Despite those huge reserves, China could be, gasp, broke
Is China broke?
Seems a silly question right? China’s foreign exchanges reserves stood at $2.4 trillion at the end of 2009. Yes, China announced that its proposed annual budget for 2010 would have a record deficit, but the deficit is just $154 billion or 2.8% of China’s GDP (gross domestic product). By contrast, the U.S. budget deficit for the 2010 fiscal year is projected at $1.3 trillion by the Congressional Budget Office. That’s equal to 9.2% of GDP.
But remember the theme of my post http://jubakpicks.com/2010/03/09/the-lesson-of-the-greek-crisis-everybody-government-cheats-and-no-one-wants-to-know/ on Tuesday March 9: All governments lie about their finances. At the worst, as in Greece and the United States, the lies are bold and transparent. Everybody knows the emperor has no clothes but no one want to say so. At the best, as in Canada and China, the lies are more subtle. More like a magicians misdirection than a Viking raider’s ax. Look at these great numbers, this lie goes, but don’t look at those up my sleeve.
There’s a good argument to be made that if you look at all the numbers, instead of just the ones the budget magicians want you to see, then China is broke.
The lesson of the Greek crisis: Every government cheats and no one wants to know
Greece cheated on its national accounts in 2009. And that led to a budget crisis in 2010.
But that’s not the important part of the story.
What makes this a crisis not just for Greece, and the euro and the European Union is that everyone—from the Greek government and its accountants to the financial officials of the European Union to the experts at international watch dog agencies such as the Organization for Economic Cooperation and Development–knew it.
And knew it for at least a decade.
Makes you wonder what other countries are cheating on their accounts. Or maybe better phrase the question as “Is anyone not cheating?” We all know that the United States does. But so does China that much admired model—at the moment anyway—of economic management. Even the Canadians—yes, the Canadians!—cheat.
The consensus view is that the world’s books are in pretty bad shape. But the consensus view has a long history of ignoring problems until they bite it. Hard.
We’re anywhere from a few years to two decades (closer to the former I think) from feeling those teeth close in on our posterior. (Especially if the economic recovery is going to be as profitless as I now expect http://jubakpicks.com/2010/01/19/get-your-portfolio-ready-for-the-profitless-global-economic-recovery/) If we want to save anything from those chompers, it’s time to face a bit of reality.
Building a house to with stand a 50-mile-an-hour Nor’easter doesn’t make much sense if you live in tornado alley.
If everyone cheats, it’s more than time to look at some of the lies.
The bet is that the Euro is headed even lower
Nobody is taking off their bets against the Euro quite yet.
Short positions against the Euro on the Chicago Mercantile Exchange, which had set a record in January, set a new record in the three weeks that ended on February 9. And judging from the continued pressure on Greek stocks and bonds, the trend is still to short the Euro’s troubles.
During the three week period short contracts on the Euro climbed to 63,000 contracts from 41,000 contracts.
Insure your neighbor’s house and then burn it down–derivatives played a role in creating the Greek crisis
Credit default swaps are not insurance.
The most common way to describe these derivatives is to say that they’re a way to insure bonds and other financial instruments against default. I’ve used that explanation myself over and over again.
But as James Rickards explains in a column in today’s Financial Times, while these derivatives may be a way to insure against the danger of default, they very much aren’t insurance in one crucial way.
And it’s that difference that has helped turn the Greek budget “problem” into the Greek budget “crisis.”
Just a euro bounce on rumors?
Why are European (and global) stock markets and the euro rallying today on vague rumors that there’s a plan to bailout Greece when yesterday similarly vague official statements couldn’t stem the tide?
Could it be because today the markets believe what they discounted yesterday?
Nah.
How ‘bout because figures released today from CME Group show that short positions against the euro climbed to record levels in the week ended February 2.
Traders and hedge funds have bet nearly $8 billion against the euro. That the biggest short position in a single currency ever, according to The Financial Times. With that many traders and that much money short, it’s a good bet that the euro is due for at least a short-term bounce.
And that’s what I think we’re seeing today. Some traders are simply trying to see if they can stampede a few of the traders holding some of the 40,000 contracts against the euro into unwinding some of that huge short position.
How long the bounce lasts depends on whether or not any of today’s vague rumors turn into anything substantial.
How vague are the rumors?
