Sell more US treasuries (at a higher yield of course) to the Chinese? This would help to support their currency manipulation. No wonder the Fed did a buy back.

I am suggesting that the US should have sold more treasuries into the demand from China, and, in a form of asset-liability matching, either saved the proceeds in the form of building its own reserves, or invested them in infrastructure. As it was, the US state actually reduced the supply of treasuries, partly through buybacks, and (of which I am most critical) by piling them up in the Fed’s System Open Market Account (SOMA). I hate to offer another of my posts to read, but this one covers the effect of the SOMA:
http://reservedplace.blogspot.com/2008/01/us-economic-policy-shot-in-foot-1-soma.html

I believe that a significant contribution to the present problems of the US has been its dogmatic attitude to the role of the state in the economy (and no, I am not a left winger; I did vote for Mrs Thatcher!). What more appropriate way to deal with official capital inflows into government bonds than with a government programme? And how ironic that, perhaps as a result of under-intervention, the US now looks like undergoing a massive increase in the role of the state.

I am planning to post more on how to deal with reserves capital inflows in future weeks. If you would be interested, send me your email address and I will alert you when I do.

Thanks again. I enjoyed both of your posts (in fact I’d run across one of them before, now that I’m thinking about it), and I agree with your implication that the root of the USA’s recent problems is a failure of responsibility at a number of levels. And I think that’s the most important thing to keep in mind here – that you cannot blame some one else for your own choices.

I agree. China buys bonds which the US offers for sale to allcomers. It is true that China denies the US the opportunity to fight back by buying Chinese assets in the same way, but even where this is possible, as in the case of Japan, the Americans have never done this. That would be to save instead of consume, and America has not been up for that! You might also appreciate another post of mine in which I explain what the US might have done with the capital inflows from the currency peggers: http://reservedplace.blogspot.com/2008/04/us-economic-policy-shot-in-foot-2.html

Though I don’t presume to understand this issue as well as most here, my question to aim was rhetorical. I have heard all over the place that the Chinese peg has US industry at a disadvantage. And I have heard all around that China maintains this peg through the acquisition of US debt and whatnot. And this is all interesting stuff up to here.

But the other thing I hear all over the place, and what really seems to drive me crazy, is that we can blame China and only China for this peg of theirs–as if we do not sell them bonds of our own free will; as if we do not choose our own spending; as if we do not choose our own tax rates.

Every time I read somebody saying, “blame only China”, I just want to reply, “grow up!” It seems to me–and please correct me where I’m wrong–how can somebody fault just China for its peg, when the financial policies of the US government itself facilitate it?

I explain how “currency manipulation” works in my blog at: http://reservedplace.blogspot.com/2008/09/mad-about-mercantilism.html

Note, however, that I conclude that it should do the US a favour. I certainly do not think that currency policies explain the US dependence on foreign oil. I am sure that, at present oil prices, US oil reserves are exploited as much as environmental regulations allow, regardless of the value of the dollar.

Uhuh. And how is the currency manipulated?