The Wall Street Journal has just run an article about the latest data manipulation coming out of China.
China is experiencing strong currency outflows. This is a combination of “hot money” from outside China, which came into the country to bet on an appreciating currency (the yuan) and is now retreating, and domestic money that is looking for a foreign home now that the Chinese bubble is appearing less and less sustainable.
In a reversal of the process that I described here, this is causing China to spend huge amounts of its foreign exchange holdings to prop up the yuan. This is the exact opposite of what China had been doing, which was to accumulate foreign exchange reserves as it depressed the yuan. China is holding up the value of the yuan now because, although it ultimately wants to see the currency fall, it is worried that a sharp decrease will cause a self-fulfilling and destabilizing flight.
Investors have therefore been watching the monthly reports of China’s foreign exchange holdings with interest to gauge the amount of capital flight and the ability of the Chinese government to support the currency. The numbers have not been comforting: foreign exchange holdings dropped from a peak of almost $4 trillion in March 2014 to $3.2 trillion in February 2016. During most of 2015, the fall was running at about $80 to $100 billion per month, even though China was running a large balance of payments surplus, which would normally increase the amount of reserves. Traders were beginning to speculate on how much longer China could continue to bleed.
And then it stopped: in February 2016, the monthly drop equalled $29 billion, down from $99 billion in January. Investors breathed a sigh of relief. It looked like the yuan wasn’t going to detonate, which was one of the possible “black swans” behind the fall in global markets at the end of 2015 and the beginning of 2016.
But, of course, they lied. Instead of buying the yuan in the “spot” markets, paying for the purchases with foreign exchange reserves in a way which is highly visible, the Chinese government has been using its lapdog banks to purchase the currency in the “forward” markets. These forward purchases hold up the current value of the yuan since the forward and spot markets are mathematically linked through interest rates.
The benefit for the Chinese is that forward purchases, which may not settle for months or even years, do not show up as an outflow of foreign exchange reserves for a long time. This allows the Chinese government to pretend that the pressures on its currency are waning and that it is winning the battle against those nasty speculators. Since, as I have noted before, the drawdown of foreign exchange reserves also tightens the domestic money supply, it also helps China to continue to run the very loose monetary policy that the government thinks is necessary to hold off recessionary pressures.
The WSJ article speculates that China may have $150 to $300 billion in currency forwards, most of which have been built up over the last few months. The article also points out that the IMF, which has just promoted the yuan to the currency major leagues by including it in its Special Drawing Rights, is pressing China to disclose information on its forward positions. The Chinese authorities promised to provide more information on its currency maneuvers when it joined the SDR in December of last year. But apparently they have already forgotten.
If it is true that China has rapidly built up this large forward position, it would mean that pressure on the yuan is continuing at a high level. It would also mean that China is maintaining its world-leading position in falsifying economic statistics.
Bernie Sanders’ Nostalgie de La Boue
I have commented before about Sander’s nostalgia for socialist European policies that are rapidly disappearing in their countries of origin. His call for tuition-free university education in public schools is another example.
The Economist has just run an article on the growing tendency of European students to forego a free public university education in favor of paying for a private one. This is quite a vote of no confidence in the public system given that the private schools often charge hefty fees. But it appears that the students value the smaller classes, the more attentive faculty (who actually treat them like customers) and the closer connection to the skill requirements of employers, many of whom run joint programs with the schools.
Apparently the students don’t even mind the longer hours, heavier course loads and shorter vacations imposed by the private schools. The article quotes a German student as saying: “We pay a lot of money for our studies and we want to make sure we receive a good education.” Bernie, are you listening?
Sanders claims tuition-free university education is necessary because free public education from kindergarten through 12th grade (“K12”) is no longer sufficient to prepare young Americans for the high-tech jobs of today.
Of course, Sanders does not mention that since the Program for International Student Assessment (PISA) started comparing 15-year olds across countries in 2000, the USA has been lodged firmly in the second ranks of countries, particularly in the math and science fields that are most relevant in a high-tech world. America has also been falling further behind: the math scores of the US students went from 88% of the leading country’s in 2000 to 78% in 2012 (the last year for this triennial report); in science, they went from 90% to 86%.
Nor does Sanders mention that we are doing a particularly bad job of preparing university students for today’s job world, as I have mentioned in “Student Loans” before. There are currently four million unfilled job positions in the US economy. This is not because we aren’t sending enough students to university, but largely because of the absence of vocational training and the choices that students make, shying away from science, technology, engineering and math. Sanders never says how getting a degree in social sciences and history, psychology, visual and performing arts or communication and journalism – the four most popular majors – is supposed to prepare students for the high-tech world he sees. Or why students freed from the cost of their courses are going to choose better than they do when they have to pay.
