Monthly Archives: January 2008

Income Redistribution – A Brilliant Plan

Robert B. Reich, the author of Supercapitalism, teaches at Berkeley. Suffice it to say, therefore, that he is a left-wing loon. In an Economist interview (on podcast), however, he made a lot of sense.

In the context of a discussion about Mike Huckabee’s extremely regressive ‘fair tax’, Reich was speaking of income inequality (as always). What was striking about this discussion, however, was that [Reich] all but acknowledged the progressiveness of a lower tax rate (in contradistinction to the absence of an income tax) in that, with a lower tax rate, higher income earners pay more taxes both in relative and absolute terms. That is to say, rich people pay more as a percentage of the total tax bill as well as more absolutely. Heck, even Pelosi’s on the Kennedy/Reagan low tax train.

Now, the point Reich made was that, in order to combat income inequality and make the tax code more progressive, what needs to be done first is the following: since low and middle income folks pay little tax beside those payroll withholdings (e.g., Social Security, Medicare, etc.), taxes on [e.g., Social Security] withholdings should not start at zero. The withholdings should not begin, e.g., until someone makes $15K and the limit on what’s taxed should be raised accordingly (to offset the difference).*

This would be a huge redistribution of income and while it will hurt the upper middle class most, it won’t be much of a dent on the super-rich, since the lower tax rate more than offsets the difference they’ll pay.

Brilliant. Just brilliant. See? This just goes to show, even if you think someone is a nutjob, if they’re smart, it pays to listen (at least once in a while) because you might learn something!

*withholdings. The current tax code is set up to capture individuals’ first $90K or something for Social Security. Any income over and above that ($90K plus one cent to infinity) is not subject to withholding.

Money and Economy (2-21-05)

Ladies and Gentlemen,

I want everyone to be on the same page with what I’m thinking right now about spending money and the state of the economy. It’s an important thing to save [money]because production is at it’s highest level in years and the economy will keep on growing until it’s satisfied. Once this happens, increased spending simply translates into higher prices. Inflation is created by money that becomes ineffective in driving jobs growth (among other factors) and this will cause the Fed to cut back the money supply to decrease consumption demand and shift spending to [long-term] investments.

What I’m asking you to do right now is to take the initiative and lower your spending because the money in your bank account is on loan to you from the Fed. That is, the nominal money supply is a temporary pool of funds that can dry up and which will dry up as soon as the economy reaches it’s full potential and we begin to experience diminishing marginal returns.

> Please don’t get frustrated with what I’m saying or how I’m saying it. There is not an easier way, just listen. Diminishing marginal returns means that you get less and less from your money or, specifically, the economy grows less and less with each dollar spent.

–> Think of it as a lions’ cage at the zoo. You go see the keepers feed the lions at noon and of course those beasts have been kept hungry for a few days so they will be growling when the meat comes out. Have you seen what happens when that meat gets thrown into the cage? The lions growl loudly and aggressively tear the flesh apart.

This is what it is like in the economy when demand gets pent up (with high interest rates over time). The Fed releases liquidity from their vaults and the hungry economy just eats it up and grows… The thing is that once those lions are satisfied, the meat can be thrown into the cage, but the lions won’t fight over it. In fact, they won’t even go over there to pick it up; rather, they will just lie there and bask in the sun with full bellies while the meat rots. That is wasted meat and money represents the meat. Don’t waste.

What I’m asking you to do is put off making any big purchases and limit your habitual consumption to a reasonable level to benefit the economy. This is asking you to sacrifice your own consumption for the greater good, I know. But it’s not too much to ask because the proposition is less altruistic (benevolent, unselfish) than you might think. Saving will prosper you because when the funds dry up, you will have money rather than needing it and getting used by creditors who charge exorbitant interest rates on loans.

Don’t get taken advantage of by creditors when you don’t have money (–>ex: maxing out your cc @ 20% interest). Instead, save your money and loan it to others so that you can make more! You might be asking, well how can I loan to others, I’m not a bank? That’s not a dumb question; you loan money anytime you buy stock, bond, mutual fund investments and the like. When you buy a bond, it is like loaning that face value over a set period of time (unless you sell it).

