Is the dollar sacred?

With all the money being printed by the government, and the fact that the dollar's foreign financiers appear -- appear -- to be losing at least some interest in maintaining their dollar investments, and the fact that America's debt is over $10 trillion (10 TRILLION!), and every year we keep growing deficits, and America's leaders on Wall Street and in Washington (including Barack Obama) seem to be more interested in re-inflating the economy in the short term in terms of bubbles rather than doing the hard work to increase the real-world productivity of our economy -- all this continues to lead me to think there's a chance for massive currency change both in the world and in the US. A chance for massive change along the lines of the end of the dollar-dominated world, and maybe just maybe the end of the dollar itself.

How would people respond to an event like this? For example, would the disappearance of the dollar be seen by Americans as an affront to their traditional way of life? Would we cling to the dollar for cultural reasons well past the time the dollar is in our economic interests? Will the dollar come to symbolically represent 'the American way of life that we must preserve'? At its moment of truth, will there be something particularly sacred about the way Americans think about the dollar that could preserve it? Or will we say, fine, let's move on?

Today's Financial Times: Brazil and China re-thinking their dollar strategies

From today's FT:

Brazil and China will work towards using their own currencies in trade transactions rather than the US dollar, according to Brazil's central bank and aides to Luiz Inácio Lula da Silva, Brazil's president. The move follows recent Chinese challenges to the status of the dollar as the world's leading international currency.

Read the online article here, or click on the picture.

Nouriel Roubini on the future of money

Nouriel Roubini, in today's New York Times:

The 19th century was dominated by the British Empire, the 20th century by the United States. We may now be entering the Asian century, dominated by a rising China and its currency. While the dollar’s status as the major reserve currency will not vanish overnight, we can no longer take it for granted. Sooner than we think, the dollar may be challenged by other currencies, most likely the Chinese renminbi. This would have serious costs for America, as our ability to finance our budget and trade deficits cheaply would disappear.

Traditionally, empires that hold the global reserve currency are also net foreign creditors and net lenders. The British Empire declined — and the pound lost its status as the main global reserve currency — when Britain became a net debtor and a net borrower in World War II. Today, the United States is in a similar position. It is running huge budget and trade deficits, and is relying on the kindness of restless foreign creditors who are starting to feel uneasy about accumulating even more dollar assets. The resulting downfall of the dollar may be only a matter of time.

. . . .

The quality of money

I hear people around me worrying about the quantity of money the government is printing. I not only hear the talk, I worry about it too. But the real question is about the quality of that money. Are we printing credible dollars? Will people, organizations, nations still want to invest in our money? That is to say, will the people who have financed our economy the past few decades want to continue to do so? Do they perceive the dollar as a quality, credible investment?

If people around the world and in our country, poor and rich alike, continue to see (or begin to see again) the dollar as a credible currency to earn and invest in, and thereby enrich who ever holds it, then our government can print all the money it wants. We can print money, in other words, unless and until there's no one who wants it. The social demand for money is a significant, necessary basis of money.

One problem: The quality of American money has for a really long time been assumed by those who study it to be credible. As a result, right now, compared to the number of social scientists who study the quantity of money, which is many, there are incredibly few who study the quality of it: whether or not American money is credible just hasn't been a burning question.

Until now. I suspect things will now begin to change. Qualitative approaches to all things economic -- like money and marketing -- should begin to take off, as a result of current events (meaning the financial collapse and the question of America's economic credibility and how to re-store it). The interesting questions are how swiftly the intellectual adaptation will take place, who will drive it and benefit, and how.

National credit-worthiness

Data-images from Krishna Guha's report in yesterday's FT Times.

I hear it said sometimes that national boundaries mean less today than they used to. The word 'globalization' is thrown around. We have come to the end of 'national soveriegnty.' Nations now are all 'in it together.' 'Interdependent.'

I don't doubt the people who say these things are right, and that globalization is significant. But we all still live in nations, whether we like it or not.

In fact, I think Americans are right now facing a major problem that sits squarely at the feet of us as a nation: As a people our collective debt/wealth, taken together, is worth far, far less than it was sitting at 21 months ago (see the middle data-image above). Some of us are doing fine anyway. Some of us aren't. There are major differences among us. But together, no matter where you are, your life is affected by the dramatic depression in the value of American debt. Financing like we've enjoyed the past decade just isn't available right now, and companies as well as households are forced to cut back in this world without such easy money.

