Economics Flashcards
What are Australia’s top 10 exports in 2017
1 Iron ores & concentrates - 16.3% 2 Coal - 14.8% 3 Education-related travel services 7.8% 4 Natural gas - 6.6% 5 Personal travel (excl education) services 5.5% 6 Gold - 4.6% 7 Aluminium ores & conc (incl alumina) - 2.2% 8 Beef, f.c.f. - 1.9% 9 Wheat - 1.6% 10 Crude petroleum - 1.4%
(Year 2017 Source: DFAT)
What is the level of global debt in the third quarter of 2017?
Global debt hit an all-time high of $233 trillion in the third quarter of 2017, according to the Institute of International Finance (IIF).
Does Germany benefit by being in the euro?
▪️ German exports are more competitive than if Germany had its own currency.
▪️ If Germany still had the D-Mark, increased productivity and low inflation would cause an appreciation in the D-Mark.
But, with Euro membership, Germany hasn’t seen this appreciation against other European economies.
▪️ Also, to non-EU countries the Euro is weaker than the D-Mark would be.
▪️ The consequence is that German export sector has done well because of improved competitiveness.
▪️ This competitiveness is reflected in a large current account surplus.
What was the US interest-rate in 2015?
▪️ The all-time low was 0.25 percent on 17 December 2008. That’s effectively zero. It didn’t raise rates until December 2015.
▪️ It’s now up to almost 2.5%.
(Before this, the lowest fed funds rate was 1 percent in 2003 to combat the 2001 recession. At the time, there were fears that the economy was drifting toward deflation)
Putting aside profits, what are the possible costs involved in shortselling?
▪️ Any loss incurred
▪️ The actual cost to borrow the stock, which can be quite high for stocks that are heavily shorted or difficult to borrow.
▪️ Payment to the lender of any dividends or rights declared during the course of the stock loan.
How does Australia rank in terms of size of our economy against the rest of the world?
▪️Australia is the 13th largest economy in the world.
How has Monetary Policy and Quantitative Easing worked in Japan?
▪️ The BOJ undertook • an initial round of QE in 2013..
▪️ The bank has moved in 2017 into a second open-ended phase of QE consisting of
• $660 billion per year in asset purchases
• Kuroda says this will continue until the 2 percent inflation target is achieved.
• The BOJ’s negative rates and asset purchases have continued into 2018.
▪️ The scale of the purchases is unmatched anywhere in the world.
▪️ The assets held by the BOJ has exceeded 70 percent of GDP
▪️The assets of the U.S. Federal Reserve are below 25% of GDP.
▪️ The assets held by the ECB are below 25 percent of GDP.
▪️ Some economists warn these low rates damage the banking system and can lead to speculative bubbles.
What are other ways of considering balance of payments other than just trade and net income balances?
▪️Balance of payments accounting defines the current account balance as the sum of the trade and net income balances.
▪️In a direct sense, Australia’s CAD reflects the fact that imports and income paid to foreign residents exceed exports and income received from abroad.
▪️However, the CAD can just as validly be thought of in two other ways:
▪️Acquisition of Australian assets by foreigners exceeds Australian acquisition of foreign assets; and
▪️Domestic investment exceeds saving by Australian residents.
▪️The saving-investment perspective is often the most useful as it recognises that the CAD reflects economy-wide factors. This helps to identify influences that can be overlooked in focussing on external transactions.
▪️For instance, it may seem counter-intuitive that the rise in Australia’s terms of trade in recent years has been associated with a widening CAD, given its direct effect is to reduce the trade deficit.
▪️From a saving-investment perspective this is not surprising, as resultant high profits in the resources sector could be expected to lead to a surge in investment.
▪️A saving-investment perspective also emphasises that the current account is best viewed in inter-temporal terms. Saving and investment are means of increasing future consumption by diverting output from current consumption. Hence, CADs can be considered optimal if they are consistent with achieving an optimal consumption path.
