The Music Goes on and on

[specuvestor]

AFC was a private sector crisis but govt has to bail it out. That's what I meant when I said "When crap hits the fan, there is little difference between private and govt foreign debt". They are both in the same boat and facing the foreign debt. The IDR didn't save the institutions from defaults. It was the IMF US$ loans. Ditto for the greek crisis. In short it was a cashflow problem. That is why Bernanke's swap lines during the GFC crisis was ingenius. You can't whack a country who has a swap line with US with unlimited US$. But effectively US is taking the credit risk during the swap tenor. They have no interest to hold for eg SGD for the long run. It has to be swaped back in a defined future.

They need US$ to cover US$ debt otherwise they default. No amount of IDR printing will do. That is why Russia defaulted.

Governments would not even let National Airlines to fail. That speaks a lot on whether they will let quasi-govt entities to fail. There are socio-political implications, not just simple capitalistic considerations. This world does not run by numbers, it is run by humans.

Since you study central bank balance sheet, what does it mean when the government and monetary authority has no foreign reserves but just local debt, including cash in circulation? Look at the closed economies like Myanmar in the past or North Korea. Again technically sovereign governments cannot be "insolvent" or "default in local currency", but again of little consequence.

PBOC has no obligation to pass you the US$ equivalent. Since RMB is managed float, at what rate are they creating the RMB "backed by USD"? 8.2 or 6.5? Whereas technically HK has to pass u US$1 for every HKD7.78 that you demand in return. It's the same principle of the gold peg and how it was broken during Nixon times because the US realise they cannot keep emptying Fort Knox. However in a fiat system it is based on PURE FAITH. We have faith in the RMB because we know it has $3t USD reserves and they are growing. We scorn at the Dong because we know their value is unrealistic due to govt policies. Fiat is generally uncollaterised debt... there is no backing.

RMB is getting internationalised exactly because the Chinese don't want to hold too much US treasuries. In future they will want to hold their own RMB bonds but they will need to make RMB a trade currency for that to happen. Republicans will get their wish and hope they will not be too surprised by the consequences.

[freedom]

There is a difference when the government saved the private sectors. Most of them assumed the private sectors' debt in their own currencies instead of foreign currencies. Even in your example of Argentina, one difference between Argentina and the creditors is the exchange rate between the US dollar and Argentine Peso. Sure, the Argentine government wants to pay its debt in Peso, and the creditors will insist the USD.

Yes. They could default. Why not? The private sectors were insolvent anyway. The only rational result was to default. Either the creditors accepted the bankruptcy or they can accept conversion of foreign denominated debt into local currency. A loss is a loss. That the government saved the private sectors does not make it no loss for private creditors. How much has creditors lost in Greek debt? Is Greece considered default or not?

Governments won't let national airline to fail? That does not make much sense. How much has airline industry contributed to the world economy? Is Singapore not be able to survive without SIA? If Singapore government wants to save its face, they can't rob the people to achieve it. It will be a faster way for PAP to be voted out. Was Japan Airline considered a national airline? Didn't it file for bankruptcy and restructure subsequently?

Clearly, you don't understand my argument. I did not talk about anything about central banks having to have foreign reserve to back their currencies. The Fed has almost no foreign reserve. What I said is merely the fact that RMB is backed by its foreign reserve. Please don't extrapolate my argument unwarrantly. PBOC wants exactly the same power as the Fed, to issue unlimited amount of its own currency at its own will. But sadly, it is not now and unlikely in the near future. Clearly, you don't understand the mechanism of PBOC's foreign exchange. Everyday, PBOC will set a basic rate for various foreign currencies. And the commercial banks can help their customers with foreign currencies obtain RMB based on the base rate set by PBOC. Through that, PBOC will have the foreign currency as foreign reserve, at the same time, create equivalent amount of RMB reserve and credit it into the commercial banks' account. Though PBOC has encouraged the commercial banks to hold the foreign currencies themselves instead of ceding them to the central bank to limit the accumulation of foreign reserve at the central bank level, it is only a small step forward. So you have to study the PBOC and your theory in monetary is too general and limited and certainly not applied to PBOC, possibly not applied to MAS.

