http://tinyurl.com/da295v

mB

To claim that demand for PBOC bonds is low because their interest rate is 5.3% vs. near 0% for US short term rates ignores the Chinese inflation rate (mentioned in the same article) which is well above 5.3%. In other words, the real yield on PBOCs is negative, suggesting demand is not that “low”.

Second, the article repeats many free-trade truisms that ignore long term trends/impacts:

– “by keeping imports cheap, it increases the purchasing power of the average U.S. consumer”

– “which helps keep U.S. interest rates low, allowing firms to make investments that would be unattractive at a higher cost of borrowing”

and, of course:

– “Chairman Alan Greenspan testified in 2005: “I am aware of no credible evidence that … a marked increase in the exchange value of the Chinese [yuan] relative to the dollar would significantly increase manufacturing activity and jobs in the United States.”"

In other words, the US should be grateful because Chinese suppression of the value of Yuan has been so good to the US economy and consumer.

The problem is simply that US consumers have a “taste for consuming instead of saving”. This is the argument now being used by Chinese monetary authorities.

Which begs the question – if the gluttonous US has a problem with consuming too much, why is China going to such lengths to prop up that consumption?

And these other questions:

Should we really be grateful for China helping keep US interest rates low, when it has become clear that recent bubbles are largely a function of excessively low interest rates even as consumption rises (which should not happen in a closed loop economy)?

If economists now blame Greenspan for holding interest rates too low in the early part of the decade, then why are they not applying the same logic to Chinese trade subsidies?

And, even better, when firms borrowed money cheaply, did they _really_ make good investments that are now paying off, or did they just frivolously waste it?

In a classic macro comparative statics model, it’s easy to show that Chinese currency manipulation helped the US. Not unlike free trade advocates arguing that its non-optimal to impose penalties for foreign subsidies.

If you broaden this to include other domains of econ, say industrial organization and labor economics, the picture is a lot murkier – in particular, there are issues such as knowledge transfer, learning-by-doing effects, fixed capital assets, natural monopolies, local externalities, etc.

As to Greenspan’s statement, he’s aware of no “credible” reports linking US job loss to China trade. I wonder what Greenspan’s standard for “credibility” is?

I don’t suppose reports like this are credible?

http://www.epi.org/publications/entry/bp219/

Currently, Russia, for example, uses its currency reserves to buy roubles and prop them up. (This managed devaluation is working much better than in the 1990s.) Above, I asked how a currency is propped down. Thanks, StatsGuy and BigBadBank, but an interesting article explains how China does this and why it is self correcting, at least in the long run.

Tabita Kaneene, in Foreign Policy, Feb. 2009, explains how it is done, http://www.foreignpolicy.com/story/cms.php?story_id=4692. The government sells renminbi (yuan) denominated (PBOC) bonds. The yuan proceeds are used to buy dollars. This props up the dollar with respect to the yuan (props down the yuan). There are no net yuan in circulation (called “sterilization”) so, theoretically, the money supply isn’t increased and is non-inflationary. The dollars are, in turn, invested in U.S. Treasuries. However, according to Kaneene, because there are so many outstanding, PBOCs are paying 5% vs. 0% for Treasuries and inflation is still 9%. This can’t go on forever and there are other more useful requests to make of China.

One not mentioned is IMF funding.

and russia still needs to build its’ pipelines:

“…Russia is mostly a pipeline exporter, and the elasticity of pipeline exports is not as high as that of, say, automobiles… Russia is the only country among the Group of 20 with double-digit inflation… Russia’s key dilemma is how to contain inflation while allowing the Central Bank to cut its benchmark interest rates. Meanwhile, in an environment of soaring Central Bank lending in recent months, the relatively cheap and abundant supply of rubles was converted into foreign cash, thereby shrinking the money supply. This stands in contrast to what occurred in other countries, where many banks loaded up on toxic assets. This was never a problem in Russia. Given that Russia’s financial system is not as deep as those in other countries – the total ruble money supply fell to around $330 billion as of Feb. 1 – Russia’s version of the balance sheet recession should last for a much shorter period of time.” http://www.moscowtimes.ru/article/1016/42/375456.htm

Dominant nations can either contest or accommodate. Accommodation, however, does not necessarily mean capitulation or appeasement.

As to the US “imploding” other economies through currency devaluation, this is quite opposite of the truth. Devaluation of a reserve currency frees other nations to engage in more aggressive monetary policy without fear of being caught in a debt/deflation trap (as was Latin American when the US hiked interest rates in the early 80s while Agentina et. al. continued to inflate).

China’s conundrum is that it has sunk so much fixed industrial capacity in supporting US-targeted exports; that fixed capacity is now idle and losing money. It was clearly not a robust model. China should have, and still needs to, dedicate more resources to its internal markets. Part of doing that is giving its citizens more purchasing power, and that means allowing the Yuan to appreciate.
This is relatively easy to fix…

The EU has its head on backwards. Perhaps the Germans want the Euro to be the world’s reserve currency (what a prize that is!). They seem intent to bankrupt their neighbors for that privilege. The devaluation of the dollar will hopefully force them to do what they should have been doing all along – print Euros and use the cash to reflate European economies. The Germans are destroying their own trading partners and thus its own export-dependent economy; it’s gotten to the point that the primary corporatist organization – the BDI (business federation) – is pressing the ECB for some sort of monetary easing.