Do you want to know what separates the people who have money and those who don’t? Do you want to know why ‘those who have will always get more and those who don’t will actually lose more’? The reason is that people who ‘have’ think ahead and plan for times when supplies run short. When supply is short, the opportunity cost of holding is high ~ you could be loaning it to others and making profits off the excess you’re holding! And that’s what they do. Now why don’t you join the ranks of the ‘monied classes’ and start saving!

I’ll get to specifics in a minute, but first I want to make a clear distinction. That is, don’t think of your economic prosperity in terms of ‘the economy’. (–>ex: I don’t have money or a job right now becuase the economy is bad). The economy is not bad or good per se. It only fluctuates between high and low levels of growth. If you want to reduce uncertainty associatied with these ‘cycles’ then pay attention to your spending habits and save money to to do just that. It won’t matter if the economy is in a high state of growth or a recession (God save us from another depression) because you have thought ahead and are ready for what comes.

Money is relative; people say that they could have better lives with a higher income, but this is not true (to an extent). Quality of life depends on what you can afford. This might seem like hair splitting, but I assure you it is not. You may afford much but choose not to consume in order to increase your options and assure that they remain open. At the same time, you may afford little but choose to consume all that you can, thereby reducing your options to a card game ~ you must be shrewd and conniving or else just play with the hand you are dealt. Please, don’t just let the cards fall as they may. Save your money for a rainy day.

I have spoken with a friend recently and she had mentioned buying a new condo. I told her, yes that is great. I’m proud of you and that is the best direction (saving) you could possibly go. To be sure, borrowing is not the same as saving, but taking out a mortgage and building equity in a home is making an investment. This is quite possibly the most sound investment you can make.

For those of you with a house, keep on building equity which will stratify you in any case. If you haven’t considered investing, you should look into it (you can buy mutual funds directly from any Wells Fargo ATM). While I don’t consider myself at liberty to give advice on investing particulars just yet, I’d like to extend my idea of a good savings plan. I’ll take just a minute more to explain a useful method.

Limit essential spending to 60%. This includes your mortgage (unless you are just starting out), car payment, insurance, groceries, vacations, dining out, etc. By saving as you are, you will be accomplishing three things:

1. Planning ahead for consumption when money is tight, thereby stabilizing your personal income cycles and reducing uncertainty.

2. Making money off your surplus when the money supply has been decreased because higher interest rates mean higher returns on your investments.

3. Stabilizing the business cycles in the economy ~ less spending in a period of full employment and nearly satiated goods/services markets equals less inflation or waste.

I don’t want to beat a dead horse, here, but don’t get caught in the age-old trap of gluttonous overspending when prosperity seems endless. It is not. Save your money rather than spending it so that you can avoid being reaped by creditors (–>ex: maxing out credit cards @ a 20% interest rate). Don’t get steeped in debt! And if you already are, get out! And if you’re laughing right now, just keep on laughing… it won’t be funny later.

Here’s a link that explains a proper savings plan. Click for further details.

State of the Union (2-31-06)

Ladies and Gentlemen,

I must pull myself away from typing practice for a moment to speak on some issues that are heating up and I’d like to get in a word before President George W. Bush speaks at the State of the Union Address (tonight at 9:15ET).

– – – – –

Samuel A. Alito will be sworn into the Supreme Court next to John G. Roberts. I mentioned in an email before the November 2004 Presidential election that Bush would not use a ‘litmus test’ for replacing a Supreme Court Justice. Well, there has definitely been a ‘rightward shift’ on the bench. Conservatives are pleased by what will entail a more traditional interpretation of the US Constitution. Make no mistake, decisions by the Supreme Court have had major effects on the direction of civil society. We will see a judicial branch which ascribes to: increasing executive power (i.e. the President will have more freedom to collect information), limiting a woman’s choice to have an abortion (i.e. disallow women to abort a pregnancy after the third trimester), and otherwise providing America with more conservative underpinnings.

– – – – –

Iran will be reported to the U.N. Security Council in March by all six major industrialized countries (US, Britain, France, Germany, Russia, and China) if it continues to defy the IAEA (International Atomic Energy Agency), our U.N. watchdog. This is a pivotal moment in world affairs; these nations whom are perceived to have the greatest stake in a properly functioning and secure international political economy have aligned over security interests. Now let me issue a small caveat because therein lies a delicate interpretation:

–> Britain is an ally of sorts with whom we are obliged to reckon

–> France has nuclear weapons they are not afraid to use them

–> Germany doesn’t want nuclear war and, as the largest economy of the EU, it will benefit from an international political economy that remains stable

–> Russia has just entered the world stage with energy (petrol, nat gas) and it doesn’t want to jeapordize its influence by making a faulty political decision on such an order of magnitude

–> China is inextricably bound with the US in terms of Dollar-Yuan/Renminbi trade flows and securities holdings

– – – –

Quickly, I’d like to mention Hamas, the Islamic Resistance Movement in Palestine. Although it may not come up today, it’s important because Mid-East tensions are flaring and it has a lot to do with history, war, diplomacy, conflicting loyalties, and the like.

Since WWI, The U.S. has supported a Zionist state (Israel) located on the west bank of the Jordan River, a territory which includes Jerusalem, the holy city of all three Abrahamic faiths. Without going into a long history of World Wars and the ‘passing-of-the-torch’ debate, it is necessary and sufficient to explain that American intervention in the Mid-East is necessary to shore up a political vacuum which would otherwise exist.

In the eyes of ‘public opinion,’ it seems that Americans will continue to blindly support Israel without regard for the conflicting needs of both Jews and Muslims in the Mid-East. Hamas is an interest group which is decidedly against the occupation of Israel in Palestine (the territories overlap, in fact, I couldn’t even provide the distinction b/w them if you asked me). The conflict lies in rhetoric. Bush has to make a choice, here.

Will we continue to support a Jewish state without regard to the needs of Islamic nationalists in the Middle East or will we make some compromise and be flexible in the boundaries which were established way back in the uncertain times of multi-polarity?

The Hamas leadership is not seeking to establish a Theocratic [Islamic] regime, rather, a pluralistic society with faith-based principles of tolerance and unity. Hamas is, indeed, an Islamic force pursuing self-determination. It seems like Hamas is being construed as some type of terrorist organization which we now must contend with in the Mid-East. Although I may be putting myself out on the line, here, I do not believe this is the case. Of course, it depends on your point-of-view.

Conservative rhetoric says, “We must back Israel at all costs.” In my personal opinion, it is more realistic to state, “There is a problem, here. How do we define loyalty? And what are the repercussions of such doctrine espousal?”

– – – – –

Now for the economy, I stated in ‘Jesus; Interest Rates,’ (June 2005) that, according to market signals (i.e. Dallas Fed Gov. said we may be in the last round of the tightening cycle ball game…), “…low interest rates, given steady rates of inflation, should continue indefinitely.” Furthermore, I went on to declare, “…[the] Real Estate [market] will continue to burn hot as home values soar with high levels of available credit.” At the time, it seemed this interpretation was a fair chart for a course that would play itself out over the next 1-2 years. It has been just eight months since that time and you have seen the rates plateau for yourselves. My Dad says, “Yeah, but ‘low’ is relative.”

In the letter, ‘my big chance,’ (April 2005) I made a definition:

n.Nautical.1. The position of a vessel relative to the trim of its sails.
2. A course of action meant to minimize opposition to the attainment of a goal.
3. An approach, especially one of a series of changing approaches.
The winds have changed and it will be prudent to state that inflation is coming soon. Right now, interest rates are being held at artificially low levels via a process termed ‘financial repression.’ It is a common Asiatic technique for filtering low-cost loans into a command economy for military-industrial development.
Chinese financial repression is beneficial for the US in the short-run because we receive cheap money to refinance homes for a better rate & term or to cash-out. Sometimes we reinvest [cash-out] money in our property to experience Schumpeterian ‘windfall profits,’ (e.g., refurbish kitchen for capital gains) while other times, we just blow it out the expense column.

Chinese national banks (i.e. Hong Kong Bank and Shanghai Bank) use the Yuan/Renminbi to buy dollar-denominated assets such as ‘zero-risk’ government bonds, T-bills, long- and short-term notes, mortgage-backed securities, and the like. They get the security of American money to run their economy as well as the advantage of relatively inexpensive goods for export in foreign markets.

We cannot avoid inflation because US consumer interests are bound with Chinese aspirations for a military-industrial complex. We are mortgaging our posterity for the ‘here-and-now’ while simultaneously bankrolling Chinese development out of our own pockets. It is a mutually beneficial situation that cannot last long.