[specuvestor]

I didn't say private sector has no loss. I'm saying whether public or private foreign currency debt in truth is irrelevant, because end of day government will have to step in during a crisis.

If all it requires is local printing of local currency then IMF will be out of job. You have the right angle and then you extrapolate it to extreme.

The failure of National Carriers is well known in the value investing circle as they are national "treasures" and high capex. Which is why it was quite surprising when Bill Miller starts turning positive on airlines. JAL will go through fire but National Carriers will seldom cease to exist come what may.

And for every cent of foreign reserve PBOC assumed, it creates equivalent amount of liability in its banks reserve(RMB) or its bills. And how do you justify that RMB is not backed by its reserve?

And I reiterate: "Fiat is generally uncollaterised debt... there is no backing"

I am well aware how PBOC works. I am not sure why you have such unreserved confidence in China macros (though I generally agree with you) when you had not defined fiat properly in the past, did not think there is a reserve system, or SMEs are being supported by State Banks, or even saying Indonesian govt saved the banks. You may not recall the iconic IMF chief standing behind Suharto with folded arms as he sign the rescue package. Nothing is easy as it sounds on paper

[freedom]

Then tell me whether IMF came in to save the US when the subprime crisis broke out in US. I don't underestimate the role of IMF, but in many occasions, IMF is not necessarily helping the suffering countries, but the sharks, especially towards emerging countries. I am pretty sure that the ASEAN lost more because of IMF. They could lose less if they just let those private corporations take their loss and go through bankruptcy and save the operating assets and forced the foreign creditors to accept conversion of foreign denominated debt into local currency debt. It is not as if IMF came in and helped the suffering countries gain credit from international credit market. Indonesia has not obtain credit from international credit market for many years even after IMF "saved" it. Look at Russia, is it really worse than Indonesia? Russia did default. Loss is loss, that government came in and help does not make it any less a loss.

Ceasing to exist is a different matter. Seldom, corporations just disappear from the planet earth. Bear Sterns is still alive inside JP Morgan. Part of Lehman Brothers is still alive in Barclays, part in Nomura. If I am not wrong, part of Long Term Capital Management is still alive somewhere, but in different form.

Certainly, government can come in, but not necessarily just to rescue the company, but to collect the remaining viable assets and operations. There is no reason that the government has to assume the liabilities of failing corporations. The US government did not assume GM's huge liabilities, only took a stake in GM after it went through bankruptcy. GM is a great American icon. There are wise and strong governments such as the US government, came in at the worst time of the crisis and bought cheap on various financial institutions, not only made a huge profit, but saved the economy from depression. There were dumb governments, I won't name it.

And I reiterate: "Fiat is generally uncollaterised debt... there is no backing"

So what do you mean? There exists one balance sheet where only one side exists? The liabilities side without the assets side? All issued notes or reserves are the liabilities of the central bank. So what's the assets side then? Nothing? All central banks are having negative equities? I don't know whether it is me who only lives on paper.

[specuvestor]

IMF loans in USD, that will give you an indication of the mechanics involved based on what we have been discussing and why IMF is usually thought to be US lackey, which is true to a certian extent. US obviously doesn't need to borrow USD from IMF.

What does it mean when a company borrows uncollaterised loan? Does it mean there is nothing on the asset side? It simply means it has no obligation to pay you from the asset side because it is not BACKED by it.

[freedom]

As I mentioned earlier, Indonesia government does not have to assume the foreign currency denominated debt. They did not have to borrow from IMF whatsoever. A lot of people thanked IMF for saving them from AFC. But there isn't much reason for ASEAN governments to thank IMF. They paid dearly.

Then we just have different meaning about "backing". What you described about the fiat system just means there is no redemption, that is, no one can ask the central bank to redeem its liabilities. But from what I see, every liability is "backed" by the asset. In another way, people can exchange RMB into USD or some other currencies indirectly from PBOC. You can deem it as redemption or you can view it as a market transaction. So it is redemption, so RMB is not a fiat system, but "backed" by something in your way? Whatever it is, in my simple view, PBOC has a balance sheet with liabilities including bank reserve and notes issued and assets including its vast foreign reserves.

