Twofish's Blog

January 13, 2010

Notes on Chinese inflation

Filed under: Uncategorized — twofish @ 1:48 am

I don’t see that much of a mystery. The primary way in which the Chinese government controls the economy is through reserve requirements, in which the banks are forced to take a huge amount of their wealth, and keep it in the form of government bonds. The “other liabilities” that you see on the PBC balance sheet consists of bonds issued by the PBC which it forces the banks to hold in as part of it’s required reserves.

Forcing banks to hold required reserves has two major goods point in that:

1) it makes the banks more resistant to shocks. If you have a massive drop in real estate prices, then you have the reserves to prevent a liquidity crisis while you figure out a way of recapitalizing the banks.

2) it gets you out of the liquidity trap. One reason that the Chinese economy bounced back very quickly from the recession, is that the PBC pushed down reserve requirements allowing banks to pump massive amounts of cash into the Chinese economy.

All of this requires a huge savings rate. If you don’t have savings then you can’t have the banks hold large amounts of reserves.

Quote: At some point, the PBOC will no longer be able to keep up this balancing act.

I’d be curious to know why not.

Quote: In theory, I think, it should be sustainable as long as Chinese firms remain profitable enough to finance themselves via retained earnings despite the fact that a big chunk of those earnings wind up metaphorically sitting in the PBOC coffers.

And I don’t see why this can’t continue for another generation. PRC companies have no shortage of capital which they use to build factories which increases productivity which creates more money that gets put into the bank. As long as productivity can be increased by capital expenditure, there isn’t anything that keeps things from growing.

All this will end when you have enough urbanization and capital investment at it’s that point that you might see either a Soviet or Japanese crisis, but that’s at least 20 years in the future. The other thing that will cause disruption is when you have retirees pull money out of the banks, but by that time, you have enough profitable factories so this is possible,

January 3, 2010

Disagree with Krugman, Fallows, and Pettis

Filed under: china — twofish @ 4:44 pm

Disagree pretty strongly with Krugman, Fallows, and Pettis about the RMB revaluation.  I think that they are vastly overestimating the amount of political pressure that exists in the US for protectionism, and making incorrect comparisons with the 1930’s.  There are a number of differences….

1) First of all, outside of some very specific industries, it’s not obvious to anyone that tariffs are going to help employment.  The problem is two-fold.  First is that you have many industries (Walmart and software) that benefit from cheap Chinese goods, and there are some major interest groups that have switched from being pro-tariff to anti-tariff over the last thirty years (organized labor).  The second issue is that a lot of the groups that would be protectionist really don’t care about China.  If you move Chinese factories to Indonesia, it won’t help anyone in the US.

2) Second, is that we have an international framework for trade now, and this limits what people can do.  In order to do something really drastic, the US would have to decide to pull out of WTO, which would be politically difficult because of factor 1).  There are too many people benefiting from international trade for the plug to be pulled.

3) Finally, I think that people vastly overestimate the importance of legislation and economic policy in globalization.  There hasn’t been any major trade liberalization legislation passed since the late 1990’s, and the many things that create globalization are technological.  I can be sitting in an office in NYC, and type on a computer in Hong Kong, and I do this pretty routinely.  Instant messaging, cheap phone calls, and jet travel have reduced the costs of international trade enormously and since the 1990’s, *those* have been the driving factors for trade liberalization, not legislation.

Having said that, personally I think that as a mechanism for resolving trade dispute, protectionist tariffs as a tools are *MUCH* better than currency revaluations.  The trouble with currency revaluations is that they always have massive global unpredictable effects.  Targeted industry specific tariffs within the framework of WTO are much, much less unpredictable.  Even when they cause bad things to happen, they tend to be known bad things, whereas tinkering with currency policy tends to cause generally unknown bad things to happen.  Having the US stick tariffs on Chinese steel might be annoying, but it’s not going to kill either the Chinese or US economy, whereas there is a laundry list of countries that have had their economies wrecked by bad currency policy.

