Might do, provided there aren’t any fresh armed conflicts just around the corner. Like Iran…

There are a number of problems with this approach. The first is that it’s not clear what China’s global obligations are in this situation. You can point to various documents, but China’s response would be “so what, it’s nothing that we signed.”

Also, nations generally abide by global norms even when it is in their short term interest not do to so, when they are binding enough so that there may be other circumstances in which it is in their interest to do so. You lose one case before WTO, you might win another.

With regard to capital flows, there’s no reason for China to believe that if it becomes a “good citizen” that those norms could be used by China against the United States or the EU at some later time. In fact, the evidence suggests the opposite in that both the US and EU will ignore norms on capital flows when it is in their interest to do so.

Part of the problem is the possible governance structures regarding capital flows (namely the IMF) have very little Chinese participation, and so there is no reason for China to care what those institutions think.

Also “international norms” means more than what Europe and the US think.

bsetser: if China doesn’t find that compelling, other countries could eventually conclude that it isn’t in their interest to keep their markets open to a country that subsidizes its exports as a core part of its growth strategy, as the costs of remaining open might exceed the benefits.

That doesn’t sound like much of a negotiating position. If you don’t do X, then maybe possibly we might get upset in a year, and then do something like write a resolution.

Since there are lots of groups that benefit from a trade deficit, and would scream at any restrictions to it. Part of the problem is to overhaul the trade system would take years, and the process would quickly get hijacked by non-trade related issues.

One reality here is that if China say, “no we just don’t want to break the peg” there isn’t that much the US can do quickly about it.

Current regime: 1 GLF = 1 USD

1 b = 100 USD; Gulfozone accumulates 100 USD of reserves and prints 100 GLF
1 b = 150 USD; Gulfozone accumulates 150 USD of reserves and prints 150 GLF
1 b = 200 USD; Gulfozone accumulates 200 USD of reserves and prints 200 GLF

Gulf oil standard: 100 GLF = 1 b

1 b = 100 USD; Gulfozone accumulates 100 USD of reserves and prints 100 GLF
1 b = 150 USD; Gulfozone accumulates 150 USD of reserves and prints 100 GLF
1 b = 200 USD; Gulfozone accumulates 200 USD of reserves and prints 100 GLF

Clearly, pegging the GLF to the oil price prevents the acceleration in the internal inflation rate that the current exchange rate regime is causing, but does not prevent the acceleration in the accumulation of USD reserves. Therefore in both monetary regimes Gulf countries are trading their only resource coming from a finite, exhaustible endowment for printed paper worth less and less. This case is completely different from that of factory countries like China, which by revaluating their currencies would render their exports less competitive and eventually bring their CA surplus to zero. That does not happen with oil exports, as oil has no viable substitute and its demand is highly inelastic and moreover has enormous growth potential (unless the Chinese can be convinced that driving cars and SUVs is for losers and that they should keep biking). Therefore, as long as a country can pay for oil with printed paper, it will print as much paper as needed while that paper is accepted as payment.

This problem (for the oil exporters) cannot be solved by switching oil trade to other fiat currencies such as EUR or JPY, because if the problem arises from the fact that the US is getting a free lunch (by having its currency used as the international trade and reserve currency), the solution cannot possibly be just taking that privilege away from the US and granting it to another oil importer like the Eurozone or Japan. The solution can only be that NOBODY gets a free lunch (gold used as international trade and reserve currency) or that Gulf countries themselves start getting a free lunch (GLF used as international trade and reserve currency). The only way to prevent this outcome is to guarantee that the printed paper used today will not be worth less and less, which requires that the USD be pegged (within some reasonable band) to the oil price. This would be equivalent to the person having the free lunch privilege committing to restraining his food intake as necessary so that, in a scenario of constrained food supply, the others can eat too.

Under this hypothetical regime, if the oil price tended to rise too much the US (biggest world oil consumer) would lower its demand as a result of tighter monetary policy. If on the other hand the oil price tended to drop too much, oil exporters could help support it by lowering their production. Needless to say, this regime would delight both Peak Oilers and Global Warmers.

tho if you think about it, that is what it has done to any european investor who bought $ five years ago.

More importantly, in terms of “oil”, it takes way less oil for Abu Dhabi to buy the Chrylser building than it used to …

The US should raise gasoline tax urgently.

a) there is a plausible argument that the saudis aren’t changing b.c. of US pressure, so this isn’t entirely a question of telling others what is in their own interest.

b) I do think it would be in china’s interest to let their currency move, and that chinese policy has been captured by special interests that benefit from low rates and the peg. but your points here resonate a bit (LArry summers incidentally made a similar argument at the PEterson institute conference, namely that it is hard for a nation that isn’t growing to tell a nation that is growing at 10% what is in its interest). I would put more emphasis on China’s global obligations as a member of the international community, particularly now that is is a huge exporter (second biggest goods exporter in the world after germany — and germany’s total is pumped up by intra-EU trade). And if China doesn’t find that compelling, other countries could eventually conclude that it isn’t in their interest to keep their markets open to a country that subsidizes its exports as a core part of its growth strategy, as the costs of remaining open might exceed the benefits. The fact that net exports contributed more to china’s growth in q1 than to us growth in q1 when china is booming and the us is stalled is stunning. a lot of the framing about it being in China’s interest was meant to create space for china to move without caving to us pressure, but well, that strategy seems to have reached its limit, as many now have the reaction that china is far better placed to determine its interest than the US.

c) Saudi Arabia doesn’t have a SWF. SAMA (the central bank) manages about $400b, with some of it supposedly in equities. but it is still more a cB with some risk assets portfolio than a SWF portfolio. The Saudis are thought to have $800-900b in total, but how exactly the remainder is managed is a bit of secret.

d) the boA comparison isn’t quite right, in my view — the Saudis are managing a foreign portfolio not a domestic portfolio. the BoA (or another US bank) doesn’t generate $200b in net demand for foreign assets. they keep matched books. the Saudi funds are “earned” money not borrowed money — they aren’t leveraged. by putting their cash in say a PE firm they can gear up and they (or their fund managers) can control much more.

the first point about d) applies with even more force to China. China’s $800b increase in its gov’s foreign assets has a much bigger impact on global flows than any private financial firm. and i rather suspect china’s combined extenral portfolio (CIC+SAFE+state banks) is going to be close to $3 trillion by the end of the year, which is WAY more than the external portfolio of any private financial institution. So from a balance of payments point of view, the assets under management of private firms matters way way less than the increase in the stocks of the foreign governments now adding to their portfolios at the fastest pace.

You call a doubling of the USD price of oil in just the last year “little penalty”?

Oil is denominated in all convertible currencies simultaneously, just like any other commodity.

The total oil revenues of Saudi Arabia in 2008 is about $200 billion. The total revenues of Walmart is about $300 billion. Saudi Arabia’s sovereign wealth fund has about $900 billion under management. Bank of America has about $1.7 trillion.

There are going to be some new faces in the board room, but I wouldn’t worry about them taking over just yet.