Have you heard the phrase 'toxic assets'? That our banks hold toxic assets is the crux of the current financial crisis. So what is a toxic asset? Toxic assets mean debt nobody will purchase.

I have to say, I find that so remarkable, that our debt is near worthless. The most followed economist of the last fifty years -- Milton Friedman -- figured he'd never see the day the collective debt of private Americans couldn't find a market. And here we are, living through precisely that, getting to look at it with our own eyes. But Mr. Friedman was right: he didn't live to see it. He passed on in 2006, bless his soul, a full year ahead of the meltdown that began in August 2007.

So, anyway, I assume economic growth is the goal. How then do we achieve it? The situation we have is the following, and it's not pretty. Either we quickly re-store our national credit-worthiness to past levels and beyond, trying to maintain the system we have enjoyed so much in which the world stockpiles dollars and finances American debt. Or we use political power to create a new system that is, like the previous one, built toward our interests.

Put another way, the question is, have we hit the peak of diminishing returns of the old system? Should we scrap it? Oh, but then we can't forget: Are we intellectually smart enough to create a robust and prosperous new system? And I guess we even need to ask: Are we that politically powerful any longer? After Iraq, and with the rise of China, ignoring this question seems untenable.

It might just be me, but it seems to be the case that, for the first time since WWII, economic growth in America has a highly uncertain future. If so, that means, cautiously speaking, that we are entering an entirely new kind of America from that which anybody under the age of 60 has ever experienced.

What in the world is liquidity?

For some reason every time I start my computer this page drops down as one of the most recent websites I've visited. It's a NY Times article from May 2nd, 2008. The headline is

Fed takes steps to add liquidity

Besides the confounding fact that it won't go away, this headline is significant for the remarkably ignorant use of the word 'liquidity.' Somehow, many people use the term liquidity when what they really mean is money. The suggestion is that by adding money, which is what the Fed technically does, they are by definition adding liquidity. So, as the Times headline shows, the money comes to get reported as liquidity.

The problem is, not all money is liquid money. That is, not all money is easy to get and trustworthy to lend. Under certain conditions money can be like that, but not always. So, yes, the Fed can just 'add' money, but no, it can't just 'add' liquidity. Not unilaterally anyway. Liquidity is created in time and context and requires on-the-level institutions and willing players. Plural. People interacting. More specifically, liquidity needs people interacting within an acceptably stable and understandable field of organized regulations. Credible and confident people, in other words, working within socially accepted parameters.

We don't have these conditions right now, and we will lack these kinds of people, at least in the near term, no matter what the Fed does. The question is whether high levels of liquidity can possibly return in the medium- and long-terms. If so, than we would do well to get our house in order and, through a little fiscal discipline, restore our seemingly natural state of credit-worthiness. If, on the other hand, conditions being as they might be, a return of liquidity simply isn't in the cards, we will need a whole new system of wealth-creation. In this case, economic growth will depend again on actually being productive.

In a way, what I am saying is a lot is riding on what we come to know about liquidity. Headlines like this, which tell me we can't even define our words let alone gain a semblance of control over them, make me less confident.

George Soros on the future of the dollar

Of course I know exactly what the dollar is going to do but I am not at liberty to tell you....

Click this link and listen to his comments. Was he joking when he said he knows "exactly what the dollar is going to do"? Was he serious -- does he really know something? If so, how could he know this? If not, why does he give a lame joke as an excuse for not knowing something and not wanting to just say that?

I have to say, in the video, the comment does not sound like a joke. But how could it not be?

Is the future of the dollar some kind of certainty the likes of Mr. Soros know but won't say?

Systemic thinking

I see that Citigroup's stock value is up a hefty percentage today (though the number remains remarkably low -- around 2.24). This fact brings to my mind the following question: Is the government doing the right thing in propping up Citigroup so that it will survive?

Actually, I think it's better if I ask it this way: Is the government correct to think of certain organizations as vital to the survival of the system?

