Every moment of stress in the global financial system is a test of lines of interconnection and power. The most obvious example of this right now is the sanctions regime imposed on Russia. That has provoked a surge in debate about possible alternatives to the dollar, ruble-yuan systems, commodity-based networks of finance etc. The line I have been taking in Chartbook is that talk of alternatives to the dollar is not so much premature as reflective of an unease with the present, which finds relief in
There are so many ways to "hedge" UST positions by Japanese investors that can be impacted that I am suspect of this explanation. First, investor could truly hedge all future USD cash flows (all coupons and final principal at maturity) back into JPY through a cross-currency swap. No-arb pricing demands this would generate a synthetic yen asset (ignoring counterparty risk) that would return about same as JGBs. So this is not very common. Alternatively investor could interest rate and/or basis swap only the fixed USD coupons into either fixed or floating JPY for all or part of the life of the UST and leave principal un-hedged. This protects income statement from FX risk (and who cares about balance sheet impact with new accounting for financial institutions allowing most bonds to be carried at cost without MTM -- I say this only partly in jest). More common, I think, is to hedge through outright FX forwards only the principal. And this is often hedged for only 6 months or one year into the future (so not out to 10 year maturity of a UST -- 10-year outright FX forwards are not particularly liquid). Higher and rising USD rates relative to JPY rates mean, of course, that the forward sales of USD for the hedges are at growing discounts, thereby hurting expected returns. But note the word EXPECTED. There is so much left UNHEDGED in these strategies (most if not all of the coupons and the remaining life of the UST after the FX forward hedge maturity -- whatever that might be -- are left unhedged) that I find arguments for asset demand based on currency hedging costs to be unreliable. NB: be careful of the use of the simple single word "swap". It can mean many different things (interest rate, cross currency, basis, interest differential forwards, etc) and is used differently by players in different parts of the world. FT journalists are some of the worst for confusing this, and most Bloomberg writers are not much better.
Great post as usual Adam! I'm not sure how many Japanese investors in treasuries actually hedge via cross currency swaps and I can't remember where I read something to the effect that the cross currency swap market isn't large enough for the holders to hedge all of their exposure. Therefore, the vast majority wear the currency risk precisely bc it is expensive to hedge and the market can't accommodate them.
Michael Hudson points to a crisis on Wall Street happening in 2019 that got wrapped up into the Covid response you describe in Shutdown. I read both of y'all's books and assume you may look at him askance, but I was wondering if there was already some instability in the system we should account for in our decision whether or not to panic.
I'm not personally panicked because things usually go slowly, and I generally take your word for stuff I don't understand well, but I think de-dollarization will eventually happen, and we seem to be pushing it along, driving our "enemies" togther. And when it happens it seems like something we should do in an orderly way. Or is splitting the globe into two halves the "orderly" solution US actors/owners have landed on?
Hi Adam! I loved the question. I would need to re read it before I understand your attempt at answering it. I do have a remark, at the end you mention the low inflation in Europe, i believe last week German inflation number was like 8%? Thats in line with the US number. What is out of whack policy wise is the ECB and BOJ keeping their low interest policies while the FED is pressed to Hike (6x this year).
Why is the whole world somehow capitulating to US aggression? Have they forgotten 2008? It makes no sense. The US prints its currency. It is propped-up by the likes of Petrodollars. The US literally gets a way with murder, gets away with flooding regions and specific conflict areas with weapons, gets away with punishing emerging nations, gets away with devaluing the quality of life in dmmm near every nation. And the world bows to the US. This concept of employing sanctions and threats thereof should be banned altogether. And still the world bows to the US. If you do global business, you have no guarantee of not getting screwed by the US the next day. You have no guarantee that what happens in the US won't cause your own nation to fail. As one body, nations together should tell the US that it will no longer buy its debt, until the US govenment assures everyone that it will only promote peace and not more of this manipulation seen in every part of the world... especially this Ukraine debacle.
Ask yourselves, why does Scandinavia just now see the need to join Nato? Ask yourselves why the Emiratis and Saudis won't return a call from the WH. Ask yourselves, which emerging nation sees any hope of recovery from inflation,since sanctions now threaten global supplies? Ask yourselves, why has each nation decided to abandon a trade partner in Russia after years and thru Jan 2022 of doing business with little incident? Chinese companies listed on NYSE? Nations dependent on wheat exports, aka the basic necessities for life? Everyone is having to play ball with the US.
And one field nuke into Kyiv, one into Lviv, one into any nuclear facility, one into Odessa and one into Mariupol simultaneously really will show just how f....n stupid sanctions are, and how useless they are to the biggest of pictures for all but the crappy US elite. Prove me wrong.