▪️For instance, CADs that finance higher levels of productive investment can raise the economy’s future output potential, allowing higher levels of consumption over time. Running CADs when income is unusually low or investment is unusually high also allows consumption to be smoothed over time.
▪️Also important is foreign investors’ willingness to finance CADs, which will depend on their confidence that liabilities will be serviced at face value in the long run.
From an Australian Treasury paper, 2010)
What was economically significant in the US about December 2018?
December 2018 was the worst December on record for the US since the Great Depression!
Why is the US dollar one of the most traded currencies in the world?
▪️ Firstly, the US is the world’s largest economy and a powerhouse in international trade.
▪️ Secondly, the US dollar is the world’s primary ‘reserve currency’, held by central and commercial banks for the purposes of international transactions and investment – estimated to make up nearly 63% of currency reserves by volume.
▪️ Thirdly, many commodities are priced in dollars, including gold, oil and copper.
(The US dollar is the number one most traded currency globally, accounting for a daily average volume of $2.2 trillion)
Does Australia support Belt and Road initiatives?
Like Japan, Australia has agreed to support Belt and Road projects in third-country projects, even though the federal government has not signed a bilateral deal. (SMH 20 April 2019)
How does the Reserve Bank set interest-rates?
▪️ The Reserve Bank’s ability to pursue successfully a target for the cash rate stems from its CONTROL over the supply of funds which banks use to settle transactions among themselves.
▪️ These are called Exchange Settlement Funds, after the accounts at the Reserve Bank in which banks hold these funds.
▪️ Decisions concerning ESF affect a range of other market and institutional interest rates.
▪️ The cash rate is determined in the money market as a result of the interaction of demand for and supply of overnight funds. If the Reserve Bank supplies more exchange settlement funds than the commercial banks wish to hold, the banks will try to shed funds by lending more in the cash market, resulting in a tendency for the cash rate to fall, and vice versa.
▪️ The Reserve Bank is able to control the supply of ES funds through its open market operations.
▪️ When the Reserve Bank buys securities, it pays for them by crediting the ES account of its counterparty (or the ES account of the financial institution of which its counterparty is a customer), adding to the overall supply of ES funds.
▪️ Funds accessed are either repaid to the Reserve Bank on the same day, or are held overnight in the recipient’s ES account with the Reserve Bank.
▪️ On the rare occasion that a financial institution needs to borrow from the Reserve Bank overnight, there is a standing facility through which the Reserve Bank agrees to extend funding at a higher rate of interest.
France approach to development
Govt buys land and sells back after rejoining
Question
And it is telling that the way to play renewed optimism is to buy stocks on the main- land. In the past, investors might have turned to Hong Kong listed shares or proxies for China’s economy, such as the Australian dollar.
What are Australia’s top 10 exports?
In 2017, Australia’s Department of Foreign Affairs and Trade (DFAT) reported a trade balance of $1.56bn – but what are the top export sectors driving Australia’s economy forward?
▪️1. Iron ores and concentrates
Iron ores and concentrates brought in a total of $45.26bn (A$63.09bn) into the Australian economy in 2017 and made up 16.3% of total exports. This marked a healthy 17.4% increase from 2016, when the industry made $38.57bn (A$53.76bn). The biggest iron ore mine in the country – and reportedly the seventh largest in the world – is Hamersley Basin, located in Western Australia, which has 1.72bn tonnes of proven and profitable iron ore reserves as investigated at the end of 2021. Rio Tinto and BHP Billiton are responsible for about 90% of all iron ore production in Western Australia, with Rio Tinto boasting a profit of $8.8bn (AU$12.26) in 2017.
From elsewhere I got the following: Considering the first ten months of the year, the trade surplus widened sharply to AUD 17.62 billion from AUD 11.80 billion in the same period of 2017.
