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US Economy

GDP is $13.8 trillion .This means an output of $46,000 per person or 10th in the world.

Can you help me with this one?

How much of the world's currency and holdings are denominated in US funds?  And against that what fraction does $1 Trillion represent?
Kirkhill said:

Can you help me with this one?

How much of the world's currency and holdings are denominated in US funds?  And against that what fraction does $1 Trillion represent?

Not an easy question, Kirkhill.

The best source for information is in the quarterly reports of the  Bank of International Settlements.

Most people estimate the world’s GDP at something about $65 Trillion and the BIS tracks $65 Trillion in assets and liabilities and it looks like about ⅓ of all assets and >⅓ of liabilities are held in US dollars.

But the number change, upwards, when purely domestic transactions are excluded – which is as it should be because, within their own boundaries, most countries use only their own currencies for all ‘public’ purposes.

There were some fairly authoritative estimates, two or ten years ago, that the dollar share of global transactions (to which I think your question relates) was falling, steadily from 90% (1960s) to 70% (1999/2000) and to even 50% (2007/08). But the numbers appear to include a Euro-zone trap because it appears, to me that the use of the € is often counted as international when it is, in fact, between euro-zone countries and, therefore, arguably domestic, vis à vis the €.

But, there are real and notional dollars (and euros, too). The $65 Trillion is ‘real’ – national banks, central banks and commercial banks, can point to $65 Trillion in ‘real’ assets and liabilities within their borders. But there are many more trillions (and quesstimates – which, in my opinion is what all of the are – vary wildly from a few dozen trillion dollars to many hundred of trillion dollars) in notional dollars. Almost all of those @#$%& derivatives are denominated in US dollars and no one knows how much is out there and how they are spread, but we do know that they were, mainly, traded in $(US). I have read estimates that derivatives, hedged bets, really, account for two to six times the ‘real’ assets under management in each brokerage house. Scary.

I think something under ⅔ of the world’s real debt is denominated in $(US) as is as much as ¾ of the notional debt. BUT if the new ‘Resolution Trust' can write down the real ‘distressed assets’ (≈$(US)1 Trillion) then will not the notional assets, no matter where in the world they are held, also be written down, automatically?

I feel the need to once again stress that the treasury is getting assets in exchange for dollars. Even if all the mortgages were non-performing [only 2% are] the underlying value is the property itself.Normally foreclosed properties sell for what the bank is owed which is a discount between the property value and the outstanding loan balance. I dont like the idea of the treasury being the nations mortgage lender but thats where we are in the interim. By taking these loans off the books of the financial institutions they are strengthened as a result.
Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail is yet more news about the US economy:

Democrats decry 'humbling' Wall St. Bailout
U.S. Treasury chief pitches $700-billion plan to Congress


From Monday's Globe and Mail
September 22, 2008 at 4:12 AM EDT

WASHINGTON — Calling it a "humbling time for America," U.S. Treasury Secretary Henry Paulson has begun the tough task of selling a Wall Street bailout that could exceed $1-trillion to nervous investors, scared bankers and a skeptical Congress.

Democrats, including presidential hopeful Barack Obama, complained the bailout plan doesn't do nearly enough for "Main Street" as the economy lurches toward recession.

And in a sign that the crisis isn't nearly over, the U.S. Federal Reserve moved last night to save the two last independent Wall Street brokers - Goldman Sachs and Morgan Stanley - by approving their transformation into bank holding companies and propping them up with emergency loans. Longer term, the move enables the companies, which survive on the willingness of lenders to keep them afloat, to bolster their capital and take deposits like other banks.

The central bank also granted the two firms' London-based brokerage subsidiaries, as well as Merrill Lynch & Co.'s London branch, access to the same line of credit, normally only available to commercial banks.

Fears that Goldman Sachs and Morgan Stanley might collapse was one of the key triggers for the U.S. government's decision to buy up bad loans.

