Some months ago on a steamy Atlanta evening I discussed with David Gilbert the implications if China decided to dump her American assets (currently $1.33 trillion dollars £658bn) it would be the on par with a nuclear bomb being dropped. It was discussed and we agreed it could happen but unlikely, this was just at the start of the sub-prime crisis. Now forward 2.5 months and look at the mess we are all in. Why would China threaten to dump her foreign assets? Partly due to the US's demands that they revalue the Yuan and reduce the huge surplus they hold in trading. The US has looked at and threatened very harsh sanctions to force the Chinese to change policy but this highly unlikely. If China was to dump US holdings It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900bn in a mix of US bonds. The Chinese have stated they have the power to trigger a massive dollar sell off but it is not in there interest to do this. This from Xia Bin, finance chief at the Development Research Centre .China is unlikely to follow suit as long as the yuan's exchange rate is stable against the dollar. The Chinese central bank will be forced to sell dollars once the yuan appreciated dramatically, which might lead to a mass depreciation of the dollar," he told China Daily.
Simon Derrick, a currency strategist at the Bank of New York Mellon, said the comments were a message to the US Senate as Capitol Hill prepares legislation for the Autumn session.
"The words are alarming and unambiguous. This carries a clear political threat and could have very serious consequences at a time when the credit markets are already afraid of contagion from the subprime troubles," he said. It seems the shoe is on the other foot and shows the weakening of America under Bush, economic power has shifted to Asia and the Middle East as reported in this blog over the past weeks. The yuan has appreciated 9pc against the dollar over the last two years under a crawling peg but it has failed to halt the rise of China's trade surplus, which reached $26.9bn in June. Whoever wins the Presedential elections next year must deal with a ever expanding Emerging markets economy and get America back on foot starting with an appreciation of the US Dollar. It is not in America's interest to bully China to change course they are in the middle of a boom, and over time this boom will run of steam, just how much time we don't know.
"The words are alarming and unambiguous. This carries a clear political threat and could have very serious consequences at a time when the credit markets are already afraid of contagion from the subprime troubles," he said. It seems the shoe is on the other foot and shows the weakening of America under Bush, economic power has shifted to Asia and the Middle East as reported in this blog over the past weeks. The yuan has appreciated 9pc against the dollar over the last two years under a crawling peg but it has failed to halt the rise of China's trade surplus, which reached $26.9bn in June. Whoever wins the Presedential elections next year must deal with a ever expanding Emerging markets economy and get America back on foot starting with an appreciation of the US Dollar. It is not in America's interest to bully China to change course they are in the middle of a boom, and over time this boom will run of steam, just how much time we don't know.
The UK has decided to keep interest rates at 5.75% the major concern inflation. They (the MPC) don't see the time right for a relaxation of interest rates but the rising pound will be cause for concern as it is over valued and affecting tourism and exports. Enjoy these favourable rates whilst you can as a correction will occur probably in the new year when the MPC will again look at interest rates.
Show no mercy for Lord Black ex-head of The Daily Telegraph and Hollinger International he is facing a lengthy jail sentence for fraud and obstruction of justice. He is charged with stealing $80 million from Hollinger International, he pleads not guilty but what is it with these mega rich guys who just want more and more? No morals and no shame, at the end of the day all you are left with is your name and integrity, what's your legacy going to be?
As the value of money erodes where next for investors, Gold, Silver, Oil? The crisis in America is real it does not only affect Americans it affects us all , oil, food prices, jobs, investments, everything we take for granted, but how many of us have paid attention to the shifting powers Russia, China, India, the Far East and the Middle East. Most Americans are blinkered in the view they see these countries but they are now serious players on the international markets. From Healthcare, Financial Bourse's, Airport authorities,etc they are all being sold to foreign companies times are changing and we have top adapt and change or fall further behind.
On closing:Car manufacturer General Motors has recorded its worst ever quarterly loss after taking a $38.6bn (£18.35bn) tax write-down.
GM, which produces cars under the Vauxhall marque in Europe, posted a loss of $39bn in the three months to September as a result of the need to write down deferred tax credits.
The move signifies that GM does not think that it will make significant profits in its automotive or financing operations in the foreseeable future.
The $38.6bn charge falls short of AOL Time Warner's write-downs in 2002 of $54bn in the first quarter and $45.5bn in the fourth quarter relating to the value of its online businesses.
GM, which produces cars under the Vauxhall marque in Europe, posted a loss of $39bn in the three months to September as a result of the need to write down deferred tax credits.
The move signifies that GM does not think that it will make significant profits in its automotive or financing operations in the foreseeable future.
The $38.6bn charge falls short of AOL Time Warner's write-downs in 2002 of $54bn in the first quarter and $45.5bn in the fourth quarter relating to the value of its online businesses.
The man who does not read good books has no advantage over the man who can't read them. -Mark Twain
2 comments:
It is quite ironic that we had this discussion some time ago as it relates to China and the US.
But the treat of China dumping US paper is only one aspect of the equation. The moving of the dollar as the currency peg is another aspect, along with the sub prime issue which based on the pundits has yet to bottom out.
My question is when the dust settles what shape will the US economy be in, and how will this affect other smaller economies that relie on the US.
KAD, Hi,
My worry is that the US will have to deal with higher inflation rates if the Fed cuts interests rates to pacify the markets and help out homeowners, or risk a full blown recession. Just how long this sub-prime, credit problems will be around is the question. Some experts state maybe 18 months to 2 years. However the fall out from the financial (Banking) sector has already hit auto loans, credit cards payments and as revealed yesterday the Insurance sector. The trail of money is all intertwined in all sectors. What shape the US economy after the fallout has settled? Well jobs will be lost in the financial sector but perhaps the biggest challenge is to reign in the spending by government but that looks difficult as you have to fund the reconstruction in Iraq, equipment for the troops, perhaps another conflict in Iran? Where will this money come from higher taxes?
I would go on a public works program to rebuild vast areas of the US as many roads, bridges are in need or repair and replacing. This would kick start certain areas in the economy. Other smaller countries that rely on the US will have tighter bonds and preferred trading status on certain goods and services. The appreciation of the dollar must also be looked at. The US is like a person who has racked up huge debts and wants to keep spending whilst the creditors are calling, so that balance has to be met, some grand plans will have to be placed on the back burner until it can be afforded. Bernanke must also come across more forceful and not let the markets presume he'll cut rates he will need to state the Fed won't bail out institutions that got it wrong by poor decisions as seen in the UK with Northern Rock. Yes the Bank of England bailed them out however politicans got involved and rather see a run on a bank that would have repercussions to the integrity of the banking industry they have loaned £23bn but much longer can a central bank help a ailing bank? Whoever takes over Northern Rock will have to repay the money loaned, the stumbling block is the BOE want's it money back by Feb 2008, prospective buyers want at least 2 years. Added to this we have not had a major UK bank tell of sub-prime losses. HSBC to some extent, and rumours around Barclays but no big fall out except Northern Rock but tight credit has arrived. The run up to Christmas will be vital for all retailers UK and US but with higher bills to pay in the new year (Gas, oil) consumers may stay what the heck and splurge and worry about the consequences later.
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