European Banking Crisis?

[petec]

Anyway, China used the money poring in from abroad to soften the blow from the 2008 financial crisis (i.e. the collapsing demand from US consumers) by spending it in an unprecedented scope for infrastructure projects (essentially doing what Neo-Keynesians demand from the US, the EU and Japan), with the right goal of raising living standards in order to replace lost consumer demand from the US by domestic demand by Chinese consumers (aka "re-balancing"). This process kept up the giant demand for commodities and, with it, commodity producing EM countries going. It also led to giant misallocations because it was a state-controlled process.

 

When China reached the limits of its borrowing capacity in 2014 or 2015 (always referring to public and privat debt taken together), the last man (consumer) standing after 2008 collapsed and with it commodity prices and the rest of EM. What we are witnessing now is a reversal of those money flows back into the US. Unfortunately, though, the US consumer is still in the process of deleveraging and will be for a long time.

 

 

ni-co,

 

My understanding is much of Chinese debt is internal, meaning that it is borrowed from domestic savers, not from foreigners.

 

A lot was also dollar based - borrow at 1% in the US, lend at >>1% in China, minimal fx risk because of the peg = nice carry.

[JBTC]

Just trying to think the effects of -ve rates through further.

 

I see several possibilities and none of them are good.

 

1. Banks earn a -ve spread and either have to raise fees or take losses which impair their capital ratios.

 

2. Banks pull reserves from the central bank and make loans, but the world is so leveraged that an unpleasantly high proportion will go bad, so the banks impair their capital ratios.

 

3. Banks pass -ve rates onto depositors which creates a bank run.  This is a big assumption but it only takes a few withdrawals to start a run - and I'm sure that 2% or 4% or 6% of depositors will decide they have better options than paying the bank to guard their money.  That's enough to start a run at the weaker banks - especially if the banks have to pull in nonperforming loans and take losses.  This has the potential to trigger a deflationary crisis.

 

What am I missing here?  I'm deeply bearish and sceptical of central bankers but surely there is a more positive outcome that they are hoping for?!

 

petec is trying to think through the negative rates. I was hoping to hear more thoughts on this.

 

1. Some of you are familiar with Sweden. They have had negative rates for a bit and just made the rates even more negative. Does anyone know what the Swedish banks are seeing? Is there a run on the banks?

 

2. What fundamental difference is there between zero and small negative rates, in terms of customer behavior and choice? I can imagine people arguing 10 years ago that if rates fall to zero, money would pour out of the banks. It hasn't happened, has it? For the poor, maybe it's easy to move their $1,000 out of their bank and put it under the mattress. But realistically for the vast majority of the rich and the middle class, what are options are we really talking about?

 

3. I recall seeing a notification from IBKR that they will start charging negative rates to customers. Could banks do that at some point?

 

4. To the extent that negative rates for customers are simply impossible, could the banks start charging for checks and all sort of transactions to make up for the loss in NIM?

 

I of course haven't got the answers to the questions. But we own businesses which hire people (hopefully capable) to deal with all sorts of difficulties.

 

Is the negative rates the thing that will finally end the banks and hence the civilization? I am quite sure without banks our life will be more miserable than without Apple and Google combined.

 

I can understand DB and other European banks are under pressure due to a number of headwinds. But I would be much more worried if indeed the negative rates by itself will stop banks from functioning.

 

 

[petec]

 

petec is trying to think through the negative rates. I was hoping to hear more thoughts on this.

 

1. Some of you are familiar with Sweden. They have had negative rates for a bit and just made the rates even more negative. Does anyone know what the Swedish banks are seeing? Is there a run on the banks?

 

2. What fundamental difference is there between zero and small negative rates, in terms of customer behavior and choice? I can imagine people arguing 10 years ago that if rates fall to zero, money would pour out of the banks. It hasn't happened, has it? For the poor, maybe it's easy to move their $1,000 out of their bank and put it under the mattress. But realistically for the vast majority of the rich and the middle class, what are options are we really talking about?

 

3. I recall seeing a notification from IBKR that they will start charging negative rates to customers. Could banks do that at some point?

 

4. To the extent that negative rates for customers are simply impossible, could the banks start charging for checks and all sort of transactions to make up for the loss in NIM?

 

I of course haven't got the answers to the questions. But we own businesses which hire people (hopefully capable) to deal with all sorts of difficulties.