Over the weekend, Mr. Paulson unveiled details of the most sweeping U.S. incursion into free markets since the Great Depression, urging Congress to pass his plan by the end of the week or risk plunging financial markets back into chaos again.

"I hate the fact that we have to do it, but it's better than the alternative," Mr. Paulson told Fox News Sunday - one of four network shows the former Wall Street banker appeared on yesterday to push the plan.

"This is a humbling, humbling time for the United States of America."

Democrats and Republicans alike appear ready to go along, however grudgingly.

The government plan is bold and sweeping. It calls on Congress to give the government virtually unlimited authority, including the power to override courts, to buy up to $700-billion (U.S.) worth of soured residential and commercial mortgage-related assets, from financial institutions operating in the country. And he called on foreign governments in Europe and elsewhere to take similar measures.

World financial markets reopen today after last week's wild and historic gyrations, triggered by the collapse of venerable investment bank Lehman Brothers, the bailout of insurer AIG and the fire sale of broker Merrill Lynch.

Taking the bad loans off their books will ease credit conditions, encourage banks to lend again, and ultimately save taxpayers money, Mr. Paulson argued.

"This is not something that we wanted to do. This was something that was very necessary," Mr. Paulson said.

And yet crucial details remain unresolved, including how to put a price on assets for which there is no market. Nor is it clear what loans or companies it will target, or when the government would begin making purchases. A leading banking industry group - the Financial Services Roundtable - warned yesterday that the government loan program, unless properly managed, could cause a further downward spiral in the value of mortgage investments.

Mr. Paulson also said foreign financial institutions will be eligible for the plan, as long as they have substantial operations and employees in the U.S. Hedge funds, on the other hand, would not.

The financial turmoil has instantly made the economy the overriding issue in the fall election, and both sides are trying to play it to their advantage.

Democrats said they are ready to go along with the bailout. But they insisted there must be a quid pro quo, including more direct aid to homeowners, stricter terms to ensure the government gets its money back and much tighter regulation of everything that happens on Wall Street, from executive salaries to lending practices.

"This plan can't just be a plan for Wall Street, it has to be a plan for Main Street," Mr. Obama said as he campaigned in Charlotte, N.C. And he called Mr. Paulson's bailout a "concept with a staggering price tag, not a plan."

Mr. Obama, like other Democrats, wants more help for homeowners struggling to stay in their homes, curbs on excessive Wall Street salaries and quicker action on overhauling bank regulation.

And yet the Democrats don't seem willing to risk blocking or delaying the bailout plan to get what they want.

Speaking in Baltimore, Mr. McCain accused Mr. Obama of playing politics amid the turmoil. "At a time of crisis, when leadership is needed, Senator Obama has not provided it," Mr. McCain said.

With the weekend announcement, the government has now committed about $1-trillion to clean up the mortgage mess.

There are two ‘stories’ here:

1. Can the Democrats in the Congress resist the temptation to try to use the bailout plan to strengthen Obama’s position by insisting on ‘more’ (money) for Main Street? It will be pure, simple pork-barrelling if they do that; and

2. The Fed is, clearly (to me, anyway) still not convinced that the ‘bottom’ is near, much less here. Giving Goldman Sachs and Morgan Stanley commercial bank status – and, therefore, ‘protection,’ is a move to counter the pessimism that could, too easily, turn to panic.

Goldman Sachs and Stanley's change of status will allow them to operate as a bank and take deposits,but it will also require them to face increased regulatory requirements.
tomahawk6 said:
... Normally foreclosed properties sell for what the bank is owed which is a discount between the property value and the outstanding loan balance ...

And therein lies a temporary (but temporary might equal 10 years!) but serious problem. The total discount is not clear, yet, but it is, clearly, greater than “normal” and it appears to be growing.

