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What happened today was quite dramatic.
Brad Stetser is almost speechless, This must be his shortest blog entry ever...
http://blogs.cfr.org/setser/2008/10/...change-market/
Macro Man is not speechless (see the link in the quote)
The most interesting comment came from Michael Pettis:
http://piaohaoreport.sampasite.com/c...s-mark-a-m.htm
Something similar, but with an (IMHO unjustified) optimistic tone, from Novosti:
http://en.rian.ru/analysis/20080924/117072937.html
If anybody else finds some interesting materials on this topic, links and/or quotes it would be appreciated... It would be nice to gather them on this thread, so we can visit them again in 6 months or a year from now. We are witnessing history in the making.
It's the "debutante ball" of the New World Order. ;)
Brad Stetser is almost speechless, This must be his shortest blog entry ever...
http://blogs.cfr.org/setser/2008/10/...change-market/
Really crazy.
Just read Macro man.
The kind of moves in the Brazilian real and Mexican peso that Macro man describes are not exactly normal.
But nothing much has been normal recently.
One last note: The demands on my time have increased recently, as the number of people looking for insights into what is going on has increased even as I struggle myself to try to understand all that is happening.
Just read Macro man.
The kind of moves in the Brazilian real and Mexican peso that Macro man describes are not exactly normal.
But nothing much has been normal recently.
One last note: The demands on my time have increased recently, as the number of people looking for insights into what is going on has increased even as I struggle myself to try to understand all that is happening.
Macro Man is not speechless (see the link in the quote)
The most interesting comment came from Michael Pettis:
http://piaohaoreport.sampasite.com/c...s-mark-a-m.htm
On a completely separate topic, a journalist friend of mine called me earlier today to ask me what I thought about the popular discussions about whether the current crisis marked a “paradigm shift” that would see a sharp decline in the relative power of Wall Street and London and a rise in the power of one of the Asian financial centers. Aside from the fact that I am a little allergic to paradigm shifts, I thought this was an interesting question. I usually get asked where the New York or Shanghai stock markets will close Friday (for the record: I don’t know).
This is also one of those “big” questions about which I think most of the current debate is a little muddled. To begin with, I don’t think the current crisis is a paradigm shift at all. It is simply yet another in the sequence of crises that have marked the six (as I count them) globalization cycles of the past 200 years. Of course there will be big changes in the worlds of commerce, finance, and politics, but these changes won’t represent a brave new world so much as a reversion to a more standard world.
After all, during the great liquidity cycles that underlie the globalization cycles, we always see in the late stages a massive growth in financial transactions and the power of financial institutions. During these periods banks get larger and larger, often though acquisitions and expansion abroad, and financial activity expands dramatically until it seems to become the hub of all industrial, commercial and political activity.
But it is these late periods which are the anomaly, not the norm. Every end of a globalization period (which usually ends in crisis) we experience a sharp deleveraging and a massive reduction in speculative activity. Along with that inevitably banks and financial markets become less central and less active. The expected decline of Wall Street and London, in other words, is not a shocking new reality but simply a reversion to more normal times – when it is not the dream of 8 out of 10 graduates of elite colleges to become investment bankers. To tell the truth when I was graduating I didn’t even now what investment bankers did. In a few years an awful lot of young graduates will be just as ignorant as I was. That is probably not a bad thing.
I suspect that a lot of experienced bankers, academic, and students of financial history will agree with me so far, but here is where I am going to get controversial. The debate about the “paradigm shift” seems mainly to be between those who say that the current crisis marks the relative decline of Wall Street as the center of world finance and those who argue that it will maintain its relative position.
But I think the effect of the crisis will actually increase the relative position of New York and London as world financial centers. Why? I say this largely because previous global financial crises were just as brutal as the current one, or even more so (1825, 1837, 1873, and 1929 were all more brutal), and yet during the subsequent years the then-global-financial-centers became more, not less, central.
