I think this takes them now 30% below old highs... They are going to have to add capital to their banks eventually (US in 2008/09 happened at -40%) to stop this price reduction in risk assets due to their current massive non-risk reserve addition... sorry libertarians...
In the meantime you got a billion people over there who are getting more pissed off day after day... scary!!!
They are losing control of the exchange rate too as they have to increase their bid in CNY per USD in order to increase reserve assets in the CNY system... more CNY per USD means the CNY goes down.... if they keep adding CNY reserves like this CNY will just keep falling... they wont hold 7... then Trump is going to get pissed...
Only light at the end of the tunnel I see is ECB is supposed to at least cease asset purchases (reserve adds) in December and at least stop some of the current global addition of non-risk reserve assets...
3% stock selloff in #China overnight as concerns grow about the #economy , #trade and forced selling due to margin call pressures. Some spillovers to #markets in Europe and US but it's notably limited (as of now) judging from #stocks, #bonds and #fx. #Oil is again under pressure.— Mohamed A. El-Erian (@elerianm) October 18, 2018
3 comments:
Hi Matt,
When you say they are adding reserves to the system, how are they doing it? Is it just through government spending? Or do you mean the central bank is buying risk asset in exchange for reserve balances?
Thank you
They (CB) have normally done it by buying foreign currency:
https://www.bochk.com/dam/investment/bocecon/SY2015005(en).pdf
What they are doing at this moment they are not disclosing... there are only summary news reports indicating they are adding reserves and “high powered money!”...
Could be foreign currency again as the CNY has been weak .... ie CB is buying on a scale UP ie increasing their bid in CNY...
“Is it just through government spending?“
Treasury withdrawals are normally offset by combination of taxes and Treasury securities issuance process which leaves reserve assets unchanged at the depositories....
CB controls the amount of reserve assets at the depositories.... in periods where CB tries to “help” (to them) they add reserves “for the banks to lend out!” (ie they reify the regulatory accounting abstraction... thru cognitive deficiency) and make the depositories insolvent if depositories don’t mark down risk asset prices in response...
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