Monday, March 05, 2007

Links of the day

Low Subsidies, Aging Plague Rural Japan...an AP story from Yahoo that gives a good illustration of problems Japan is facing...

Japan's Consumer Prices Flat in January...the BoJ doesn't seem to have room to raise rates again in the near future...

The Fourth Great Assault on the Anglosphere..."essential values - belief in democracy, the rule of law, tolerance, equal treatment for all, respect for this country and its shared heritage"...good...

Georgia to increase its military contingent in Iraq - president...that's the country of Georgia, not the home of the Atlanta Braves:)...courtesy of GlobalSecurity.org...

About Recent Financial Turbulence...re sources of inflation outside the US is this quote:

"China and India are expected to continue tightening in response to inflationary pressures. Indeed, the China Economic Review says analysts expect reserve ratios in China to go as high as 11.5% in 2007. And analysts expect more hikes in India given domestic inflation of 6.5% and forecasted GDP growth of 9.2% (highest rate in 18 years)."

The author further states: "one trigger for the recent turbulence in stock markets was a stepping up of efforts to withdraw liquidity from the world economy", referring to the previous quote. Although the primary goal of the Chinese and Indian authorities is naturally to reign in their domestic inflation, it is likely that this withdrawal of liquidity will have meaningful effects in the US capital markets. For example, funds for purchase of mortgage-backed securities may shrink as a result of these actions. A document produced by Brad Setser has several interesting statements:

"Chinese deposits in international banking system are relatively small; most Chinese reserves seem to be invested in securities.
It is not just Treasuries
China holds a relatively diverse portfolio
Lots of agency bonds
Other mortgage backed securities as well
The trend has been for more purchases of agencies, corporate debt, and the dollar-denominated debt of emerging economies
China will likely set up a “government investment corporation” at some point to make more aggressive investments; PBoC manages a very significant share of China’s national wealth."


It seems to me that the PBoC is possibly going to take it in the shorts not only on its dollar reserves that it has accumulated while suppressing the value of the RMB, but on its investments made with those dollar reserves.

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