Maybe a little bit, but probably not much. The spike in interest rates on ten year US bonds accompanying a "weak" sale last week from 3.67% to 3.91% has the WSJ and numerous commentators freaking out about US national debt crisis and collapse and also noting that China bought little to nothing, leading some to speculate that China is punishing the US either for Google standing up to them or to the US for Obama pressuring them to appreciate the yuan/renmimbi, with Krugman and others howling for a 25% import tariff on their goods to make them do so. Jim Hamilton at econbrowser provides a good summary of much of this with some excellent comments.
Anyway, there are several reasons not to panic and even to think that while the Chinese are clearly annoyed, their weak buying is probably not due to some massive vendetta/collective punishment. One fact is that last month the Chinese actually ran a trade deficit, suggesting that their currency may not be all that undervalued after all, even if their bilateral surplus with the US remains large. This situation would mean that they are probably buying few foreign securities at all as they do not have the current account inflow to do so. Even if their currency is still undervalued, their high growth rate compared to other countries suggests one would expect their imports to be rising more rapidly than their exports.
Another aspect of this was pointed out by a commenter at econbrowser named Tom, who noted that the Fed has just turned a policy corner towards a more restrictive stance, having just brought to a final end its policy of propping up the housing market with MBS purchases. Many of us had been pointing for some time to March 23-25 as a point when there might be a spike in interest rates as this policy finally came to an end. So, the spike has happened, and we should probably be glad that it has not been worse, especially given the weak buying by the Chinese due to the change in their balance of payments situation, as this could have led to a renewed collapse of the US housing market and a fall into a definite double dip of the recession.
5 comments:
Simply stated: If you are the supplier of the reserve currency, then you cannot rely on exchange rates to balance trade while maintaining a superior middle class prosperity, Malthus via Ricardo will kick yer' ass -- Law of Wages and Law of Rent
Imagine if you will, two sovereignties with fixed natural resources -- USA and China. Once you populate these areas with people you must gauge the success or failure of political economy based on mean income measured in disposable leisure time. Because disposable leisure is the only _real_ economic value. Only by enclosing the USA can you prevent the problem of over-population from destroying American middle class prosperity. While the Chinese population is not flowing across the border as is the Mexican population, the low cost of transport coupled with the mobility of finance is screwing the American middle class out of the leisure that would otherwise inure to them. Rent is a return to ownership; not a return to production. The only return to production is wages or classical profits. Classical "interest" like "rent" is a return to ownership.
Enclosure means import tariffs and redistribution via bottom side stimulus. It is a collection and distribution of rent.
The Chinese run a trade deficit with their regional trading partners. So a good strategy for them would seem to be thus: Use surplus of dollar assets to pay down Chinese trade imbalances. Also invest heavily in global oil production knowing that a surplus of dollars will cause dollars to migrate to the oil producing nations. This dollar migration though could be made less noticeable if channeled through the largest possible number of nations, thereby hiding to some extent the fact that the supply of dollars is rising at an increased rate. The Chinese could then, during this window of time, stock-pile oil and they might also encourage their trading allies, especially those in the new ASEAN-China trade arrangement, to also store as much oil as possible. This would create the illusion that the demand for oil is rising. As the cost of oil rises that could provide a hedge against the ultimate fall of the dollar if the Chinese are able to divest enough dollars into oil and other commodity investments.
The Chinese Government announced as part of its 11th 5 year plan, back in 2006, that it wanted to diversify its portfolio away from dollar related assets. The Chinese also formally announced that they believe that they are being made the victims of the Triffin Dilemma (2008).
The USA on the other hand, caused a global meltdown, and that allows the Chinese the political capital to act in accordance with whatever they deem to be in their best interest. A cheaper dollar could of course improve US exports and thereby the job situation, but in conjunction with higher energy costs, and higher interest rates due to falling demand for the dollar, the Chinese might in the end might say: "be careful what you wish for" (or some equivalent).
r l love said...
Lot's of stuff about how China is using or going to use US dollars. The fact is that if China was using their US dollars to balance trade or build football stadiums or power plants or "invest" in oil fields or algae farms in Africa then they would not have a big pile of T-Bills. That big pile of T-Bills is the stone cold evidence that they ain't spendin' the money. Over and out.
The USA can take two courses of action: We can print money thus devaluing the stuff that China is holding and thus ENCOURAGE them to spend it, or we can use import duties to stop the flow of dollars into the "savings accounts" of the Chinese. If we print the money then it causes _everyone_ to spend and the Chinese have shown a willingness to simply devalue their currency in step. If we use tariffs we can micromanage the problem. We should probably do a bit of both. But notice the difference here. Other people seem to want to establish some sort of "relationship". I do not want to _CARE_ what the hell China does. They can run their country and we can run ours, That is one of the good things about tariffs. Each nation can see to its own best interests.
If we use import duties on goods from China then China can most certainly reciprocate. We (middle class Americans) win so long as the proceeds of the tax are distributed as a bottom side stimulus.
Trucker,
Like I said: be careful what you wish for. The only bottom-side stimulus the tariffs you speak of, is likely to be of the type that requires lubrication. More than half of the imports from China are from the MNCs and so US stockholders lose while US consumers pay more. Do you really believe the tariff revenues will transfer to those who most deserve them? Do you have any examples?
I have not minced words or politics in my assertions concerning the manner and method of distribution of tariff proceeds. You are playing the role of a conservative, basing your opinions and observations on a government that has been made to fail by 30 years of Republican self serving destruction.
I do believe that tariff proceeds can easily be transferred as I have stated because it is the easiest political sales job on earth. We are budget neutral, we are protecting American interests, and we are helping people stand up for America. At the same time, we are fighting the corporations that have been offshoring all the jobs.
I have no examples because the Republicans have controlled the government for 28 of the last 32 years. The only time Democrats had control, the progressive nature of the income tax was increased and the economy boomed because of it. But there is a bill in the Senate that does the same sort of thing I recommend for tariffs. It is the Cantwell-Collins Clean Energy Bill. That bill is yet another example for governments to follow within their own borders in their own interests. It is "states rights" writ large and it is "No one world gummint" writ large.
You might want to correct or contribute to the wikipedia efforts in economics. Be advised that you will have to find references for whatever you say and I had to search long and hard to find the reference I used for my addition to "tax incidence" (actually "tax burden").
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