Headed for a Sudden Stop

[metalman]

Re: Headed for a Sudden Stop

Don't fall into the trap of being so focused on only the financial and trade aspects. One must also consider the geopolitical and military aspects.

The US provides military protection through out the world by projecting its military supremacy into certain regions. It is no co-incidence that these countries the US:p provides military protection to are also its largest creditors. Like all empires the :pUS Empire extracts a tithe from smaller nations. It has been doing this for several decades by selling debt.
:p:p
:p
I don't think we have to worry about the creditor counties cutting off their credit until such time as :pUS military might fades and the empire dies.
:p:p

that aspect has been discussed here for years so i don't think it hasn't been considered in the sudden stop analysis. us trade partners have been making alternate security arrangements for years... in prep for the day when the usa can no longer afford its military and they can get it cheaper elsewhere.

[marvenger]

Re: Headed for a Sudden Stop

nouriel roubini seems pretty adamant that a better solution than the 700b bailout would have been government and private equity injections; these can take many forms, preference shares, common stock, equity for debt, suspension of dividends. Roubini argues that the current bailout is for bank shareholders and unsecured creditors which foreign CB's and SWF's are not major holders of; so it seems to me that the bailout is more about protection of the sanctity of credit and the uber rich's free ride rather than trying to avoid a sudden stop.

[zenith191]

Re: Headed for a Sudden Stop

Don't fall into the trap of being so focused on only the financial and trade aspects. One must also consider the geopolitical and military aspects.

The US provides military protection through out the world by projecting its military supremacy into certain regions. It is no co-incidence that these countries the US provides military protection to are also its largest creditors. Like all empires the US Empire extracts a tithe from smaller nations. It has been doing this for several decades by selling debt.


I don't think we have to worry about the creditor counties cutting off their credit until such time as US military might fades and the empire dies.

[reallife]

Re: Headed for a Sudden Stop

If the House Republicans find a way to hold out, we could see the FED vanish in their own excrement. I would love to see Bernacke selling inland empire homes in a swanky gold jacket with the Century21 badge!

Yes, but would YOU buy a used house from Bernacke??:p:p

[kingcopper]

Re: Headed for a Sudden Stop

If the House Republicans find a way to hold out, we could see the FED vanish in their own excrement. I would love to see Bernacke selling inland empire homes in a swanky gold jacket with the Century21 badge!

[Tulpen]

Re: Headed for a Sudden Stop

there's a massive liquidity crunch at the Fed, hence the need for taxpayer dollars to move dogshit from fed b.s. to a greater fool.

A concise summary of what is going on!

Also remember it is the end of the quarter, only a few more days left to hide the disasters from the books by using 700 billion dollars.

[JoeSixpack]

Re: Headed for a Sudden Stop

re: Here it comes

Chris, i would speculate this is probably related to the extreme tightness is european USD liquidity, and much worse in Asia.

You can see this for example in the extreme dislocations in LIBOR. For that reason, central banks (ECB, SNB, BanqueLuxembourg, also BOE ?) now offer their banks access to USD repos in special auctions, which they cover via the swap facility with the FED.

As the banks are forced to refinance their USD positions in the shortest terms, they look to reduce exposure to the risk of a sudden complete dryup in USD.

In the the very extreme a bank may therefore choose to stop its USD business, as the poster in your link has claimed.

But I am not certain on the effects this has in the overall scenario we follow on itulip.

[JoeSixpack]

27 things you may not have known about banking crises

This comes from Merrill Lynch

http://ftalphaville.ft.com/blog/2008...anking-crises/

Conclusions (my emphasis):

Implications: Past banking crises suggest that fiscal costs are likely to be substantial and the government is highly unlikely to make a profit on any recapitalization program. Fiscal packages do positively help the economy. Blanket government guarantees are sometimes necessary when previous liquidity provisions have failed.