To answer only some of your questions, the Europeans seem (with perhaps the exception of Hungary) far more upset with Russian aggression toward Ukraine than the US which, for much of the time, has been behind the curve.
Finland and Sweden are seeking to join NATO out of fear of Russian bellicosity and not because of anything the US has done.
The Saudis and Emiratis won’t talk to the Biden Administration because, as far as I can tell, its push to resuscitate the JCPOA at any cost. The Sunni Arabs see this deal as resuming the financing of Iran’s hegemonic plans for the region through sanctions relief and the transfer of billions ultimately to the IRCH and its terror proxies, and inevitably culminating with a nuclear Iran once the final sunset clause takes effect in about a decade. Should this weaker JCPOA be agreed to, look for nuclear proliferation among some Arab countries in advance of Iranian going nuclear along with a new series of overt Arab commercial and military alliances with Israel, the only stable country there that has shown the will and ability to defend itself against Iranian aggression.
So while I see a huge US geopolitical error in progress with respect to Iran, as far as Ukraine, Finland and Sweden are concerned, the geopolitical error there has Russia written all over it. But that just my opinion.
But, when it comes to business, no one but the US government had any problem with Russia. That is best seen in the values of trade, and years doing it and the praises on the people like how Merkel was deified and always re-elected and went out as a champ. I understand things can change on a dime. But why? As in, how is Ukraine so important that everyone, except the US government, is willing to sacrifice everything for one nation? That's stupid. Arming Ukraine is stupid from that vantage point and many vantage points. A war would have finished in four days as Kyiv would have fallen without much damage to the structure within Ukraine's economy. Not having a Russian-backed government installed would have prevented so many issue within the countray and outside, except for one thing...Sanctions, the chief weapon and the point of my words, where the US again bullies everyone. Who's the real enemy? The US bullies thru sanctions, because it can shut down trade, corporations doing business, money flow, payment, etc. I really don't think Europe had any problem with Russia until having an issue with Russia became some crap rally cry. But heck, that's how emotions suck peple in thru psyops.
The US is under no obligation to allow Russia to gain power unopposed. To argue in response that the US has acted badly in the past, even if true, is quite irrelevant to hard power international politics. That it may be giving passes of various types to Iran as it penetrates Venezuela and Nicaragua, does not mean it cannot treat Russia differently as it sees fit. Simply put, the US is a superpower that can act as it does, even if mistakenly or foolishly, because it can deal with the adverse consequences.
In sharp contrast, Putin’s act of will in transforming a weak Russia into a superpower entitled to international respect has hit a wall of reality in Ukraine. Russia has been exposed for what it truly is, a middling power with a military that bears the scars of endemic corruption and poor leadership that sits atop a fragile economy that leaves it vulnerable. It is a tough thing to reconcile yourself to the fact that your country’s days of shining in the Sun are past, but the Western European former Great Powers have (more or less) made that transition and one day, the US will have to do the same - but that day has not arrived for America; it has for Russia.
And even if the US is a “bully” in pushing economic sanctions in lieu of risking a shooting war, what would you call Russia’s naked and unprovoked aggression against its neighbor? That’s really just a rhetorical question.
The only question of interest for the world is whether Putin will accept this reality and withdraw, which will cost him his position and possibly his wealth and life, or will he take as many down with him as possible. Only time will tell.
Points taken, but the US might be said to have a *moral* obligation to allow Russia to shore up power *it already has*.
Perhaps taking the trust-but-verify approach to Putin following his stated goals rather than assuming he's about to march into Western Europe would lead to fewer deaths (and other misery) both short and long term.
In international affairs, morality is generally not a factor in decision making. It may be deployed as a justification for the decision reached. Here, though, I don’t see allowing Russia to swallow Ukraine, as originally envisioned, to be something in the US interest given the agricultural (among other) windfalls that would accrue to Russia.
And, of course, given Putin’s statements and track record, what possible guarantees could he give to the EU or NATO countries? Next stop, a corridor to Kaliningrad. After all, the West demands that Israel sever itself to provide Palestinians with contiguity between Gaza and the West Bank - so what’s the moral difference, one might ask.
If you're saying that moral obligations can't fall onto a country just because it's international relations, I have to disagree.
If these powers that be are trying to convince me, the citizen, to agree with them/support them, which is the only reason why I can see them going to such effort, then I can speak of moral obligations. And we certainly claim them ourselves when we get involved.
Swallow Ukraine? That's not what Putin said he was doing nor seems to be trying to do. He took a small army in and seems to be focused on the areas where the western ukrainian army interacts with the newly independent Donbass oblasts (or whatever they are called).