▪️2. Coal
It’s no surprise to see Australia’s coal industry high up on the exports list, and indeed it takes up a share of 14.8% of total exports. It is interesting to note that the fossil fuel industry is still experiencing massive growth, with 35.2% exhibited year on year in 2017. The figure amounted to $41bn (A$57.13bn) as opposed to 2016’s $30.32bn (A$42.27bn). The biggest operational coal mine in the country in terms of output is the Bulga Coal mine in Singleton, New South Wales, with 10.8mn tonnes of coal mined per annum, all of which is exported.
▪️3. Education-related travel services
According to the Department of Foreign Affairs and Trade, education-related travel encompasses the travel, fees and living expenses of students studying in Australia, across the sectors of: * higher education; *vocational, education and training; * English Language Intensive Courses for Overseas Students; as well as an * ‘other’ segment which includes non-award courses, students from New Zealand, and various government scholarships. Overall, this market brought in $21.71bn (A$30,26bn) in 2017, marking a significant increase of 17.3% from 2016’s figure of $18.5bn (A$25.79bn). Education-related travel services take up 7.8% of Australia’s total exports.
▪️4. Natural gas
In 2017, Australia exported $18.34bn (A$25.62bn) worth of natural gas. This industry has grown significantly over the past couple of years, with export sales increasing by 43% from 2016’s figure of $12.82bn (A$17.91bn). As of yet, natural gas makes up 6.6% of the total export space – but according to Business Insider this is only set to rise, with Australia expected to become the world’s largest exporter of natural gas by 2019. A report stated that LNG (liquefied natural gas) exports from the country will reach 77mn tonnes in 2018-19, up from 52mn in 2016-17.
▪️5. Personal travel services
Personal travel services (excluding education-related travel, which makes up a significant segment of Australia’s service exports on its own), maintained a steady year-on-year rise of 0.4% in 2017. The invisible export brought $15.18bn (A$21.28bn) into the economy, following on from $15.12bn (A$21.19bn) in 2016. Overall, personal travel makes up 5.5% of Australia’s exports. Currently, Australia is one of the beneficiaries of a tourism boom in the surging aviation markets of China and India: around 1.4mn visitors came to Australia from mainland China, marking a 13% year-on-year increase, while visitor numbers from India rose 15%, reaching 302,900.
▪️6. Gold
Though down by 6.5% from 2016, gold still has a place on Australia’s list of top exports, and contributed a total of $12.58bn (A$17.63bn) in exports. While this dipped from 2016’s figure of $13.46bn (A$18.86bn) but in 2017, the precious metal still takes up 4.6% of total exports. The largest gold mine in Australia is Boddington Gold Mine, located around 100km from Perth in western Australia. Upon the mine’s reopening in 2010, it was predicted to have a production capacity of 1mn ounces over five years. Proven ore reserves at the end of 2011 amounted to 20.3mn ounces of gold, as well as 2.26bn ounces of copper.
▪️7. Aluminium ores
Aluminium ores (including alumina) made up 2.2% of Australia’s total 2017 export sales, brining $5.89bn (A$8.25bn) into the country. This marked a massive increase from 2016’s figure of $4.61bn (A$6.46bn) – as much as 30.4% year on year. Around the world, the main uses of aluminium are within the transportation, construction, electricals and consumer goods industries. The global aluminium market is valued at $133.6bn in 2015 according to Allied Market Research – this is set to increase to £167.3bn by 2022, representing a CAGR of 3.3%.
▪️8. Beef
In 2017, beef exports took up 1.9% of Australia’s total exports, bringing in $5.31bn (A$7.45bn). This marks a moderate increase of 0.7% from the 2016 figure of $5.28bn (A$7.4bn). In fact, in 2016 Australia was reportedly the third largest exporter of beef in the world, following India and Brazil, and was named in 2017 by the Red Meat Advisory Council as the world’s largest exporter of beef, as well as the largest consumer of the produce globally.