 

Is the negative rates the thing that will finally end the banks and hence the civilization? I am quite sure without banks our life will be more miserable than without Apple and Google combined.

 

I can understand DB and other European banks are under pressure due to a number of headwinds. But I would be much more worried if indeed the negative rates by itself will stop banks from functioning.

 

1. Handelsbanken's AR suggests corporates are starting to pull deposits.

 

2. There are lots of options - bonds, stocks, real estate, gold etc.

 

3. Yes.  One of the small Swiss banks already has I believe.

 

4. Yes - or raising borrowing costs which I believe has happened in Switzerland.

 

Agreed re banks vs. Apple and Google!

 

I don't think NIRP stops banks from functioning per se - but I do think it makes life very hard for them and crucially I think it has all sorts of unintended consequences.  Perhaps most importantly it makes it abundantly clear that easy money hasn't created "escape velocity".

[JBTC]

Anyway, China used the money poring in from abroad to soften the blow from the 2008 financial crisis (i.e. the collapsing demand from US consumers) by spending it in an unprecedented scope for infrastructure projects (essentially doing what Neo-Keynesians demand from the US, the EU and Japan), with the right goal of raising living standards in order to replace lost consumer demand from the US by domestic demand by Chinese consumers (aka "re-balancing"). This process kept up the giant demand for commodities and, with it, commodity producing EM countries going. It also led to giant misallocations because it was a state-controlled process.

 

When China reached the limits of its borrowing capacity in 2014 or 2015 (always referring to public and privat debt taken together), the last man (consumer) standing after 2008 collapsed and with it commodity prices and the rest of EM. What we are witnessing now is a reversal of those money flows back into the US. Unfortunately, though, the US consumer is still in the process of deleveraging and will be for a long time.

 

 

ni-co,

 

My understanding is much of Chinese debt is internal, meaning that it is borrowed from domestic savers, not from foreigners.

 

A lot was also dollar based - borrow at 1% in the US, lend at >>1% in China, minimal fx risk because of the peg = nice carry.

 

Chinese GDP is over USD10tn, and some people peg Chinese debt as much as 3x GDP, or USD30tn.

 

Whatever your "a lot" is, it's likely small when measured in China's scale. 

 

 

[petec]

Anyway, China used the money poring in from abroad to soften the blow from the 2008 financial crisis (i.e. the collapsing demand from US consumers) by spending it in an unprecedented scope for infrastructure projects (essentially doing what Neo-Keynesians demand from the US, the EU and Japan), with the right goal of raising living standards in order to replace lost consumer demand from the US by domestic demand by Chinese consumers (aka "re-balancing"). This process kept up the giant demand for commodities and, with it, commodity producing EM countries going. It also led to giant misallocations because it was a state-controlled process.

 

When China reached the limits of its borrowing capacity in 2014 or 2015 (always referring to public and privat debt taken together), the last man (consumer) standing after 2008 collapsed and with it commodity prices and the rest of EM. What we are witnessing now is a reversal of those money flows back into the US. Unfortunately, though, the US consumer is still in the process of deleveraging and will be for a long time.

 

 

ni-co,

 

My understanding is much of Chinese debt is internal, meaning that it is borrowed from domestic savers, not from foreigners.

 

A lot was also dollar based - borrow at 1% in the US, lend at >>1% in China, minimal fx risk because of the peg = nice carry.

 

Chinese GDP is over USD10tn, and some people peg Chinese debt as much as 3x GDP, or USD30tn.

 

Whatever your "a lot" is, it's likely small when measured in China's scale.

 

Yes, but not necessarily small when compared to:

1. Chinese borrowers' ability to repay in dollars

2. Chinese capital and current account flows

3. Chinese bank equity.

 

These are the things that matter when it comes to whether China will have to devalue (which I believe they will).

 

Bottom line: all EM's are having moderately serious issues with $ debt.

[ni-co]

Good summary of the European banking malaise:

http://www.wsj.com/articles/european-banks-buffeted-by-bond-investors-fears-1455527280

 

What I find interesting is to think about is this:

 

The guiding principle behind the new [bail-in] standards is that investors rather than taxpayers should be on the hook for losses when a bank goes under.

 

To me, this principle sounds like a choice only politicians and ideologues are able to make-up as a guideline. Shouldn't it be obvious that investors will quit giving their money to (hugely fragile) European banks when they know that taxpayers will step in only after investors will be wiped-out? Anticipating that, a prudent bond- or shareholder will cash out long before his bank seems to be even close to the brink, thereby driving down the bank's equity and debt prices, in this way closing capital markets for this bank and, in the end, causing a rat-race to the bottom at which the bank will have to be bailed-out by taxpayers. This seems to be inevitable.

