On China’s Financial System and Property Markets: Aliber and Walter

We are delighted to share work presented in recent days by two good friends of the CFS: Robert Z. Aliber and Carl E. Walter.

Carl discussed his forthcoming book The Red Dream: the Chinese Communist Party and the financial deterioration of China. Red Dream analyzes 1) the build-up of leverage throughout the system, 2) how regulators have worked to generate strong performance metrics while sloughing off unwanted assets, 3) the health of the financial system, as well as 4) the present within the context of prior financial stressors in the U.S., Japan and China itself.

Bob offers his latest thoughts on China’s property market, Evergrande, and future economic prospects more broadly. He first discussed these dynamics in the epilogue of the seventh edition of Manias, Panics and Crashes: A History of Financial Crises.

Carl recently served as an independent director of a major Chinese bank. For many years, Carl worked in China, where he last served as JP Morgan’s China COO and CEO of its banking subsidiary. He is now a visiting scholar at the Stanford Shorenstein Asia Pacific Research Center.

Bob is professor emeritus of International Economics and Finance at the University of Chicago. He has written extensively about the prices of currencies, international investment flows, banking issues, the multinational firm, international monetary arrangements, and financial crises.

To view Carl’s slides on China’s financial system:

To view Bob’s “The Ponzi Bubble in China’s Property Market is Deflating”:

As these topics are complex and challenging, we look forward to any comments you might have.

Rhodes on Debt for Vaccines program

CFS Chairman of the Advisory Board William R. Rhodes and World Health Organization epidemiologist Cristina Valencia offer an intriguing idea to help ameliorate the COVID-19 pandemic in Latin America… debt for vaccine swaps.

Bill pioneered the use of debt for equity swaps throughout the Emerging world, as head of many advisory committees of international banks. The present idea builds on debt for nature swaps – integrating pharmaceutical companies.

We look forward to any comments you might have.

To view the full article:

Database of Sovereign Defaults Updated

David Beers (formerly of the Bank of Canada, now at the Bank of England) and Jamshid Mavalwalla (Bank of Canada) have produced an update (PDF) to a database (Excel) of sovereign defaults. Coverage now extends from 1970 to 2015. The database shows, country by country and for all countries combined, who was in default, by how much, and to what groups (IMF, World Bank, Paris Club countries, foreign currency bond holders, etc.)

Another useful feature of the database is that it has a score showing how reliable the data are, in the authors’ view. It is all too often forgotten in economics, especially when comparing or combining figures across countries, that the underlying data may vary widely in their reliability, sometimes because of outright falsification, but more usually because of difficulties in measurement. Pointing out where data are of lower quality can spur researchers to go out and find better data or more accurate ways of estimation for filling in gaps.

(Thanks to David Beers for bringing the database to my attention.)

Rhodes on “Greece’s Achilles’ Heel” in The Wall Street Journal

This morning, The Wall Street Journal published an op-ed “Greece’s Achilles’ Heel” by William R. Rhodes.  Bill is the President and CEO of William R. Rhodes Global Advisors, LLC; Professor-at-Large at Brown University; and former Senior Vice Chairman of Citigroup Inc.  CFS was honored to have Bill serve as a member of the Honorary Committee at Bretton Woods 2014.

“Greece’s Achilles’ Heel” is excellent (see http://on.wsj.com/1HUxBjp).  It struck a chord on two levels.

1) The approach is clear and represents the best path for Greece.  Bill notes:

– “It has yet to start negotiating seriously about a long-term solution to its debt crisis. The government needs to understand that creditors have long memories and want assurances that it will live up to the terms of whatever deal is struck.”

– “Past crises have shown that there is never a white knight able to ride to the rescue – despite rumors that the Greeks may turn to Moscow and Beijing for aid.”

– “Sovereign-debt deals have the best chance of succeeding if they are not seen as being imposed by the creditors, but rather owned and authored by the debtor country’s government.”

In a paper “Solving the Greek Crisis,” CFS outlined the math supporting a similar strategy in 2011.  Although time has elapsed, the basic approach remains valid (See “Solving the Greek Crisis: http://www.centerforfinancialstability.org/research/Greece_062411.pdf).

2)  On a personal note, I traveled with a fellow banker to Nicaragua in the late 1980s to help structure a buyback.  Nothing happened.  In the aftermath, the country remained stagnant through 1995 when a buyback was finally orchestrated and the country began to grow again. Now is the time for action in Greece.

Lastly, at Bretton Woods, Bill offered an Honorary Committee Address called “Critical Issues for the Bretton Woods Institutions” – see http://www.centerforfinancialstability.org/bw2014/bw_rhodes.pdf.  Many of these issues and recommendations are essential reading in advance of the upcoming IMF / World Bank meetings.