Economists like to say ‘there is no free lunch.’ If we have any indication of what the future may hold, it is possible that we can check the history books and look back to the Kennedy-Johnson era increasing inflation and stagnating growth.

The idea is that this ‘free money’ you’re getting from your house isn’t really free. In economic terms, we like to say, ‘there is no free lunch.’ Financial repression is an artificial maneuver that causes interest rates to stay low for the short term and then, as inflation rises and the value of currency declines, interest rates will spring back up and the market will collapse.

Essentially, that money you got on refinancing your home is Chinese money. That interest rate on your home mortgage is staying low because the Chinese are funneling money into the US through financial repression.

In ‘Money & Economy’ (February 2005) I used the allegory of lions at the zoo to explain the international economy as it pertains to us as American citizens. In that story, I explained that inflation is waste. The connection I want to make here is that profligate spending leads to inflation and that is bad.

The nation has two deficits:

1. the Current Account (Imports minus Exports)

2. Government Budget (social programs and military spending — national overhead)

As citizens, the only part of the ‘twin deficits’ we have control over is household spending. In the aggregate, American household savings rates are negative. People are using their homes like ATMs, taking cash out to buy hummers, plasma screen tvs, and using the money to go on vacations. Fun fun fun.

We have spent loads of money rebuilding Iraq. We did not go into Iraq to build a nation. There isn’t any more money in the government’s budget for nation-building nor will there be measures to increase the budget for the rebuilding efforts in Iraq. When this 2006 money runs out, that’s it.

Oil companies across the globe are benefitting from the highest petroleum prices in history. My Dad made a good point that high energy costs lower corporate profit margins due to increased transporation expenditures which increase cost of goods sold. Prices must be increased to sustain profitability, and thus workers demand higher wages to keep up with inflation. Hi hi hi hi hi hi hi. You can see everything goes up. That is one way to experience inflation.

Inflation can also be experienced by way of overextension. This is the most popular explanation and it pertains to the Current Account (household spending on foreign goods) as well as the government budget (war in Iraq, foreign aid, national social programs including provision of health care and social security to illegal immigrants who have children inside our boarders).

Right now, we see both tendencies on the rise. Energy prices are going through the roof and as Americans we are overextended both at home and abroad. More on this later. The President is speaking now.

Fed Rate Cut Plus Fiscal Stimulus Package

Ladies and Gentlemen,

This move by the Fed (75 basis point cut) coupled with a planned fiscal stimulus was/is probably a good idea. In hindsight, people are going to talk about bubble creation and such, but here on the ground, for people who are worried about losing their jobs or not getting one and for people who just want to pay the rent or mortgage, it’s definitely going to keep some heads above water. Moreover, all things considered, the dollar should hold up*.

*dollar should hold up. That’s not to say some dumb foreign money won’t be somewhat impulsive and destabilize the system, but if the giants (industrialized nations) keep their heads about them, Amerikana and friends will be able to pull the global economy through.

Fed Rate Cut Adds Pressure On China

Ladies and Gentlemen,

The following is an explanation of the underlying issues that contribute to fluctuations in our money markets. It should provide a relatively sufficient means for conceptualizing the import of a forthcoming Financial Times (FT) piece below:

Economists have been debating the following issue for some time now: If China stubbornly refuses to stop buying dollar denominated assets at a rate commensurate with new Fed money creation (to ‘sterilize’ the Yuan/Dollar exchange rate), a growing resistance between real world (market) interest rates and China’s rates will become a rather combustible mixture. Without proper foresight and measured adaptations, this relationship could result in that spring action I was referring to in the ‘State of the Union’ email (2/31/06), whereby currency values fall [suddenly] and interest rates go way up. That would be bad for global price stability and it would throw a lot of businesses into a tailspin. Accordingly, it would behoove US and Chinese policy makers to work together to assuage the issue. But – and this is a big but – the onus of responsibility lies upon the US consumer, as we wouldn’t be in nearly the financial position we are in today if [the average household] were not profligate.

Not to point fingers, but an informed body-politic makes wise decisions, while an uninformed one just decides to put-off hard questions for later (e.g., Social Security and Medicare entitlements unfunded liabilities crises, but I digress).

