balance sheets – assets v liabilties whose balance sheets –firms and banks –households –rest...
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Balance Sheets – Assets v Liabilties
• Whose Balance sheets– Firms and Banks– Households– Rest of the World
• What Dominates– Assets or Liabilities?– Firms, Banks, Households, RoW?
Balance Sheet Structure• Financing Profiles are really expectational profiles
• Hedge – income expectation certain – production dominates
• Speculative – financing expectation also certain
• Ponzi – income expectation certain (negative) financing expectation uncertain – finance dominates
Ponzi accounting
Interpretations – Cushions of Safety
How Good are Balance Sheet Statistics
• Firms -- – Ponzi Accounting
- No longer simple bank loans, bonds and equity --New Financial Architecture
- Banks –- No Assets – Fee and Commissions, Prop Trading
Non-Bank Financial Institutions – Ponzi Traders
No good measures of leverage – no good measures of cushions of safety
Discount window no longer works to support asset prices
How Good Are Balance Sheets
• RoW –Balance of Payments Stats– Created for a Fixed Exchange Rate Regime
– Low Capital Flows
– Vertically Integrated Domestic Production
• Factor Services Account• Exchange Rate Revaluations of Foreign Assets• Sales of Subsidiaries –
– German Firms sell more from US subs than from Exports to the US market
Reading Balance Sheets
• Finance now dominates domestic production
• International Finance now dominates Trade• Rest of World now as important as
Domestic• Need to look at Sectoral Balance sheets in
the RoW to Understand International Imbalances
Figure 2 US International Transactions 1977-2006QIQuarterly Data 4 Q Moving Averages
-50000
0
50000
100000
150000
200000
250000
1977
:IV
1978
:IV
1979
:IV
1980
:IV
1981
:IV
1982
:IV
1983
:IV
1984
:IV
1985
:IV
1986
:IV
1987
:IV
1988
:IV
1989
:IV
1990
:IV
1991
:IV
1992
:IV
1993
:IV
1994
:IV
1995
:IV
1996
:IV
1997
:IV
1998
:IV
1999
:IV
2000
:IV
2001
:IV
2002
:IV
2003
:IV
2004
:IV
2005
:IV
$ m
illio
n N
SA
Net Capital Flows
Net Purchases of USGoverment Debt"
Net Foreign Direct Investment
Three Basic Points
• Imbalances are normal, part of development process– Currently it is the size – due to capital
liberalisation and horizontal production
• Determined by Development Policy Decisions
• What appear to be “hedge” structures are indeed Ponzi structures
Development Policy
• Positive Net Resource Flows– Trade deficit, capital flows from developed to developing
• Negative Net Resource Flows– Trade Surplus, capital flows from developing to
Developed Countries– Self-Insurance Reserve Accumulation
• Europe and OPEC Developing Asia All Use NNRF Policies for Different Domestic Objectives– Asia – employment– Europe – price stability– OPEC – domestic industrialisation – geopolitical factors
Figure 1 US Balance on Goods Trade Quarterly Data 4Q moving averages 1978-2005
-55000.00
-45000.00
-35000.00
-25000.00
-15000.00
-5000.00
5000.00
$ m
illio
ns Japan
OPEC
China+HongKong
Canada
Korea, Singapore, Taiwan
Europe
Latin America
Figure 3 China's Asian Trade Balance
-40.0
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
$ bi
llion
Asia
Japan
Other Asia
Six East Asian traders
NNRF as a Hedge Profile
• Export earnings cover imports and debt service
• Foreign Exchange Reserves Cover Capital Reversals
• No Risk of Financial Crisis
• Adjustment via Trade Flows and Exchange Rates
Figure 4 Net Foreign Acquisition of US Long Term Securities and Exchange Rates
1977-04/2006 monthly data 12 mo moving averages
-10000
0
10000
20000
30000
40000
50000
60000
70000
80000
1977
-12
1978
-08
1979
-04
1979
-12
1980
-08
1981
-04
1981
-12
1982
-08
1983
-04
1983
-12
1984
-08
1985
-04
1985
-12
1986
-08
1987
-04
1987
-12
1988
-08
1989
-04
1989
-12
1990
-08
1991
-04
1991
-12
1992
-08
1993
-04
1993
-12
1994
-08
1995
-04
1995
-12
1996
-08
1997
-04
1997
-12
1998
-08
1999
-04
1999
-12
2000
-08
2001
-04
2001
-12
2002
-08
2003
-04
2003
-12
2004
-08
2005
-04
2005
-12
$ m
illi
on
50
60
70
80
90
100
110
120
130
$ E
xch
ang
e R
ate
Ind
ex
Total Net Inflow s
Federal Reserve MajorCurrency Index
Federal Reserve OtherImportant Partners Index
US Net FDI Flows 4 Q Moving Averages NSA 1995-2005Q3
-40,000
-30,000
-20,000
-10,000
0
10,000
20,000
30,000
40,000
50,000
60,000
1995;1 1996;1 1997;1 1998;1 1999;1 2000;1 2001;1 2002;1 2003;1 2004;1 2005;1 2006;1p
$ m
illi
on
TotalCanadaAsia and Pacific Europe OPEC2
Figure 8 Net Non-Resident Acquisition of US Long-Term Securities 1977-04/2006 monthly data 12 mo moving averages
-10000
0
10000
20000
30000
40000
50000
60000
70000
80000
1977
-12
1978
-08
1979
-04
1979
-12
1980
-08
1981
-04
1981
-12
1982
-08
1983
-04
1983
-12
1984
-08
1985
-04
1985
-12
1986
-08
1987
-04
1987
-12
1988
-08
1989
-04
1989
-12
1990
-08
1991
-04
1991
-12
1992
-08
1993
-04
1993
-12
1994
-08
1995
-04
1995
-12
1996
-08
1997
-04
1997
-12
1998
-08
1999
-04
1999
-12
2000
-08
2001
-04
2001
-12
2002
-08
2003
-04
2003
-12
2004
-08
2005
-04
2005
-12
$ m
illi
on
NetTotal
Total Europe
Total Asia
Total Latin America
Asset – Liability Stability
• Domar on Domestic and Foreign Debt Sustainability
• NNRF is stable if rate of increase in foreign lending is equal or greater than the rate of interest on foreign assets – cet par (exchange rate).
• This is the definition of a: ??
Ponzi Financing Scheme
• It is Financial Fragile
• What will trigger Instability?– Sectoral Balance sheets– Interest Rates