Why this happened is not hard to figure out, I think. During the liquidity booms, the great advantage of the primary financial centers – the fact that they are much more liquid than other markets – is usually sharply eroded by the huge increases in liquidity, trading volumes, and financial transactions across the world, and with them, the decline in the value of liquidity. In fact it was always during the long boom periods that secondary financial centers were able to grow in importance – just as Sao Paolo, Frankfurt, Delhi, Shanghai, Singapore, Dubai and even Hong Kong have all grown dramatically in the past 10 years.
After the booms, however, the sudden reduction in underlying liquidity and the greater value investors and issuers placed on liquid markets typically causes most of the secondary financial centers to die out as trading and issuance migrate to the deeper markets of the primary financial centers. This is simply a form of the old traders saw – “liquidity draws liquidity.” If liquidity truly dries up around the world and trading and issuance volumes collapse, the value for investors and users of capital of accessing New York or London will be greater, not smaller.
What about the argument that an Asian financial center will rise in relative importance? I think this may very well happen, but it will have little or nothing to do with the current crisis.
An Asian financial center will or will not rise depending on several factors. These include the liquidity and value of its currency for international transaction, the strength and impartiality of its legal framework, the scope for political and regulatory independence, a clear governance framework (which implies, among other things, that managers are minimally constrained by policy needs), the size of the home market, the openness to foreign markets, the importance of financial markets (as opposed to large banks) in financing, and several other obvious and not-so-obvious things. The financial center also needs to be perceived as politically (and geopolitically) safe and stable, and especially a safe haven in times of tension, which is not always an easy thing in an Asia which consists of several very large, often heavily armed countries with a long history of mutual distrust and rivalry.
This is also one of those “big” questions about which I think most of the current debate is a little muddled. To begin with, I don’t think the current crisis is a paradigm shift at all. It is simply yet another in the sequence of crises that have marked the six (as I count them) globalization cycles of the past 200 years. Of course there will be big changes in the worlds of commerce, finance, and politics, but these changes won’t represent a brave new world so much as a reversion to a more standard world.
After all, during the great liquidity cycles that underlie the globalization cycles, we always see in the late stages a massive growth in financial transactions and the power of financial institutions. During these periods banks get larger and larger, often though acquisitions and expansion abroad, and financial activity expands dramatically until it seems to become the hub of all industrial, commercial and political activity.
But it is these late periods which are the anomaly, not the norm. Every end of a globalization period (which usually ends in crisis) we experience a sharp deleveraging and a massive reduction in speculative activity. Along with that inevitably banks and financial markets become less central and less active. The expected decline of Wall Street and London, in other words, is not a shocking new reality but simply a reversion to more normal times – when it is not the dream of 8 out of 10 graduates of elite colleges to become investment bankers. To tell the truth when I was graduating I didn’t even now what investment bankers did. In a few years an awful lot of young graduates will be just as ignorant as I was. That is probably not a bad thing.
I suspect that a lot of experienced bankers, academic, and students of financial history will agree with me so far, but here is where I am going to get controversial. The debate about the “paradigm shift” seems mainly to be between those who say that the current crisis marks the relative decline of Wall Street as the center of world finance and those who argue that it will maintain its relative position.
But I think the effect of the crisis will actually increase the relative position of New York and London as world financial centers. Why? I say this largely because previous global financial crises were just as brutal as the current one, or even more so (1825, 1837, 1873, and 1929 were all more brutal), and yet during the subsequent years the then-global-financial-centers became more, not less, central.
Why this happened is not hard to figure out, I think. During the liquidity booms, the great advantage of the primary financial centers – the fact that they are much more liquid than other markets – is usually sharply eroded by the huge increases in liquidity, trading volumes, and financial transactions across the world, and with them, the decline in the value of liquidity. In fact it was always during the long boom periods that secondary financial centers were able to grow in importance – just as Sao Paolo, Frankfurt, Delhi, Shanghai, Singapore, Dubai and even Hong Kong have all grown dramatically in the past 10 years.
