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At least a crisis marked by a run out of risky US assets and into safe US assets. Right now Agency bonds — think Freddie and Fannie — are considered risky assets while Treasuries are not.
A run out of all US assets and the dollar would look very different.
The October TIC data tells a striking story — one marked by a massive surge in demand by both private and official investors for “safe” assets. Foreign investors bought $182 billion of Treasuries — including $147.4 billion of short-term Treasury bills. There is no real mystery why bill yields dropped so low even as the supply of bills surged. And foreigners added $207 billion to dollar bank accounts.
Sum that up and it works out to close to $400 billion in demand for safe dollar denominated assets. If that kind of monthly inflow is annualized it is a shockingly large number.
It isn’t hard to figure out why the dollar rallied.
$400 billion in a month is far more than the US needs to cover its trade deficit. It allowed foreigners to reduce their holdings of Agencies by close to $75 billion (including a $25 billion fall in short-term Agencies), their holdings of long-term corporate bonds by $13 billion and their holdings of US equities by $6 billion without causing any strain on the dollar.
Indeed, the fall in foreign holdings of US corporate bonds and US equities (though not the outflow from the Agencies) could have been financed by the sale of $36 billion of foreign assets by US residents …
Usually I argue that the TIC data understates official flows. And this month’s data may well do so.
Some of the $35 billion in long-term Treasury bonds bought by UK investors were probably bought by central banks, and selling by central banks could have contributed to the $13.8b in net sales of long-term Agencies. But in broad terms I don’t doubt that private demand for “safe” US assets soared as a result of the crisis — and much of the inflow came from private investors seeking to increase their holdings of the most liquid dollar assets.
In October, China was about the only central bank adding to its reserves (I suspect, it hasn’t formally released its reserves data). Most central banks were selling. That shows up in the US TIC data. South Korea, Brazil, Mexico, Russia and Ukraine were all net sellers of long-term US Treasury bonds …
The big central bank flow was a reallocation away from Agencies toward Treasuries. And specifically toward short-term Treasury bills.
China increased its holdings of short-term Treasury bills by a stunning $56 billion while also buying $10 billion of long-term Treasuries. That flow alone would have been enough to cover the trade deficit in the absence of any offsetting outflows. Russia cut its holdings of short-term Agencies by a little over $22 billion while increasing its holdings of short-term Treasuries by almost $12 billion.
So much for talk that central banks are always a stabilizing presence the market. They clearly have destabilized the Agency market. The fall in demand for Agencies over the past three months — and most Agency demand has come from central banks until recently — has been sharper than than the fall in demand for US corporate bonds (think securitized subprime mortgages, the category “corporate bonds” in the BoP data includes asset-backed securities) after the crisis of last August.
The fall in demand for corporate bonds (the redline) is what generated a rather scary graph after the initial crisis last August. Things haven’t gotten any better since …
The Agency market is a rather important market. Increased lending by the Agencies offset the fall in demand for “private” mortgage-backed securities after the crisis last August. More recently, the absence of a “central bank bid” has kept Agency spreads wide even after the US Treasury bailout of Freddie and Fannie. And that in turn has pushed the US to adopt other measures to bring down long-term mortgage rates. The Fed and the Treasury are literally now buying the Agencies that foreign central banks are selling. Action, reaction …
i suspect your analysis is about to be overtaken by events..
Useful information. I would reverse the direction of causality between foreign purchases of U.S. debt and the trade balance, though. The trade deficit is not an exogenous amount that will be financed one way or another. An inflow of official investment will create a trade deficit where none would have otherwise been, or worsen the balance that would have occurred.
“this sucker could go down” -
who said that ?
i suspect that the idea that the dollar could collapse will prove to be as ephemeral as the idea that asian economies could ‘de-couple.’ it is currency which could collapse. what would you do if you were a japanese policy advisor, and all of your exporters were getting choked by a falling dollar while a chinese yuan was following it down . . . ? would the constraints of being a long term u s ally still apply ?
i asked this months ago in the form of a joke – “bernanke can only launch the helicopters if he can impose a no-fly zone everywhere else.”
in an extreme situation maybe they would have to close the treasury market while they had a g20+ conference ?
