Should Frozen Russian Assets Fund Ukraine?

♠ Posted by Emmanuel in ,, at 4/20/2024 09:23:00 PM

The adversaries during more cordial times.

Unbeknownst to many, one of the linchpins of the post-WWII global infrastructure is coming under sustained attack... from its main beneficiary. The United States has been extraordinarily fortunate that its national debt is regarded as being among--if not the--safest investment around. IOUs in the form of US Treasuries are a standard dollar holding across the world, and this demand allows the US to run an unimaginable debt of $34.58 trillion at the time of writing.

Would it be strange if the US were to put its debt's status as a safe asset in jeopardy? Well, that's precisely what's going on with the House of Representatives advancing legislation--the REPO Act--meant to use Russia's Treasury holdings and suchlike for funding Ukraine's defense from Russian invasion.

The REPO Act, which would authorize Biden to confiscate the frozen Russian assets in U.S. banks and transfer them to a special fund for Ukraine, is part of the foreign aid package that was stalled for months in the House. More than $6 billion of the $300 billion in frozen Russian assets are sitting in U.S. banks. Most of the $300 billion are in Germany, France and Belgium.

To be sure, Vladimir Putin hedged his bets by keeping much more euros than dollars in his reserve holdings:

[F]ollowing Putin’s invasion of Ukraine, all of the Group of Seven (G7) countries including the U.S., U.K., Canada, France, Germany, Italy and Japan banded together and froze all of the $300 billion dollars of Russian foreign currency reserves held in banks in those countries, most of the money in Europe.

“The Russians were surprised when, right after the war started, the Europeans took the exact same measures as the United States, freezing all of the reserves that were there and the Japanese did the same, which is why most of Russia’s reserves today are frozen in western banks,” said Chris Miller a professor at the Fletcher School at Tufts University.

Now, there are two main takes on the implications of giving Ukraine the confiscated reserves of Russia. Critics say that other countries will lose faith in investing in American sovereign debt since the US does not have apparent qualms about taking away other countries' investments. For instance, here is Christopher Caldwell:

If Russia, China and other diplomatic rivals were to decide that their dollar assets were vulnerable and that they could no longer trust the dollar as a means of exchange, we would feel the pain of that $34 trillion in debt in a way that we don’t now. Retaining the advantages of a reserve currency depends on our behaving as a trustworthy and neutral custodian of others’ assets. If we start stealing people’s money, that could change...

For decades now, the United States has been deferring hard decisions at home and abroad and papering over partisan divisions with the tens of trillions of dollars that our advantageous international position has allowed us to borrow. Our options, though, are narrowing. If [Speaker Mike] Johnson thinks the United States is “projecting weakness” now, wait till he sees it without its reserve currency.

Meanwhile, the REPO Act's champions high-mindedly echo Michael McFaul. In the NBC News article in the initial link:

McFaul, whose been lobbying for the REPO Act for months, clapped back at Caldwell’s assertion and said the use of Russian assets for Ukraine would send an important message to autocratic nations around the world. “There are those that say, 'Well, this will hurt the dollar. It’s bad for our reputation.' I have a pushback to that. I don’t want criminals investing in American Treasury bonds,” McFaul said.

Actually, I side more with the REPO Act skeptics in the sense that "beggars can't be choosers": The US is able to fund its chronically huge budget deficits by not being too picky about its creditors. There are any number of regimes with questionable good governance records--you can easily identify them yourselves from a list--that lend tens of billions of dollars to the United States. Will they take fright if the US proceeds with legislation meant to strip Russia of billions? 

You know, we may find out real soon... and the consequences of an answer in the affirmative could literally reshape the postwar global infrastructure.

AN ASIDE regarding the EU: With the bulk of Russian foreign exchange reserves in the EU, the latter are understandably resistant to US President Joe Biden's pleas to also donate frozen Russian assets to Ukraine. With the relatively new euro single currency in a precarious state ever since global financial crisis, its users are not exactly excited about the Yanks pressuring them to also use seized Russian monies to fund Ukraine. Having the bulk of the frozen Russian reserves and being right next door, the EU is collectively nowhere near as gung-ho about the matter. At most, EU suggestions are half-hearted like just using interest on frozen Russian reserves to fund Ukraine. People act in their interests, and the Europeans are understandably reticent despite (or because of) their enormous distrust of Russia.

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Young Worker Exodus from Low Pay Japan

♠ Posted by Emmanuel in , at 4/13/2024 04:33:00 PM

Outbound 'r' Us.