After the booms, however, the sudden reduction in underlying liquidity and the greater value investors and issuers placed on liquid markets typically causes most of the secondary financial centers to die out as trading and issuance migrate to the deeper markets of the primary financial centers. This is simply a form of the old traders saw – “liquidity draws liquidity.” If liquidity truly dries up around the world and trading and issuance volumes collapse, the value for investors and users of capital of accessing New York or London will be greater, not smaller.
What about the argument that an Asian financial center will rise in relative importance? I think this may very well happen, but it will have little or nothing to do with the current crisis.
An Asian financial center will or will not rise depending on several factors. These include the liquidity and value of its currency for international transaction, the strength and impartiality of its legal framework, the scope for political and regulatory independence, a clear governance framework (which implies, among other things, that managers are minimally constrained by policy needs), the size of the home market, the openness to foreign markets, the importance of financial markets (as opposed to large banks) in financing, and several other obvious and not-so-obvious things. The financial center also needs to be perceived as politically (and geopolitically) safe and stable, and especially a safe haven in times of tension, which is not always an easy thing in an Asia which consists of several very large, often heavily armed countries with a long history of mutual distrust and rivalry.
Something similar, but with an (IMHO unjustified) optimistic tone, from Novosti:
http://en.rian.ru/analysis/20080924/117072937.html
The total state debt of the USA will rise to well over $11 trillion. It is obvious that such a colossal debt can never be repaid. Instead, it will be serviced by more debt in the future. The contrast with Russia, which has painstakingly sanitised its state finances to the point that it now has more money to lend than the IMF, could hardly be greater. The recent financial crisis itself grew out of this American culture of debt. To some extent, all countries share it: since 1914, all countries use paper currencies, i.e. debt instruments which are never redeemed. Whereas before the First World War, bank notes were essentially vouchers for specific amounts of gold cash, now the "promise to pay the bearer" (which remains inscribed on British bank notes) is in fact hollow.
In America, this basic culture of debt is aggravated by the fact that other countries use the dollar itself as a reserve. This means that the United States can export dollars in order to pay for its imports without the dollar losing value. Other states also need dollars to buy key commodities like oil. The USA can therefore export paper currency almost indefinitely - the famous "deficit without tears" analysed by the great French economist, Jacques Rueff. Naturally, if the state itself encourages such a culture of debt by issuing unredeemable paper currency to pay for imports, and by accumulating such mountains of debt, then it is no surprise if the American financial markets themselves operate on the same basis. But the collapse of those markets is only a symptom of a much deeper problem, the basic insolvency of the American state itself.
What can Russia do about this? At first sight, Russia's role in the international financial system does not seem very large. However, as a major exporter of hydrocarbons, her role in the world economy is actually very important. As the age of the dollar draws to a close, Russia will have to consider selling her oil and gas not in the devalued American currency, but instead in the euro used by most of her customers. It is surely unnatural for two geographical neighbours to do such large volumes of business using the currency of a distant and now ailing nation.
In America, this basic culture of debt is aggravated by the fact that other countries use the dollar itself as a reserve. This means that the United States can export dollars in order to pay for its imports without the dollar losing value. Other states also need dollars to buy key commodities like oil. The USA can therefore export paper currency almost indefinitely - the famous "deficit without tears" analysed by the great French economist, Jacques Rueff. Naturally, if the state itself encourages such a culture of debt by issuing unredeemable paper currency to pay for imports, and by accumulating such mountains of debt, then it is no surprise if the American financial markets themselves operate on the same basis. But the collapse of those markets is only a symptom of a much deeper problem, the basic insolvency of the American state itself.
What can Russia do about this? At first sight, Russia's role in the international financial system does not seem very large. However, as a major exporter of hydrocarbons, her role in the world economy is actually very important. As the age of the dollar draws to a close, Russia will have to consider selling her oil and gas not in the devalued American currency, but instead in the euro used by most of her customers. It is surely unnatural for two geographical neighbours to do such large volumes of business using the currency of a distant and now ailing nation.
It's the "debutante ball" of the New World Order. ;)
President Medvedev blamed Washington's 'economic egotism' for the world's financial woes Photo: AP 
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