Brad,
David Goldman has been calling this the ‘black hole’ effect on his blog at Asian Times. It’s the positive feedback mechanism between the supply of Treasuries and global risk that’s been creating this snowball effect. Since this is all happening in a time of great uncertainty when people actually put their money where their mouth is, perhaps this is the best reflection of the true power structure of today’s global political economy.
Maybe it is true that the Europeans will practice greater fiscal austerity than the Americans, but it’s hard not to get the sense that Asian policy makers coordinate much closer with American policy makers than they do with the Europeans. Despite the rhetoric about implementing structural changes in the balance of payment, Chinese and American policy actions so far look a lot like attempts to restore the old status quo at the expense of the rest of the world.
US policymakers are having no qualms about bankrupting the debtors around the world to have enough capital to fund its banking system and domestic spending through tax cuts and credit market interventions. Likewise, the Chinese are adding market share in global trade at the expense of other exporting nations. It doesn’t look like either one is willing to relinquish their old calling card without a fight.
so if all act selfishly, as is likely – what happens when the japanese investors feel they have better rates and more safety at home, and cause a self feeding rise of the yen which chokes their own exporters ?
smaller investors have much more freedom to initiate runs and panics than your c bs and swf s. i would be afraid of what would happen if the japanese money started to run for home.
gillies,
It might be true that Japanese boomers would eventually have to redeem their investments in the US to fund their retirement, but is there anything in the short term that would prompt a run? Inflation might do it in the next couple of years, but I doubt the flight of private Japanese money alone, without participation of the Asian central banks would cause a massive collapse.
gillies
the usa is not asia’s biggest export market. moreover, china et al prefer the dollar to devalue against other currencies (euro, etc), if it means their currencies will depreciate in tandem. and they don’t mind their currencies appreciating (a bit) against usd if usd is devaluing.
but why strive to win a bigger share of a rapidly shrinking pie? us consumers are no longer buying asian exports at any price. does the pain really feel that different in your export sector if exports are down 30% instead of 40%? what if your actions trigger retaliatory protectionism that damage your exports even more?
now the tide has turned against the dollar, i suspect that some asian cbs (probably the smaller ones that feel more exposed and who actually care very much about the value of their reserves) will flake. he who panics first panics best. will china be left holding the can?
So,
US Government Sponsored Entities back mortgages by selling bonds to foreign central banks…
The mortgage meltdown leads foreign central banks to abandon buying GSE debt..
And instead buy US government bonds…
The proceeds of which the US government uses to buy GSE debt…
Having eaten its own tail, this snake is moving onto the head…
Brad,
I have been trying to figure out why the Fed, the Treasury, and almost everyone else in Washington is trying so hard to bring down mortgage interest rates, as if that would revive the house price bubble.
Every decent economist in the rest of the world knows that this is a fool’s errand. The Central Banks in the rest of the world have been voting with their money that this can’t be done.
The house price bubble can’t be turned around until prices get back to fundamental levels. That’s how bubbles have always played out in the past, and that’s how this one is going to play out.
When the history of Washington’s reaction to this crisis is written. Social-psychologists will have a field day analyzing the conformist-thinking that prevented Washington and the majority of American economists from understanding that this crisis stems from the fact that mercantilism destroys its customers.
American consumers couldn’t keep borrowing more and more for imports. In the long run, in order to buy more and more imports, you have to have more and more income. American consumers didn’t have that income because mercantilist countries were playing the game of maximizing exports and minimizing imports.
By the way, Peter Navarro, one of the most clear-thinking economists this country has ever produced, has been writing some great stuff on Chinese mercantilism lately. You can’t find any of it in American publications, but you can find lnks to it on my blog.
