Interesting undercurrents at The Next Global Crisis panel at the World Economic Forum at Davos…
Check out the video at 1 hour 10 minutes.
You can see the comments of Zhu Min, the deputy governor of the People’s Bank of China (the Federal Reserve of China), as he gives some insight from his part of the world on the risks of the next global crisis.
Mr. Zhu raises the specter of “capital flows” as the real risk the global economy faces this year…
Because of very low US rates many financial institutions can borrow from the Federal Reserve or through their prime broker at extremely low interest rates and are engaged in the “dollar carry trade“…
Mr Zhu pegs the sum of the carry trade between $1 trillion to $1.9 trillion. This is much bigger than the Japanese yen carry trade of 10 years ago.
He goes on to say because of the $ carry trade all this money runs in and out of emerging market economies creating asset volatility… he is politely describing “global hot money” flows…
The Chinese central banker is implicitly condemning the damage that zero interest rates of the US Federal Reserve are causing in less advanced economies… it’s a form of inflation exporting… and it’s morally indefensible… and it could be the cause of the next global crisis…
The moderator asks Mr. Zhu about the yuan and its value… he argues that it is important that the yuan be a “stable” currency to counterbalance the extreme instability that can be created in Asian economies from the “global hot money flows”…
Barney Frank asks him to raise the value of the yuan…. hmm… those are sovereign decisions…
Rather than trying to influence the monetary policies of other nations I think we need to address the problem of the overly large and unstable financial sector in the United States…
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From Jesse’s Cafe American… a riff on President Obama propping up the banking system:
~~~ ” … The US is heading towards a double dip recession, and the next leg down may be more fundamentally damaging than before.
The reason for the decline will be the abject failure of the Obama Administration to address the roots of the problem, instead wasting trillions to prop up a banking system that is a useless distortion.
Worse than useless really, because it actually presents a huge negative influence by stifling the recovery, channeling funds to the crony capitalists and non-producing wealth extraction sector, who tax the people like feudal lords under license of a corrupt government.
So far, Obama has failed the people, but preserved the banks.
A source of his failure has been his weakness in listening to Larry Summers and Tim Geithner, the Rubin-Clinton wing of Democrats, who have well established their incompetence and inability to act at a level suitable to their positions. They are captive to special interests, locked into the ways of thinking that brought the world to the point of crisis.
In response to the next leg down, Bernanke will monetize debt at an even more furious and clever pace, perhaps in alliance with the Bank of England and Bank of Japan. The ECB resists, and all who balk will be chastised by the monied powers and their demimonde, the ratings agencies and global banks. This is modern warfare of a sort…”~~~
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The strongest is never strong enough to be always the master, unless he transforms strength into right, and obedience into duty.
Jean Jacques Rousseau, The Social Contract, 1762
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Tax on speculators urged
Tim Colebatch, The Age, February 6, 2010
A former deputy governor of the Reserve Bank [of Australia] has urged the federal government to consider taxing short-term capital inflows to stop them destabilising Australia’s economy.
Stephen Grenville, who retired from the RBA in 2001 to make way for present governor Glenn Stevens, has broken with economic orthodoxy to call on governments to discourage foreign speculators from parking their cash wherever short-term returns are highest.
In a paper published by the Lowy Institute, Dr Grenville takes aim at the ”carry trade”, in which foreign investors borrow cheaply where interest rates are low and invest the money where rates are high.
A classic example is companies borrowing in Japan to invest in Australia.
Dr Grenville said that while this could bring big profits to investors – 100 per cent profit for Japanese who parked their money in Australia from 2003 and 2007 – it could produce serious downsides for countries swamped with unwanted cash.
Among other things, he argues, it provides fuel for asset bubbles, undercuts monetary policy goals and pushes up the exchange rate. Such investors are also prone to abandoning ship abruptly, causing a foreign exchange crisis and adding to investment uncertainty, he says.
Brazil has imposed a 2 per cent tax on short-term capital inflows, primarily to stop them pushing up its exchange rate.
A higher exchange rate hurts local producers by making their products more expensive to foreign buyers, while making imports cheaper on domestic markets.
Australia, by contrast, has made itself a haven for such inflows, which help finance the current account deficit, allowing the nation to spend more than it earns.
But Dr Grenville warns that the problem is set to get worse. ”Now we have not just Japan, but low interest rates in the United States, United Kingdom and Europe”, he says. ”Those interest rates are not just low now, but are likely to stay low for some years, with the prospect of a slow US recovery.”
He urges governments to consider a ”Tobin tax” – a small levy on capital inflows to deter excessive flows – first proposed by US economist James Tobin to put ”sand in the wheels” of financial speculation.
The impact in Australia would be to lower the exchange rate, easing pressure on manufacturers, tourism operators and farmers, while making imports slightly more expensive.
It would benefit areas of the economy being put under most strain by the minerals boom.”~~~
Tobin tax in Riski,,,