Balance Sheet Recession In The Us Is Over

[Guest_FaFa!_*]

http://pragcap.com/the-balance-sheet-recession-is-over#qtEXYdG6oDK4Zmkv.99

I am glad (and sad) to say that the Balance Sheet Recession in the USA appears to be over. Yesterday’s Z.1 report from the Fed confirmed that households have indeed begun releveraging. Household debt showed its first year over year gains (on a quarterly basis) in Q3 since the crisis began. The end of the BSR arrived just about on time. Several years ago I predicted that the Balance Sheet Recession would likely end sometime in 2013 or so.

This is a good sign. But we’re by no means back to levels where we were. On the other hand, growth is growth. The economy rarely grows without private sector debt accumulation so this is a sign that balance sheets are normalizing. It’s also a sign that the tapering can begin without worry of imploding the markets. The private sector is really starting to run with the baton here so we shouldn’t be terrified of the government stepping back some of its extraordinary measures here.

I assume the re-balancing of the world economy will occur over multiple cycles then, not a big bang. Asians will continue to enjoy handing us stuff for free.

Edited December 10, 2013 by FaFa!

[The Masked Tulip]

Taper next week? Who knows. Just wait and watch.

I have a pension with Standard Life and would love to now, but am unable to do so, mo e it from shares to cash for a while. Totally inflexible. I watched it shoot up over the past 12 months and will now probanly watch it go back down. Oh well, someone made money along the way.

[R K]

http://pragcap.com/t...YdG6oDK4Zmkv.99

I assume the re-balancing of the world economy will occur over multiple cycles then, not a big bang. Asians will continue to enjoy handing us stuff for free.

That's the conclusion I have come to, but in fits and starts.

China appears to be signalling that, but is also taking crazy risks in the South/East China seas. US trade deficits are improving, albeit also due to oil imports/oil prices. Europe have yet to decide whether they wish the Euro to become a global reserve currency though - which remains a rather large unresolved issue and likely will be for some time.

I think we're looking at decades for all this too unfold fully rather than a year or two.

[crashmonitor]

http://pragcap.com/the-balance-sheet-recession-is-over#qtEXYdG6oDK4Zmkv.99

I assume the re-balancing of the world economy will occur over multiple cycles then, not a big bang. Asians will continue to enjoy handing us stuff for free.

Whilst wanting a bit more tangible stuff than fiat this time around....more London houses, works of art, a share in HS2, the odd Crystal Palace rebuild vanity venture etc...........seems like a fair swap for all that lovely stuff they supply us with at Poundland.

[zugzwang]

That's the conclusion I have come to, but in fits and starts.

China appears to be signalling that, but is also taking crazy risks in the South/East China seas. US trade deficits are improving, albeit also due to oil imports/oil prices. Europe have yet to decide whether they wish the Euro to become a global reserve currency though - which remains a rather large unresolved issue and likely will be for some time.

I think we're looking at decades for all this too unfold fully rather than a year or two.

The US trade deficit is shrinking - as the dollar is the global reserve currency that means things are getting worse not better. The yuan can't fulfill the reserve role while China continues to run a trade surplus. The euro is a bancor currency and will remain so until a full debt-sharing union is attempted. Don't hold your breath. Maybe Abe can pull up global demand with all his yen? OK, maybe not. No-one wants to own JGBs.

So it looks like we're all waiting for China's shadow banking system to blow up after which we go straight back to the Stone Age.

[interestrateripoff]

I think we're looking at decades for all this too unfold fully rather than a year or two.

Only a few decades?

[Guest_FaFa!_*]

So it looks like we're all waiting for China's shadow banking system to blow up after which we go straight back to the Stone Age.

Are you saying that the Chinese shadow banking sector is so large that when it explodes it will tear a hole in the space-time continuum?

[Sancho Panza]

Are you saying that the Chinese shadow banking sector is so large that when it explodes it will tear a hole in the space-time continuum?

Amazon Inside China's Shadow Banking: the Next Subprime Crisis? Joe Zhang

Economist 1/6/13

'Like banks, shadow banks are middlemen, issuing liabilities and holding assets. Another point of resemblance is that their assets are often less liquid, longer-term and riskier than their liabilities purport to be. Yet unlike banks they lack an official safety net, such as a lender of last resort, should these mismatches ever be exposed. That makes shadow banking a bit scary. The International Monetary Fund frets that “a fast-growing share of credit is flowing through the less-well-supervised parts of the financial system.” Mr Zhang’s book is marketed to people who suspect that systemic dangers lurk in these shadows. But the tale it goes on to tell is more interesting. Shadow banking, he argues, is “more a symptom than the disease itself.”

The disease itself is financial repression. China imposes a ceiling on the interest rate that banks can pay to depositors. This keeps banks’ cost of funding low, making them eager to lend. To curb their enthusiasm, the regulators must impose offsetting limits on their lending, as Dong He and Honglin Wang of the Hong Kong Institute of Monetary Research have pointed out. These limits range from conservative loan-to-deposit ratios to heavy reserve requirements and blacklists of overexposed borrowers, such as property developers or local governments.

Where there is regulation, there is evasion, notes Mr Zhang. Much of China’s shadow-banking system serves merely to help banks evade deposit ceilings and lending guardrails. It would be less pervasive if China’s lending limits were less strict. But then those limits would not need to be so tight if banks’ funding costs were not repressed.

