Moon of Alabama Brecht quote
April 29, 2005

Billmon: Down Time

What the U.S. bubble economy needs, then, is for even more speculators to take even larger unhedged positions in the bond market financed with borrowed yen. And the best way to persuade them to do that is to convince them short-term yen rates will remain close to zero; that the ODIC cartel will defend the dollar to the death; and that long-term U.S. bond prices are unlikely to fall dramatically. It also helps to make alternative uses of speculative capital look less appealing.
.. As I told a friend the other day, the supply side hag may be aging rapidly, but she may still have a few more, um, carnal moments left in her yet. And at this late date, that may be about the best we can expect.

Down Time

Posted by b on April 29, 2005 at 7:34 UTC | Permalink


And the best way to persuade them to do that is to convince them short-term yen rates will remain close to zero;

Done: Bank of Japan Says Deflation Will Last for 8th Year

April 28 (Bloomberg) -- Japan's deflation will last for an eighth year, the central bank said today, making it less likely it will soon end its policy of keeping rates at zero and pumping cash into the world's second-largest economy.

Posted by: b | Apr 29 2005 7:58 utc | 1

the ODIC cartel will defend the dollar to the death

To revalue the Renimbi now would blow up the major Chinese banks. I guess that means ODIC will keep operating as before.

Bank refinance may cost Beijing $190bn

The recapitalisation of the Industrial and Commercial Bank of China and the Agricultural Bank of China, two of the country's largest lenders, could cost Beijing up to $190bn (€147bn, £99bn), according to Standard & Poor's.

In research made public yesterday, the credit ratings agency predicted it would cost the Chinese government between $110bn and $190bn to recapitalise ICBC and ABC several times what it has already cost to recapitalise Bank of China and China Construction Bank. Beijing last week announced a $15bn cash injection for ICBC.

S&P's latest estimate suggested the financial cost of reforming China's “big four” state banks would be enormous and no guarantee of longer-term profitability.

In all - this confirms Billmon's scenario, though I feel more negative about the equity markets and suspect a heavy slump with some one-day rallies inbetween.

Sell 'Em All!

Posted by: b | Apr 29 2005 8:09 utc | 2

I think the dynamics are those of any bubble--no-one wants to be the first to precipitate the collapse, but sooner or later the collapse comes.

Posted by: Randolph Fritz | Apr 29 2005 8:23 utc | 3

,Martin Bormann, Nazi in Exile

Posted by: Uncle $cam | Apr 29 2005 8:36 utc | 4

China government is now providing huge funds to companies to use directly for customer financing of deals worldwide. This will lead rapidly to export declines for the US, but offer the Chinese a means of mitigating their dependence on the US market.

Posted by: citizen k | Apr 29 2005 13:05 utc | 5

"durable gods?" I think an 'o' has gone missing from the text.

an inveterate proofreader.

Posted by: rhc | Apr 29 2005 13:24 utc | 6

All things considered, the main point of this post was: "Durable Gods" is a great band name.

Posted by: J | Apr 29 2005 13:39 utc | 7

I wanted to ask Billmon a theoretical question:
Let's assume the the current arrangement between Asia the US and Private investors can be maintained indefinately.
So year after year you have an American current account deficit.
Wouldn't the theoretical outcome be that as we reach infinity, all American portfolio investment and eventually all American publically traded assets must come to rest in the hands of foreigners? Isn't the long term theoretical result of the current situation as equilibrium result in foreigners owning all of America's publically traded assets?
Or is that outcome impossible since in order to buy the assets, foreigners would have to liquidate or redirect their Treasury purchases, which would cause the system to collapse.
Can foreigners buy assets and treasuries at the same time?

Posted by: Scott McArthur | Apr 29 2005 14:06 utc | 8

Another question for Billmon:

As oil prices work their way through the economy, and consumers have to pay more for not only gasoline but food and many other goods, wouldn't the effect on consumer demand be a major drag on the economy?

