Contradictions of the policy of support of $ by the administration of financial flows (2005-2009)

This article examines the inflows and outflows of goods, services, capital income (Interest, Profit, and Dividend), cash flow and unrequited transfers. These flows are essential for determining the strength of the US currency.

Since the 1970s, the US has managed to offset the erosion of its trade balance by developing its financial market. Capital flows entering year after years exceeding the US have been able to keep the dollar’s international role, they have prevented long-term – nearly half a century – the erosion of the value of the US currency.

In a previous post, we drew attention to the effects of the crisis on the value of $. Changes in the external accounts put the US currency at risk in the T-1 and T-2 2009. Six months later, the data published by the FED invite us to qualify this point of view.

In this post, we will examine the underlying elements of the “monetary health” of the US currency. Changes in the balance of payments coverage (A) and the components of financial flows entering the US (B). We will conclude with a review of the specific role of debt issued by agencies and GSEs in the Treasury in the financial coverage of US external accounts. The notion of hedge administration will illustrate the role of the FED and the Treasury in US general policy in the face of the crisis.

That flows are isolated from the Credit policy, orchestrated by the FED, is due to the fact that low credit rates do not make them an active instrument for managing capital inflows in the US. As for the speculators, they only reveal the economic, financial and monetary weaknesses of a country. The dollar is not yet a prey for them.

The data we use are extracted from the public FED Flow of Financial Accounts (Rated FRB FFA) published on March 11, 2010. When we talk about buying GSE assets, it is still for foreign investors to purchase of securitization products from GSE or GSE backed securities (GSEs).

The financial coverage of the US balance of payments.

1 ° Understand the graph data

Foreign income refers to US cash outflows represented by sales of foreign-produced goods and services to the territory (US Imports) plus capital income (Interest, Profit, and Dividend) paid to the United States. outside (US income payment to the rest of the world). Transfers are an integral part of Foreign Income. They are noted A on the legend of the graph.

The foreign outlay to the US synthesizes cash inflows to the US. They represent the sum of sales of goods and services outside the United States, plus income from capital owned outside the United States by US residents. They are marked B on the legend of the graph.

The difference between the two is the balance of payments balance (balance of trade and services balance + balance of income + transfers). This difference corresponds to our chart to the balance of payments deficit + Transfers without counterpart. They are noted AB on the legend of the graph. In the remainder of this post, the balance of payments deficit will always include transfers in its calculation.

On our chart, this balance (in green) is negative continuously since the United States have for years unbalanced external accounts, this imbalance is the consequence of their trade deficit that partially compensates for the positive balance of services and IPD and that transfers without counterpart aggravate.

So long ago the US currency should have collapsed, but the strength of the US is to have built a gigantic global savings pump: their financial system.

The financial coverage of the external accounts in imbalance results from the inflows and outflows that form the Net financial investment of the USA (red). Net financial investment has a long history of rebalancing the US balance of payments deficit, which is why we call it “financial hedging”.

To measure the capacity of the United States to refinance its external deficit in a period of crisis, it suffices to compare the imbalances of the balance of payments (balance of trade and services balance + balance of capital income + transfers) with the net financial investment who refinance it. This refinancing depends on the excess of the dollar outside the US and ultimately the value of the US currency according to the needs of the international market (trade and finance).

Since the beginning of the crisis, the US fiscal balance has deteriorated.

2 ° Analysis of quantitative data

In 2005 and 2006, the balance of payments deficit is still offset by net capital inflows (inflows and outflows). Financial coverage of external deficits is perfectly ensured by net capital flows. A balance of payments deficit of $ 740 billion is balanced by $ 712 billion of financial hedges in 2005. In 2006, $ 798 billion was offset by $ 805 billion in financial hedges. The year 2006 shines is the record year for external deficits and net capital inflows (Input – Output).

As of 2007, the degradation is continuous. The lack of coverage of 64 billion in 2007 is growing in 2008 to 201 billion dollars. The year 2009 is still worrying: despite the weakening of the balance of payments deficit ($ 424bn in 2009), net capital flows still do not ensure the coverage of the balance of payments deficit: missing $ 221 Md. These outflows of dollars, which are not offset by capital inflows, represent a hemorrhage of more than $ 500 billion in three years. That’s enough to weaken the US currency. It’s not enough to make her sink. Erratic dollar exchange rates reflect the slide of the US economy into the cumulative imbalance of its external accounts.

This tri-annual balance sheet should be tempered by taking into account the quarterly data for the year 2009. The quarterly data are expressed as annualized data on the graph.

Coverage defaults are not the result of a continuous deterioration in the contribution of net capital flows in 2009, the insufficient quarters (2009 T-1 and 2009 T-3) alternate with better quarters (2009 T-2 and T-4). Developments in net capital flows do not make it possible to speak of an inexorably weakening trend in the dollar. There is indeed an erosion of the coverage, but the data of the chart allow to consider an improvement of the situation in 2010. The financial market was not the object of the attentive care of the administration Obama and the FED in 2009.