Or backing up even further, what 'system' is the government thinking about? What are the structural outlines of this system? The economists in the administration, as well as those many with blogs who argue so forcefully -- what basis do they use to think about systems?

To me this is a central question. The dominant view of economic thinking is to see social organization (e.g. 'the market') as consisting just about solely as a simple aggregate of individuals with more or less uniform rationalities. Assuming this gives economists significant privileges -- like the ability to sometimes predict future behavior from past behavior, for example. However, the notion that social organization is more than the sum of its individual parts is, to this point, still, like it or not, a central tenet of sociological, not economic thought.

Or let me put it this way. It is sociology, more specifically, social theory, in any case not economics, that provides the conceptual tools to make sense of social systems.

That's why I find myself wondering who the economists are relying on to make decisions with regard to a system. Are they reading social theory? I wonder, because I doubt we can succeed in re-constructing our economy as well as we are actually capable of re-constructing it, without a solid theoretical conception of the 'system' we are trying to re-construct.

Big setback for GE in a sign of the times

General Electric's credit-worthiness officially marked lower. From Bloomberg:

General Electric Co. and its finance arm lost the AAA rating that they’ve held from Standard & Poor’s since 1956 as a global recession sapped earnings and exposed potential risks.

The downgrade to AA+ with a “stable” outlook affects long-term debt, S&P_ analysts said in a statement today.

The loss of the AAA -- a sign that a company is among a handful of the world’s safest and strongest -- is a setback for Chief Executive Officer Jeffrey Immelt, who said as recently as January that GE generates enough earnings to justify keeping both the rating and the annual dividend. A month later he reduced the shareholder payout for the first time since 1938 in a move to save about $9 billion a year.

Standard & Poor’s in December said GE had a 1-in-3 chance of losing its top AAA designation within two years, and S&P kept GE’s “negative” outlook after the dividend reduction. Moody’s put GE on review in January and, after the dividend cut, said it would keep studying GE’s debt for a possible lower rating than its top-level Aaa.

The company has come under attack from some investors and analysts for a lack of transparency at GE Capital, the finance arm. Investors are concerned that the unit, already facing rising credit-card delinquencies and $4 billion in unrealized property losses, will require more capital than GE anticipates.

GE’s shares traded below $6 on March 4, the lowest since December 1991, while credit-default swaps that investors buy as protection against possible default surged.

More good news! Consumer credit grew in January

Look at the data here. A few months ago I spent some time pouring over these consumer credit data. I came away thinking they stood out as a very useful macroeconomic indicator of the direction of the economy. I'll get a data-image up soon, and a sense of what I mean.

Is the Federal Reserve providing a basis of stabilization? Alternative title: Can Citigroup make it?

US Federal Reserve assets

Maybe it's the scent of good news in the air, but I am thinking today about the institutional basis of a financial stabilization. Or let me put it this way: I wonder what kinds of institutions it will take to restore a steady flow of credit to Americans and American organizations. So, anyway, did I say good news? Here's some, I think: Citigroup stock value is up somewhere around 20 percent. More specifically, the bank is claiming to be profitable again:

Chief Executive Officer Vikram Pandit said his bank is having the best quarter since 2007, when it last posted a profit. The shares rose as much as 27 percent and helped spur gains for finance company stocks.

“I am most encouraged with the strength of our business so far in 2009,” Pandit wrote in an internal memorandum obtained today by Bloomberg. “In fact, we are profitable through the first two months of 2009 and are having our best quarter-to-date performance since the third quarter of 2007.”

Citigroup has logged five quarters of losses totaling more than $37.5 billion since it posted a $2.1 billion profit in the third quarter of 2007. Once the world’s biggest bank by market value, it fell below $1 in New York trading last week for the first time as investors lost confidence that the shares can recover after losses and a government rescue.

“I am, like you, disappointed with our current stock price and the broad-based misperceptions about our company and its financial position,” Pandit, 52, said in the memo, adding that the price doesn’t reflect the New York-based bank’s capital strength and earnings potential. The company had $19 billion of revenue in January and February excluding writedowns that have already been disclosed, Pandit said.

Can Citigroup make it? On its own, I would say no: my sense is Citi has destroyed its social capital, its credibility. I mean, should we even consider trusting the CEO's earnings statements? It's hard for thinking minds to believe and have faith in Citigroup.

