GCC countries already have that veto in practice and are about to start using it.

Saudi Arabia’s Shura council (parliament) will hold a series of meetings over the next two weeks to discuss a controversial proposal by a key member to curb oil production to save reserves for better prices, Saudi media reported. The council will listen to a report by deputy chairman of the Shura water and public utilities committee, Salim bin Rashid Al Marri, who will argue for cutting crude supplies to maintain the Kingdom’s underground reserves.
“Marri will seek to persuade council members that the oil production must be linked to the country’s actual development needs not the needs of foreign consumers,” Alriyadh newspaper said in a report from the capital Riyadh. “He will tell the Council that keeping sufficient oil quantities underground is a good investment for the future as oil prices will then be higher…he will argue that this will be better than producing more oil and generating financial surpluses on the grounds these surpluses are causing inflation.”

To understand this move, we should take into account two facts.

First, that, as GWB reminded them on May 18, “The rising price of oil has brought great wealth to some in this region, but the supply of oil is limited, and nations like mine are aggressively developing alternatives to oil.” Which may be translated as: “Keep in mind that just as you will be depleting your finite oil reserves, we will be turning more and more of our crops into biofuels, no matter what happens to people in food importing countries (like yours, BTW).”

Second, the loss of purchasing power of their forex reserves lately in terms of grains, oilseeds, etc., resulting from US monetary policy that – as the US officially states – is not directed in the least to maintaining the purchasing power of the $ in terms of internationally traded goods.

In this scenario, the only logical response that can be expected from countries with big current account surpluses, whose exports come from a finite, non-renewable endowment, and which are – and will always be – heavy food importers, is to cut down their oil exports to just cover their imports, so as not to add any further dollar to their fast-depreciating (in real terms) reserves.

The other cost comes from the changes in the composition of output that accompany the rise in Chinese financing. the combination of easy access to debt and the difficulties competing against production in China encourages investment in the non-tradeables sector and discourages investment in tradeables. yet over time, unless the US can run up its debts for ever, it needs to export more or import less — so it needs more investment in tradables. The longer the current situation persists, in my view, the more difficult the ultimate adjustment back to an economy that pays for its imports with real exports rather than the export of IOUs.

the frictionless costless movement of resources between sectors in most economic models doesn’t match my sense of how the world works.

cheers!

In the long-term this is bad for the US because China, in theory, would be able to buy all of our assets with our money, until we have nothing left (although our government would likely step in unilaterally in some way before that). They could also probably cause a currency collapse by selling all their debt on the open market at once, but the international destabilization would hurt everyone.

Assuming neither of the end-game scenarios, what’s the short-term negative for us to their holding trillions of US debt and financing our continued deficit spending? Or is the negative the threat of bigger actions?

I would note two other sources of pressure:

a) Chinese firms borrowing abroad and moving funds back
b)Chinese households shifting out of domestic dollar deposits (or putting $ under the mattress in the bank)

all told tho it is hard to see exactly how so much money is coming in …

the bets i see on China based in new york are, as Judy Yeo notes, proxy bets — but relying on what your hear of directly isn’t an accurate guide to what is going on.

I don’t. There are about 40 million overseas Chinese, and a $70 billion inflow means that on the average each overseas Chinese deposited about over a thousand dollars into the PRC last month. I didn’t do anything like this and neither did anyone else that I know, and you don’t see any particular signs of massive deposits from the overseas Chinese news media.

The amounts involved are just too large for the diaspora.

dmg555: How, in this complicated world of central bank manipulative policy, do we approximate the amount of money in the money supply.

First we need to define what money is, and that’s much harder than it first seems. Money is like gravity, it’s something that you run into so often that people just don’t think deeply about what it is, and the more you think about it weirder and more mysterious it is.

dmg555: In older times, governments just turned on the printing press, to use a phrase, but these days we don’t have a printing press gauge any more.

Actually there is. Look at the Federal Reserve’s balance sheet and that tells you how much paper money there is out there in the world. It turns out that there is only about $900 billion in US paper money out in the world.