▪️9. Wheat
Last year, Australia’s wheat exports were worth a total of $4.32bn (A$6.06bn), which marked a 24.9% increase from the previous year’s $3.46bn (A$4.85bn) in 2016. Sales of wheat took a 1.6% share of the country’s total exports. While wheat exports declined by around 34% in 2017, this year the industry is experiencing steady growth of just under 7%. The eight-year low experienced last year has reportedly been helped by heavier rain in Australia’s west in the past few months.
▪️10. Crude petroleum
In 2017, crude petroleum brought US$3.74bn (A$5.25bn) into the Australian economy. This marked a 10.4% year-on-year rise from the 2016 export figure of US$3.39bn (A$4.75bn). The most significant area for crude petroleum exports is Western Australia, which is said to produce over 70% of the country’s crude oil and condensate. The total share of the export market taken up by crude petroleum was 1.4% in 2017.
What countries are the largest investors in Australia?
▪️USA
▪️UK
▪️Belgium
▪️Japan
(Note big increases by China and Hong Kong - they reflect the biggest increases of any country over 5 years.)
As at end if 2017:
▪️ USA - 27.5% of foreign investment ($896 billion); up 6.9% over 5 yrs
▪️UK - 14.7% of foreign investment ($481.4 billon); up 4.2% over 5 yrs
▪️Belgium - 9.3% of foreign investment ($305.3 billon); up 9.6% over 5 yrs
▪️Japan - 6.7% of foreign investment ($219.2 billon); up 7.6% over 5 yrs
▪️Hong Kong (SAR of China) - 3.6% of foreign investment ($116.6 billon); up 17% over 5 yrs
▪️Singapore - 2.5% of foreign investment ($82.0 billon); up 5.6% over 5 yrs
▪️Luxembourg - 2.5% of foreign investment ($81 billon); up 4.7% over 5 yrs
▪️Netherlands - 2.4% of foreign investment ($79 billon); up 15.9% over 5 yrs
▪️China - 2.0% of foreign investment ($65 billon); up 21.6% over 5 yrs
▪️Switzerland - 1.6% of foreign investment ($53.7 billon); down -2.7% over 5 yrs
▪️Canada - 1.4% of foreign investment ($47.3 billon); up 9.8% over 5 yrs
▪️Germany - 1.4% of foreign investment ($45.1 billon); up 9.9% over 5 yrs
▪️NZ - 1.4% of foreign investment ($79 billon); up 15.9% over 5 yrs
Source: DFAT from ABS updated May 2018.
What are two key issues for the US in relation to bond purchases and servicing the debt for 2019?
▪️ Purchasing fewer bonds (and therefore lessening demand for Bonds) with the end of QE.
▪️ Needing to sell more bonds to service Trump’s increasing debt level.
▪️It won’t help markets in 2019 that, even as the central banks are withdrawing liquidity and shrinking as a big source of demand for demand for bonds, the US Government is facing record borrowing requirements.
▪️US Treasury not only has to find replacement demand for the bonds that the Fed used to acquire but the soaring deficits generated by Trump’s tax cuts and spending – the deficit will near $US1 trillion in the 2019 financial year – will swell its issuance of bonds.
What is the rank order of countries which are our largest trading partners (sum of imports and exports)?
- China - 24%
- Japan - 9.4%
- United States - 9%
- Republic of Korea - 7.2%
- India - 3.6%
- New Zealand - 3.6%
- United Kingdom - 3.5%
- Singapore - 3.3%
- Thailand - 3.0%
- Germany - 2.7%
(Year 2017 Source: DFAT)
What Is one forum that exists to facilitate the Belt and Road initiative by China?
Belt and Road forum.
China says 37 world leaders or heads of government will arrive in Beijing next week for its second Belt and Road forum to discuss Chinese President Xi Jinping’s grand infrastructure project.
But the United States won’t be among them.
The forum run for three days from April 25, with a world leader’s roundtable expected to produce a communique on Saturday April 27.