What is different about this crisis:So far the US and the UK have not suffered from a sudden stop of capital inflows which has been the feature of many episodes in the past. We continue to remain concerned of the risk of a current account financing crisis. Note overnight an article in the South China Morning Post suggested that China’s regulators had told mainland banks to stop lending to US financial institutions. The article was later vehemently denied by the regulators.

The role of the international investor:
The international investor remains a significant holder and continued buyer of US assets. These have primarily been in recent years in the form of fixed income securities, particularly by foreign official institutions. Foreigners own 47 per cent of the Treasurys market; foreign official institutions have accounted for 91 per cent of flows into the agencies market. In order for foreigners to change their US fixed income reserve accumulation policies, they would have to substantially revise their existing exchange rate policies, acquiescing to currency strength. In our view, investors should start preparing themselves for the eventual shift in existing central bank reserve accumulation policies.

[phirang]

Re: Headed for a Sudden Stop

Here it comes

Warning: no source disclosed.

there's a massive liquidity crunch at the Fed, hence the need for taxpayer dollars to move dogshit from fed b.s. to a greater fool.

[Chris]

Re: Headed for a Sudden Stop

Here it comes

Warning: no source disclosed.

[aa]

Re: Headed for a Sudden Stop

Right, but if you have a dollar-denominated mortgage at 6%, stocks that have returned jack squat for 8 years, and a tight labor market, making 10% nominal return (or 6% for that matter) would be attractive. Even if inflation eats nearly all of it, the need for dollars for debt servicing would be satisfied.

Perhaps I'm missing something but, if you've got a mortgage and you've got the cash to buy treasuries, why wouldn't you pay the mortgage off with the cash?
I'm in Aus where mortgages are always variable and personal mortgage interest cannot reduce your income tax, so that might make a difference.

[jtabeb]

Re: Headed for a Sudden Stop

the need for dollars for debt servicing would be satisfied.

You sir, have your eye on the ball!!!

[jimmygu3]

Re: Headed for a Sudden Stop

3) Rising yields in the US may or may not be an opportunity to 'lock in 10%'...again it will depend on what the denominator is doing...in this case the USD...just look at the stock mkt rally since 2002...and then divide by the euro (for example)...a 10% nominal return might actually become a negative real return if the denominator moves against you.

Right, but if you have a dollar-denominated mortgage at 6%, stocks that have returned jack squat for 8 years, and a tight labor market, making 10% nominal return (or 6% for that matter) would be attractive. Even if inflation eats nearly all of it, the need for dollars for debt servicing would be satisfied.

[Sainttjames]

Re: Headed for a Sudden Stop

couple of thoughts:

1) these asian countries own all this treasury debt because they have manipulated the FX rate between their currencies and the dollar for years...in Japan's case decades which leads to...

2) They manipulated the rate in order to provide an economic advantage to domestic industry/labor...it is not in their interest to see a disorderly move in the USD.

3) Rising yields in the US may or may not be an opportunity to 'lock in 10%'...again it will depend on what the denominator is doing...in this case the USD...just look at the stock mkt rally since 2002...and then divide by the euro (for example)...a 10% nominal return might actually become a negative real return if the denominator moves against you.

[phirang]

Re: Headed for a Sudden Stop

Whoa. That's serious stuff. Sounds like the options are whether to get out fast or get out gradually. No mention of continued buying.

Question: If they can't agree and instead race to get out before the other, that would obviously push yields up. Would that be a time for mortgaged middle class investors to shift into treasuries, taking guaranteed 10% (or whatever it's pushed to) nominal returns to provide current income and service lower fixed-rate debt, thereby crashing stocks?

Is this one of the scenarios the Fed & Treasury are aware of and could implement pre-emptive currency controls to mitigate? If so, what type of controls would discourage China & Japan from dumping?

Jimmy

If there's a dollar-dump, expect the sort of controls that reek of cordite...

The US can strong-arm people into buying shitty debt pretty easily, but it will definitely have long-term implications.