But maybe Citigroup can survive with the help of others. As the above chart lays out, the American government is now the direct lender of first resort to Wall Street -- as well as a Citigroup shareholder. This fact will matter in the coming months as the government could advance some much-needed credit-worthiness to Wall Street, most of all, Citi. I can envision a scenario in which the expansion of the Fed's balance sheet proves to be the basis of Wall Street's survival -- lending to these troubled banks not just credit, but credibility as socially beneficial capitalist institutions with solid long-term plans. So yes, I think Citigroup could survive. The US government got in the game and in doing so, I think it could ultimately restore the credit-worthiness of our private organizations.

'Imperatives'

“It is imperative that we continue to move with speed to help make housing more affordable and help arrest the damaging spiral in our housing markets,” said Timothy F. Geithner, the Treasury secretary, quoted here.

One of the under-analyzed words relating to the current economic problems is 'imperative.' It is being said that certain economic actions are 'imperative,' like continually saving AIG, and others are not, as when Lehman was allowed to fail. For a while it seemed reversing the housing downturn was not imperative, now we hear it is. How did this decision come about? Where did this notion of the imperative come from?

I have little doubt that, in a general sense, some parts of our economy are more important than other parts. My question is in the details. Do we have a good theoretical framework for actually knowing what is imperative and what is not? And imperative to what? To whom? For example, the government beliefs that led them to let Lehman fail, as of today, look dubious, according to, in any case, the very 'systemic risk' test the government is supposedly using to make its decisions. In other words, in hindsight, saving Lehman looks like it had been imperative, by the government's own approach, but the government let it fail anway. Are we making other similar mistakes?

I guess what I want to ask is: Who are the economists who have studied the concept of 'the imperative'? What knowledge is Sec. Geithner relying on?

Or let me put it this way: Where in all the theories of capitalism is there given such central importance to the notion of the imperative? I see the concept in functionalist sociology like that of Parsons and Habermas. But where else? You can't tell me the Secretary is reading Parsons, or Habermas. Maybe he should be. Who are the economists working on a theoretical conception of the imperative? Who does Geithner talk to and about, and who and what does he read, that is, when he's not making asinine tv on CNBC?

My hunch is that today's officials have no theoretical framework. They go case by case.

Monetary risk

It looks like tomorrow President Obama will sign into law the stimulus bill. It is a historic bill -- a meaningful re-distribution of wealth that contrasts sharply with the previous administration's approach to distributing wealth, especially their initial tax cuts. About this plan, the other day I wrote:

The argument against Obama's plan is that it exacerbates monetary risk.

The words 'monetary risk' represent a need for new categories of language and knowledge. The recent era of easy money was little concerned with monetary risk. Instead, the country has proceeded as if our monetary regime is beyond reproach -- we were, we are, the world's printing press, the thinking went, and so we can, if we choose to, create more and more debt. Or, as Dick Cheney, put it, "Reagan proved deficits don't matter."

The current contraction is ending this knowledge. Events are showing that America's ability to print money and finance huge debts is not endless.

It is time the words 'monetary risk' get bandied about more seriously when economists, social scientists, journalists, and businessmen and women talk. The sentiment behind the words should be in the minds of elites and publics alike.

But to this point, our ideas have not yet acclimated to this new knowledge, as this stimulus bill includes tax cuts instead of a way to pay for it.

That said, I still am for the stimulus.

More on the contraction of total consumer credit

Credit contraction of December 1990-June 1992:

19 months, 16.4 billion

Credit contraction of October 2008-Present:

3 months, 19.8 billion (data through 2008)

This is an interesting data comparison. I note the differing intensities of the contractions as well as the different durations of time (so far). If in 2009 and beyond we combine 2008's rapid rate of loss with 1990's length of time, we would have a nasty result.

Total consumer credit is now contracting

The question of the dollar

From Bloomberg News:

The Treasury will likely borrow a record $2.5 trillion this fiscal year ending Sept. 30, almost triple the $892 billion in notes and bonds sold in fiscal 2008, according to Goldman Sachs Group Inc. The New York-based firm is one of the 16 primary dealers. This week, the Treasury is selling $187 billion of bills, notes and bonds.