Papua New Guinea is among the countries attending the leader’s forum. Malaysia, which last week renegotiated and won a cheaper deal from China on an expensive high-speed rail project, will attend, along with Singapore, Indonesia, Thailand and Vietnam.
From Europe, Greece, Italy, Switzerland and Russian heads of state will join the forum, while France, Germany and Britain will send envoys.
From Australia, where the federal government is in election caretaker mode, Victorian Premier Daniel Andrews will attend the forum after he controversially signed a Belt and Road memorandum of understanding between Victoria and China. (SMH 20 April 2019)
What are the amounts by sector of world debt?
▪️ Non-financial companies - $68 trillion
▪️ Governments around the world - $63 trillion.
▪️ Financial institutions - $58 trillion of borrowings.
▪️ Households - $44 trillion.
(end 2017)
What four things did the US Fed do early, in its response to the GFC?
At the beginning of the GFC, the Federal Reserve found itself in a precarious position. Short term interest rates were close to zero, making it hard to conduct traditional open market operations. If short-term rates are close to zero, there is little room for them to fall and stimulate spending. To deal with this situation, the Fed and the U.S. Treasury tried a number of innovative initiatives:
▪️Quantitative Easing: In quantitative easing, the Fed buys longer-term assets, instead of just T-bills, thus, lowering long-term interest rates, which they hoped would stimulate spending. QE includes the purchase of non-traditional assets like mortgage-backed securities, as well as Treasury and Corporate debt. By doing this, the Fed injected money into the banking system and increased the amounts of funds available to lend to the business sector and consumers.
▪️Paying interest on bank reserves: The Fed began paying interest on bank reserves, something they had not done previously. This provided an incentive for banks to hold more reserves.
▪️Use of repurchase agreements: In addition, the Fed made more aggressive use of repurchase agreements (or Repos). Repurchase agreements are essentially overnight loans in which central banks exchange cash for T-bills held by commercial banks, thus increasing holdings of bank reserves.
These transactions are automatically reversed (i.e. the T-bills are “repurchased”) at a small profit to the banks after 24 hours, so this has a very short term impact on bank reserves.
▪️ The Troubled Asset Relief Program (TARP): While not technically monetary policy if we are speaking strictly, the Congress and the President also passed several pieces of legislation that would stabilize the financial market. The TARP passed in late 2008, allowed the U.S. Treasury to inject cash into troubled banks and other financial institutions and help support General Motors and Chrysler as they faced bankruptcy and threatened job losses throughout their supply chain.
The Treasury purchased “troubled assets” from the banks, allowing them to clean up their balance sheets and begin lending again. The TARP was criticized as a “bail-out” of large banks by taxpayers, but while the Treasury purchased some $450 billion in troubled assets, they were able to recoup all but $37 billion by selling those assets once financial markets had stabilized.
An article I read said that because of Germany’s trade surplus, it “exported capital” (and the IMF said they should be investigating more at home). How could a trade surplus mean a country is exporting captial?
Clearly with a trade surplus, they export more than they import which means they have net reserves of cash in the country. They can invest it in Germany or invest it outside. Obviously they mostly invest it outside. Thus capital is “exported”.
This is an explanation of Exporting capital:
The export of capital takes two forms: ENTREPRENEURIAL capital and LOAN capital.
The export of capital in the form of ENTREPRENEURIAL (or operating) capital means the investment of capital in industrial, agricultural, transportation, trade, and other enterprises (shares of industrial, trade, and banking enterprises or share investments)
The export of LOAN capital occurs in the form of short-term credits—that is, those for up to one year (deposits in foreign banks)—and long-term credits (external loans). Inter-governmental loans, a form of the export of capital that arose during World War I (1914-18) under the name inter-Allied debts, play the primary role. At the end of 1947 they constituted 85 percent of the total volume of foreign investments in the form of loan capital, and at the end of 1968 the figure was 59 percent.
What is the level of private (non-financial corporate) debt in the US?
