was needed was for me to word my question better. By "actual cash" I did not mean to limit it to green dollar bills. "real money" would have been better but "assets in excess of liabilities" is what they really need to make a new loan. That they can get either by selling the mortgage #1 in some secondary market (and I prior to your post thought that was their only option. - Why in some recent post I claimed that in Canada there had to be some form of secondary market for newly issued mortgage)
I now, thanks to you, know that there is also the option of killing a liability via a CDS. I.e. it was real ignorance, not "false modesty" on my part.
How dare you accuse me of "false modesty"!! I can be as arrogant as any posting here.
I never under stood CDS as a way to gain new net assets - can see why they were popular, until some turned out not to be worth the paper they were written on. Thanks again.
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"... Russia and Brazil, seeking to reduce their dependence on the dollar, announced plans to buy $20 billion of bonds from the International Monetary Fund and diversify foreign-currency reserves. … China will buy $50 billion and India may announce similar funding. … Treasuries fell today, six days before officials from the so-called BRIC nations meet in Yekaterinburg, Russia, where they plan to discuss the status of the dollar as the world’s reserve currency. The bigger picture is people are worried there are too many Treasuries, and that no one is even making a pretense of getting the fiscal deficit under control …
IMF will pay a yield similar to U.S. Treasuries and will be denominated in the IMF’s basket of currencies, known as Special Drawing Rights, Mantega {Brazil’s "Sec. of Treasury"} said at a press conference in Brasilia. The IMF calculates the value of SDRs daily, with 44 percent weighted towards the dollar, 34 percent to the euro and the remainder split between the yen and the pound, according to its Web site.
Brazil’s central bank will decide which assets to sell from its reserve portfolio to free up the funds needed to purchase the IMF securities, Mantega said. ..."
From: http://www.bloomberg.com/apps/news?pid=20601087&sid=a_znw8oxnBzs
Bill T notes: Local Bloomberg TV streamer at bottom of screen said, translating from Portuguese, that IMF is planning to sell 500 billion of these bonds and the “BRICs” would be buying many more along with others {oil exporters mainly} with dollar inflows or large reserves.
The timing of these announcements, less than an hour before US treasury had relatively little interest in the 19 billion it offered in 10 Year notes today, may be significant.
“…U.S. stocks extended declines as a disappointing auction of $19 billion in 10-year Treasury notes and a jump in oil prices spurred concern higher interest rates and accelerating inflation will threaten an economic recovery. …”
From: http://www.bloomberg.com/apps/news?pid=20601087&sid=a9mSRzqyRI1o
For more on Treasury disappointing sale*, see also:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aqzM_WbYT5F0
Bill T expects that the IMF will have less trouble selling its bonds than the US as many obviously are now reducing their exposure to risk a collapsing dollar. – Pretty much as I predicted some years ago, but I expect the BRIC nations meeting in Yekaterinburg, Russia next week will probably try to get some mutual agreement not to dump US treasuries now. (There is a big temptation to be the first to do that, but even the first will be badly hurt if done now.) In a year or two, perhaps more than half of global reserves will be in IMF bonds, instead of dollars.
IMF selling bonds is good news for gold bugs - IMF probably will not now sell its gold, as was planned (but US may be forced to).
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*Tomorrow Treasury will try to sell 11 billion of 30 year bonds - FED and perhaps a pension fund or two will be the only buyers, I bet.
IMF will pay a yield similar to U.S. Treasuries and will be denominated in the IMF’s basket of currencies, known as Special Drawing Rights, Mantega {Brazil’s "Sec. of Treasury"} said at a press conference in Brasilia. The IMF calculates the value of SDRs daily, with 44 percent weighted towards the dollar, 34 percent to the euro and the remainder split between the yen and the pound, according to its Web site.
Brazil’s central bank will decide which assets to sell from its reserve portfolio to free up the funds needed to purchase the IMF securities, Mantega said. ..."
From: http://www.bloomberg.com/apps/news?pid=20601087&sid=a_znw8oxnBzs
Bill T notes: Local Bloomberg TV streamer at bottom of screen said, translating from Portuguese, that IMF is planning to sell 500 billion of these bonds and the “BRICs” would be buying many more along with others {oil exporters mainly} with dollar inflows or large reserves.
The timing of these announcements, less than an hour before US treasury had relatively little interest in the 19 billion it offered in 10 Year notes today, may be significant.