We are tripling the rate we create debt? $187 billion last week? Using more debt to deal with a crisis of too much debt has even the relevant actors questioning themselves:

Treasury Department and Fed officials want to ensure there are enough firms bidding at auctions to keep borrowing costs low after the total number of dealers dropped last year to the lowest amount since the network was formalized in 1960. The Treasury Borrowing Advisory Committee, a market group that works with the central bank, wrote in a memo released Feb. 4 that more dealers would reduce “the possibility of an undersubscribed auction.”

What might a string of these "undersubscribed auctions" mean for the dollar?

Is the US government making a huge, unsure bet? It seems we are acting boldly with little relevant experience guiding us.

President Obama on nationalizing the banks. Paul Krugman on President Obama.

Terry Moran of ABC News yesterday interviewed President Obama. Whole transcript is here.

TERRY MORAN, ABC NEWS: There are a lot of economists who look at these banks and they say all that garbage that's in them renders them essentially insolvent. Why not just nationalize the banks?

OBAMA: Well, you know, it's interesting. There are two countries who have gone through some big financial crises over the last decade or two. One was Japan, which never really acknowledged the scale and magnitude of the problems in their banking system and that resulted in what's called "The Lost Decade." They kept on trying to paper over the problems. The markets sort of stayed up because the Japanese government kept on pumping money in. But, eventually, nothing happened and they didn't see any growth whatsoever.

Sweden, on the other hand, had a problem like this. They took over the banks, nationalized them, got rid of the bad assets, resold the banks and, a couple years later, they were going again. So you'd think looking at it, Sweden looks like a good model. Here's the problem; Sweden had like five banks. [LAUGHS] We've got thousands of banks. You know, the scale of the U.S. economy and the capital markets are so vast and the problems in terms of managing and overseeing anything of that scale, I think, would -- our assessment was that it wouldn't make sense. And we also have different traditions in this country.

Obviously, Sweden has a different set of cultures in terms of how the government relates to markets and America's different. And we want to retain a strong sense of that private capital fulfilling the core -- core investment needs of this country.

And so, what we've tried to do is to apply some of the tough love that's going to be necessary, but do it in a way that's also recognizing we've got big private capital markets and ultimately that's going to be the key to getting credit flowing again.

Paul Krugman uses his blog to respond:

Yes, Obama is impressively articulate and well-informed — and his response shows that he has actually considered the issue. It’s light-years better than what we’ve grown accustomed to in recent years.

But his two main arguments aren’t actually very good. Yes, we have thousands of banks — but the problems are concentrated in a handful of big players. In fact, the Geithner plan, such as it is, already acknowledges this: the “stress test” is to be applied only to banks with assets over $100 billion, of which there are supposed to be around 14.

And the argument that our culture won’t stand for nationalization — well, our culture isn’t too friendly towards bank bailouts of any kind. Yet those bailouts are necessary; and even in America they may be more palatable if taxpayers at least get to throw the bums out.

Oh, and not a week goes by without the FDIC taking several smaller banks into receivership. Nationalization is actually as American as apple pie.

Source.

Geithner announces broad outline of new TARP plan. Dow falls 400 points. The depth of the liquidity crisis even more apparent.

--After getting raked across the coals on television all day, Sec. Geithner's performance today is now being given as the reason for the tank in the Dow today -- 400 points last time I looked. Sec. Geithner looks to have some broad ideas and little confidence, at a time when the expectation was that he'd have specific policies and some confidence that they'd work.

--I understand President Obama and Sec. Geithner's (et al) reason against just taking over the banks is that it would be politically tricky. Is what the Secretary, and by extension the President, are going through today any more politically palatable?

--Beside the unwillingness to just take over the problem organizations, the reason for the Secretary's poor showing is structural: the bad assets in question are that deeply illiquid. They have a de-stabilizingly low market value. At this point, Sec. Geithner doesn't want to pay market values, and he doesn't want to use federal money to pay above-market values. Being committed to do one or the other was necessary to having a fully formed plan today. He wasn't, there was no plan, and the whole operation lost credibility for it.

--Nationalization is the only option I see. They should get to work on it. President Obama is the most credible social force in the world today. Credibility is what the banks need. A perfect merger. Let Obama's administration run things, and may they be creative.