In many respects, as even Hillary Clinton has pointed out in the debates, Sanders’ proposal is a transfer program from the broad base of taxpayers to support a college-going elite’s ability to engage in wittier cocktail party banter and the elaborate mating rituals of university life. It would also be a further transfer program to university teachers and administrators, who have been huge beneficiaries of government support for higher education. Not surprisingly, this group comprises a significant part of the Sanders “political revolution” that aims to break the corrupt links between Wall Street and Washington.
There are none so blind as those who will not see.
Of course, only a churlish fiscal conservative like me could suggest that, before embarking on the experiment of free public university education, we should probably do something to correct the obvious faults of our existing K12 and university systems. But since this could only be done by confronting key parts of the Democratic Party voting base, the default option of throwing more money at the problem will be chosen.
It appears to be a defect of the statist mind that, when confronted with evidence of the failure of a cherished policy, the only possible response is to cry for “moooaaarrr.” When Keynesian economic policies fail, it is always for want of “moooaaarrr.” When military intervention in the Middle East causes more chaos, civil wars and terrorism, it can always be fixed with “moooaaarrr.” When American public education in the years K12 fails miserably, then it is obvious that the solution is a “moooaaarrr” extension to the university years.
Einstein’s definition of insanity, in case anyone needs to be reminded, is “doing the same thing over and over and expecting a different result.” One wonders what he would make of people who are constantly suggesting doing “moooaaarrr” of the same failed policy and expecting a better result.
Justice for Zoolander
The political correctness crowd claimed another scalp this past week. Raymond Moore, the director of the Indian Wells tennis tournament, was a goner after he said the following:
In my next life when I come back I want to be someone in the WTA because they ride on the coattails of the men. They don’t make any decisions and they are lucky. They are very, very lucky. If I was a lady player, I’d go down every night on my knees and thank God that Roger Federer and Rafa Nadal were born, because they have carried this sport.
I have pointed out before the absurdity (see “Tennis and PC Nonsense” here) of the WTA’s claim for equal pay for female tennis professionals. To make this point more graphically, I have decided to launch a campaign entitled #JusticeforZoolander.
It turns out that the highest paid female model, Gisele Bundchen, was paid $47 million for the years 2013 and 2014. This dwarfed the amount paid to the highest paid male model, Sean O’Pry, by a factor of over 30 times. And the disparity isn’t only at the top end. Female models make an average of $41,300 per year, which is 148% of what male models make on average.
Now, I ask you, is this fair? I am pretty sure that Sean works every bit as hard as Gisele, just as the WTA players work as hard – well, not really, since their matches only go to three sets – as their male counterparts.
Fairness, as that term is understood by the WTA and the feminist movement, is a meaningless concept when it comes to compensation or any other price in a market economy. People are not paid in accordance with this simplistic idea of “fairness.” People are paid on the basis of how much the rest of society values what they do and therefore how much they are willing to pay for it. Which, if you are capable of thinking about it for a second, is actually about as close to “fairness” as we are going to get in this life.
Novak Djokovic, who in addition to having awesomely consistent and powerful ground strokes and a much improved serve, actually appears to understand economics. Before he was forced to retreat by the ferocious ignorance of the PC harpies, Djoko correctly stated (in perfect Serbo-English) that “our men’s tennis world, ATP world, should fight for more because the stats are showing that we have much more spectators on the men’s tennis matches.”
This is also the explanation for the disparity between Gisele and Sean. Between clothing and beauty products, women spend a lot more on the stuff modelled by Gisele than men spend on the stuff modelled by Sean. (It is also tempting to deduce that men can be less influenced in their buying decisions by models, which could be another factor behind this disparity, although this is pure speculation.) So, Sean gets paid 96.8% less than Gisele. This is logical, but since the WTA and feminists in general do not feel the need to be bound by logic, then neither will my campaign.
Government Gone Wild
This video is worth a quick viewing. Like everything else on the internet, it should be taken with a grain of salt and I have made no attempt to verify the statistics that are quoted, but they appear plausible. The video is worth watching just for the following passage:
We keep on hearing that…we need to get the special interests out of politics….But what most fail to realize is that government itself is its own special interest and will do and/or say almost anything to protect itself.
Most chilling statistic: 16% of the voting population works for the government. Include one voting dependent for each one of these, and you are talking about 30% of the voting population. No wonder that the only argument in American politics is which party will make the government grow most quickly.
Weybridge, United Kingdom
The ”spot” market for a currency is for transactions where the currencies are exchanged quickly, usually within two days. The “forward” market is for exchanges that take place at a date in the future. For example, two counterparties could agree to buy yuan with US dollars at the rate of seven yuan per dollar, with the exchange to take place six months from the date of the agreement. Forward transactions are usually used for hedging purposes – by a company, for example, that is expecting to receive a foreign currency payment at a date in the future – but they can also be used to speculate or for other purposes.
 “Nostalgia for the mud.” A French expression meaning a desire for degradation or depravity (like “slumming” in English). Not really used properly here, but a great phrase and so I decided to throw it in. On the other hand, since we are talking about depravity and a politician, it cannot be entirely inappropriate.
 The Women’s Tennis Association