“…U.S. stocks extended declines as a disappointing auction of $19 billion in 10-year Treasury notes and a jump in oil prices spurred concern higher interest rates and accelerating inflation will threaten an economic recovery. …”
From: http://www.bloomberg.com/apps/news?pid=20601087&sid=a9mSRzqyRI1o
For more on Treasury disappointing sale*, see also:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aqzM_WbYT5F0
Bill T expects that the IMF will have less trouble selling its bonds than the US as many obviously are now reducing their exposure to risk a collapsing dollar. – Pretty much as I predicted some years ago, but I expect the BRIC nations meeting in Yekaterinburg, Russia next week will probably try to get some mutual agreement not to dump US treasuries now. (There is a big temptation to be the first to do that, but even the first will be badly hurt if done now.) In a year or two, perhaps more than half of global reserves will be in IMF bonds, instead of dollars.
IMF selling bonds is good news for gold bugs - IMF probably will not now sell its gold, as was planned (but US may be forced to).
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*Tomorrow Treasury will try to sell 11 billion of 30 year bonds - FED and perhaps a pension fund or two will be the only buyers, I bet.
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Mickmeister
Registered Senior Member
I absolutely agree! Thank God the capital gains tax has stayed at 15%, although Obama wants to raise it to 20%. I still stand behind that they should have suspended the capital gains tax for a specified period of time to bring investors back into the capital markets.
Both please answer:
If gains are not to be taxed are losses also not deductable? :shrug:
I tend to prefer all income be treated equally. Seems hard to tell an ordinary salary worker he needs to pay taxes but not a investor buying and selling stocks etc.
Municiple bonds have what you both want and here is the result:
4,322 U.S. tax return filers with incomes of $200,000 and more paid no income taxes worldwide, according to the Internal Revenue Service’s Statistics of Income Bulletin. For more details see: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a.Hiva4n_BxM
Here is one well know case, mentioned at that link:
"... after her husband, automotive pioneer Horace E. Dodge, died in 1920, the $59 million Mrs. Dodge inherited was put into tax-free municipal bonds. The money was said to have earned on the average of $1.5 million a year, and Mrs. Dodge never had to pay a federal income tax. ...”
I would not be very unhappy if Obama were to get tax law changed so that annual incomes above $500,000 paid 20% in taxes.
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Mickmeister
Registered Senior Member
You can use variable universal life insurance policies to defer the capital gains and income tax on dividends. Plus, it defers a good amount of taxation upon withdrawals at retirement.
There are lots of ways to defer taxes, but all I know of require eventual payment. For example for several years I have been required to take the minimum required distribution from my 403b retirement plans and from my IRA.
Even just a "buy and hold" stock investor who will someday pay a capital gains tax can defer taxation by 20 years or so! I bet W. Buffett has deferred some taxes for more than 35 years on some of his early buys of Coke Cola. - He invested his "trickle down" tax relief in China however (He is 10% owner of the BYD factory - maker of the world's first mass produced (400,000 of them this year as I recall) electic hybrid car** priced at $22,000).
Arguments can be made for deferred taxes in that society does benefit by encouraging saving. (US does much too little of that so borrows from China where population saves ~45% of income.).
Having rich, with skilled tax lawyers, who NEVER pay taxes is what I do not like. Nor do I like the complex tax code, filled with special interest loop holes. I have given some thought as to how the US tax code could be improved and greatly simplified. (My code fits on a 3by5 inch index card, instead of a library room full of books, but it does need both sides of a sheet of paper to clearly define all the terms and give examples of them.) You may like it not placing any tax on corporation that distribute profits to tax payers within 10 years* of earning them. (Another example of encouraging saving for investment at the corporate level and companies can be more efficient without their tax lawyers.) See it at:
http://www.sciforums.com/showpost.php?p=1792841&postcount=1
BTW, despite my "please" you did not answer the only question in post 135 (I have now made it bold text so you can find it easily.)
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*Not exactly 10 years as that would require new records to be kept. All profits in the annual report are distributed (or become the IRS's) by the end of the annual report period, nine years later. - No new records to keep.