 

Sorry but why should taxpayers be liable for the downside, when all the upside goes to greedy bankers and investors? A well managed bank doesn`t need to issue equity. And if the taxpayers money is used to resuce the system, than all the upside from that move should go to the taxpayer, too. Makes shorting troubled banks easier, but maybe they will just forbid that when shtf.

 

This is not a question of morality. Of course taxpayers should not pay the bill. But in the end, they will have to do it anyway. Why set up the system in a way that incentivizes investors to run from bank investments? All you're doing is adding oil to the fire thereby making sure that you won't be able to recap banks in a controlled fashion. We all know that it's just wishful thinking that the market provides for a functioning banking system without implicit or explicit guarantees by the state. Building an emergency system on the belief that the market will take care of this is just stupid.

[giofranchi]

Agreed re banks vs. Apple and Google!

 

What do you mean?

Both Apple and Google are examples of companies which create wonderful products.

Banks instead are very useful, I agree. But I would not define their products nor services wonderful.

Therefore, I don’t see how a comparison between something that’s ‘necessary’ and something that’s ‘wonderful’ might make much sense…

 

Cheers,

 

Gio

 

[JBTC]

 

petec is trying to think through the negative rates. I was hoping to hear more thoughts on this.

 

1. Some of you are familiar with Sweden. They have had negative rates for a bit and just made the rates even more negative. Does anyone know what the Swedish banks are seeing? Is there a run on the banks?

 

2. What fundamental difference is there between zero and small negative rates, in terms of customer behavior and choice? I can imagine people arguing 10 years ago that if rates fall to zero, money would pour out of the banks. It hasn't happened, has it? For the poor, maybe it's easy to move their $1,000 out of their bank and put it under the mattress. But realistically for the vast majority of the rich and the middle class, what are options are we really talking about?

 

3. I recall seeing a notification from IBKR that they will start charging negative rates to customers. Could banks do that at some point?

 

4. To the extent that negative rates for customers are simply impossible, could the banks start charging for checks and all sort of transactions to make up for the loss in NIM?

 

I of course haven't got the answers to the questions. But we own businesses which hire people (hopefully capable) to deal with all sorts of difficulties.

 

Is the negative rates the thing that will finally end the banks and hence the civilization? I am quite sure without banks our life will be more miserable than without Apple and Google combined.

 

I can understand DB and other European banks are under pressure due to a number of headwinds. But I would be much more worried if indeed the negative rates by itself will stop banks from functioning.

 

1. Handelsbanken's AR suggests corporates are starting to pull deposits.

 

2. There are lots of options - bonds, stocks, real estate, gold etc.

 

3. Yes.  One of the small Swiss banks already has I believe.

 

4. Yes - or raising borrowing costs which I believe has happened in Switzerland.

 

Agreed re banks vs. Apple and Google!

 

I don't think NIRP stops banks from functioning per se - but I do think it makes life very hard for them and crucially I think it has all sorts of unintended consequences.  Perhaps most importantly it makes it abundantly clear that easy money hasn't created "escape velocity".

 

Other assets are not replacements for cash. You can buy stocks from me, but then I am stuck with the cash. I can buy a house, then the seller is stuck with cash. The cash has to be somewhere. If not in the bank, where?

 

I suppose the central banks wanted to get people to use cash to buy stocks etc. But now with negative rates, stocks have crashed. So apparently there are not enough people willing to take their cash to buy stocks. -0.1% is no good, but -30% is worse.

 

So some banks have started to charge more. I frankly always thought they could. If the negative rate environment applies to all banks, of course they can charge whatever they want, as long as they don't over charge relative to competitors.

 

Regarding easy money, I am not going to justify it. But the key question is - what could the central banks have done better and what could they do now? If they are doing the best they can (not saying they are, I just don't know much about these things), we just need to move on.

 

Steve Eisman, of Big Short fame, wrote a piece in NYT last week saying that the big banks are not the issue today. The issue is income inequality, which has caused the poor to borrow to finance their lifestyle. He may be right or wrong. If he is right, I don't know the solution to that. These are big issues. I wish I could understand them better, but I imagine neither Buffett nor Watsa has a solution or invests based on these imponderables. But I digress...

