Chinese to dump their dollars

Some in America already partially diversify into other currency (your humble servant since 2003). The Chinese TV's advice is a few years late.

i

But the advice for Chinese investors is based on an entirely different dynamic. Their basic problem is that the control regime of the Yuan is coming to an end, and simultaneously, against their trade interests as well as their investment interests, the US dollar is dropping in value.

If they could still control the Yuan as they did in the past their response would be to buy *more* US dollars, not fewer. That's what all the export-driven Asian central banks have done for the past 30 years, whenever the dollar started to fall. But the game is up; currency control regimes are getting harder to sustain; and the US shows little interest in doing anything on its own to prop up the dollar. If the Chinese government or Chinese citizens tried to buy dollars in order to sustain their currency advantage for trade, they'd just wind up holding the bag.

It's not an altogether bad thing for the US either way.

-- Ed Huntress

I am also of the opinion that fall of the dollar's price is not a bad thing to happen, and is fully justified economically. That was why I bought euros. The deficits and low interest rates and high dollar, could not last forever.

i

I've never taken a course in economics. Can you elaborate on this a bit, in layman terms?

Jon

I may be getting into something bigger than I want to bite off here...

Ok, the short version: Assume the US dollar is valued right but the currency of some big trading partner, like China, is undervalued. Our trade balance is going to go negative because their goods are cheap for us, and ours are expensive for them. This is not too bad because, all else being equal, the value of their currency will rise because of the foreign cash they accumulate, which will drive the value of their currency up. We'll get some cheap goods for a while and then everything will balance out.

Now, say the US dollar is overvalued (it is), and the Chinese Yuan is intentionally way undervalued (it is). Then the system may not balance. They keep piling up cash and our current accounts go real far south. Then we got trouble. And we do.

Then let's say the Chinese start buying up US treasury bonds like there's no tomorrow (they have been). They do this *not* because US bonds are such a great investment (they've been Ok, but the Chinese could do better), but because they have to get rid of their foreign cash to keep the value of their own currency down, and they want to prop up the value of the US dollar even further by creating demand for our treasury bonds (they have). Now they sort of have us by the balls because we *need* them to keep buying our bonds, or our bond interest rate will go through the roof if the demand for US bonds falls. And then we'll have big-time inflation.

But we have each other by the balls. They need to keep the value of their currency down so they can maintain a big positive balance of trade with us. If their currency rises, we won't buy so many of their goods and they won't have the cash they need to keep buying our bonds. Their currency will rise further; ours will drop in value. Our interest rates will go up; their exports will go down; we're in a spiral that hurts both of us. If the Chinese don't get off of this merry-go-'round, their entire economy could spin out of control, with a sharp falloff in exports and no way to recover, and we could have at least a major recession.

So it's a good idea for each of us to let go of the other's gonads. The Chinese should diversify a bit and the US dollar should fall a bit, to help our exports recover. All of this has to go gently or there will be hell to pay, because the whole structure is pretty delicate.

A cheaper dollar is going to hurt, no doubt about it. The cost of imports will go up and interest rates will rise. We could have some trouble controlling inflation. But the cost of trying to sustain the dollar at such high levels is an accumulating likelihood of a train wreck. We don't want the whole thing to collapse, or we're certainly in for a sudden and violent recession.

That's all grossly simplified but it gives the general idea. BTW, most of Asia runs this kind of currency-control regime. It was a big part of Japan's rise to prominence, as well. But Japan is a lot smaller than China. The danger for us with China, in playing this game, is a result of their freaking enormous size.

-- Ed Huntress

You don't remember? The time is almost ripe for a Jimmy Carter financial funride experience ag'in.

It probably portends a lower standard of living the future, and a higher standard of living in China (almost a given). I do wonder if they've thought things through here. If you give every Chinese a 20% raise (by currency appreciation) they'll probably outbid US-dollar based buyers on commodities and other stuff (eg. energy, metals). They're not really into conservation (much like the US and Canada) so they're not going to tax themselves to death like the Japanese or Europeans. Same with India (rupee valuation). Since the US, while still a big factor, is down to 20% of world GDP and dropping, it no longer calls the shots on pricing. Essentially, in the before-time, by making yourself a bit poorer you could force world prices down on commodities and jump start the economy while simulataneously hurting your competitors. That's no longer true-- you may end just making yourself poorer and less powerful, in a spiral downwards. The US, for all it buys, is now only about 20% of all Chinese exports (according to Forbes), which in turn are 20% of their GDP. The US is starting to look rather dispensable as a market. Even if it dropped to half (which would be a total disaster in the US) they'd be back at the same level within a single quarter at current growth rates.

Anyway, I don't buy the total gloom and doom, things will sort themselves out, and they'll do so faster and with less pain if governments keep their hands out of it other than minding their own business domestically.

Look up "national debt" and "deficit spending," which you seem to have conflated and confused.

-- Ed Huntress

Let's say I make $10,000 per month, but I spend $13,000 per month due to borrowing money. That is a "higher standard of living" than I would have if I spend $10,000 per month, right? But if we keep in mind that the higher standard of living needs to be repaid one day, then it is not really a higher standard of living, it means consuming more now but less in the future.

The sale is with the US standard of living, enabled by trade deficits.

i

=================== It all depends whose credit card I am using. If I steal your credit card and "live large," you are stuck with the bill.

As for the Chinese, they appear to be operating on Will Rogers old axiom:

The return of my investment is more important than the return on my investment.

In [their] living memory they [the Chinese] have been through several currency "reforms" and periods of hyper inflation, thus are much more sensitive to asset depreciation [inflation] than we in the US.