Posted by: liz | Apr 29 2005 16:25 utc | 9

@Scott McArthur - not Billmon, but you are right.

Warren Buffet spoke of this phenomenon as the sharecropper society

If nothing is done, he said, the United States will continue to transfer ownership of assets to foreigners to finance American overconsumption. Americans, he said, will eventually "chafe at the idea of perpetually paying tribute to their creditors and owners abroad."

"A country that is now aspiring to an 'Ownership Society' will not find happiness in - and I'll use hyperbole here for emphasis - a 'Sharecropper's Society.' But that's precisely where our trade policies, supported by Republicans and Democrats alike, are taking us."

Foreigners could buy treasuries and equities alike. Daimler can buy Chrysler and the Bundesbank the bonds. Now those were old times. Today PetroChina can buy ExxonMobile and the Bank of China loads up on treasuries.

Posted by: b | Apr 29 2005 17:21 utc | 10


- it already is - that's why the S&P retailers index (blue) is falling droping more than the S&P (red).

But then core inflation is calculated ex food and energy and not rising that much. So if you put on those rosy glasses, all is well.

Posted by: b | Apr 29 2005 17:43 utc | 11

That's why I think a U.S. economic slowdown would make China and the other Asian countries less likely, not more, to pull the plug on ODIC. It would be like cutting their own carotid arteries. So someone else is going to have to yank that particular chain.

Joseph Gundzik suggests that that someone else could be Russia:

In 2005 Russia is likely to surpass Saudi Arabia as the world's largest oil exporter. This, combined with continued contraction of global oil stocks, gives Moscow enormous leverage over international oil prices. Russia could easily push the price of crude oil above $100 per barrel by reducing oil production. No other oil-producing country, including Saudi Arabia, has sufficient spare production capacity to counter a production cut by Russia.

By effectively controlling international oil prices, Russia could undermine U.S. economic growth. More importantly, Russia could encourage the devaluation of the dollar by redenominating its substantial energy trade with Europe from dollars into euros. Redenomination, which is supported by both Russia and the European Union, would force Europe's central banks to rebalance their foreign exchange reserves in favor of the euro.

Rather than establishing economic and geopolitical hegemony around the world, the "war on terrorism" is making the U.S. increasingly vulnerable to a sharp economic recession delivered to Washington by Moscow.

Posted by: Eddie | Apr 29 2005 17:56 utc | 12

I don't know whether anyone has the time to explain Billmon's carry trade example because I am confused. If you borrow yen to buy dollars and then buy U.S. bonds and the dollar then rises in value with regard to the yen, I would think you would make a lot of money. Your creditors are owed yen, which are worth relatively less. What do I have wrong?

Posted by: tedb | Apr 29 2005 18:21 utc | 13

I think Billmon meant to say that the trader would be hurting if the dollar were to fall in value versus the yen...

Posted by: Detroit Dan | Apr 29 2005 18:35 utc | 14

@tedb - I think you are right and Billmon has used the 50:50 chance to err here.

But borrowing in yen adds yet another way to lose money on the carry trade: If the dollar unexpectedly rises against the yen, the trader will have to pay his creditors back with a currency that's worth more, while earning profits in a currency that's worth less. If the position is highly leveraged, it doesn't take much of a move to wipe out the profits all together

It should say:
If the yen unexpectedly rises against the dollar unless there is some magic that is outside my realms.

Posted by: b | Apr 29 2005 19:01 utc | 15

Detroit Dan and b: Thanks, guys. I guess Billmon was just checking to see if we were really paying attention.

Posted by: tedb | Apr 29 2005 19:29 utc | 16

I think Billmon meant to say that the trader would be hurting if the dollar were to fall in value versus the yen...

Yeah, I balled that one up big time. 3am, not enough sleep, etc. Thanks for the catch.

Posted by: | Apr 29 2005 19:51 utc | 17

It is theoretically possible to have permanent current account deficit and yet no transfer of wealth: simply imagine that each generation borrows money from abroad between the ages of 20 and 40 and repays it afterwards. If the absolute amounts borrowed and repaid by each generation are growing (which is not unusual in our current growing economies), the balance each year is negative, although each generation balances its books ultimately.