 

 

[SharperDingaan]

3. Bankers will charge as long as their competitors charge, & their regulator allows them to. The threshold seems to be around 50bp.

4. Canadian banks routinely charge for everything they can. Individuals traditionally hold the minimum balance needed to waive the charges; a $2500 balance saves roughly $225-250/yr in fees (10-11%/year) + a $500-$1000 float to cover everyday draws.

 

Lots of chatter amongst very smart people around what to do if Canada goes negative. Most wouldn't change their basic banking. However, a number would simply pump surplus cash into the banks prefs - & put the prefs into a margin account. Whenever a block of cash is required, the bank credits your bank account. Earn 6-8% on the prefs, pay 3-5% on the margin, & claim a tax credit on the margin interest. Basically f*** with me, & I will go out of my way to hurt you.

 

You might also want to keep in mind that it is highly likely that Eurobank capital ratios are severely inflated, re the practice of underweighting risk (Greek government debt carried a 0% risk weight). They are nowhere near as strongly capitalized as advertised.

 

SD

 

[NewbieD]

 

petec is trying to think through the negative rates. I was hoping to hear more thoughts on this.

 

1. Some of you are familiar with Sweden. They have had negative rates for a bit and just made the rates even more negative. Does anyone know what the Swedish banks are seeing? Is there a run on the banks?

 

 

The banks have not started charging people for keeping Money. There is a ton of Money sitting at 0%, as usual, and I don't Think the amount has changed much.

The major trend the last years has been people top-up their mortgage to the maximum. The interest feels so small to people that the banks have now introduced a limit based on people's wages (5X pre-tax income) in addition to their normal cash-flow and loan-to-value rules. This limit has been pushed by the financial regulators. There is also talk of reducing the tax-benefit of having a mortgage (currently 30% of interest is deductible).

 

I don't think mortgages are gonna increase more when/if rates go down further.

 

The banks have increased margins on mortgages as rates dropped so when it comes to Sweden I don't feel there is a pressure on bank earnings as long as they have enough capital to keep their loan base.

[ni-co]

Anyway, China used the money poring in from abroad to soften the blow from the 2008 financial crisis (i.e. the collapsing demand from US consumers) by spending it in an unprecedented scope for infrastructure projects (essentially doing what Neo-Keynesians demand from the US, the EU and Japan), with the right goal of raising living standards in order to replace lost consumer demand from the US by domestic demand by Chinese consumers (aka "re-balancing"). This process kept up the giant demand for commodities and, with it, commodity producing EM countries going. It also led to giant misallocations because it was a state-controlled process.

 

When China reached the limits of its borrowing capacity in 2014 or 2015 (always referring to public and privat debt taken together), the last man (consumer) standing after 2008 collapsed and with it commodity prices and the rest of EM. What we are witnessing now is a reversal of those money flows back into the US. Unfortunately, though, the US consumer is still in the process of deleveraging and will be for a long time.

 

 

ni-co,

 

My understanding is much of Chinese debt is internal, meaning that it is borrowed from domestic savers, not from foreigners.

 

A lot was also dollar based - borrow at 1% in the US, lend at >>1% in China, minimal fx risk because of the peg = nice carry.

 

Chinese GDP is over USD10tn, and some people peg Chinese debt as much as 3x GDP, or USD30tn.

 

Whatever your "a lot" is, it's likely small when measured in China's scale.

 

Yes, but not necessarily small when compared to:

1. Chinese borrowers' ability to repay in dollars

2. Chinese capital and current account flows

3. Chinese bank equity.

 

These are the things that matter when it comes to whether China will have to devalue (which I believe they will).

 

Bottom line: all EM's are having moderately serious issues with $ debt.

 

Exactly. The inflowing dollars were converted into yuan (in the end the PBoC bought those dollars with newly printed yuan and invested them into US treasuries held as reserves). The capital, in form of newly printed yuan, found its way – through the regular and the shadow banking system (multiplier effect!) – into the Chinese economy. A lot of yuan denominated loans are directly or indirectly dependent on those capital flows.

 

Now the flows are in reverse-gear and the multiplier effect works in the other direction, tightening credit conditions. Even worse, by trying to stabilize the yuan against the dollar (selling USD and buying yuan), China is actually tightening domestic money supply as well, thereby making the problem worse.

[JBTC]

Agreed re banks vs. Apple and Google!

 

What do you mean?