So if it’s necessary to protect a class of politically sensitive constituents with tariffs, then I think it’s a good idea for the US or China to raise tariffs at that specific industry.  All of this can be discussed and negotiated within a WTO framework.  US puts tariffs on steel, China raises a counter tariff on something else, WTO blesses everything and we just carry on business. It’s especially good, because one you have tariffs to protect steel workers or textile workers, they aren’t going to care about tariffs in other areas.  You’ll only have problems if people want to try to raise tariffs on everything, but that would require pulling out of WTO, and you’ll blow up the industries that *do* generate jobs from trade.

This poses a general problem with macroeconomic solutions which is why I like industry-specific tariffs.  Macroeconomic solutions tend to be extremely blunt and can’t really be used to micromanage an economy.  If you have steel workers that are screaming at you, the only think that an economist can tell you to do is to do something like raise interest rates, which then changes the whole world in unpredictable ways.  If you just do targeted industry tariffs and then negotiate with your trading partners over what tariffs *they* can raise, then you end up with “known bad stuff” happening.

November 17, 2009

Not such a mystery

Filed under: Uncategorized — twofish @ 11:01 am

It’s actually not a mystery why Chinese companies (and households) hoard cash. The problem is that they cannot be guaranteed bank loans when things go bad, so they end up with massive amounts of cash which they can spend if things go bad.

I really don’t understand why this is a bad thing. It’s not as if companies are literally piling away paper in vaults. When Chinese companies save, this goes into bank deposits which the banks can lend out for infrastructure improvements.

Personally, I think that given that macroeconomic theory is a mess, when macroeconomists say that China should save less and spend more, and that China is doing an obviously stupid thing by undertaking the policies that it has, then we really ought to question the assumptions of the macroeconomists.

The problem with discouraging savings is that it assumes that companies will always be able to get funding when they need it, so when funding breaks down, you have a major crisis in the United States that you really don’t have in China. When a company in the US loses bank financing, then it has to immediate lay off workers, whereas Chinese companies have enough cash to keep workers employed while the government figures out what to do and while stimulus starts going on line.

September 19, 2009

Business As Usual – One hopes

Filed under: finance, wall street — twofish @ 10:02 am

One more thing about incentives. There has been no massive public outcry for really deep, radical changes in Wall Street. There will be changes, but they won’t be huge ones. The reason for this is simple. The Dow is at 9700, and unemployment seems to be stabilizing.

If the Dow were at 6000 and unemployment at 15%, there would be huge, angry, lynch mobs looking for bankers to string up, and there would be the political will and incentive for vast, deep, and radical changes in Wall Street.

As it is, things seem to be getting back to normal, and people aren’t quite as angry as they were a few months ago. With people not angry, people just don’t care that much about radical changes to the financial system, and that means “business as usual” when it comes to hammering out the details.

If we get back to Dow at 12000 and unemployment at 6%, then all will be forgiven. If we have a double dip, and things start going into free fall again, the public will be back to “shoot the bankers” and they’ll probably be even angrier than they are now.

Now what I’m thinking about is what are the minimum set of changes that we absolutely have to make to the financial system to make sure that I don’t have to go through this hell again.

September 14, 2009

Tire tariffs and the general cluenessness of the New York Times

Filed under: china, new york times, wall street — twofish @ 10:34 am

I’ve been in this discussion of the Chinese tariff on Brad Delong’s website,

when this article from the New York Times comes in.  Geeze they are totally clueless.

China unexpectedly increased pressure Sunday on the United States in a widening trade dispute, taking the first steps toward imposing tariffs on American exports of automotive products and chicken meat in retaliation for President Obama’s decision late Friday to levy tariffs on tires from China.

China’s response is only unexpected if you know nothing about international trade and Chinese politics.  The Chinese response is perfectly expected if you have the slightest idea of what is going on.  It’s not as if the Chinese Ministry of Commerce, suddenly had a meeting on Saturday when they decides what to do.

Even if you know *nothing* about Chinese politics and economics, the prospect that the Chinese government would impose some sort of tariff in response to Obama’s tire tariff is hardly unexpected.  What would you expect the Chinese government to do, hug and kiss the US trade negotiations and heap love and praise on them.  Thank you, thank you, thank you for imposing tire tariffs.  Sheesssshhh.