**
“…BYD's F3DM can travel up to 100 kilometers (62 miles) solely on battery power, and contains a back-up gas engine. Drivers alternate between the two power modes by flipping a switch. The battery takes up to seven hours to {100%} charge with a regular plug, and up to 15 minutes to be 80.0% charged at a special recharging station. …” {I.e. the Li-ion battery can rapid charge, but your house wiring can not deliver power at that rate.}
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"... Last week, the President of Russia called for establishment of an alternative to the USD. The governor of the Bank of China recently called for the creation of the super sovereign reserve currency and the Chinese PM has expressed concern that the weaker USD will hurt China's US investments. The World Bank president Zoellick says that China may diversify reserves away from the USD. Monday, the
head of China's second largest bank said that: US should start issuing bonds in Yuan
and the IMF said that there is a strong possibility of the development of a new reserve currency to replace the USD.
From: http://www.actionforex.com/fundamen...ise-rates-sooner-than-expected-2009060989149/
The bold text above is a semi-official insult to the US from China because only countries with weak finances must issue their bonds with payment promised in the currency of another country with strong currency.
Years ago, ALL of Brazil's bonds promised payment in dollars. A few years ago, some promised to pay in Euros. Now it is easy to sell them with payment in Brazilian Real. In fact some issued a year or two ago when Brazil's interest rates were higher, sell for 13% more than face value!
If US's Debt to GDP ratio increases as many fear it will, the US may need to promise to pay in RMB (Yuan) of even Brazilian Real. - They are big trade surplus countries with decreasing debt to GDP ratios. Perhaps it would be less embarrassing if US issues bonds in Norwegian Kroner?
See more related news released earlier today in post 133.
head of China's second largest bank said that: US should start issuing bonds in Yuan
and the IMF said that there is a strong possibility of the development of a new reserve currency to replace the USD.
From: http://www.actionforex.com/fundamen...ise-rates-sooner-than-expected-2009060989149/
The bold text above is a semi-official insult to the US from China because only countries with weak finances must issue their bonds with payment promised in the currency of another country with strong currency.
Years ago, ALL of Brazil's bonds promised payment in dollars. A few years ago, some promised to pay in Euros. Now it is easy to sell them with payment in Brazilian Real. In fact some issued a year or two ago when Brazil's interest rates were higher, sell for 13% more than face value!
If US's Debt to GDP ratio increases as many fear it will, the US may need to promise to pay in RMB (Yuan) of even Brazilian Real. - They are big trade surplus countries with decreasing debt to GDP ratios. Perhaps it would be less embarrassing if US issues bonds in Norwegian Kroner?
See more related news released earlier today in post 133.
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Beijing doesn't have a strong currency. They've been systematically manipulating the yuan to keep it weak - specifically with respect to the dollar - for years now.
The comment is an insult to the Chinese Central Bank, which has bet trillions of China's wealth on the US dollar, and so now is hostage to any inflationary measures the US government might pursue (and over which they exert little influence).
Please read my post again. I did not say "weak currency" I said: "weak finances" *
I agree that the RMB has been held below it true worth by China aggressively buying dollars, but do note that despite this the RMB has been appreciating. (It was 8 to the dollar and now is, if memory serves, less than 7 required to buy a dollar). I do however; consider a currency "strong" if it has been increasing in value reasonably steadily for several years and "weak" if the opposite is true. Thus the RMB and Real are "strong" and the pound and dollar are "weak." The Euro has been bouncing around too much to be considered to either have been REASONABLY STEADILY increasing or decreasing for several year, as I recall the facts.
China has much stronger FINANCES than the US. You will probably see that in spades tomorrow when the US tries to sell only 11 billion of 30 year bonds.
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*It is however a safe generalization that a country with "weak finances" will soon have "weak currency" (currency of decreasing value, YoY or longer). The buyer of a bond wants to be paid in a currency which is strong (increasing in value) so countries with strong finances can easily sell bonds in their own currency. The Dollar has historically (since WWII at least) been the world's standard for safety but that is clearly being questioned now because the US finances are very weak. So much so that some are questioning the AAA rating even though all think the US will never default on it bonds.
PS: As you note, one cannot judge if a currency intrinsically is weak or strong (I.e. reflecting a weak or strong economy or financial structure) from the exchange rates as the exchabge rates can be effected by central bank buying or selling.
Your concept of "weak currency"seems to be that it is under valued wrt the dollar; but that can not be applied to the dollar. My concept of a "weak currency" is one that buys less with each passing year faster than most others - the dollar plays no special role with my POV so I can tell when the dollar is weak or strong. As inflation is so common, I need to to make some comparison also ("faster than most others") but not to just the dollar.
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