Of course, this is not what is happening now. Bush has been borrowing several generations' worth and he will not be there to repay it all.

The most fascinating thing with the current situation is that the USA are the first empire in history to import capital from the rest of the world. The dollar is not standing because it is the strongest currency around, but because it is the weakest, and everybody fears that they will be hurt more than the others when the awful truth comes out, and thus everybody has an interest not to buck the system, which keeps on growing ever more unstable. It is literally like building a pyramid upside down. It's possible to do that for a while, and for another while with outside props, but it WILL fall.

Posted by: Jrme | Apr 29 2005 21:09 utc | 18

So the absolutist free market party is turning Americans into the indentured servants of foreign masters?
That's funny.

Posted by: Scott McArthur | Apr 30 2005 2:41 utc | 19

Yes, but that free market party is perfectly prepared to become foreigners if that's what it takes to own the place.

Maybe funnny, but rather sickly.

Posted by: citizen | Apr 30 2005 2:59 utc | 20

Beijing needs export-led growth to keep the social pot from boiling over and to prevent a painful unwinding of their own economic excesses (which to a large degree mirror our own).

A most instructive post, Barkeep--and thanks for this!--but there's one point that I know nothing about, and have trouble following how do Beijing's economic excesses mirror our own? Buying all those treasuries (a mirror of our selling them)? A trade surplus (versus a deficit)? overall dependence on a Big Foreign Economy? Pulling in foreign oil? None of the above?

Posted by: alabama | Apr 30 2005 6:42 utc | 21

how do Beijing's economic excesses mirror our own?

We consume and don't save; they save and don't consume. We have a tepid rate of investment; they spend 50% of their GDP on investment. We run a huge current account deficit; they run a big current account surplus (and finance the surpluses of their Asian neighbors.) They receive enormous inflows of private capital (which have to be neutralized to keep their currency from rising too fast); we depend on enormous inflows of central bank financing to keep our currency from falling too fast.

And so on.

Posted by: Billmon | Apr 30 2005 6:49 utc | 22

Another view on the Chinese economy: Kos posted

Posted by: Jérôme | Apr 30 2005 7:18 utc | 23

@Scott Macarthur

Running a current account deficit forever is sustainable in theory (Australia has almost been doing this) as long as one condition is met. Your GDP is growing fast enough to cover your Current Account Deficit

In simple terms if your are a household and you are spending 5% more than you earn then your debt will be going up. But that is no problem if your income is growing fast enough. If you know next year's income will be 10% bigger than this year's then you will be earning enough to cover the debt you created last year and then some.

Posted by: still working it out | Apr 30 2005 11:44 utc | 24

Thanx for that post Billmon. I have been trying to figure this stuff out by reading Setser and Roubini, but alot of the time they are way over my head up in the international finance stratosphere and its a bit much for humble IT guy like me. Very nice to have it in high quality plain english.

Posted by: still working it out | Apr 30 2005 11:56 utc | 25

Thanks for the link to the Asia Times article about Russian oil. Of course Russia is not a member of OPEC, and relations have been fractious between them for some time.

Posted by: Dismal Science | Apr 30 2005 13:32 utc | 26

The metrics look rusty. How can we keep excluding food and fuel from inflation? Given the urban structure of modern North America, gasoline is a necessity of life. Yes, it's volatile, so maybe give it a longer averaging period or something, but don't exclude it altogether. Food is not volatile and is currently insignificant as a portion of consumer spending. But it should be included, too, as the structural changes associated with peak oil are going to make food permanently more pricey.

Second, as Billmon hints above in this comment thread, it's starting to make less sense to consider China and the United States as separate economies. The two are so intertwined that they are almost one country. What would the indicators, from GDP to quality of life, look like if we considered the US and China together?

Posted by: hedgehog | May 1 2005 12:06 utc | 27

The comments to this entry are closed.