Tuesday, April 12, 2011

Demand miracle in the Middle Kingdom?

Recent article about the Paper Dragon...comments in italics as usual.

By David Goldman Who would have thunk it two years ago? China’s massive trade surplus melted into a deficit during the first quarter, mainly due to unexpectedly high domestic demand. That is perhaps the best piece of news the world economy has had in a long time: it means that China has shifted from dependence on exports to sustain a 50% savings rate, to a more balanced model sustained by the internal market. We don’t yet have data, but China’s saving rate must have shrunk, and China’s relatively poor interior must be absorbing more of its output. All this is
for the good.

Much to early to call a demand miracle in Asia. Domestic demand always spikes prior to asset price collapses, and the savings rate data (if any is to be believed) is hopelessly skewed by bank lending numbers, and caution must be heeded prior to making definitive statements about the distribution of demand.

Also remarkable is that the United States is managing to import capital at a trillion-dollar annual rate despite the fact that China no longer has a trade surplus to invest in US Treasury securities. Who is buying US Treasuries? The answer is: Everyone. As the table below makes clear, a third of the total came through the United Kingdom, which means banks and hedge funds, and a sixth of the totla came through the Caribbean, which also means banks and hedge funds. Brazil accounted for $35 billion.

Of course everyone is buying. The smart money has always been in the debt markets, and they see what is (likely) on the horizon...to say nothing of securing "good" collateral given the tempests ahead for other "reserve" currencies like the Euro and Yen.

That contains good news as well as bad news. The good news is that a great deal of the world’s new wealth is coming back to the US Treasury market. Despite the frightening size of the US deficit, the US Treasury market in some ways is the leper with the most fingers. Japan’s debt ratios are the worst in the world, and the European Union is held back by the PIIGS. New wealth diversifies out of risk, and some of this comes back to the US. The bad news is that some of this reflects the weakening of the US dollar and foreign exchange intervention by central banks, including Brazil, whose reserves have grown by almost $29 billion this year. The Fed prints money and foreign central banks print their own currency to slow the rate of appreciation of their own parity.

First part yes, as to the "printing"...whatever. This is not a lock-step procedure, and I have no idea what the author's point is here...that "bad news" floating currency pricing?

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