Do not split our banking business

DEBATE

For Christian Noyer, Governor of the Banque de France, it is imperative to preserve the financing capacity of companies.

The hour of reality has come for Europe. The Governor of the Banque de France chairs the authority that supervises the banks, the Prudential Supervisory and Resolution Authority (ACPR). How can he oppose an initiative that aims to reduce risks, protect the taxpayer and fight against an excessive and dangerous concentration of banking activities?

The objective pursued by the Commission is legitimate, but the methods chosen are dangerous because they directly affect the financing of companies. His proposals stem from a misconception that there are banks on the one hand and credit markets on the other, and financial markets that focus unnecessary risks on the economy. This is no longer the case today. The crisis has taught us, on the contrary, that finance is a whole. Banks and markets are constantly interacting with financing companies of all sizes. This is true in times of crisis; it is also true in a more normal period.

STABLE, ROBUST AND CONTROLLED RELATIONS

This complementarity between banks and markets will, in the future, be even more necessary than in the past. Companies will still need banks, either for Thebestautoinsurancequotes payday loans or to raise funds from investors. But the new prudential requirements – which strengthen banks’ strength – will also lead to a more selective distribution of credit.

It is desirable that companies, including small and medium-sized enterprises (SMEs), can issue stocks and bonds and find financing in the markets and banks. The development of sound securitization – through transparent, simple, homogenous, regulated and monitored instruments – should help powerfully.

Banks must also be able to call on the major intermediaries who manage the savings of the French. And investors, individuals, small mutuals, complementary pension funds, managers of SICAV, will have to find the banks able to ensure the liquidity of their investments.

A healthy economy is therefore based on stable, robust and controlled relationships between banks, companies, insurance companies, pension funds and undertakings for collective investment in transferable securities (UCITS). That is deep, liquid, functional and well-regulated financial markets. To want to isolate totally from one another is to slow down the financing of companies, to slow investments, to penalize savings and to reduce growth.

The separation of activities, including in the form of subsidiarisation, as proposed by the European Commission would probably lead to very serious financing difficulties for our companies. For example, market-making by banks is not a highly profitable activity. If it disappears, which investors will buy corporate bonds without the prospect of being able to resell them easily when needed? The state itself would be seriously affected by the issuance of its debt.

ACCOMPANYING OUR COMPANIES

Similarly, the resources raised, without the help of its parent company, by a specialized subsidiary will be limited and very expensive. I do not believe, under these conditions, that banks could continue to provide the same service and at the same cost, to mid-cap companies (SMEs) and SMEs. I do not think they could provide the same support for our export companies, by managing in the same relationship with companies their credit needs, their foreign exchange transactions, their needs for refinancing on the markets.

Read (edition subscribers): Since 2009, Michel Barnier seeks to better control the financial sector but faces the reservations of the States

It is an illusion, moreover, to think that a total specialization of banks through the separation of activities would enhance security. Our experience is the opposite. During the crisis, the largest banking claims occurred in highly specialized institutions. Lehman Brothers was a pure investment bank, as was Bear Stearns. Northern Rock, which was the finest example of a bank panic, was a pure retail bank. In contrast, the large, diversified universal banks withstood shocks better.

For five years, the international community, under the auspices of the G20, has made great progress in regulating financial activities. European Commissioner Michel Barnier has played an important role here – and I want to pay tribute to him sincerely.

The strengthening of banks’ capital, which is particularly important for the so-called systemic banks, the imposition of liquidity requirements, the establishment of resolution systems, and the development of stronger and more rigorous supervision are major advances.

THE VOLCKER RULE

In this new prudential landscape, regulation of market activities has its place. In particular, it is legitimate to prohibit a bank from taking directional positions on its own behalf. This is the purpose, in the United States, of the rule called “Volcker”, the name of the former president of the Federal Reserve that inspired, directly affecting the financing of companies.

It is also the object of the measures recently put in place in France and Germany – which are inspired by the same philosophy. It is not surprising that our two countries, the first in Europe to introduce legislation in this area, are now reluctant vis-à-vis a Brussels project of very different inspiration.

As for the idea of leaving a margin of appreciation to the supervisor to judge activities that must be cantoned, this good provision exists in French law. But this does not fundamentally change the essential question: what are the operations useful or not to the real economy? And what are really risky operations? If we start from bad reasoning, it is unlikely that we will achieve a good result. And I felt it my duty to say it clearly and without waiting.

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REFERENCE:

  1. http://www.mass.gov/ocabr/banking-and-finance/loans-and-mortgages/payday-loans.html
  2. Paydayloanhelpers.com/payday-loan-consolidation/ payday loan consolidation
  3. https://studentloans.gov/myDirectLoan/index.action

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