I make no comparison to Israel. Different situation
There are so many ways to "hedge" UST positions by Japanese investors that can be impacted that I am suspect of this explanation. First, investor could truly hedge all future USD cash flows (all coupons and final principal at maturity) back into JPY through a cross-currency swap. No-arb pricing demands this would generate a synthetic yen asset (ignoring counterparty risk) that would return about same as JGBs. So this is not very common. Alternatively investor could interest rate and/or basis swap only the fixed USD coupons into either fixed or floating JPY for all or part of the life of the UST and leave principal un-hedged. This protects income statement from FX risk (and who cares about balance sheet impact with new accounting for financial institutions allowing most bonds to be carried at cost without MTM -- I say this only partly in jest). More common, I think, is to hedge through outright FX forwards only the principal. And this is often hedged for only 6 months or one year into the future (so not out to 10 year maturity of a UST -- 10-year outright FX forwards are not particularly liquid). Higher and rising USD rates relative to JPY rates mean, of course, that the forward sales of USD for the hedges are at growing discounts, thereby hurting expected returns. But note the word EXPECTED. There is so much left UNHEDGED in these strategies (most if not all of the coupons and the remaining life of the UST after the FX forward hedge maturity -- whatever that might be -- are left unhedged) that I find arguments for asset demand based on currency hedging costs to be unreliable. NB: be careful of the use of the simple single word "swap". It can mean many different things (interest rate, cross currency, basis, interest differential forwards, etc) and is used differently by players in different parts of the world. FT journalists are some of the worst for confusing this, and most Bloomberg writers are not much better.
Great post as usual Adam! I'm not sure how many Japanese investors in treasuries actually hedge via cross currency swaps and I can't remember where I read something to the effect that the cross currency swap market isn't large enough for the holders to hedge all of their exposure. Therefore, the vast majority wear the currency risk precisely bc it is expensive to hedge and the market can't accommodate them.
Thank you. That is good to know. Was following the FT line here. Would love to read more.
Michael Hudson points to a crisis on Wall Street happening in 2019 that got wrapped up into the Covid response you describe in Shutdown. I read both of y'all's books and assume you may look at him askance, but I was wondering if there was already some instability in the system we should account for in our decision whether or not to panic.
I'm not personally panicked because things usually go slowly, and I generally take your word for stuff I don't understand well, but I think de-dollarization will eventually happen, and we seem to be pushing it along, driving our "enemies" togther. And when it happens it seems like something we should do in an orderly way. Or is splitting the globe into two halves the "orderly" solution US actors/owners have landed on?
Another outstanding take
See what happens after the quarterly refunding mid May
Hi Adam! I loved the question. I would need to re read it before I understand your attempt at answering it. I do have a remark, at the end you mention the low inflation in Europe, i believe last week German inflation number was like 8%? Thats in line with the US number. What is out of whack policy wise is the ECB and BOJ keeping their low interest policies while the FED is pressed to Hike (6x this year).
Why is the whole world somehow capitulating to US aggression? Have they forgotten 2008? It makes no sense. The US prints its currency. It is propped-up by the likes of Petrodollars. The US literally gets a way with murder, gets away with flooding regions and specific conflict areas with weapons, gets away with punishing emerging nations, gets away with devaluing the quality of life in dmmm near every nation. And the world bows to the US. This concept of employing sanctions and threats thereof should be banned altogether. And still the world bows to the US. If you do global business, you have no guarantee of not getting screwed by the US the next day. You have no guarantee that what happens in the US won't cause your own nation to fail. As one body, nations together should tell the US that it will no longer buy its debt, until the US govenment assures everyone that it will only promote peace and not more of this manipulation seen in every part of the world... especially this Ukraine debacle.
Ask yourselves, why does Scandinavia just now see the need to join Nato? Ask yourselves why the Emiratis and Saudis won't return a call from the WH. Ask yourselves, which emerging nation sees any hope of recovery from inflation,since sanctions now threaten global supplies? Ask yourselves, why has each nation decided to abandon a trade partner in Russia after years and thru Jan 2022 of doing business with little incident? Chinese companies listed on NYSE? Nations dependent on wheat exports, aka the basic necessities for life? Everyone is having to play ball with the US.
And one field nuke into Kyiv, one into Lviv, one into any nuclear facility, one into Odessa and one into Mariupol simultaneously really will show just how f....n stupid sanctions are, and how useless they are to the biggest of pictures for all but the crappy US elite. Prove me wrong.
To answer only some of your questions, the Europeans seem (with perhaps the exception of Hungary) far more upset with Russian aggression toward Ukraine than the US which, for much of the time, has been behind the curve.
Finland and Sweden are seeking to join NATO out of fear of Russian bellicosity and not because of anything the US has done.