▪️$8.7 trillion, equal to more than 45 percent of GDP (this is non-financial corporate debt)
(Source: CNBC 20 Nov 2017).
▪️(and same from Forbes 29 August 2018: U.S. corporate debt is now at an all-time high of over 45% of GDP, which is even worse than the levels reached during the Dot-com bubble and U.S. housing and credit bubble)
Fuelled by low interest rates and strong investor appetite, debt of nonfinancial companies has increased at a rapid clip, to $8.7 trillion, and is equal to more than 45 percent of GDP, according to David Ader, chief macro strategist at Informa Financial Intelligence.
According to the Federal Reserve, nonfinancial corporate debt outstanding has grown by $1 trillion in two years.
“Everything is fine until it isn’t,” Ader said. “We don’t need to worry about that until we’re in a slowdown and profit declines.”
Low rates have encouraged companies to borrow, but instead of using the money to expand, they have used it to boost their share prices, he said.
What is the U.S. budget deficit for 2018?
The budget deficit is
▪️$779 billion for the year ending September 2018, an increase of 17%.
▪️Projected to be almost $1 trillion US this financial year.
What causes the volatility in the Shanghai Composite Index?
One of the biggest factors in this stock market correction was the lack of experience that China had in dealing with a stock market. The U.S. stock market, for example, has learned from past market crashes and corrections. Although far from perfect, the various exchanges have methods of slowing the market to allow for trading during falling prices while subtly pushing back against the all-out panic that can be disastrous.
Another factor contributing to volatility in the SSE Composite and Chinese stocks in general is the lack of stock market players. China’s stock market is relatively new and mainly made up of individuals. In most mature stock markets, the majority of buyers and sellers are actually institutions, when measured by volume. These big players have risk tolerances that are far different from the individual investor. Institutional buyers, particularly hedge funds, play an important role in maintaining liquidity in the market and shifting risk onto entities that can usually handle it. Even with those big players, things can and often do go wrong. That said, a market dominated by individual investors - particularly a large amount of individual investors trading on margin - is bound to see overreactions on the way up and the way down.
The role of the Chinese government is intertwined with the maturity issues the Chinese stock market faces. Governments intervening in the stock market is nothing new, but the eagerness with which the Chinese government jumped into the market troubled many. Most countries put off intervening until it is clear a systemic meltdown is unavoidable. However, the Chinese government felt the need to intervene strongly in 2015, perhaps because its policy decisions helped build up the bubble in the first place. This also set a hands-on precedent for future market events, which undercuts free market forces. The potential result - a Chinese stock market that is highly regulated to fit government ends - is a less attractive market for international investors. (From Investopedia 6/5/19)
What is a currency swap?
▪️ A currency swap, sometimes referred to as a cross-currency swap, involves the exchange of
• interest
• (sometimes) principal
in one currency for the same in another currency.
▪️ Parties agree in advance whether or not they will exchange the principal amounts of the two currencies at the beginning of the transaction. The two principal amounts create an implied exchange rate…
▪️ Interest payments are exchanged at fixed dates through the life of the contract.
▪️ At maturity, the same two principal amounts must be exchanged, which creates exchange rate risk as the market may have moved.
How volatile is the Shanghai Composite Index?
The SSE Composite is notoriously volatile. As an example, between November 2014 and June 2015, the SSE Composite shot up more than 150%, as the state-run media outlets talked up Chinese equities and encouraged inexperienced investors to buy them. Then, in the three months following that peak, the index lost more than 40% of its value. Companies suspended trading, short selling was essentially outlawed and the government intervened to support the market. (From Investopedia 6/5/19)
What proportion of Australian goods and services are traded internationally?
▪️Around a fifth (21%)of all goods and services (by value) produced in Australia are traded internationally.
(Parliament of Australia Paper probably 2016)
But what determines the value of the Australian dollar?
(From ABC WEBSITE 5 July 2018)
There’s a number of factors that influence what the Aussie dollar is worth at any given time.
