12 Settembre 2008

On a sunday, being unoperative the stock mkts as one would have thought, the US nationalized Fannie&Freddie, the two mortgage giants. Tax payers costs, as Paulson has reluctantly admitted, are unknown. The US Gvt, will provide as much funds as requested, hand to mouth, aware that they dont have a clew of how much it will be.

For the time being, has given some hope to bond keepers, and among them, two akward ones, China and Russia.
The Chinese Central Bank is just with the head ot of the water, requests fresh cash, because it holds 1 trillion of US Treasury bonds and also Fannier and Freddie ones ( just 350 billion), considered as safe as Bot, one way or another guaranteed by the one and only superpower left. The yieldings of these investments are incredible losses, 80% in value, topped with another 21% usd devaluation.

The IMF did warn the Chiense Central Bank not to carry on buying foreign debt in such large amounts, which were not counterbalanced with its own capital.

 How about buying one trillion when you are only worth 3.2 billion? China has carried on buying in the sake of keeping a weak yuan infront of the usd, and thus make exports more competitive. Now the catch22 situation is as clear as daylight.
The central bank, could eventually print money (the can do it as they are sovereign, not like us europeans), but would make inflation jump, already at unexpected heights. Instead, they have asked for help  to the Finance Ministery, which thanks to the fat commercial surplus, is still in black figures. The ministry could transfer bonds and other assets from various branches to the Central Bank, and so, sourcing a capital increase ( a paper one, of course). The problem is the two ministeries are declared enemies. Central bankers aimed a slow yuan revaluation whilst The Minstery of Finance wants it ever weakening, for competitiveness reasons. The Finance misnistery wants surplus to be invested in overseas assets whilst the Central Bank wants to keep it in guaranteed foreign bonds (as Fannie&Freddie). To ask money to the Ministery, means losing its own autonomy being on the rival ministries thumb.

Theres light at the end of the tunnel, the train is coming. To make it worse, in a country that fiercely controls media, and erases any criticism, voices have arisen ( the new stock market experts) awakening people from the dependency on US bonds.

A chinese blogger ( found by the Telegraph) writes this example, ' it is as if China had gifted the US with 200 airplanecarriers', mind you that cost per head is only 5 billion, so the trillion chinese support to the US could buy 200 of those, making evident the comparison between real economy, and creative accounts finance.

Only last year, chinese spent an eigth of its income in buying US bonds, making a 3% interest on those in usc, thus losing 21% on currency

Where do the chinese find the money for such naif purchases?. Mainly from private individuals savings. Commercial Banks are obliged by law to deposit massive funds to the Central Bank, and get 2% interest for it, so the outcome the savers get is even lower, making higher the differencial betwen taking and lending interest.

This formula equates to a transfer of wealth from chinese savers to their Central Bank, and consequntly funding the US, who by selling to China large amounts of debt, can afford consumer and war overspending.

Obviusly chinese are losing its patiente with their governement, furthermore now than the economy is rapidly slowing down.
Last year, an essay called currency wars, was published in China. The author stands for that The US have incentivated the Bond buying inChina, knowing before hand they were worth nothing. American consumers have bought incredible amounts of chinese goods, without paying for them, or at least having hard discounted the price. Will they be able to repeat the trick?14 trillion is the american family debt ( to carry on with previous example, 2800 airplane carriers) but their outcome is one trillion less than that figure.

So , resuming, now the Us is repaying the favour to China by nationalizing Fannie&Freddie, hoping that foreign bond investors will be reassured, and will carry on bond buying, making the bail out much affordable. Beijing will be compelled to do it, their main customer cannot be massacred.

As Richard Connally says ( he is a counter finance pundit), moneys invested during the bubble in shares, bonds and real state are lost, unless money from a blackhole is created again, making the blackhole mess even bigger.

Will it work? May be not, may be, mm, perhaps.

Maurizio Blondet

Translation by EFFEDIEFFE.com