Both Apple and Google are examples of companies which create wonderful products.

Banks instead are very useful, I agree. But I would not define their products nor services wonderful.

Therefore, I don’t see how a comparison between something that’s ‘necessary’ and something that’s ‘wonderful’ might make much sense…

 

Cheers,

 

Gio

 

Sorry we weren't discussing the investment merits between banks and Apple etc.

 

I was trying to say that human society progressed despite not having smart phones in the past 1000 years. But without banks the human progress would not have happened.

 

Now with the onset of negative rates, looks like we may need to go back to our caves :-(

 

 

[ni-co]

Other assets are not replacements for cash. You can buy stocks from me, but then I am stuck with the cash. I can buy a house, then the seller is stuck with cash. The cash has to be somewhere. If not in the bank, where?

 

In €500 notes in vaults for example. Wait a second…

 

Exclusive: ECB Wants to Stop Issuing €500 Bills · Handelsblatt Global Edition

 

The governing council of the European Central Bank wants to abolish €500 bills, Handelsblatt has learned.

 

The ECB’s top decision-making body recently adopted a declaration of intent on this topic, insiders told Handelsblatt, which is a strong indicator of how the central bank is likely to decide in several months’ time.

 

Mario Draghi, the ECB’s president, later Monday afternoon confirmed that the central bank was “considering action on that front” in testimony before the European Parliament.

 

The council has already asked its committee on banknotes to look into the technicalities of withdrawing the bills from circulation, according to a source familier with the matter. The committee now has two to three months to complete this process before the central bank reaches a final decision. Key questions include how long the bill will continue to be accepted once circulation is halted.

 

For the ECB, ending circulation of the bill is a means to fight money laundering. The bill is used primarily for illegal business, according to corruption and crime experts.

 

https://global.handelsblatt.com/breaking/exclusive-ecb-wants-to-stop-issuing-e500-bills

[petec]

Anyway, China used the money poring in from abroad to soften the blow from the 2008 financial crisis (i.e. the collapsing demand from US consumers) by spending it in an unprecedented scope for infrastructure projects (essentially doing what Neo-Keynesians demand from the US, the EU and Japan), with the right goal of raising living standards in order to replace lost consumer demand from the US by domestic demand by Chinese consumers (aka "re-balancing"). This process kept up the giant demand for commodities and, with it, commodity producing EM countries going. It also led to giant misallocations because it was a state-controlled process.

 

When China reached the limits of its borrowing capacity in 2014 or 2015 (always referring to public and privat debt taken together), the last man (consumer) standing after 2008 collapsed and with it commodity prices and the rest of EM. What we are witnessing now is a reversal of those money flows back into the US. Unfortunately, though, the US consumer is still in the process of deleveraging and will be for a long time.

 

 

ni-co,

 

My understanding is much of Chinese debt is internal, meaning that it is borrowed from domestic savers, not from foreigners.

 

A lot was also dollar based - borrow at 1% in the US, lend at >>1% in China, minimal fx risk because of the peg = nice carry.

 

Chinese GDP is over USD10tn, and some people peg Chinese debt as much as 3x GDP, or USD30tn.

 

Whatever your "a lot" is, it's likely small when measured in China's scale.

 

Yes, but not necessarily small when compared to:

1. Chinese borrowers' ability to repay in dollars

2. Chinese capital and current account flows

3. Chinese bank equity.

 

These are the things that matter when it comes to whether China will have to devalue (which I believe they will).

 

Bottom line: all EM's are having moderately serious issues with $ debt.

 

Exactly. The inflowing dollars were converted into yuan (in the end the PBoC bought those dollars with newly printed yuan and invested them into US treasuries held as reserves). The capital, in form of newly printed yuan, found its way – through the regular and the shadow banking system (multiplier effect!) – into the Chinese economy. A lot of yuan denominated loans are directly or indirectly dependent on those capital flows.

 

Now the flows are in reverse-gear and the multiplier effect works in the other direction, tightening credit conditions. Even worse, by trying to stabilize the yuan against the dollar (selling USD and buying yuan), China is actually tightening domestic money supply as well, thereby making the problem worse.

 

+1

[petec]

Other assets are not replacements for cash. You can buy stocks from me, but then I am stuck with the cash. I can buy a house, then the seller is stuck with cash. The cash has to be somewhere. If not in the bank, where?