▪️ Differential interest rates: The biggest single factor on the menu, in the long-term, is interest rate differentials.
“If interest rates in Australia are very high relative to the US, that makes it attractive for investors to take their US dollars, come buy Australian dollars and invest in, say, Australian government bonds,” Professor Holden says.
“And, of course, that causes them to sell US dollars [and] buy Australian dollars, changing the difference in supply and demand between the two currencies and shifting the Australian dollar up.”
This isn’t always a smooth process.
“The Australian dollar is actually a very volatile currency,” Professor Holden says.
“In recent years … we’ve seen the Australian dollar go from around 50 US cents to around $US1.10 and a whole bunch in between — in a very jiggedy-jaggedy way.”
▪️ It’s a proxy for exposure to the emerging Asian markets Rollins says many investors see the Australian dollar as a “proxy for exposure to the emerging Asian markets”.
“Partly this is because it’s such a heavily traded currency … it’s a reasonably safe and liquid way to expose yourself to what’s going on in the emerging Asian markets,” he says.
“It’s seen as quite a valuable trade to try and ride the tiger of Asia without being full-blooded exposed to it.”
▪️ It’s a Commodity currency: You may also have heard the dollar referred to as a “commodity currency” — that’s because its value also moves with the prices of commodities like gold, oil and natural gas.
“In simple terms if the iron ore prices and other commodity prices go up, the Australian dollar will go up. And if oil prices and other commodity prices go down, then the Australian dollar will follow, and that makes it special,” Professor Bauer says.
Which are the greatest holdings of US dollar denominated debt, public or private holdings?
▪️CENTRAL BANK RESERVES held in dollar-denominated debt, are small compared to PRIVATE HOLDINGS of such debt (11/18)
What is the role of the Reserve Bank of Australia?
▪️The Bank conducts the nation’s monetary policy and issues its currency.
▪️It seeks to foster financial system stability and promotes the safety and efficiency of the payments system.
▪️It also offers banking services to government.
How could a slow down in U.S. imports because of tariff increases trigger a crisis in emerging markets (and potentially in the world economy)?
▪️ Fewer US imports mean fewer dollars out there to trade with. This means the dollar rises against other currencies.
▪️ Foreign governments and corporations, particularly those in emerging market countries, owe trillions in dollar-denominated debt.
▪️ The rising dollar is making it more expensive to repay those debts.
▪️ Governments and central banks are taking heroic measures to help but can only do so much. Eventually, some will default.
▪️ Then we will have an old—fashioned currency crisis in a world far more interconnected and leveraged than it was in 1998. (Mauldin) 11/2018
In relation to the current account, what is the effect of the TRADE BALANCE versus other money inflows and outflows?
▪️A trade deficit then means that the country is importing more goods and services than it is exporting—BUT the current account also includes net income (such as interest and dividends) and transfers from abroad (such as foreign aid).
▪️But the latter are usually a small fraction of the total.
(From the IMF, December 2018)
Take couple of stats from here in Margaret Gardner article
Fourth, it will further undermine Australia’s position in research and development investment relative to our economic competitors. China now invests 2.1% of its GDP in research and development – while Australia’s total investment from all sectors in research and development (government, business and research institutions) is now just 1.88% of GDP. China’s economy is ten times bigger than Australia’s, but they’re investing 30 times more than we are.
Our government only spends A$10 billion on research and development each year. Only last Friday, it was revealed Australia’s government spending on research and development was already forecast to fall this year to its lowest level in four decades as a percentage of GDP – to 0.5%. This new research funding cut only worsens this situation.
What are the two types of currency exchange rates?
Today, though, two types of currency exchange rates—floating and fixed, are still in existence. Major currencies, such as the Japanese yen, euro, and the U.S. dollar, are floating currencies—their values change according to how the currency is being traded on forex (FX) markets. Fixed currencies, on the other hand, derive value by being fixed (or pegged) to another currency.