China is famously in dire economic straits, but how's Japan really doing to solve its longstanding problems like a dearth of working-age citizens? Here's a wrinkle in what is effectively Japan's attempt to devalue its way to prosperity: Just as the yen has fallen to a 34-year low of 153-something to the dollar, the resulting peanuts wages in Japan vis-a-vis those in other developed countries are making younger folks depart in search of higher pay.

With similar visa programs [to Australia's] in the U.K., Canada and New Zealand recovering post pandemic, the outflow of talent risks exacerbating Japan’s acute labor shortage. It’s also a sign that many younger Japanese aren’t buying into the nation’s economic optimism as it exits from decades of deflation. "Youth are questioning Japan’s economic outlook,” said Yuya Kikkawa, an economist at Meiji Yasuda Research Institute. "Living conditions are far tougher than the headline inflation figure suggests.”

The Bank of Japan finally scrapped the world’s last negative interest rate last month amid signs a virtuous cycle of wage gains is feeding demand-led inflation. But even after Japanese labor unions won their biggest wage hike in more than 30 years last month, there remains a notable gap in real wages with other advanced economies. In 2022, average annual wages in Japan were $41,509, compared with Australia’s $59,408 and $77,463 in the U.S., according to the latest data from the Organisation for Economic Cooperation and Development.

You see, the old (pre-inflation) deal was for Japanese workers to accept lower wages in exchange for job security during uncertain economic times. However, that deal no longer works as the cost of living has risen:

A long-running trade off that put job security ahead of higher pay made more sense when prices were barely moving. Now with inflation at its strongest in decades, Japanese are starting to realize that years of static wages leave many of them budgeting each month before their next pay check.

"Japan’s wages hadn’t risen at all for 20 years while other countries were increasing theirs,” said Atsushi Takeda, chief economist at Itochu Research Institute. "With the yen getting weaker, the gap has become even bigger.”

Some 14,398 Japanese were granted working holiday visas in Australia in fiscal 2022-23, the highest number in Australian government data going back to 2001. It allows 18- to 30-year-olds (or 35 for some countries) to have a 12-month holiday and work in roles ranging from farming to hospitality, nursing, construction or office work to fund their trip. There’s also an option to extend as long as three years.

So, not only is Japan lacking working-age people to take up the nation's workload, but they are also leaving in ever-larger numbers since the pay at home is comparatively low by OECD standards. Even in Japan as its stock market hits record highs, the "main street" reality is rather grimmer.

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“Adios to the Chinese Dream” (Xi’s Theme Song)

♠ Posted by Emmanuel in at 4/07/2024 03:17:00 PM

With apologies to Rodney Crowell... Excuse me mister but what did you say? / My hard-earned money’s all gone away / Xi ain’t into capitalism you see / The stock market is just no place to be. Voila, An American Dream is a catchy ditty that I've turned into a lament for the loss of the so-called "Pacific Century" that academics so love[d] to talk about. Supposedly, China's economic ascent would power the entire Asia-Pacific into a period of global dominance. 

Let's just say that hasn't been how things have turned out. In the interests of "national security," the "national interest," or whatever the Communist Party claims is best in a patriarchal sense, it's gone after industry after industry--digital payments, after-school tutoring, residential real estate... the list goes on and on. Given the level of state intervention in economic matters, it's ironic that the PRC keeps wanting to shed its designation as a "non-market economy" by the United States and others. It's derogatory--Vietnam wants to shed the label ASAP--but accurate so far the PRC goes insofar as winners and losers are not determined by the market but rather by government fiat.

Given limited space to air discontent over state policies, disgruntled Chinese investors have taken to using the US embassy social media account to bash the Communist Party, of all channels. Presumably, the Yanks are less likely to censor criticism of the authoritarians:

Many Chinese are venting their frustration at the slowing economy and the weak stock market in an unconventional place: the social media account of the U.S. Embassy in Beijing. A post on Friday on protecting wild giraffes by the U.S. embassy on Weibo, a Chinese platform similar to X, has attracted 130,000 comments and 15,000 reposts as of Sunday, many of them unrelated to wildlife conservation. "Could you spare us some missiles to bomb away the Shanghai Stock Exchange?" one user wrote in an repost of the article...

The Weibo account of the U.S. embassy in China "has become the Wailing Wall of Chinese retail equity investors", another user wrote.The U.S. embassy did not immediately respond to a Reuters request for comment.

The Pacific Century has been crushed underfoot by Chinese authorities who are obviously more interested in maintaining their grip on power than the (financial) well-being of their citizens. I've even penned a song about it. Sort of.

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