Let’s use broad strokes to check out the rationale behind this currency mechanism by which the Chinese have been hoovering cash right out of your wallets and furthermore, investigate the consequences of such policy both at home and abroad. First, we’ll briefly identify the primary forces which cause money values to rise and fall, then we’ll proceed with an illustration of how money is created and how the Fed affects interest rates. Next, this email will attempt to concisely identify the process by which China manipulates its currency vis-a-vis the United States in response to Fed actions and suggest the consequences which this policy has for the Chinese economy. Lastly, this email will suggest two or three possible scenarios regarding the relationship of the Chinese and the American, hence, world economy going forward.

Any attempt to explain value fluctuations in what Benjamin Graham (the dean of Wall Street) famously referred to as the ‘abstruse money market’ must begin with the notion of something called an [uncovered] interest parity condition, which works symbiotically with the so-called Fisher effect, such that [the amount of] money supply creation, hence the concomitant relative value (or price) of a currency and rates of interest on said currency, are inversely proportional. Or simply: As the money supply increases interest rates will fall.

The following is an example of the process by which money is created:

The US Government, via our Treasury, writes an IOU, or a bond, with a specific interest rate; the Fed then buys the bond via the Government from the Treasury with cash delivered on order from the Bureau of Printing and Engraving. The US Government then takes that cash and transfers it to commercial lenders (banks) by hiring so-called employees and buying so-called products, with government checks, which are deposited into these institutions as ‘federal reserves’. In a fractional reserve banking system, commercial banks can lend out a certain percentage of their deposits (usually around 90%), while keeping the balance (usually around 10%) on reserve. Obviously, a Fed’s increasing available reserves for banks frees up said banks’ loanable funds and, via the money multiplier, the overall money supply in the economy increases (like tenfold or something).

The actual interest rate mechanism is set in various ways, but in the main, rates charged between banks for overnight loans form the basis for interest rates charged for loans [to entities other than banks] in the economy. The discount rate also has an effect, albeit somewhat negligible by some accounts, but that is the rate banks can borrow (now a half a percentage point or fifty basis points higher than the fed funds rate) directly from the Fed in the short term. This is a stop-loss measure; it’s good for things like liquidity crises (not that we know anything about that).

What China is doing today is essentially buying up incoming dollars with newly issued stock of Yuan/Renminbi to keep the differential values constant between the currencies (i.e., to prop up the value of the dollar against the Yuan/Renminbi). This has a price – namely, the difference in rates of return on Fed bonds and those of China’s money. One one hand, it only costs 2.07% interest to hold US money (based on the current 1-month Treasury yield rate), but on the other hand, that money is only earning a 2.07% return, while the Chinese money rate is closer to 4%. The difference (about 200 basis points or two percent) is what it costs China to buy US monies and ‘sterilize’ the currency (to peg the value at a constant rate).

You might ask, ‘Well, why doesn’t China just lower its cost of money and erase the differential or close the gap?’ The reason being, grasshopper, is that China’s inflation rate has been out of control (OC). There have been pork shortages so people have boiled dogs and cats for dinner (no lie), volatility has been on the rise; therefore, companies have a hard time deciding which investments will be profitable. Consequently, companies (mostly run via government through banks) cut back and people lose jobs, this affects a death spiral on GDP/incomes per capita, hence consumption, investment and round and round.

It is costing China a certain amount to hold our currency at the levels which they now hold (there are currently over $1.5 Trillion worth of reserves being held in China, but the exact proportions of that pie denominated in American dollars is uncertain)* and there is an offset between the export-driven gains of holding the currency at those amounts and the fiscal losses due to the costs of money related to holding those amounts. Accordingly, any major decision China makes regarding these funds will have an impact on the United States – indeed, on the entire global economic system.

Generally, neither America nor any country should feel itself hostage to the political fortunes of sovereign wealth fund manager’s or their bosses’ decisions. However, one might say that it is not unwise to try and manage realistic expectations about those decisions for the good of the nation and for the global economy-at-large. To that end, we have two, perhaps three plausible scenarios for Sino-American economic relations going forward:

1. China decreases the rate at which it buys forthcoming dollars, thereby allowing the Yuan/Renminbi to strengthen, which, by virtue of Hume’s price-specie flow mechanism, will restore equilibrium in markets. Consequently, US exports increase along with the rest of Europe compared to financially repressive neomercantilists and, ceteris paribus, the world economy is liberated from an otherwise looming recession.