A small share of the rich US housing market is still a very big problem – especially for lower middle class employment, rather than just for “Wall Street,”"Bay Street" and "The City." The very people who are losing their home building (and home building dependent) jobs are the ones who are likely to default on their overvalued mortgages. Those ‘distressed assets’ are what US taxpayers – middle class workers in the main – are being asked required to buy. Taxes may have to rise to pay that bill; when taxes go up disposable income/consumption falls – consequentially; falling consumption = fewer jobs = more mortgages in default. Downward spiral, anyone? This is just one of the examples of the “Wall Street” <> “main Street” interaction.

We (everyone in the world) aren’t at the “bottom” yet. We need to get there (in what, 2010?) and then start, however hesitantly, to grow again before this crisis begins to resolve itself. Until then the US taxpayer is being asked required to defend the whole world, including China and Russia,  from a deep recession. As I said elsewhere: Americans are good at responding to crises- thankfully.

I suspect the discount was already factored into the bailout price. The Treasury is hardly going to pay face value. I just dont see a downside to this deal right now. The Federal Budget alone is something like $2.9 trillion. These loans also generate monthly payments which will go into the Treasury.
tomahawk6 said:
I suspect the discount was already factored into the bailout price. The Treasury is hardly going to pay face value. I just dont see a downside to this deal right now. The Federal Budget alone is something like $2.9 trillion. These loans also generate monthly payments which will go into the Treasury.

See my comments, above, in answer to Kirkhill. I think the discount has been guesstimated into the price in so far as it represents the real ‘distressed assets.’ Since I do not believe that anyone knows the ‘value’ of the notional (hedged) ‘distressed assets,’ or even who holds them all, I do not believe they are in any way realistically ‘factored into’ the price. BUT, I repeat, they may disappear when, rather than if, the real ‘distressed assets’ are written off.

But, basically, T6, I agree that this is a ‘good thing’ because I cannot see any other alternative. The US taxpayers survived the 1989 Resolution Trust exercise without too much problem – and it may be that this crisis is, proportionately smaller than the thrifts fiasco of 20 years ago. 

These investment houses unloaded Billions of $$ around the world over the last couple of years....is the bailout going to cover these ...now....international investors?
GAP said:
These investment houses unloaded Billions of $$ around the world over the last couple of years....is the bailout going to cover these ...now....international investors?


At least I hope not.

It is quite enough to ask require the US taxpayers to clean up Wall Street's mess; Bay Street and The City (and Beijing) can and must look after themselves.

BUT, the fed has extended 'protection' to the UK branches of Goldman Sachs and Morgan Stanley, so ...  ???
Many thanks to both you, Edward and to T6.

Would this be a fair assessment?

If I assume that the available "real" supply of US dollars is the smaller numberguesstimate of $65,000,000,000,000 (vice the manifold larger "notional" number)
And I further assumed that 100% of the outstanding mortgages were non-performing (vice the 2% stipulated by T6)
Leaving the Federal Treasury on the hook with absolutely worthless paper and zero assets (which ignores the real value, however minimal, of the property underwriting the mortgages)

Would it be fair to suggest that the generalized impact of this $700,000,000,000 buy out, could be seen as a one time inflationary event, or alternately as a devaluation of the US dollar, with a magnitude on the order of  700/65,000 or approximately 0.1% globally?

If the actual default rate is 2% as T6 seems to suggest (if I understand correctly) then that impact would drop from 0.1% to .002%.  Likewise, if I were to assume  a 10 fold greater Notional supply of US Dollars then the impact would further drop from .002% to .0002%.

My sense of things is that the US Treasury, is not just the US's lender of last resort, it is, like the Bank of England before it, also the world's banker. 

While even the US economy will have a bit of trouble digesting a $700,000,000,000 surge in new money (if it were all to come due in one day as opposed to 10 years) in terms of the worlds economy and the soundness of the US dollar trading system it seems to me to be well within the absorption capacity of that system.