Best regards,

The Economist on “The 70-Year Itch”

In The Economist this week, there is a terrific article The Bretton Woods agreements: The 70-year itch.  Highlights include:

– America learned the benefits of economic co-operation the hard way. Its failure to create institutions to help steer the world economy after the first world war exacerbated the Great Depression and paved the way for the next conflagration.

– Yet today’s pre-eminent powers seem to have forgotten this lesson.

– If John Maynard Keynes were alive, he would sigh not just at the risks in all this economic nationalism but also the huge missed opportunity. Perhaps it is time to send another group of dignitaries to New Hampshire.

The full article is at http://www.economist.com/news/leaders/21606280-both-west-and-china-are-neglecting-institutions-help-keep-world-economy

The piece is similar to my Forbes column Lessons from the Summer of 1944.

The full column can be viewed at http://www.forbes.com/sites/greatspeculations/2014/06/06/lessons-from-the-summer-of-1944/

Keynes on Sovereign Debt

John Maynard Keynes (United Kingdom) on Sovereign Debt

Mr. Chairman, since the United Kingdom is the only country here represented which has incurred large-scale war debt to our allies and associates, also here present, these three alternative amendments must be assumed, as indeed Mr. Shroff made clear, to relate primarily to her. Mr. Chairman, the various members of this alliance have suffered in mind, body and estate through the exhaustion of war, through which we are differing in kind and degree. These sacrifices cannot be weighed one against the other. Those of us who are most directly threatened and were nevertheless able to remain in the fight, such as the USSR and the United Kingdom, have fought this war on the principle of unlimited liability and with a more reckless disregard to economic consequences. Others are more fortunately placed. We do not need information in the larger fields of human affairs. Nothing could be less prudent than hesitation or careful counting of the cost. But as a result, there has been inevitably no equality of financial sacrifice.

In respect to overseas assets, the end of the war will find the United Kingdom greatly impoverished and other of the United Nations considerably enriched at our expense. We make no complaint to this provided that the resulting situation is accepted for what it is. On the contrary, we are grateful to those allies, particularly to our Indian friends, who put their resources at our disposal without stent, and themselves suffered from privation as result. Our efforts would have been gravely, perhaps critically, embarrassed if they had held back from helping us so wholeheartedly and on so great a scale. We will appreciate the moderate, friendly and realistic statement to the problem which Mr. Shroff has put before you today. Nevertheless, the settlement of these debts must be, in our clear and settled judgment, a matter between those directly concerned. When the end is reached and we can see our way into the daylight, we will take it up without any delay to settle honorably what was honorably and generously given. But we do not intend to ask assistance in this matter from the International Monetary Fund beyond the fact, as Mr. Bernstein has just pointed out, that the existence of the Fund and the general assistance it will give to stability, and expansion of trade may be expected to improve indirectly our ability to meet other obligations. We concur entirely with the view that has just been expressed by Mr. Bernstein on behalf of the American delegation that the Fund is not intended to deal directly with war indebtedness.

Now, since we do not intend either to ask for or to avail ourselves of any special treatment from the Fund, it appears to the United Kingdom delegation that this amendment could be of no practical effect, and it is therefore better to discard it if misunderstanding is to be avoided about the role which the Fund can be expected to play.

(Commission I, third meeting)

The Bretton Woods Transcripts
Typescripts and Conference Proceedings of the United Nations Monetary and Financial Conference
Bretton Woods, New Hampshire
July 1-22, 1944

Edited by CFS Senior Fellow of Financial History Kurt Schuler and CFS Senior Associate Andrew Rosenberg

Comments on TIPS Article in the WSJ

This morning, Min Zeng and Carolyn Cui from the WSJ wrote a terrific piece For Treasury, a Question of Fundamentals / Department Seeks Answers for Inflation-Protected Securities.

I would add that two factors are operative in pushing real yields (TIPS) higher:

First, investors are re-balancing their portfolios from bonds to stocks on the heels of tapering comments.  A Fed less active in purchasing Treasury obligations at some future date reduces the constant bid for all Treasuries – TIPS included.

Second, the TIPS market was mispriced with negative yields.  Inflation is positive at present…and will likely remain substantially above zero for the foreseeable future.  June CPI inflation reached 1.8% on a year-over-year basis up from 1.4% the previous month,

The bottom line is Fed purchases have distorted pricing in the Treasury market.  Changes on the margin prompt swift shifts in pricing and yields.

CFS Monetary Data are Revealing Regarding the Future

Today we release CFS monetary and financial measures for May 2013.
CFS Divisia M4, which is the broadest and most important measure of
money, grew by 4.9% in May 2013 on a year-over-year basis.

CFS monetary data provide particular insights regarding the Federal
Reserve’s supersized balance sheet, policy options, and the future.
For special analysis, please contact LeAnn Yee at lyee@the-cfs.org.

For Monetary and Financial Data Release: