If China addresses its low level of domestic consumption—a product of the renmimbi peg, but also of structural problems in the Chinese economy including an underdeveloped social safety net—then it will unleash one of the largest potential markets in the world. By substituting domestic consumption for foreign consumption, China fixes one of the principal obstacles to sustainable economic growth.
Other people (e.g. London Banker and Yves Smith) have also extolled Irving Fisher, but I would still rank Fisher as highly underappreciated relative to insight and clarity of thought.
via Marginal Revolution: Irving Fisher: Underappreciated economist.
We now believe that being long the Yuan through the Wisdom Tree Dreyfus Chinese Yuan (NYSEArca: CYB) and short DBV are hedges that are more adequate at this stage of the deleveraging cycle. Consequently, on Monday November 23, 2009, we decided to increase our exposure to a theme that dominates the markets when default risk is greater than inflation risk: the Anti-Carry Trade (AC) theme.
I am skeptical. Financial transactions are easy to move: If two parties to a financial contract can just as easily sign and enforce the contract in the Cayman Islands as in New York or London, there is little point in US or UK policymakers imposing a Tobin tax. Unless, of course, moving the finance industry offshore is the policy goal.
“Mohamed was having a heart attack,’’ said one former financial executive, who spoke on the condition of anonymity for fear of angering Harvard and Summers. He considered the cash investment a “doubling up’’ of the university’s investment risk.
But the warnings fell on deaf ears.
Summers, amazingly, wanted to invest 100% of the university’s cash in the endowment, and had to be talked down to investing a mere 80%. No wonder Meyer and El-Erian tried to talk him out of it: the Harvard endowment was never designed as a place to invest sums of cash which might be needed immediately. Instead, it’s designed to invest for the very long term, taking advantage of the higher returns on illiquid investments.
via Felix Salmon » Blog Archive » How Larry Summers lost Harvard $1.8 billion Blogs.
In economic terms, the prices of Chinese exports will probably fall, as overextended businesses compete to justify their capital investments… American businesses will find it harder to compete with Chinese companies, and there will be deflationary pressures in both countries. And … the Chinese … may have less to lend to the United States government. … The United States will face higher borrowing costs, and its fiscal position may very quickly become unsustainable.
That’s not so much a prediction as a very possible contingency, and we should be prepared for it. For now, we should avoid two big mistakes. The first would be to assume that just because borrowing costs are now low, we can postpone fiscal responsibility and keep running up the tab — with the aid of Chinese lending, of course. The history of financial crises shows that turning points can come swiftly…
The second mistake would be to demand too many concessions from the Chinese. What we see in the numbers today are a growing China… Yet there’s a real chance that, soon enough, Chinese economic weakness will be a bigger problem than was Chinese economic strength.
Would a Tobin tax solve all our problems? Of course not. But it could be part of the process of shrinking our bloated financial sector. On this, as on other issues, the Obama administration needs to free its mind from Wall Street’s thrall.
In crude terms, a bank borrowing at the London interbank offered rate could buy a metric ton of aluminum for $1,994, fund it 80% with debt, and sell three-month futures at $2,028. Factor in storage costs of 25 cents per metric ton per day, and the implied return is 1.9%. That doesn't sound much, but the trade is virtually risk-free and the three-month return from holding Treasury bills is basically zero.
The upward-sloping futures curve, or contango, suggests anticipation of economic recovery. Contango occurs when near-term contracts are cheaper than contracts for delivery in the future. But Jim Southwood, president of CRU Price Risk Management, said, “the price today is fully incorporating a full recovery back to 2007 or 2008 levels by the middle of 2010.”
That long money, which often invests in futures, may explain why the contango yield extends years into the future, rather than the more usual matter of months. Similar carry-trade and dollar-hedging activity in energy markets also boosts aluminum prices.
For the likes of the Federal Reserve, aluminum offers a case study in what zero interest rates and quantitative easing do to asset prices. The inflationary implications also ought to worry central bankers. Conversely, should policy makers unexpectedly decide to act on those worries, and raise rates, the carry trade underpinning many commodities could unwind quickly.
There appears to be a major problem for relying on institutional investors to act as responsible shareholders
via Did Shareholders Cause The Crisis? – The Atlantic Business Channel.
“You can’t beat a bunch of supercomputers at their own game but not even a surfeit of supercharged silicon circuits can detect intrinsic value.”