Also, saying that maybe you will have the WTO look into something is not a *strong countermove*.

The Chinese government’s strong countermove followed a weekend of nationalistic vitriol against the United States on Chinese Web sites in response to the tire tariff. “The U.S. is shameless!” said one posting, while another called on the Chinese government to sell all of its huge holdings of Treasury bonds.

My God!!!!  This is dumb.  The New York Times is reduced to figuring out what is going on from *BLOG POSTS*.   What’s worse they are mentioning a blog posting without doing something creative like maybe linking to the posts.

So let me get this straight.  Some college student in some internet cafe somewhere starts writing some angry blog posts in between games of World of Warcraft and surfing internet porn.  The New York Times reads this and concludes that China is about to declare economic war on the US.  OK maybe, but can you at least do me the favor of *linking* to that blog post?

But the timing of the announcement — on a weekend and just after the tire decision in Washington — sent an unmistakable message of retaliation. The official Xinhua news agency Web site prominently linked its reports on the tire dispute and the Chinese investigations.

Well maybe can you link to that website?

Also you might try to find someone that can read Chinese, who can point out that the tire dispute isn’t being mentioned very heavily at all on any Chinese website.  Finally, you aren’t getting the hint.  The tire dispute on Xinhua is number two.  If you look at the number one article on any Chinese website (that is, assuming you can read Chinese), you’ll find that the number one article on Xinhua is Hu Jintao visiting the G20 summit to talk about financial regulation.

“Why did our government purchase so much U.S. government debt?” said one posting signed by a “Group of Angry Youths.” It continued, “We should get rid of all such U.S. investments.”

Yes.  The “Group of Angry Youths.”  As we all know the “Group of Angry Youths” is such an important group in Chinese trade policy.  Now that Obama has got the “Group of Angry Youths” upset, we know that there is going to be WAR!!!!!  The Politburo thought that they were going to issue just a formulaic response, but then they started reading the blogs and found out that the “GROUP OF ANGRY YOUTHS” was upset, so Hu Jintao got on the phone and told the Minister of  Commerce,  we need to do something because internet bloggers are after us.

Actually as the day goes on, I expect to see the New York Times gradually change.  Also, if any reporters from the NYT really do want some ideas as to what is going on.  Just go to the discussion on Brad Delong’s blog.

Here the general cluelessness of the NYT is just funny.  The fact that we got into a major war based on “intelligence” that wasn’t much better than this makes it less funny.

Also, I don’t have a problem with the NYT getting it’s news from blog posts and websites, but do you mind maybe *linking* to those sites.

September 12, 2009

Reading the whole damn speech

Filed under: wall street — twofish @ 10:42 pm

One problem with the sound bite era is that people read clips of speeches rather the whole damn thing.  For example  This is the whole speech the Gordon Gekko made which is very different from the clip.

Gordon Gekko: [at the Teldar Paper stockholder’s meeting] Well, I appreciate the opportunity you’re giving me Mr. Cromwell as the single largest shareholder in Teldar Paper, to speak. Well, ladies and gentlemen we’re not here to indulge in fantasy but in political and economic reality. America, America has become a second-rate power. Its trade deficit and its fiscal deficit are at nightmare proportions. Now, in the days of the free market when our country was a top industrial power, there was accountability to the stockholder. The Carnegies, the Mellons, the men that built this great industrial empire, made sure of it because it was their money at stake. Today, management has no stake in the company! All together, these men sitting up here own less than three percent of the company. And where does Mr. Cromwell put his million-dollar salary? Not in Teldar stock; he owns less than one percent. You own the company. That’s right, you, the stockholder. And you are all being royally screwed over by these, these bureaucrats, with their luncheons, their hunting and fishing trips, their corporate jets and golden parachutes.

Cromwell: This is an outrage! You’re out of line Gekko!

