Twofish's Blog

August 28, 2007

Mellow in Brooklyn

Filed under: Career, china, finance, new york city — twofish @ 3:44 am

Looking out at the harvest moon, I’m in a calm mood which is quite unusual for me.  It’s a cool evening, and it looks like it will be unnecessary for me to get that air conditioner.  It’s amazing how much my life has changed over the last year, and the one thing that the last year has cured me of is the fear that things won’t change.  Things have changed, and will continue to change, for the better or worse I do not know.  Also whatever happens it was the result of a conscious decision on my part to change things.

I’ve found that it is important to write things down because it is difficult often to remember how something felt when time passes.  As time passes old memories fade and new memories are recreate, and the past becomes transformed.  But the written word fixes a moment in time, and one can record feelings and thoughts that would otherwise disappear.  I was walking down Soho, and thinking about what it must have been like before the condonmiums and the upscale restaurants, when it was a gritty, more creative place.  That place is gone, but in between looking at that place and reading the history books, I think I have some sense of what that place *felt* like when Andy Warhol lived there.

I grew up in the 1970’s when New York City was the symbol of urban decay and hopelessness.  The snippets of information that I got about NYC was that it was a den of sin and crime.  It took New York a while to pull itself out of the pit, and it took me a while to get rid of my stereotypes.  One of the mental blocks that I had was that with my background, I’d associated suburbs and exurbs with escape from the city, and when I grew dissatisfied of where I was, I was terrified that there wasn’t anything more than where I was.  People change.  Things change.  Neighborhoods change.  Now that I’m here, I think I know a bit what it felt like for someone to arrive here in 1850 or in 1920, the idea that there was something somewhere here to look forward to.

August 27, 2007

Comments on Revaluation and NPL’s

Filed under: china, finance — twofish @ 3:17 am

My disagreement with most international economists is that I think they vastly underestimate the shock to the system that a sudden shift in currency value will cause, and the risks in a one time revaluation outweigh the benefits. I have no objections to a gradual shift of 10-15% over two years.

As far as NPL’s, I think most commentators overestimate the dangers of NPL’s to the banking system. Most loans by the big four banks are as working capital to the large state-owned enterprises. These are flush with cash, and even though there *will* be a change in the business cycle, the SOE’s should have enough cash reserve in the good times to insure that they won’t default when times turn lean. The danger in real estate and bad loans are in the joint stock commercial banks, but those are mainly small enough so that if one fails, then it won’t wreck the entire system.

The original NPL problem in the big banks was *not* due to bad risk management, but rather to the fact that they were ordered to make social welfare payments to the SOE’s. That problem has been fixed.

This is not to say that I’m not completely worried about NPL’s in the big banks. It means that I think that there are other things have me a lot more worried. The big one is provisioning of rural credit to create economic growth in the rural areas. The rural credit cooperatives have bad loans that are much worse than anything the big banks have. The other thing that worries me is how the bubble in the stock market will get deflated. I’m worried that there are linkages between the stock market and the rest of the financial system that aren’t immediately obvious.

On the other hand, one thing that makes me less worried is that it seems that most of the investment in China comes from internal revenues of SOE’s. This may be why it seems that the central bank has limited control of the financial system because most Chinese companies are spending their money rather than the banks money. This may be a good thing in that it means that when the shock comes, you’ll see a lot of empty office buildings, but you don’t end up with much bad debt.

I think the real solution to the problem of excess liquidity lies in getting the government to get SOE’s to issue dividends to the government to reduce their cash reserves. By the way, this all makes wholesale privatization of SOE’s a bad idea, IMHO, since whatever increases in efficency are outweighed by the government totally losing control over macroeconomic policy.

Finally, there is the worry about the thing that you don’t know what to worry about. It’s likely that the next Chinese financial crisis will come from something that no one has thought of yet, because things that people think of, tend to get fixed. You can’t predict everything, and you shouldn’t try. What is possible is to increase “robustness” into the system.

I do agree that inverted balance sheets are very bad things, but I think the key disagreement involves to what extent and where the balance sheets are inverted, and I think that the amount of balance sheet inversion in the big banks or the SOE’s isn’t that huge. I’m a lot more worried about the joint-stock commercial banks. I’m alarmed at anything that is connected with the stock markets.

August 26, 2007

Moved in

Filed under: academia, china, new york city, personal — twofish @ 1:32 am

I moved out of my summer sublet into a more permanent apartment in one of the outer boroughs of New York.  It’s a nice neighborhood, not too shabby but at the same time not gentrified.  The weird thing about walking around in the neighborhood is that it makes be realize how bizarre my life is, and by extension how bizarre I am.  This is the “real world” far away from the halls of academia, and just looking at the pizza place and the cheap restaurants and the people on the sidewalk talking. the physics department of a major university and the subtle academic hierarchies seems like a strange bubble.

I’ve been thinking about theories of warfare as I’ve been lugging stuff across New York City.  One important element of warfare is to establish a base area and to maintain lines of supply with that base area.  Without a base area, you are constantly on the move, and being without a place that you can sit down and think this becomes very exhausting, as does trying to move furniture from one place to another.  One reason I haven’t been blogging much is that my access to computers has been limited because I haven’t had a semi-permanent room of my own for the last several months.  I’ve also been thinking about Anthony Cordesman’s point in the CSIS that even if the US wanted to pull out of Iraq, this would take time because there is simply so much stuff there.

One other thing.  Books are heavy.  Also without an address, you  can’t have people send you books.

So now that I have a base area.  What do I want to think about…..  Let’s try with out to destablize the academic systems.  When I was in high school, I absolutely hated the cliques and the social ladders.  Little that I know that I was going to be part of a system of cliques and social ladders that was every bit as pernicious as the ones I saw in high school.  The thing that I find disturbing about academic cliques and social ladders is that I think something has been lost, which is the idea that social hierarchies are tools that should be used to help people reach their potential and improve society.  The problem with academic hierarchies is that I think they have become too closed and too engrained and too out of touch with the real world to have social usefulness.

The reason I find this particularly scary is that we are moving to a “knowledge society” where wealth and power are determined by access to education.  What I find frightening is that the rigid and disfunctional class system that one sees in academia will spead to the rest of society, and the scary thing is that I think I’m seeing a lot of this.

August 14, 2007

China inflation numbers

Filed under: china, finance — twofish @ 5:23 am

 What is interesting are the July CPI numbers. There are basically two narratives going on here. One is that the inflation is due to demand shocks. The other is that inflation is due to monetary supply expansion. The second one is significant for RMB appreciation.
I really don’t have a clue right now which one (if either) is correct, but what I’m really looking for is some empirical test to distinguish between the two. (i.e. if it is due to monetary expansion that you ought to see X.) The other thing that I’m looking for is the consequences of being wrong. What happens if you do policy X on the assumption that it is a monetary issue and it isn’t versus what happens if you assume that it isn’t a monetary issue and it turns out to be.  The curious thing about this is that it will be obvious by the end of the year )(and probably by October) which narrative, if either, is correct.

There are interesting implications for the way that the financial media presents information.  It seems really hard for an economist or analyst to just say “I don’t know,” and one thing that would be nice (and I’d put one together if I had the time) is a chart summarizing the different points.  The other interesting thing about this issue is that this is an issue over which you can have a “real debate” as opposed to the “pseudo-debates” people tend to have on the media.

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