2. a) China fails to decrease the rate at which it buys forthcoming dollars, which, in turn, increases the cost of holding those reserves and lowers China’s Return-on-Investment (ROI). At some point, the ROI will become negative and there are three main things which must be taken into account to determine this. First, we already know that China foots the bill of a cost differential of about 200 basis points by holding our currency. Second, the Chinese need to figure out if they are making more than 2% after inflation on export-led growth (net real income). You could say that their cost of capital, in an inflation and tax-neutral environment is 2%. But factor in an 11% inflation rate with much room to rise and you’re looking at gains which must exceed 13% or more to break even. (And that’s before the 3% profit margin incentive which investors consider prudent, so in reality we’re looking at over 16%.) If the Chinese keep buying our currency, and we buy less of their exports; if the rest of the world slows down in buying Chinese exports as well, due to a global slowing phenomenon, China’s margins are going to get squeezed. Technocrats could decide, then, in all probability, to diversify into other currencies (maybe some southeast Asian ones) and/or liberalize their economy somewhat for flexibility in responding to inevitable [demand] shocks. As a result, trade relations between China and the rest of the world could normalize somewhat and ties of mutual interest might incentivize further Chinese liberalization, hence normalization of trade relations in a virtuously self-reinforcing manner.

2. b) The scenario plays out as in 2a above, except Chinese technocrats respond to the imminent zero hour by financial brinkmanship and subsequent panic after crossing the point of no return (when all foreseeable returns go negative). As a result, financial markets go into a protracted hysteria, businesses get cold feet regarding new investments and the world sinks into a depression.

2. c) The scenario plays out as in 2a above, and Chinese technocrats respond with financial brinkmanship as in 2b, except the increasing pressure of decreasing margins turns into a critical mass which explodes, not when returns go invariably negative, but when an exogenous supply shock (e.g., leading to a major energy price swing) causes these countries decide that each other’s currencies just aren’t worth what was previously thought and consequently, there ensues a speculative financial collapse, badly damaging the value of debtor nations’ currencies (e.g., US, Britain and the Eurozone) and, by extension, the value of China’s foreign assets**. Thereupon, business investment halts at each nation’s respective borders and a new era of protectionism ensues; world GDP falls by 75% over the following decade.

*$1.5 Trillion in reserves. If we considered the average ratio of the world’s reserve currency denominated in dollars to be 75%, it may hold, but of course that’s any man’s (or woman’s) guess. Individuals familiar with the matter suggest there is probably a somewhat diversified mix of industrialized nations’ currencies (e.g., Pound Sterling, Dollars, Euros, Yen).

**China’s foreign assets. China’s central bank purchases foreign reserves with checks written against itself. In a double-entry bookkeeping system, that means if China purchases one dollar, it must offset that dollar [asset] with one dollar’s worth of a liability. So China goes negative in its Financial Account in order to keep a surplus in its Current Account (its net exports or Exports minus Imports). Accordingly, China’s costs of maintaining a hefty surplus in their Current Account are coming home to roost. And the subsequent problem is that, if the value of American dollars, British pounds and European Euros goes down, the value of Chinese assets goes down. This paradoxical situation is what one might refer to as fiscally irresponsible or a “lose-lose situation”.

US rate cut adds to pressure on China

By Richard McGregor in Beijing

Published: January 23 2008 18:10 | Last updated: January 23 2008 18:10

The sharp cut in US interest rates has increased the conflicting pressures on Beijing’s management of its economy and its simultaneous efforts to stem potential losses of billions of dollars in its foreign exchange holdings.To keep the currency stable, the People’s Bank of China buys almost all incoming foreign currency, and then attempts to “sterilise” the monetary impact by issuing renminbi bills to take the funds out of circulation.
The US cut means China’s central bank will pay almost 200 basis points more on the bills it issues at home to manage its currency than it will get on purchases of US Treasuries.The PBoC pays about 4 per cent on its so-called “sterilisation” bills, while one-year US Treasuries now carry an interest rate of 2.07 per cent.Both countries are likely to maintain their policy biases in coming months, the US cutting rates, and China lifting them, a trend that will intensify the pressure on Beijing’s currency policies.”Things just got a lot more complicated for the managers of China’s economy,” said Stephen Green, of Standard Chartered bank, in Shanghai, on Wednesday.China does not release the exact makeup of its foreign exchange holdings, nor how they are invested, making it difficult to get a precise reading on their profitability.But Hong Liang, Goldman Sachs China economist, calculates the PBoC is losing about $4bn a month on its bills because of the turnround in the interest rate differential over the past 18 months.