Most of the Caribbean islands (Aruba, Bahamas, Barbados, and Bermuda, to name a few), peg to the U.S. dollar because their main source of income is derived from tourism paid in dollars.
Fixing to the U.S. dollar stabilizes the economies and makes them less volatile.
In Africa, many countries peg to the euro. Djibouti and Eritrea, pegged to the U.S. dollar, are the exceptions.
In the Middle East, many countries (including Jordan, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) peg to the U.S. dollar for the stability—the oil-rich nations need the United States as a major trading partner for oil.
In Asia, Macau and Hong Kong fix to the U.S. dollar.
(from Investopedia 6/5/19)
(and from Wikipedia 6/5/19) Since 2006, the renminbi exchange rate has been allowed to float in a narrow margin around a fixed base rate determined with reference to a basket of world currencies.
The Chinese government has announced that it will gradually increase the flexibility of the exchange rate.
What are the three prongs of Abenomics and with what success?
Prime Minister Shinzo Abe’s three-pronged approach, dubbed “Abenomics” and launched in 2013, combines
▪️fiscal expansion
▪️monetary easing
▪️and structural reform.
▪️ After four years of heavy stimulus, the country has begun to see moderate growth but growth remains tepid.
▪️ Abe’s hefty stimulus package, focused on building critical infrastructure projects, such as bridges, tunnels, and earthquake-resistant roads. (11/18)
Who holds the $21.21 trillion of US government debt?
▪️ US Investors - $6.89 trillion (32.5%)
▪️ US Government - $5.73 trillion (27%)
▪️ US Federal Reserve - 2.38 trillion (11.2%)
▪️ Foreign Investors - $6.21 trillion (29.3%)
So, some 70% of the national debt is owned domestically. A shade under 30% is owned by foreign entities.
The US investors are private and state pension funds as well as individual investors and they are the biggest holders. They owned $6.89 trillion in debt and absorbed about four-fifths of the increase over the past year.
▪️China - $1.18 trillion (5.6% of total US debt) ▪️Japan - $1.03 trillion (4.9% of total US debt) ▪️Brazil - $300 billion (1.4%) ▪️Ireland - $300 billion (1.4%) ▪️UK - $274 billion (1.3%) ▪️Switzerland - $237 billion (1.1%) ▪️Luxembourg - $220 billion (1.0%) ▪️Cayman Islands - $197 billion (•9%) ▪️Hong Kong - $196 billion (•9%)
The Chinese government or Chinese investors likely own EVEN MORE U.S. debt, purchased through entities in other countries such as Hong Kong, Luxembourg or the Cayman Islands, all of which are havens for tax shelters.
Notably, Russia has slashed its Treasury holdings to a mere $15 billion from a peak of $153 billion in mid-2013 amid worsening tensions with the U.S.
So far there’s little evidence that other countries will follow suit to strike back at the U.S. amid ongoing trade disputes. Many need or want Treasury bonds and notes as a safe place to park their savings.
(All above from Marketwatch.com 23 August 2018)
What is short selling?
▪️ Borrowing the stock from a broker, and immediately selling the stock at its current market price, with the sale proceeds credited to the short seller’s margin account.
▪️ At a future point, buying the stock again in the market and repaying the loaned stock to the broker.
What is the evidence that foreign investors are about to buy more Chinese shares and bonds?
There is more to foreign buying of Chinese stocks than a revival in risk appetite.
Global investors own just 2-3% of Chinese stocks and bonds, well below the country’s weight in world GDP.
Foreigners buying financial assets in China is tricky, but has become a lot easier.
MSCI (Morgan Stanley Capital International is speeding up the inclusion of China A-shares in its emerging— market index and will quadruple their weighting this year.
Next month Bloomberg Barclays is adding China to its main bond index.
Other providers of bond indices are likely to follow suit.
Analysts at MorganStanley expect a marked acceleration of foreign capital flows into Chinese shares and government bonds this year in response.