 

 

Well that's sort of my point: when no-one wants to hold cash, and passes it on to the next person as fast as possible, you get a rise in the money velocity and, all else equal, inflation.  Which is what the central banks think they want.

 

You're assuming the cash has to be parked somewhere.  That's exactly what the central banks are trying to stop.  They want it to go round and round.

 

 

 

[petec]

Agreed re banks vs. Apple and Google!

 

What do you mean?

Both Apple and Google are examples of companies which create wonderful products.

Banks instead are very useful, I agree. But I would not define their products nor services wonderful.

Therefore, I don’t see how a comparison between something that’s ‘necessary’ and something that’s ‘wonderful’ might make much sense…

 

Cheers,

 

Gio

 

The statement I agreed with was "I am quite sure without banks our life will be more miserable than without Apple and Google combined".

 

Take Apple and Google away and I can't call my mum or waste time on tinterwebs.  Take the banks away and we're back in 1932.  I know which would make me more miserable!

[giofranchi]

Sorry we weren't discussing the investment merits between banks and Apple etc.

 

I was trying to say that human society progressed despite not having smart phones in the past 1000 years. But without banks the human progress would not have happened.

 

Now with the onset of negative rates, looks like we may need to go back to our caves :-(

 

Ok. I understand. But I wasn’t discussing investment merits either… Instead, I am not sure I would say humanity at the stage of development it has reached today only benefits from what’s ‘necessary’… Imo the more technological progress goes on, the more humanity will benefit from ‘great’ products.

 

In the past the onset of negative rates has led to wars, hasn’t it? War has historically succeeded in accelerating the deleveraging process through defaults, and in causing inflation (and interest rates) to rise again. Right?

 

It might be just wishful thinking… But let’s hope this time the deleveraging process might proceed from the building of wealth, instead of the defaulting of debts. And to build wealth you ‘need’ great products!

 

Cheers,

 

Gio

 

[petec]

Sorry we weren't discussing the investment merits between banks and Apple etc.

 

I was trying to say that human society progressed despite not having smart phones in the past 1000 years. But without banks the human progress would not have happened.

 

Now with the onset of negative rates, looks like we may need to go back to our caves :-(

 

Ok. I understand. But I wasn’t discussing investment merits either… Instead, I am not sure I would say humanity at the stage of development it has reached today only benefits from what’s ‘necessary’… Imo the more technological progress goes on, the more humanity will benefit from ‘great’ products.

 

In the past the onset of negative rates has led to wars, hasn’t it? War has historically succeeded in accelerating the deleveraging process through defaults, and in causing inflation (and interest rates) to rise again. Right?

 

It might be just wishful thinking… But let’s hope this time the deleveraging process might proceed from the building of wealth, instead of the defaulting of debts. And to build wealth you ‘need’ great products!

 

Cheers,

 

Gio

 

Ha - excellent post!  However I fear we have already shown that growth won't dig us out of this hole.  Deflation, default, and cleared markets may be the only way - not, I hope, aided by war.

[frommi]

 

This is not a question of morality. Of course taxpayers should not pay the bill. But in the end, they will have to do it anyway. Why set up the system in a way that incentivizes investors to run from bank investments? All you're doing is adding oil to the fire thereby making sure that you won't be able to recap banks in a controlled fashion. We all know that it's just wishful thinking that the market provides for a functioning banking system without implicit or explicit guarantees by the state. Building an emergency system on the belief that the market will take care of this is just stupid.

 

Yes you are right, negative rates are not the solution, but maybe giving money directly to people will solve it. The swiss are voting on this in the summer (http://www.thelocal.ch/20160127/swiss-to-vote-on-guaranteed-income-for-all), when this gets approved than thats probably the channel to throw money of the helicopter. If enough countries do it, you can be sure that inflation picks up sometime down the road. I was always under the impression that current government policy (austerity) is the real problem, because they don`t see the problem in the first place. Maybe it comes too late to save the banks, who knows.

[petec]

 

This is not a question of morality. Of course taxpayers should not pay the bill. But in the end, they will have to do it anyway. Why set up the system in a way that incentivizes investors to run from bank investments? All you're doing is adding oil to the fire thereby making sure that you won't be able to recap banks in a controlled fashion. We all know that it's just wishful thinking that the market provides for a functioning banking system without implicit or explicit guarantees by the state. Building an emergency system on the belief that the market will take care of this is just stupid.