Neglected by the banks, small firms are willing to pay the 20-24% interest rates charged by China’s 6,080 microlenders. But micro-loans amounted to only 592 billion yuan ($97 billion) at the end of last year, equivalent to less than 1% of bank credit (see table). A far bigger source of finance for illiquid firms is other more liquid ones. Non-financial companies are barred from lending directly to each other, but they can make “entrusted” loans via a bank or trust company. This lending is sizeable, but also relatively safe, according to Standard & Poor’s. Most of the loans are made by big firms to their sister companies.

WMP! There it is

As well as midwifing loans from one firm to another, trust companies also raise pools of money from investors by issuing their own WMPs. These products amounted to 1.9 trillion yuan at the end of 2012. Most mature within 1-3 years, according to Jason Bedford of KPMG, an auditing firm. The money is often invested in loans to credit-starved enterprises. Some products are, however, more imaginative, speculating on tea, spirits, or even graveyards. In at least one case, a product was not just imaginative but entirely imaginary: raising money for a non-existent project dreamed up by a rogue trust-company manager.

These products are, then, risky. But potential losses are cushioned by collateral and unmagnified by leverage, Mr Bedford points out. In principle these losses are also borne by investors. The buyers of two faltering products issued by CITIC Trust, China’s largest trust company, have been told not to expect a bail-out. In practice, however, many trusts are less stiff-spined. They are tempted to rescue investors to maintain their good name.

Often, these trust products are sold through banks, which distribute them, without guaranteeing them. The public, however, “pretends not to understand the distinction”, Mr Zhang says. By feigning ignorance, aggrieved investors hope to browbeat the government into holding the banks liable, he argues. In Hong Kong banks had to ease the pain of losses on Lehman minibonds sold through their branches. It is notable that one of the banks involved, Bank of China, has been unusually reluctant to sell WMPs in the mainland, points out Mike Werner of Sanford C. Bernstein, a research firm.

Trust products sold by banks tend to be confused with a less risky kind of WMP: bank products packaged by trusts. In the first case, Mr Bedford explains, the bank provides a service to the trust companies, offering its staff and branches as a distribution channel. In the second case, the roles are reversed: trust companies and, increasingly, securities companies, provide a service to the bank, helping it to package assets in its WMPs.

Unlike trust products sold by banks, bank products packaged by trusts are fairly conservative. They are mostly “deposits in disguise”, as Standard & Poor’s put it, offering yields one or two percentage points higher than the deposit-rate ceiling. As well as helping banks to breach this ceiling, these products allow banks to window-dress their balance-sheets, points out Mr Werner. The WMPs are typically timed to mature just before the end of each quarter. As the money is returned to the WMP-buyers, it is paid into their deposits at the bank, just in time to bring the bank’s loan-deposit ratio below the regulatory limit of 75%.

If enough of the riskier WMPs fail, it might prompt investors to stop buying fresh products. Since WMPs usually mature long before the underlying assets do, that could inflict a nasty credit crunch on otherwise solvent ventures. But the impact on the banking system would be less obvious. If investors lose confidence in WMPs, they are likely to switch to deposits instead. The result would be a run to the banks, not a run on them. The only worry is that investors may not run to the same banks that issued most of the WMPs. China’s smaller joint-stock banks, which have led WMPs issuance, could therefore face a funding squeeze.

One answer would be to introduce formal deposit insurance. That would force banks to pay for the implicit backing they enjoy from the state. It would instil confidence in the smaller banks, as well as the ones that are obviously too big to fail. It would also draw a clearer distinction between safety (insured deposits) and risk (uninsured investments).

Critics of China’s shadow banking like to compare WMPs to the collateralised debt obligations at the heart of the global financial crisis. But according to Ting Lu of Merrill Lynch, the banks’ WMPs bear a closer resemblance to American money-market funds, investing mostly in safe, liquid, short-term paper. Those funds, which first arrived in America in 1971, competed successfully with bank deposits, forcing legislators to phase out America’s caps on deposit interest rates in the 1980s. Perhaps the banks’ WMPs will prove a similar spur to reform in China.

Mr Zhang is impatient for that day. He graduated from the central bank’s academy back in 1986 with a thesis entitled “The Path to Interest-Rate Liberalisation”. Then, he thought the removal of interest-rate controls was only five years away. Over a quarter of a century later, students are still writing the same thesis, he says. “Those five years have never ended.”''

[Guest_FaFa!_*]

What do you think the impact of the Chinese shadow banking system will be? How globalised is it?

[zugzwang]

Are you saying that the Chinese shadow banking sector is so large that when it explodes it will tear a hole in the space-time continuum?

It's the global economy's last prop. The dollar's unstoppable rise even in the face of unlimited QE is evidence of a lack of demand worldwide and yet still the Chinese economy powers on? The additional credit is clearly being created informally by non-bank intermediaries, shadow and grey banks outside the purview of the PBoC.

A disaster in the making.

Of course, there's plenty of subprime debt creation going on elsewhere to fuel the conflagration once it gets started: US subprime autoloans with an average LTV of 110%... a trillion dollars of student debt ... George Osborne's HTB.