The Saudis and Emiratis won’t talk to the Biden Administration because, as far as I can tell, its push to resuscitate the JCPOA at any cost. The Sunni Arabs see this deal as resuming the financing of Iran’s hegemonic plans for the region through sanctions relief and the transfer of billions ultimately to the IRCH and its terror proxies, and inevitably culminating with a nuclear Iran once the final sunset clause takes effect in about a decade. Should this weaker JCPOA be agreed to, look for nuclear proliferation among some Arab countries in advance of Iranian going nuclear along with a new series of overt Arab commercial and military alliances with Israel, the only stable country there that has shown the will and ability to defend itself against Iranian aggression.
So while I see a huge US geopolitical error in progress with respect to Iran, as far as Ukraine, Finland and Sweden are concerned, the geopolitical error there has Russia written all over it. But that just my opinion.
But, when it comes to business, no one but the US government had any problem with Russia. That is best seen in the values of trade, and years doing it and the praises on the people like how Merkel was deified and always re-elected and went out as a champ. I understand things can change on a dime. But why? As in, how is Ukraine so important that everyone, except the US government, is willing to sacrifice everything for one nation? That's stupid. Arming Ukraine is stupid from that vantage point and many vantage points. A war would have finished in four days as Kyiv would have fallen without much damage to the structure within Ukraine's economy. Not having a Russian-backed government installed would have prevented so many issue within the countray and outside, except for one thing...Sanctions, the chief weapon and the point of my words, where the US again bullies everyone. Who's the real enemy? The US bullies thru sanctions, because it can shut down trade, corporations doing business, money flow, payment, etc. I really don't think Europe had any problem with Russia until having an issue with Russia became some crap rally cry. But heck, that's how emotions suck peple in thru psyops.
The US is under no obligation to allow Russia to gain power unopposed. To argue in response that the US has acted badly in the past, even if true, is quite irrelevant to hard power international politics. That it may be giving passes of various types to Iran as it penetrates Venezuela and Nicaragua, does not mean it cannot treat Russia differently as it sees fit. Simply put, the US is a superpower that can act as it does, even if mistakenly or foolishly, because it can deal with the adverse consequences.
In sharp contrast, Putin’s act of will in transforming a weak Russia into a superpower entitled to international respect has hit a wall of reality in Ukraine. Russia has been exposed for what it truly is, a middling power with a military that bears the scars of endemic corruption and poor leadership that sits atop a fragile economy that leaves it vulnerable. It is a tough thing to reconcile yourself to the fact that your country’s days of shining in the Sun are past, but the Western European former Great Powers have (more or less) made that transition and one day, the US will have to do the same - but that day has not arrived for America; it has for Russia.
And even if the US is a “bully” in pushing economic sanctions in lieu of risking a shooting war, what would you call Russia’s naked and unprovoked aggression against its neighbor? That’s really just a rhetorical question.
The only question of interest for the world is whether Putin will accept this reality and withdraw, which will cost him his position and possibly his wealth and life, or will he take as many down with him as possible. Only time will tell.
Points taken, but the US might be said to have a *moral* obligation to allow Russia to shore up power *it already has*.
Perhaps taking the trust-but-verify approach to Putin following his stated goals rather than assuming he's about to march into Western Europe would lead to fewer deaths (and other misery) both short and long term.
In international affairs, morality is generally not a factor in decision making. It may be deployed as a justification for the decision reached. Here, though, I don’t see allowing Russia to swallow Ukraine, as originally envisioned, to be something in the US interest given the agricultural (among other) windfalls that would accrue to Russia.
And, of course, given Putin’s statements and track record, what possible guarantees could he give to the EU or NATO countries? Next stop, a corridor to Kaliningrad. After all, the West demands that Israel sever itself to provide Palestinians with contiguity between Gaza and the West Bank - so what’s the moral difference, one might ask.
If you're saying that moral obligations can't fall onto a country just because it's international relations, I have to disagree.
If these powers that be are trying to convince me, the citizen, to agree with them/support them, which is the only reason why I can see them going to such effort, then I can speak of moral obligations. And we certainly claim them ourselves when we get involved.
Swallow Ukraine? That's not what Putin said he was doing nor seems to be trying to do. He took a small army in and seems to be focused on the areas where the western ukrainian army interacts with the newly independent Donbass oblasts (or whatever they are called).
I make no comparison to Israel. Different situation
"Prove me wrong" is not how it works. You have to prove your own thesis, and not by asking the reader to "ask yourself".
It kinda reminds me of may 1997
Hahaha, ok. But I already proved my line items
Good point! When you’re operating inside a box, every corner looks like an opportunity!