Good call on the Turkish Lira. Got any more tips? Renminbi does seem solid in this environment.

We don’t seem to understand these things very well, we don’t even seem to have gotten the last time round sorted out. I’ve begun reading Kindleberger’s “Great Depression” (I know, there may be other books that are better, but I have to start somewhere), and he makes a lot out of falling commodity prices and global imbalances involving US foreign lending as the setting for what happened at the end of the 1920s.

Isn’t it odd that we have had the same in the past years – falling (commoditised) consumer article prices and global imbalances involving chinese (also japanese etc) lending?

It was the USA as source of the falling prices and global lending that got clobbered last time. Could it be that this time it will be China that will get well and truly clobbered?

The big news for me this week was that India one of china’s biggest customers has been having problems with mutual funds being withdraw. Inter bank lending rates in India having at one point reached 23 percent according to live mint web site and the credit markets are frozen much as they have been in western economies. Relaxation in some trading rules (Shorting shares, trading in derivatives) point to the Chinese economy struggling more than would appear on the surface at the moment. I would not be surprised if the government has to stamp forcibly on political unrest as a result and its for this reason I suspect the renminbi will experience a short term fall and may be forced to sell dollars to limit its fall.

Lack of information about what is going in china mean almost any action with respect to the renminbi is possible.

And the AUD and NZ plunging isn’t a tragedy. They don’t have a lot of dollar denominated debt. Australia had the best growth rate of all advanced economies in the early 2000s and their currency was between 50 and 60 to the greenback.

Now holding the RMB peg right now is a minority scenario. But look at how international trade is plummeting. China is export dependent. You simply cannot rule out the scenario that China will backpeddle on letting the RMB rise to keep more exporters from going bankrupt (and there were a very large number of bankruptcies in certain provinces in the month BEFORE the Olympics). And if they do keep a hard peg to the dollar, that kills US exports which was our best hope of pulling ourself out of a slump.

Your dismissal reminds me a lot of the speeches Timothy Geithner used to give about how wonderful our modern financial system was at distributing risk, how in this best of all possible worlds, really we were all a lot safer. But even in those rosier days, he’d acknowledge if we did have a systemic crisis, it could be much worse than if we lacked all this fancy new risk transfer technology.

He at least considered multiple scenarios. You two have simply dismissed ones you consider low odds. We’ve seen repeatedly that supposed ten sigma events seem to show up once a decade. And this even based on press reports has considerably higher than a ten sigma probability.

And 3:10, we are in a massive Treasury bubble. There is huge demand for dollars to unwind trades, and that is being shifted into Treasuries via all these fancy new facilities here and abroad and dollar swaps. Just like the commodities bubble went far enough long enough to turn lots of people into converts, so too will this bubble. They always go farther and last longer than anyone forecasts, but this too will reverse quickly when it finally blows. There is too much inflation in the offing once the CBs finally get money market and credit mechanisms working. How long that takes is anyone’s guess, but as with past bubbles, the reversal will be sharp.

I completely agree with this, and a quick look at a chart will show hardly any movement in the exchnage rate compared to current account deficit countries such as Aussie dollar, New Zealand dollar and Turkish Lira (now that really is a bubble in the process of bursting!). Equally though US Treasuries are also not a bubble. Bubble conditions occur when investors hold large long positions. However most investors are short US Treasuries. Take a look at PIMCOs Total return bond fund – not a single US Treasury. Look at failed trades in US repos which are currently running at 4.5 TRILLION. Thats becuase the banks are net short of US Treasuries. Thats a big mistake in my opinion. If you look at Fed custody holdings central banks have been selling US agency paper recently and buying large amounts of US Treasuries. I cant prove that the Chinese are doing the same but it would seem odd for them to be unhappy with losses whilst at the same time stepping up purchases of Fannie and Freddie paper.

There has certainly been a variety of commercial activity (including leases and sales) of this land over the last 20 years, but all of this has been “collective”. The anecdotes from the gentleman in Zhejiang above fits in that category. The NY Times blog that Yves links reflects the downside of such an approach, in which local government officials have often become filthy rich by monetizing the “collective” assets of villagers. The new reforms will give land back to individuals.

The only concrete initial policies I’m hearing about refers only to non-agricultural land (ie: residential lots in the countryside). Your average Joe Wang will now be able to “lease” (essentially sell) their ancestral home to real estate development companies, and will then be expected to use that money to move to a small township… doing their part to contribute to the on-going urbanization of China.

Yves,

Appreciate your detailed comments. I’m still of the opinion that of all the possible crisis focal points out there, China’s currency is a non-story. Setser has a blog entry a few days ago, pointing out that China’s reserves continued to grow through Q3, and shows no sign of reversing.

I believe Chinese policy makers remember well the visible hand of speculative hot money from ‘97, and this led to numerous obstacles blocking excessive inflows of hot money over the last 4 years. They couldn’t stop them, of course, but they certainly slowed them down. I simply don’t think there’s enough hot money in the Chinese economy to do real damage and force the government’s hands.

The real point of impending reforms is to give solid legal standing to sub-leasing ones own lease rights for the long-term. This may have two effects. One the sub-leasor gets a modest but steady cash flow to finance something else they want to do with their life and time which is not tied to the location in which their family was born. They may or may not migrate, but those who do will come moderately better financed rather than incipient shantytown dwellers, something of signicant importance. The other, and really more important issue, is that sub-leasees have the incentive to actively invest and develop the landholding since they have longer term time frames and solid rights to what they create. Now in much of the country, local officials can stick in their oar and palm at any time, at least for a shakedown to look the other way but even worse to try to snatch away developed plots for themselves or their cronies. _Clear title_ is essential for investment. Your father-in-law sounds like an enterprising sort who knows well the ‘lay of the land’ in his district, and has nothing to fear from the local powers that be. That is not the case in many other places. Outright sale of lease rights would be far more radical, with larger systemic effects, not all of them necessarily desirable. I would be more surprised to see this in the near future, but who knows?