I would further suggest that when Britain Ruled the Waves and the Bank of England and the Government of Britain were joined at the hip (visible but unacknowledged) Britain managed to finance many wars, hiring and equipping other countries to do the fighting (The Seven Years - French and Indian Wars comes first to mind but it also applies to the Napoleonic Wars).  It would occasionally go into deficit, causing the Pound Sterling to fall against the Gold Standard but by and large, over the centuries from 1694 to 1944 the world's financial system was firmly grounded and survived war, famine, plague, pestilence, recession and depression.  And Britain and the Bank of England invariably profited.

My sense is that Bretton Woods was the unmaking of that old system and the making of the US Treasury and the US Government as arbiters of the new system - with all its inherent advantages.

I don't think that the US economy can be looked at in isolation.  I think it has to be seen as the primary beneficiary of a global economy which largely runs on inertia.

I do agree however, that as you - Edward - have said about Canadians and Politics, "perception is reality" that the economy is one area where intangibles like trust and panic and perception trump balance sheet facts.

While governments may fall and depositors may fail I don't believe that the system will be harmed.

Very few people liked having the world's economy in the hands of HMG and the Bank of England (least of all T6's revolting colonials  ;))but they accepted it because it was the safest haven where laws actually meant something.  I don't see investors seeing a better haven now than the US Treasury.  Russian Ruble? Chinese Yuan? Anything in Europe - including dear old Britain?

Faut de mieux! Least-Worst.

I  don’t agree with your assumptions, Kirkhill. The US money supply (M2) equals about $7 Trillion, not $70 Trillion. See:  http://www.federalreserve.gov/releases/h6/current/ The $65 Trillion is the world’s GDP, the US GDP is, as T6 says, around $14 Billion or about 20+% of global GDP being generated by about 5% of the world’s population (a productivity factor of 4 – Canada, by contrast, produces 1.5% of the global GDP with 0.5% of the population for a productivity factor of only 3).

My sense of things is that the US Treasury, is not just the US's lender of last resort, it is, like the Bank of England before it, also the world's banker. 

Bingo! And, risks and all, the US taxpayer reaps the rewards of that – remember all those invisible exports?

The relative ‘cost’ of the bailout (for the US taxpayer) is higher than you would get with a $70 Trillion ‘base,’ but, as I said earlier, I’m guessing that, in relative terms the burden is less than in 1989 when the Savings and Loans blew up in our faces. Some might argue that the perceived relief when (mid ‘90s) the thrifts fiasco was behind us spurred the decade of prosperity that allowed Jean Chrétien and Paul Martin to balance Canada’s budget by screwing the rich provinces and relying upon an expanding economy to generate more and more revenue and allowed Bill Clinton to lead during a decade of fiscal exuberance.

E.R. Campbell said:

At least I hope not.

It is quite enough to ask require the US taxpayers to clean up Wall Street's mess; Bay Street and The City (and Beijing) can and must look after themselves.

BUT, the fed has extended 'protection' to the UK branches of Goldman Sachs and Morgan Stanley, so ...  ???

Looks like this answered my question.....

Canadian banks look for opportunities in U.S. crisis
Updated Mon. Sep. 22 2008 11:38 AM ET The Canadian Press
Article Link

TORONTO -- Canadian financial institutions are exploring opportunities in the American financial-sector crisis, and some may be in line for a share of the U.S. government's massive rescue plan.

The U.S. Treasury Department said during the weekend that institutions from outside the United States will be eligible for assistance in the planned US$700-billion taxpayer takeover of impaired debt instruments.

"If a financial institution has business operations in the United States, hires people in the United States, if they are clogged with illiquid assets, they have the same impact on the American people as any other institution," Treasury Secretary Henry Paulson said Sunday.

The original sketch of the rescue plan would have excluded non-U.S. based banks.
Paulson has also expanded the proposal to include all toxic assets, not only those related to the collapse of the American housing market.

The Treasury Department -- which remains in negotiations with congressional leaders -- said banks with "significant operations" in the United States should be included.