Sec. Geithner getting raked across the coals

CNBC anchors are having their fun tearing down a government official. And it is true that Sec. Geithner in his statements this morning still provides no plan to fix America's banking problems. However, my reading of the situation tells me there is a real good reason the Secretary has no plan: he won't consider the only viable one -- full, honest, and proud nationalization.

America's private banking system has no credibility: it doesn't lead to growth but contraction; it causes rather than solves social problems; and it is mired in terrible public relations. The banks' troubles are bringing down the whole country's operation, from consumers, to companies, to the Treasury. To save the whole, the banks must be made over. New institutions must be created. The only way to do this, that I see, is for the government to seize the banks' assets, let the bad banks fail, let the good ones struggle to maintain their existence, and put our knowledge toward new ideas rather than bailing out old ones.

Finally, you can't simply 'put more liquidity in the market.' The problem is not a lack of money, but a lack of money movement. Liquidity is a multidimensional construct, not a unilateral one. The confidence to lend and borrow depends on credible laws, credible organizations, credible people. The existing banks don't have any of this. New institutions are needed. In the new world of American capitalism, credibility is not announced, it is socially decided.

Why is there still a liquidity crisis?

What, precisely, is going on with the banks?

With all the money the government has pumped into banks via auctions and direct capital injections, why are they still worthless as organizations? The dollar is a viable currency. We are giving billions of these dollars to our banks. Why is this having minimal effect? Why aren't the banks yet lending money? Or are they?

Without a plausible answer to why the banks are in trouble even though they have all the money they need, thanks to the US government, any explanation of the current economic problems strikes me as hollow.

What have the banks done with all the money they've been given? Didn't they use it to pay down their debts? To the contrary, we still hear that the banks are bogged down in bad debt. What happened, then, to the TARP money?

I think there are at least three possible explanations why, despite the TARP money, the banks continue to face liquidity problems:

1. There is a 'confidence' crisis. In this case, the banks are better capitalized now, but maintain the bad assets on their balance sheets. As a result, despite the capital, there is little trust in lending to US consumers and other banks, at least until these assets are given a price. Moreover, for the same reasons, foreign lenders lack confidence in US markets. The pertinent questions become: When will these assets be given a price? How far will these bad assets come down? And will the prices by then be high enough to re-gain our credibility as borrowers? In this scenario, we should do the stimulus now, the TARP later after stimuls raises the prices of the securities.

2. There is a 'jobs/actual-wealth/actual-productivity' crisis. Nobody has the hard income or the physical wealth to sustain the borrowing that went on the past few years. We are significantly poorer as a result of de-leveraging, i.e. the marking down of debt. At a historically normal level of credit-worthiness, very few Americans and American organizations now qualify in terms of hard equity. Again, the solution is demand-side -- we need to build a consumer class again.

3. The banks are lending the money. The TARP money is going (or has gone) straight into the US bond market, which accounts for the bubble in the yields on Treasuries. And therefore there will be a need for more TARP money, because the bad debts have barely been touched. In this scenario, investors are wondering how long the US government can stop-gap Wall Street, because Wall Street is currently stop-gapping the US government.

If the problem is confidence, then I think the banks are under-priced. If they have the capital to wait it out, a stimulus plan can slowly re-value the price of those bad assets. Once we gain evidence of a strengthened American consumer, these assets will be more valuable than they are right now.

If the problem is jobs and wealth -- the lack of any real productive wealth-building for the past three to four decades -- then I say we have the stimulus plan twice over, minus the tax cuts, paid for by a repeal of the Bush tax cuts. Let's invest in America's productivity again.

If the problem is that the TARP money went into treasuries, that means the money went to make more debt rather than pay down debt. To put it mildly, this is a more complex issue. To put it less mildly, this is potentially a harbinger of even bigger problems. For example: Is this putting the Treasury at risk of a default? Is the only thing worse than depending on China, depending on Wall Street?

If it's any two of those three -- a shift in the direction of economic confidence; a lack of jobs, productivity, and actual wealth on the balance books; or a dead treasury -- or god forbid all three, wow: we are short of the middle of a deep contraction and a difficult recovery.