 

Yes you are right, negative rates are not the solution, but maybe giving money directly to people will solve it. The swiss are voting on this in the summer (http://www.thelocal.ch/20160127/swiss-to-vote-on-guaranteed-income-for-all), when this gets approved than thats probably the channel to throw money of the helicopter. If enough countries do it, you can be sure that inflation picks up sometime down the road. I was always under the impression that current government policy (austerity) is the real problem, because they don`t see the problem in the first place. Maybe it comes too late to save the banks, who knows.

 

My feeling is that the real problem is the unwillingness to allow recessions and deflation to clear markets.  But that aside, I agree that a guaranteed income for all is a great channel for helicopter money and may well be the future.  Free markets my a*se.

[ni-co]

 

This is not a question of morality. Of course taxpayers should not pay the bill. But in the end, they will have to do it anyway. Why set up the system in a way that incentivizes investors to run from bank investments? All you're doing is adding oil to the fire thereby making sure that you won't be able to recap banks in a controlled fashion. We all know that it's just wishful thinking that the market provides for a functioning banking system without implicit or explicit guarantees by the state. Building an emergency system on the belief that the market will take care of this is just stupid.

 

Yes you are right, negative rates are not the solution, but maybe giving money directly to people will solve it. The swiss are voting on this in the summer (http://www.thelocal.ch/20160127/swiss-to-vote-on-guaranteed-income-for-all), when this gets approved than thats probably the channel to throw money of the helicopter. If enough countries do it, you can be sure that inflation picks up sometime down the road. I was always under the impression that current government policy (austerity) is the real problem, because they don`t see the problem in the first place. Maybe it comes too late to save the banks, who knows.

 

You may have misunderstood my post. I was referring to the new bail-in rules. Sorry, it's a bit confusing to discuss regulatory requirements, Apple, China and negative rates at the same time. ;)

[petec]

http://www.bloomberg.com/news/articles/2016-02-14/here-s-why-ecb-and-boj-can-t-copy-danish-negative-rate-success

 

EDIT: also http://www.economist.com/news/leaders/21690031-negative-rates-club-growing-there-limit-how-low-rates-can-go-negative-creep

 

"For commercial banks [in Europe], a small interest charge on electronic deposits has proved to be bearable compared with the costs of safely storing stacks of cash—and not yet onerous enough to try to pass on to individual depositors."

 

"Banks in Europe have started to pass on some of the cost of negative rates to big corporate depositors. Their only ready alternative to stashing large pots of cash is safe and liquid government bonds, whose yields have also turned negative, for terms of up to ten years in Switzerland. Rich personal-account holders are next. The boss of Julius Baer, a Swiss private bank, said this week that if interest rates in Europe go further into the red, it might have to charge depositors."

 

"That would be only the start of the topsy-turviness. Were interest rates negative enough for long enough, specialist security firms would emerge that would build vaults to store cash on behalf of big depositors and clear transfers between their customers’ accounts. Firms would seek to make payments quickly and receive them slowly. Tax offices would discourage prompt settlement or overpayment of accounts: one Swiss canton has already stopped discounts for early tax payment and said it wants to receive money as late as possible. Far from being incentivised to lend more, banks worried about shrinking deposits would be warier of extending credit."

[JBTC]

Anyway, China used the money poring in from abroad to soften the blow from the 2008 financial crisis (i.e. the collapsing demand from US consumers) by spending it in an unprecedented scope for infrastructure projects (essentially doing what Neo-Keynesians demand from the US, the EU and Japan), with the right goal of raising living standards in order to replace lost consumer demand from the US by domestic demand by Chinese consumers (aka "re-balancing"). This process kept up the giant demand for commodities and, with it, commodity producing EM countries going. It also led to giant misallocations because it was a state-controlled process.

 

When China reached the limits of its borrowing capacity in 2014 or 2015 (always referring to public and privat debt taken together), the last man (consumer) standing after 2008 collapsed and with it commodity prices and the rest of EM. What we are witnessing now is a reversal of those money flows back into the US. Unfortunately, though, the US consumer is still in the process of deleveraging and will be for a long time.

 

 

ni-co,

 

My understanding is much of Chinese debt is internal, meaning that it is borrowed from domestic savers, not from foreigners.

 

A lot was also dollar based - borrow at 1% in the US, lend at >>1% in China, minimal fx risk because of the peg = nice carry.

 

Chinese GDP is over USD10tn, and some people peg Chinese debt as much as 3x GDP, or USD30tn.