"How `significant operations' would be defined is uncertain, but it seems to suggest that the Royal Bank of Canada (TSX:RY), Toronto-Dominion Bank (TSX:TD) and Bank of Montreal (TSX:BMO) would qualify," BMO Capital Markets chief economist Sherry Cooper commented Monday morning.

Those three Canadian banks have large American commercial banking subsidiaries -- the Royal concentrated in the U.S. Southeast, TD in the Northeast and BMO in the Midwest.

"We will continue to see deleveraging of the U.S. financial system; as well, banks will be raising additional capital," Cooper noted.

Observers see this as an opportunity for Canada's banks, whose capital reserves remain robust. They also would have tailwinds in takeovers from the relatively strong Canadian dollar and their high share values compared with the ravaged stock prices of American banks and insurers.
More on link
Thanks for continuing to guide my thinking here Edward.

So if I stipulate my error on the M2 (vs M3, M4 or L?) and my further error on the approximately 40%? of Global GDP that is actually US Dollars (thus taking 70 Trillion down to 28 Trillion on GDP, 14 Trillion on US GDP and 7 Trillion on M2?) then 700 Billion represents something between 10% of M2 and 2.5% of US denominated global GDP?

Given that, wouldn't the impact still be ameliorated by the time factor (not all loans will default at the same time), the default rate (not all loans are likely to default) and the real value of the properties (not all properties will have zero value - in fact given what I understand to be neighbourhood clustering effect dilapidated properties may actually have improved value because small dilapidated lots can be amalgamated for a more generalized property redevelopment).

I guess what I am trying to come to terms with, as ever, is that no matter how much the press tries to sell soap,  the situation is seldom as bleak as reported.
Somebody has done alright by way of the sub-prime market.....

Fairfax makes $2.1-billion gain on credit default swaps
The Canadian Press 
url= http://ctv2.theglobeandmail.com/servlet/story/RTGAM.20080922.wfairfax0922/business/Business/businessBN/ctv-business]Article Link[/url]

TORONTO — — Fairfax Financial Holdings Ltd. disclosed Monday that it has $2.1-billion (U.S.) in realized and unrealized gains on credit default swaps.

This includes cash proceeds of $574.5-million as of Friday on sales of credit default swaps — derivatives which transfer the risk that a third party will fail to repay debt — with a notional amount of $3.22-billion, the amount of risk covered.

“Beginning in 2003, we took significant steps, including the purchase of credit default swaps, in an attempt to protect our balance sheet from investment risks,” said Prem Watsa, chairman and CEO of the Toronto-headquartered insurance holding company, which keeps its accounts in U.S. dollars.

“Given the unprecedented events of the past week, we felt it was prudent to update shareholders on the progress of our credit default swap sales prior to the date that we would customarily report our third-quarter results, particularly since we have an active share buyback program.”

Monday's disclosure showed that Fairfax has sold credit default swaps last year and so far this year with a notional amount of $8.9-billion, for which it paid $197-million and realized $1.85-billion to clear $1.65-billion.

It still holds credit default swaps with notional amount of $12.9-billion, for which it paid $238.1-million and which are currently valued at $684.9-million, for an unrealized gain of $446.8-million.

Fairfax noted that “the credit default swaps are extremely volatile, with the result that their market value and their liquidity may vary dramatically either up or down in short periods, and their ultimate value will therefore only be known upon their disposition.”
More on link

So, from the looks of it, they still hold 12.9 Billion currently valued at 684.9 million, but at this point in the game have realized all their costs as of last Friday, and the rest will be gravy  somewhere between the difference of 684.9 million and 12.9 Billion ...
Kirkhill said:
...  the situation is seldom as bleak as reported.

That's right. BUT: The situation is serious; this is a real crisis; investors - rarely famous for being able to focus on facts - are frightened; the regulators are trying to prevent panic.