Gordon Gekko: Teldar Paper, Mr. Cromwell, Teldar Paper has 33 different vice presidents each earning over 200 thousand dollars a year. Now, I have spent the last two months analyzing what all these guys do, and I still can’t figure it out. One thing I do know is that our paper company lost 110 million dollars last year, and I’ll bet that half of that was spent in all the paperwork going back and forth between all these vice presidents. The new law of evolution in corporate America seems to be survival of the unfittest. Well, in my book you either do it right or you get eliminated. In the last seven deals that I’ve been involved with, there were 2.5 million stockholders who have made a pretax profit of 12 billion dollars. Thank you. I am not a destroyer of companies. I am a liberator of them! The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA. Thank you very much.

The other example of this is this quote from Kennedy
First, I believe that this nation should commit itself to achieving the goal, before this decade is out, of landing a man on the moon and returning him safely to the earth.
It was part of a much, much longer speech.
And the context even within that section was interesting….

First, I believe that this nation should commit itself to achieving the goal, before this decade is out, of landing a man on the moon and returning him safely to the earth. No single space project in this period will be more impressive to mankind, or more important for the long-range exploration of space; and none will be so difficult or expensive to accomplish. We propose to accelerate the development of the appropriate lunar space craft. We propose to develop alternate liquid and solid fuel boosters, much larger than any now being developed, until certain which is superior. We propose additional funds for other engine development and for unmanned explorations–explorations which are particularly important for one purpose which this nation will never overlook: the survival of the man who first makes this daring flight. But in a very real sense, it will not be one man going to the moon–if we make this judgment affirmatively, it will be an entire nation. For all of us must work to put him there.

Secondly, an additional 23 million dollars, together with 7 million dollars already available, will accelerate development of the Rover nuclear rocket. This gives promise of some day providing a means for even more exciting and ambitious exploration of space, perhaps beyond the moon, perhaps to the very end of the solar system itself.

Third, an additional 50 million dollars will make the most of our present leadership, by accelerating the use of space satellites for world-wide communications.

Fourth, an additional 75 million dollars-of which 53 million dollars is for the Weather Bureau–will help give us at the earliest possible time a satellite system for world-wide weather observation.

Let it be clear–and this is a judgment which the Members of the Congress must finally make–let it be clear that I am asking the Congress and the country to accept a firm commitment to a new course of action-a course which will last for many years and carry very heavy costs: 531 million dollars in fiscal ’62–an estimated seven to nine billion dollars additional over the next five years. If we are to go only half way, or reduce our sights in the face of difficulty, in my judgment it would be better not to go at all.

Now this is a choice which this country must make, and I am confident that under the leadership of the Space Committees of the Congress, and the Appropriating Committees, that you will consider the matter carefully.

It is a most important decision that we make as a nation. But all of you have lived through the last four years and have seen the significance of space and the adventures in space, and no one can predict with certainty what the ultimate meaning will be of mastery of space.

I believe we should go to the moon. But I think every citizen of this country as well as the Members of the Congress should consider the matter carefully in making their judgment, to which we have given attention over many weeks and months, because it is a heavy burden, and there is no sense in agreeing or desiring that the United States take an affirmative position in outer space, unless we are prepared to do the work and bear the burdens to make it successful. If we are not, we should decide today and this year.

Toward a new two-party system

Filed under: wall street — twofish @ 10:27 pm
Also if you want a two party system, don’t worry about the Republicans. They are in the process of self-destruction. If you look at the real health care debate (i.e. not the death panel non-sense), the real fights have been between the Democratic left and the Democratic right over things like the role of private insurers and the “public option.” One possibility is that if the Republicans don’t get their act together, is that well have a two party system, but the Republicans won’t be one of them.

Obama is very clearly a member of the Democratic right. On every single issue in which he has to choose between moving left and moving right, he has moved right. The left wing of the Democratic party has put up with him only because there is fear that the Republicans are worse. If it becomes obvious that the Republicans are not going to be in power, then there is no reason for the Democratic Left to support Obama or his ideological successors, and they probably will start their own party. Alternatively if the Democratic Left gets in control of the party and it’s clear that the Republicans won’t play ball, the the Democratic Right will bolt and start their own party.

