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The implications of the US dollar's decreasing global share and China's push for yuan-denominated trade.
Here is what we will be getting into today:
Semiconductor’s, EVs & Dollar Liquidity.
The State of Mortgage Delinquencies and Foreclosures.
Breaking the Monopoly: How Texas's Energy Market Adheres to the Bell Doctrine.
Let's Dive In!
Newsletter: Exorbitant Privilege
Title: Exorbitant Chat: Episode 3, Brad Setser.
Here are the key highlights:
The Biden Administration has taken steps to re-shore chip manufacturing, EV production and battery supply chains back to the United States. These policies have raised questions about their effect on US relations with other countries, but they are likely to increase global trade due to US demand. Additionally, governments around the world have been providing support to their semiconductor industries, leading to a more dispersed global production structure which is better equipped to handle foreseeable shocks.
The US has implemented subsidies for electric vehicles and clean technology through the Inflation Reduction Act in order to avoid a transition to Chinese made vehicles. Europe is facing an additional challenge when it comes to electric vehicle production due to high energy costs, while the US has created a battery supply chain independent of China.
There has been a decrease in the dollar's global share due to the rise of the Chinese yuan and other currencies. US sanctions have had a significant impact on Russia, even when its assets are held outside the US. China is actively attempting to re-denominate its currency used in trade towards the yuan, and Saudi Arabia and other Gulf countries have yet to shift away from the dollar.
US sanctions and Chinese withdrawal of dollar liquidity have had significant implications for global economies, leading to payment difficulties and a lack of resources for development projects. This has caused concern regarding global growth and prosperity. Governments must work together to ensure that resources are available while taking US sanctions into account.
Prior to the Global Financial Crisis, global reserve managers were the primary source of demand for US bonds and dollars, financing the US current account deficit due to a household sector deficit. Former Federal Reserve Chairman Alan Greenspan's description of a vast global capital market populated by private actors was not entirely accurate; it was actually large state institutions that are the primary source of demand for US bonds. This allowed countries with high investment needs to tap into global markets instead of relying solely on their own savings, reducing the risk associated with persistent large external deficits over time.
The US current account deficit is expanding significantly, with China, Saudi Arabia, and Russia providing the majority of financing. Japan's investment policies have had an impact as well, resulting in a large component of their bid for global bonds disappearing. This has created an uncomfortable situation for both sides, as China needs its export machine to drive its economy while the US lacks sufficient national savings to finance domestic investment.
The US and UK are relying on China, Saudi Arabia and other autocracies to finance their deficits, but breaking free from this relationship could be difficult due to current economic conditions.
Egypt and Turkey have been reliant on external financing and IMF support to stay afloat, and the Central Bank of Egypt has more liabilities than liquid foreign assets. The government of Egypt is living off modest amounts of IMF financing, while Turkey has conjured up a lot of funding over the past 12 months. This becomes even more concerning when considering China's structural recalibration of its economy, which could cause geopolitical tension if it chooses to devalue its currency.
Website: Wolf Street
Title: Why the Fed Can Let the Housing Bust Rip: Mortgages, HELOCs, Delinquencies, Foreclosures, and Whos on the Hook
Here are the key highlights:
The mortgage market has seen a significant rise in balances in the last few years due to increased home prices, resulting in more debt being taken out to finance the same home. In the fourth quarter of 2021, overall mortgage balances rose 2.2%, or by $253 billion, from the prior quarter and 9%, or by $1 trillion, from a year earlier despite a 34% drop in home sales volume.
Balances of Home Equity Lines of Credit (HELOC) have increased for the first time in years as cash-out refinances have become less attractive due to higher interest rates. Mortgage and HELOC delinquencies have increased from historic lows but remain very low. The 30-plus-days delinquency rate of HELOCs decreased for the second month in a row, to 2.0%, which is right in line with pre-pandemic levels. Balances that transitioned into serious delinquency (90-plus days delinquent) of mortgages and HELOCs remained near historic lows with 0.43% for mortgages and 0.9% for HELOCs.
Foreclosures have also ticked up from historic lows but remain near historic lows with 34,280 consumers with foreclosures in Q4 2021. During pre-pandemic good times there were about 70,000 consumers with foreclosures and before 2006 there were about 150,000 consumers with foreclosures which is over four times the current number.
Since the Financial Crisis of 2005-2012, when banks held most of the risk associated with mortgages and not taxpayers, it is unlikely that a similar crisis will occur again as taxpayers are now on the hook for much of the risky mortgage debt that has been securitized into MBS and other government backed loans such as FHA and VA loans.
Newsletter: Knowledge Problem
Title: Electricity Restructuring and the Failure to Quarantine the Monopoly.
Here are the key highlights:
Fifteen years after the passage of the first state-level electricity regulation restructuring legislation, retail competition for residential customers remains anemic in most of these states.
There are various theories as to why this is, such as high customer acquisition costs and incumbent default service contracts serving as entry barriers. Texas stands out among these states as it has managed to successfully implement electricity restructuring legislation.
Texas has quarantined the wires monopoly by restricting its market participation to regulated functions and separating ownership and control from other vertically-related functions. This has enabled multiple retail firms to offer a variety of traditional and green electricity products at competitive prices without having to worry about incumbents monopolizing related markets.
The success of Texas’s approach can be attributed to its adherence to what is known as Baxters Law or the Bell Doctrine which recognizes that regulated monopolies have an incentive and opportunity to monopolize related markets in which their monopolized service is an input. By quarantining the monopoly in electricity and restricting its market participation, Texas has been able to create a competitive environment where multiple retail firms can offer different products without fear of incumbents dominating related markets.
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