As in all crises, there are, also, opportunities. While, I repeat, we haven't reached the "bottom" - yet, it is a good time to start "bottom feeding." Some really first rate companies with bright futures are being sold, today, at fire sale prices and some smart people - the infamous smart money people - are buying, before the more cautious move.

I, ss Merrill Lynch used to say, am bullish on America. At my age I have a 20-30 year active investment window and the "bulls" have always won when the 'window' is more than about 10 years. I expect to win, again.

The example of the Resolution Trust for the "S&L" crisis of the 1980's does not inspire confidence. The Resolution Trust was mandated to deal with the toxic assets of S&L's, but as they worked to unload mortgages and securities from distressed S&L's under their authority, this caused a corresponding reduction in the value of the mortgages and securities that underpinned S&L's in general. As the value of their asset base was eroded by the actions of the Resolution Trust (attempting to follow the mandate of the Congress), these S&L's became distressed, and then fell under the control of the Resolution Trust, in an ever expanding spiral.

The Resolution Trust is a perfect example of Regulatory failure in action; if the few distressed S&L's that had aggressively exploited the rules and fallen into trouble were simply allowed to fail, the pain would have been sharp and local, rather than essentially destroying the entire S&L industry in the United States (and incidentally making "Freddy" and "Fannie" enormously more powerful than they would otherwise have been).

Perhaps the one "out" has been alluded to; one economic ratio that is overlooked is the ratio between "stocks" and "flows". The stocks of real value in the United States is well over $50 trillion USD (houses, factories, land, real property), while the flows of cash is a fraction of this value (although a significant fraction, especially when "notional dollars" are taken into account). Since there is a vast store of underlying real capital (and "live" capital in the sense of Hernando De Soto's formulation) the tools are available for Edward's hoped for rebuilding of America.

The counter argument to the bailout:


The Atlantic's Steven Landsburg on the bailout:

    What's clear is that a bunch of financial institutions have made mistakes and lost money. What's unclear is why anyone (other than the owners and managers) should care. People make mistakes and lose money all the time. Restaurants fail, grocery stores fail, gas stations fail. People pick the wrong stocks, they buy the wrong cars, and they marry the wrong spouses without turning to the Treasury for bailouts.

    So what's special about banks? According to what I keep reading, it's that without banks, nobody can borrow, and the economy grinds to a halt.

    Well, let's think about that. Banks don't lend their own money; they lend other people's (their depositors' and their stockholders'). Just because the banks disappear doesn't mean the lenders will. Borrowers will still want to borrow and lenders will still want to lend. The only question is whether they'll be able to find each other.

    That's one reason I feel squeamish about the official pronouncements we've been getting. They tell us bank failures will make it hard to borrow but never that bank failures will make it hard to lend. But every borrower is paired with a lender, so it's odd to state the problem so asymmetrically. This makes me suspect that the official pronouncers have not entirely thought this thing through.


    In other words, I'm not sure these big Wall Street banks are really necessary, and I'm not sure we'd miss them much if they were gone. Maybe there's something I'm missing, but if so, I think it should be incumbent on Messrs. Bernanke, Paulson and above all Bush to explain what it is.

Ilya Somin, at The Volokh Conspiracy, chimes in:

    Ultimately the key question is this: why shouldn't these banks be treated like any other business whose management has displayed bad judgment and lost a great deal of money as a result? Capitalism works because we insist that businesses bear the cost of their own losses, a process that gives them strong incentives to make good decisions and transfers their wealth to others with better judgment if they persist in screwing up anyway (as the big banks have done in this case). Perhaps really big banks are somehow special and deserve bailouts that we would deny to other businesses. But there is a heavy burden of proof on those who claim that this alleged specialness really exists and that it justifies hundreds of billions of dollars in public expenditures, unchecked executive power, and unprecedented control of the economy by the federal government. Like Landsburg, I am skeptical that the burden has been met.
Breaking News:

FBI Investigating Fannie Mae, Freddie Mac, Lehman Brothers and AIG for Potential Fraud