“The trend is clearly accelerating as the reserves continue to grow faster than GDP,” she said.

China has lifted rates eight times since early 2006, to cool an economy that grew by more than 11 per cent last year and, more recently, to combat inflation, which hit an 11-year high in November.

But further use of interest rates is constrained by Beijing’s tight management of the renminbi, a policy aimed at preventing it appreciating too rapidly.

The government fears more rate rises could attract speculative capital inflows, adding to already swollen foreign reserves, which stood at $1,530bn at the end of 2007.

Despite this objection, the government’s commitment to fighting inflation means further rate rises are inevitable, China economists say.

The PBoC, in expectation of losses on its sterilisation bills, has used other tools in the past year to drain the funds, mainly by requiring commercial banks to leave more money with it on deposit. Chinese banks are required to place 15 per cent of their deposits with the PBoC, at a much lower interest rate than the 4 per cent offered by the sterilisation bills.

The heavy use of this measure has allowed the PBoC to limit losses on its foreign exchange holdings.

Some economists argue the reserve losses are only on paper, but “at some point, that paper loss may result in a fiscal loss”, said Brad Setser, of the Council on Foreign Relations. “It certainly represents a fall in domestic purchasing power of China’s external foreign assets. Money held in dollars will end up buying fewer Chinese goods in five years than it does now,” he said.

Copyright The Financial Times Limited 2008

Rant on Double-Talking Liberals (Embryonic Stem Cell Research)

Ladies and Gentlemen,

Throughout school all I was ever taught was how conservatives are ‘anti-progress’, but that doesn’t make any sense when you consider the fact that New Deal Liberals tend to be anti-Real Estate Development and anti-Globalization. They are anti-innovation in the field of morality unless ideas conform with preconceived notions ( i.e., they are closed-minded). New Deal Liberals tend to be obsessed with fighting against developments that create new jobs and new industries while they seem rather inclined to recreate old jobs (even if they are obsolete) by fiat, even if that makes no economic sense. New Deal Liberals are afraid of innovation insofar as it threatens their otherwise happily complacent positions in the social stratum. New Deal Liberals tout the imports of technology ( e.g., embryonic stem cell research) only when they can contrive it for purposes that drive their real goals – i.e., uprooting traditional social mores, hence undermining the rule of law and bringing anarchy cum tyranny via totalitarian dictatorship of the proletariat.

You see, things like embryonic stem cell research (as opposed to non embryonic stem cell research) paves the way to creating drones in society to do the chores that people don’t want to do and for harvesting useful things like organs. Embryonic stem cell research paves the way to normalizing abortion, hence, murder – as long as that murder can be rationalized to suggest someone is not actually ‘human’ until a certain age ( e.g., 30 days out of the womb). Embryonic stem cell research paves the way for New Deal Liberals to reach their ultimate goal – i.e., to play God (more than they try to do now).

Why Is The Yield Curve Inverted?

Ladies and Gentlemen,

To the question of why the Yield Curve is inverted:

The Fed lost much of its influence over long term bond prices once sovereign wealth funds (e.g., China) became majority shareholders of these instruments. Rational actors price risk according to, as people have pointed out previously, recessionary trends and other factors that affect opportunity cost. [Esp. foreign and lesser developed countries’] governments, however, act like institutional investors with a time horizon and risk assessment much different from that of Wall Street or Main Street.

There is an inversion in the yield curve from 6mos through two or three years because of the level ownership of these instruments in foreign countries. Sovereign wealth funds’ time horizons begin at one year and end at thirty, whereas [Wall Street and Main Street] begin their calculations, of course, at 30 days. So, for foreign governments, the yield curve is not necessarily inverted. Rather, the shape of the curve reflects the aforementioned demand assessments manifest in the levels of ownership of these instruments.

Even if the whole yield curve is inverted, however, that just means foreigners heavily value [the] stability [of US securities] over actual returns (even if ROI is negative after inflation). These cats will pay the cost of inflation for the effects of sterilization (to boost international trade) and of stimulus to their respective economies due to the phenomenon of coupling with America.