If you draw that USA debt curve in your “reserve” graph, you won’t even see the chinese reserve growth because of scale :).

The chinese had no impact on USA local bank deciding to create 13 trillions of USA local household debt in 17 years, at an annual rate near 1 trillion for the past few years. It’s all local (very very bad) politics and regulation.

Of course this will stop but it can’t go on (2007 debt creation rate was lower than 2006) but that’s a local USA political issue.

Add a few trillions wasted for Iraq, a few other billions of totally wasted oil and you have 99% of the explanation of current imbalance/USA issues.

I could defend Iceland pegging to the Euro, provided the rhetoric was Iceland’s intention to seek joining the EU and the monetary union. Besides, the Icelandic economy is so tiny that any pegging would not have any distorting effect in the bigger picture.

In a way you can look at the big oil exporters, the ones with dollar pegs, and say that their economies are effectively dollar economies.
I’ve had the dubious pleasure of doing considerable business with Nigerians, exporting foodstuffs to that market, and at least one sweeping statement can be made about that business:
*they buy in dollars*
It would be easier to sell the pope condoms, than to invoice the Nigerians in any other currency than USD.

So I like to think of Nigeria as an appendix to the US economy, even if that may seem a bit far fetched.

The Chinese peg is sort of different, at least in that the Chinese do business in multiple currencies. I think their peg is a kind of a false comfort, perhaps intended to give the image of a stability that is not really there. Chinese citisens experiencing inflation, if measured in USD, might not be too happy about it.

I think the way forward is a more frequent shift in this peg with the future intention of depegging. The closer to “fair” value the better. Otherwise the splash will be too great for any one’s comfort. You don’t float a ship by dropping it from any height, but rather by slipping it in the water smoothly.

It is also fundamentally true that US deficits shouldn’t be unilaterally corrected by US fiscal policy. The situation between China and US needs to be ironed out with both governments working towards the same goal, and even then it will not be easy, or painless.

The situation that is brewing between the oil exporting economies and the rest of the world is a little different.
It is already impossible for the Saudis to import and consume foreign product to match their oil export revenue. That challenge seems only to be increasing with the steady rise in the price of oil.

This is a situation that cannot go on forever. In theory the oil exporting nations would end up in possession of all investments and effectively be doing business with themselves.

So what is the remedy there?
Shifting or abolishing their dollar peg would not touch the fundamental problem.
It’s a problem that has to do with distributing a very great deal of wealth, and a significantly scarce resource. Horrible wars have been fought over a lot less, so it will be in all our interest to systematically decrease demand for oil. On a global scale.

To point out the reasons that something has happened, as 2fish has done, is in no way to argue that the process is sustainable. And as for the argument that the Chinese government is doing what it believes to be in the national interest, I have to say that it is not at all clear to me that the government is any longer in the position of determining the outcomes. They sound very worried even in public and certainly in many of their private conversations.

I think everyone ackowledges that there must be a substantial adjustment, and most believe the adjustment is likely to be very bumpy at the least. Even if reserves were somehow to stop growing at this breakneck pace, there is still the problem of many years of accumulated money growth that needs to be wrung out of the system — somehow in a gradual way. I think one can posit non-disruptive scenarios, but they are not highly plausible.

The same probably holds for CB reserves.

They can’t, but when it stops it doesn’t mean everything is going to fall apart. The PRC is either going to have to appreciate the RMB or sterilization is going to fail and you are going to see (and in fact are seeing) inflation.

bsetser: The point here was that Chinese export growth and reserve growth looks like it is way out of line with historic norms.

Everything about the Chinese economic and globalization is way out of line with historic norms. We really are in uncharted territory. The closest thing here is Japan in the late-1980’s, and people will get into fights over what exactly happened then.

bsetser: I would argue that this boom will eventually turn into a bust.

And I agree. Business cycles tend to work like this. The big question is how deep the bust is going to be, what exactly it is going to look like, and when is it going to happen. The danger is coming up with cures that are worse than the disease.

bsetser: tho i would point to Larry Summers FT oped and a host of poll data on the other side.

The trouble with poll data is that they don’t capture how deeply someone feels about something and what trade-offs their are willing to make. It may be that 90% of the people in the US are against the US having the trade deficit with China. That doesn’t translate into political action.

I think the limit to reserve accumulation (which we’ve already reached) is China’s ability to sterilize, and that is going to trigger changes long before it becomes a major political issue in the US.

The point I’d like to make is that even if PRC reserve growth stops accelerating, I think it will end up stabilizing at a figure that people in the 1990’s would find huge. Also however the problem gets “fixed” it will open up a whole set of new problems, and personally I’m interested in being a bit ahead of the curve by figuring out what issues will come up as a result of things getting fixed.

Its not sustainable - period. I’m not sure the additional import trade to the US is all that profitable for either sides any more ether as low hanging fruits been picked - I hear that from A LOT from my mfg biz buds. Had meetings on it yesterday in fact. China biz that’s there seems fine but more? Diminishing returns from higher entry costs.

It isn’t cheap doing business in China if your goal is to bring back cheap product to NAFTA Zone… due to strong euro maybe EU still viable but not so much here anymore. One of the guys I traveled with yesterday just got back from Europe & he said the contacts he has are having second thoughts about continuing to expand in China though too - looking harder at NAFTA Zone.

Ironically - they WOULD all expnd like crazy in China if they thought the policy regime would be more favorable to domestic China consumption. He said that is the big prize - when will those billions of workers become billions of consumers? That in a nutshell is why most of those firms are there - they only export back now to cover the start up of going in over there but the real money will be made selling to Chinese from China.

So when in the heck is that going to happen? In real numbers?

Great stuff as always Dr Setser (btw was out in Kansas yesterday btwn KC & Lawrence - nice breeze, almost 80, clear skies - thought of you). Ate really good BBQ too. Still have plenty of pork in KC. Yum.