[specuvestor]

Agree totally that IMF policies are dubious... I kinda suspect their policy makers are ivory tower economists... they are a one trick pony: Austerity, ever since the day I started looking at how they tackle issues But as long as you own USD debt or need USD to transact with rest of the world, IMF will be the one you have to call... unless of course you decide not to have offshore capital transactions like Iceland or the Axis of evil, or unless you are nuke capable like Russia.

That's why the Euro was trying to supplant the USD dominant position; and now RMB will be next to try. There are considerable leverage in being a global currency for trade and reserve.

Fiat system is backed by the faith in the country. Faith is fragile which is why Robert Rubin consistently say that a strong USD is in the interest of the US. Russia tried to engineer a faith crisis during the GFC by urging China to sell their US assets. Scary part is that Russia was not joking. They sold all their treasuries and MBS while China stayed put.

Currency is a system of exchange to replace barter trade ie it flows both ways. Fact that it can be changed to other currencies says nothing about it being backed, which BTW RMB is still not fully convertible per se via the Central Bank. HKD as I mentioned is a currency board whereby if u bring HKD7.78 to HKMA, they technically can give you one USD (If they didn't laugh at you first of course). It is like SAFRA voucher... it is backed by repute of SAFRA and the faith in the SAF. SAF practically printed their own fiat currency.

And if you bring a strong currency like SGD to Poland or Timbuktu, I'm sure they don't recognise it as legal tender even if we can arguably say SGD is AAA while USD is AA. But people have faith in USD globally.

[freedom]

Not exactly. If a company is indebted in foreign currencies, it does not have to have the foreign currencies to repay its debt. There is always the way, default. During AFC, various Indonesian companies were insolvent because of foreign currencies denominated debt. I guess, at that time, the problem could be that Indonesia did not have a proper bankruptcy law to govern the bankruptcy process. If Indonesia has a legal system as sophisticated as the US, I am sure, there are better ways to solve the problem. The insolvent Indonesian financial institutions and companies could file for bankruptcy. The deposits in Indonesian banks can still be protected in the highest priority if the law is there so that the depositors would be paid first. The financial institutions and companies could be reorganized into a good company and a bad company, with the government buying the good companies in local currency. The proceed can be used to repay whatever local and foreign debt owed. The bad companies could continue to liquidate to repay its creditors. It is not that difficult. Many companies have bankrupted then bought by other companies or the governments. It could still save all the good part of the Indonesian corporations but with a fair price.

As for RMB, yes, there is limited convertibility. But for the limited convertibility, do you consider it as a fiat system of no redemption or a system with partial limited redemption, which certainly will not be a fiat system. What is it? RMB is "backed", "not backed", or "partially limited backed"?

[specuvestor]

Like you said, the foreign debtor would want to be paid in USD rather than IDR. As explained it is a measure of whether you think after messing with them this time, how long will it takes before the international community accepts you again.

You are still considering the exchange of fiat currency as redemption. Fiat itself has no physical nor intrinsic backing like I used the SAFRA voucher example.

In fact the government can come out and say the old note is no longer legal tender and as good as waste paper. This happens when monetary authority needed to refresh currencies for various reasons, usually inflationary. I think our neighbour at the south does this periodically.

The "paper" money loses the "value" and you have no recourse for any form of exchange. You can't exchange it for foreign currency anymore. The implied faith is no more. Whereas even non-fraud S-chips have some residual value backed by nett asset Even Blumont is not zero.

[freedom]

I don't consider exchange in general market as redemption, that's merely a trade. I only consider exchange from PBOC as a way of redemption. I am not talking about general central banks. I am talking about PBOC only throughout the entire conversation. The USD from PBOC is not SAFRA voucher, it is as real as any USD is. A lot of Chinese companies acquire oversea assets through this way.