 

Whatever your "a lot" is, it's likely small when measured in China's scale.

 

Yes, but not necessarily small when compared to:

1. Chinese borrowers' ability to repay in dollars

2. Chinese capital and current account flows

3. Chinese bank equity.

 

These are the things that matter when it comes to whether China will have to devalue (which I believe they will).

 

Bottom line: all EM's are having moderately serious issues with $ debt.

 

Exactly. The inflowing dollars were converted into yuan (in the end the PBoC bought those dollars with newly printed yuan and invested them into US treasuries held as reserves). The capital, in form of newly printed yuan, found its way – through the regular and the shadow banking system (multiplier effect!) – into the Chinese economy. A lot of yuan denominated loans are directly or indirectly dependent on those capital flows.

 

Now the flows are in reverse-gear and the multiplier effect works in the other direction, tightening credit conditions. Even worse, by trying to stabilize the yuan against the dollar (selling USD and buying yuan), China is actually tightening domestic money supply as well, thereby making the problem worse.

 

I don't want to go into details, other than saying for most China watchers, foreign debt is not China's Achilles heel. See the quote below and a full article on this subject.

 

"Another concern is that the weaker RMB will increase China’s external debt burden, a key ingredient in both the Latin American debt crisis in the 1980s and the Asian financial crisis in the 1990s. In our view, there are far fewer risks associated with China’s current external debt than those crisis-ravaged countries."

 

http://www.barrons.com/articles/does-chinas-external-debt-pose-a-major-risk-1444726980

 

I however do not disagree China may have to devalue. This is off topic but perhaps important to many.

 

The current account is no problem. China continues to run huge surplus in current account, especially in goods. Basically the rest of world has stopped making things and can only buy from China. This is partly due to misguided industrial policies of many DM countries where manufacturing is regarded as outdated. But this is reality today. In services, there is a deficit, as China has to buy Hollywood films and the millions of tourists are spending overseas. But all in, FX piles up everyday due to China's manufacturing competitiveness.

 

The risk is in capital account. China has run up major asset bubbles, mostly in housing. It tried to ignite a bubble in stocks last year, but it was not as successful. Increasingly Chinese companies are finding it difficult to make money at home. All of this is compelling money to leave China. Companies are buying up overseas businesses and commercial properties. The individuals have pushed up property prices from Vancouver to Sydney. Here, money leaks out everyday.

 

So it seems to me both factors need to be taken into consideration when thinking about Rmb.

 

Based on what has occurred in Europe, Japan, etc, I am tempted to think a cheapening Rmb is helpful to the Chinese government. However, this will benefit mostly companies that export, rather than consumers who buy imported goods. That is a problem, because Chinese government's stated goal is to re-balance, meaning to move to a consumer based economy. By cheapening Rmb, consumers' buying power is weakened.

 

So nothing is too obvious. In the end, I feel the government will probably give up on its goal to rebalance (which is a LT benefit) and try to protect the exporters.

 

 

[petec]

JBTC I think we have been arguing at cross-purposes.  I agree with your post and wasn't trying to argue that foreign debt is the key problem (although it is a problem).

 

What I would question within your post is the continued competitiveness of Chinese manufacturing.  We know their currency has appreciated vs competitors, that salaries have risen fast, that urbanisation has reversed (indicating fewer manufacturing and other jobs in cities). 

 

My understanding is that the only reason the trade balance is OK is because imports are falling even faster than exports!  Jan -18% and -11% for example.  Neither looks good.

[JBTC]

Other assets are not replacements for cash. You can buy stocks from me, but then I am stuck with the cash. I can buy a house, then the seller is stuck with cash. The cash has to be somewhere. If not in the bank, where?

 

 

Well that's sort of my point: when no-one wants to hold cash, and passes it on to the next person as fast as possible, you get a rise in the money velocity and, all else equal, inflation.  Which is what the central banks think they want.

 

You're assuming the cash has to be parked somewhere.  That's exactly what the central banks are trying to stop.  They want it to go round and round.

 

First of all, is it happening? As rates have come down, has money velocity gone up? I want to know.

 

Second, if it is and somehow causing inflation, that's great news isn't it? Because we can finally get rid of negative rates.

 

Back to normal - whew!

 

I actually don't completely discount the possibility of seeing inflation. Maybe that's the ultimate contrarian trade.

 

Call me biased but I don't quite like the negative rates death spiral seemingly unfolding before us...