Alternatively, the Republicans could come up with a political genius like Reagan to reconstitute some sort of coalition, but it’s really, really hard for me to imagine Sarah Palin saying good things about big corporations, thereby gaining access to corporate and lobbyist money. The thing about Reagan is that he could combine different Republican factions because he wasn’t one of them. He wasn’t a member of the religious right, the economic right, or the Cold War hawks. Right now, there isn’t any major political figure that I can see that appeals to the remaining factions within the Republicans, but aren’t one of them.

One thing about Democrats is that they are willing to make tactical compromises. I’m sure that Michael Moore dislikes me and everything that I stand for (corporate America good!!!!!), but he is willing to put up with me as long as it means keeping someone worse out of power, and no one is under any illusions that this is anything other than a marriage of convenience.

The problem is that I don’t see this sort of willingness to tactically compromise among the Republicans.

Gordon Gekko votes Democrat

Filed under: wall street — twofish @ 10:19 pm

Gordon Gekko here…..

I’m a Gordon Gekko, “greed is good”, Reagan/Thatcher, pro-Wall Street, corporate America-loving, pro-banking, pro-business, wannabe filthy rich, pro-finance, economic conservative, and I’m on your side.

It’s quite simple. Since I’m a fan of Gordon Gekko, I take a look at who is more willing to let me make money and keep it, and it’s not the Republicans. I’m greedy, but I’m not stupid. Helping you make money, helps me make money. Getting the economy in shape so that everyone has health care, jobs, and a decent standard of living, means that you aren’t going to get angry when I make lots and lots of money. Heck, if it is obvious that my bonus is paying for your health care and your kid’s schools, you’ll probably want me to make more money. That’s fine with me.

If you think that I make too much money, then we sit down, and you tell me how much you want? You want health care, good schools for your kids, good public transportation, a great job. Fine…. That probably works up to about a modest increase in my taxes, so have the IRS take a fraction of my salary (I probably won’t notice it), spend it on your family, and enjoy. You would regulation so that we don’t have another financial disaster? So do I. So put in government bureaucrats to monitor capital requirements and lending policy, don’t put in restrictions on salaries and bonuses, and we are all good.

The Republicans have become very anti-banking, anti-corporate, and anti-finance. There are anti-banking, anti-corporate, and anti-finance people in the Democrats, but the interesting thing about them is that they can be reasoned with. If it’s about money, then we can make a deal. Figure out how much you want and then take it.

I am a greedy bastard. I don’t like dealing with people that are crazy in a bad way. You can’t cut a deal with crazies. Once you do cut a deal, you can’t be sure that they won’t stab you in the back when you aren’t looking, and they tend to stubbornly cling to their ideas even if it means taking them and me to the poor house.

Michael Moore, Ralph Nader, and Paul Krugman aren’t like that at all.

And Barney Frank is my hero……

August 29, 2009

Making connections between Taiwan and US politics

Filed under: china, taiwan — twofish @ 3:11 pm

Part of the reason I’ve been thinking a lot on how the Republican party collapsed between 2004 and 2008 as that people have been talking about Ma Ying-Jeou’s response to Morakot and W’s response to Katrina, and I’ve been thinking about how to make sure that the same thing *doesn’t* happen.  Fortunately so are people within the KMT.  We’ll see how things look like in a few months.

One thing I do find interesting is that the Western media has characterized the PRC’s response to the Dalai Lama’s visit to Taiwan as “angry.”  It really isn’t.  I’ve seen the PRC angry, this isn’t angry.  It’s also interesting to me that all of the official mention of it is in the English media.  So far the PRC has not mentioned it at all in the Chinese language press.  Also there isn’t a huge amount of coverage in the Taiwan press (either pro-blue or pro-green).  The pro-blue press is trying to forget the story.  The pro-green press is trying to do what they can to make Ma look bad by suggesting that he cooperated with the PRC in handling the public response to the visit (and I wouldn’t be surprised at all if he did).

The other thing that I find interesting is the parallels between politics in southern Taiwan and those of the southern United States.  A lot of the notion of “independence” is rather similar in both places.

Southern US politics

Filed under: china — twofish @ 2:57 pm

Here is a note on southern US politics that mutated out of a discussion on health care reform.

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