The depreciation of their currency has done in a number of empires. Ron Paul is frequently criticized for wanting to return to or at least extensively examine the gold standard, but this [or a silver standard] where a countries paper currency is backed by a fixed amount of precious metal, possibly with some multiplier, seems to have been the only way to attain stability and make money a reliable "measure and store of value" in addition to a medium of exchange. ['assignats'/'mandats' anyone? click on

Unka' George [George McDuffee] ============ Merchants have no country. The mere spot they stand on does not constitute so strong an attachment as that from which they draw their gains.

Thomas Jefferson (1743-1826), U.S. president. Letter, 17 March 1814.

====================== Very good free market explication.

The problem is that this assumes honesty and transparency, neither of which have been demonstrated by the governments involved, their central banks or their financial institutions.

For example, how much money has the Federal Reserve created [at

10 FR dollars per 1 $ of US governmental debt] and then how much money have the banks created through the traditional fractional banking process, aided, abetted and amplified by 'conduits' and 'SIV's?

This "creation' appears to have been exceptional high in the non-bank "banks." If you and I do this the old fashioned way, with ink and paper, it is called counterfeiting and we will be put in jail.

The PRC appears to have replaced the US in many sectors as the "workshop of the world," and has used/invested much of their economic surplus to establish both secure their supplies of raw materials and markets in the Mid-East and especially Africa. Thus the US 'needs' the PRC more than the PRC 'needs' the US, and this is only in the economic sphere.

A major concern should be that not everything [and in many societies not even most things] is determined by 'economics' and the US has set itself up for a major "squeeze play." The other players have many other objectives besides making a short term profit (and that for their few/elite). These include revenge, hegemony, and national prestige.

Asymmetric financial warfare is now an established fact, a financial 9/11 is well within the realm of possibility, and it would be hundreds to thousands of times more disruptive, in the sense that the financial buildings the debt aircraft would crash into are huge, built [too] close together, constructed of wood, and filled with propane tanks and gasoline in plastic drums.

Unfortunatly these financial towers also contain most of the national liquid assets such as pension funds, IRAs, institutional and personal savings, etc.

May you live in interesting times....

Unka' George [George McDuffee] ============ Merchants have no country. The mere spot they stand on does not constitute so strong an attachment as that from which they draw their gains.

Thomas Jefferson (1743-1826), U.S. president. Letter, 17 March 1814.

I don't think that money supply will be a big factor, George, unless we have a serious contraction of our economy. And we've been through that before, in a worse case, when Volker wrung out the economy in the late '70s and early '80s. That's very painful but it's also manageable.

As for financial interdependence, that's now an established fact. Every significant economy is now locked into that mutual dependence. The ones who might want to play by non-rational rules aren't big enough to cause much trouble.

A lot of what's going on today is a case of plowing new economic ground, although the theories have been in place for decades. I don't think we're really that vulnerable to a big crash. We are, however, facing a variety of factors that could lead to a slowdown of the US economy, and that could happen.

But the US's economic engine is the strongest one in the world, and I don't think we'll fare worse than anyone else. As you know, China probably has the most vulnerable economy in the world. They're the ones who would really suffer if there was a worldwide depression.

-- Ed Huntress

================ Wow -- an almost real time email on this one.

One article suggests:

"LONDON (Reuters) - The impact of the U.S. mortgage market crisis on the underlying economy could be "dramatic" as leveraged investors may need to scale back lending by up to $2 trillion, according to investment bank Goldman Sachs (GS.N).

For the rest of the article click on

Other articles have suggested up to 4 trillion [with a T] and the guy with the green eye shade is still adding...

Unka' George [George McDuffee] ============ Merchants have no country. The mere spot they stand on does not constitute so strong an attachment as that from which they draw their gains.

Thomas Jefferson (1743-1826), U.S. president. Letter, 17 March 1814.

Thanks for that explanation, helps a bit. Being self employed, I'm watching news on the economy with great interest even if I don't understand what's going on and why.

Jon

It's a pretty obscure business if you don't study it for a while. And if you do, all you can see is the broad moves. A lot of it goes on in shadows.

There's no mystery, however, to what's going on between China and its big trading partners. How it will all pan out is anybody's guess. A lot depends on seemingly small decisions made by people who control the policy at the major central banks.

Just don't make the mistake of thinking that it's like household budgeting. We can't "create" money at home by adjusting the reserve requirements of member banks. People who say that the national debt is like personal debt just don't understand how it really works.

-- Ed Huntress

=========== for entire article click on

The dollar's decline: from symbol of hegemony to shunned currency By Andy McSmith Published: 17 November 2007

The warning was reinforced by a Chinese central bank vice-director, Xu Jian, who said the dollar was "losing its status as the world currency".

China has stockpiled £700bn worth of foreign currency, and has only to decide to slow its accumulation of dollars to weaken the currency further. Last month, in a humiliating turn of events, the central bank in Iraq, four years after the United States invaded, stated that it wished to diversify reserves from a reliance on dollars.

Korea's central bank has urged shipbuilders to issue invoices in the local currency and take precautions against the weakened dollar, and ==> three of the world's big oil exporters, Iran, Venezuela, and Russia, are demanding payment in euros rather than dollars. Iran insisted that Japan should make all its payments for oil in yen, rather than dollars.

He first bought currency in 2003. I am proud that I did the same, and without knowing that he did the same thing, and before he announced his currency position.

i

Wow, this is REALLY shocking:

I guess they really DON'T like competition from non-fiat currency.

Best regards, Spehro Pefhany

The first misconception that most people have is that the Federal Reserve Bank is a branch of the US government.

Does this mean the US Government will send creditors to the fed when the bill comes due ?

Best Regards Tom.