Howard Richman
http://www.tradeandtaxes.blogspot.com
bena: but why strive to win a bigger share of a rapidly shrinking pie? us consumers are no longer buying asian exports at any price.
That’s not quite true. Exports year to year are down 2%. It’s not up 50%, but it’s also not down 50%. One thing that is happening is that as the economy shrinks, people are buying more things from Walmart rather than from more expensive stores, and this helps low cost manufacturers, and provides yet another reason people aren’t thrilled about import restrictions.
Richman: I have been trying to figure out why the Fed, the Treasury, and almost everyone else in Washington is trying so hard to bring down mortgage interest rates, as if that would revive the house price bubble.
They aren’t. They are bringing down all interest rates since this is the standard medicine for a recession. Once interest rates go down enough, people will start refinancing, and this will mean that some extra cash gets spent.
Richman: American consumers couldn’t keep borrowing more and more for imports. In the long run, in order to buy more and more imports, you have to have more and more income.
The trouble with that is that this is inconsistent with the fact that 30 year treasuries are at 3% and 3 month treasuries are negative. Also this isn’t true for the US, since the US can finance imports by printing money which the rest of the world seems to want. This may stop working in 10 to 20 years, but it’s not the cause of the current problems.
Observer: Despite the rhetoric about implementing structural changes in the balance of payment, Chinese and American policy actions so far look a lot like attempts to restore the old status quo at the expense of the rest of the world.
What rhetoric?
No surprise in the Agency-to-treasury shift. And even more so in the Corporate-to-agency one. Still it does not explain the source of the other 300 bn inflow. What this probably means is that foreign creditors have shifted USD denominated bank deposits to US banks, including US offices of non-US banks (would there have been a slow run on US banks earlier in the year that was not noticed?, anyway) from non-US banks (including no-US offices of US banks.
Perhaps the mystery can be explained by the very low interest rates applicable now, which virtually eliminate one of the original causes of the eurodollar market, i.e. reserve requirements.
To have an effect on USD exchange rates, though, there should have been a hefty exit from EUR etc denominated assets, or liquidation of USD hedges (basically any kind of USD short positions) Not implausible but also not something that would go on forever. A remarkable thing is that with Euroland governments generally guaranteeing their banks, the interbank market continues far above the ECB rate. In addition, the spreads between Germany and all other countries (including very creditworthy ones like Holland) are wider than they have ever been.
All in all, it is more likely that this is simply a transient phenomenon than the beginning of a trend. Massive market failure creating a “fog of war”..
Mercantilism and consumerism go arm in arm as twins. The separation between consumers and producers make people hard to understand the other side of the story. The dimension of distance is not only a geographic one, but also a mental distance. It creates an understanding gap – a gap of information, awareness and responsibility towards each other. Most US consumers are completely ignorant about the devastating environmental impact towards other people, other land on other side of the planet caused by innocent indulgence in consumption. Most Chinese producers have no ideas that they took American manufacturing jobs away from American workers. In reality, pension funds in the US funded multinational firms which in turn made heavy investment in China and other developing nations. Ask how much GM invested in China. If any American wants to blame anyone or country for the crisis, he or she should really look at its own system and fix it. It’s not Mercantilist country that destroyed the United States. It’s the systemic policy choices the United States made in the last decades that leads to the current financial crisis.
Isn’t this a case of US foreign creditors essentially renegotiating the terms of their loans to the US?
I enjoy reading this blog, but I am sometimes (OK often times) mystified by the terminology, so I have an embarrassingly stupid question: I can’t find a definition of “agencies.”
What is an “agency”?
what is the distinction between a treasury and an “agency?”
Why is it important?
thanks
@dan
from
http://en.wikipedia.org/wiki/Agency_debt
Agency debt is a security, usually a bond, issued by a U.S. government-sponsored agency. The offerings of these agencies are backed by the government, but not guaranteed by the government since the agencies are private entities. Such agencies have been set up in order to allow certain groups of people to access low cost financing e.g. students and home buyers. Some prominent issuers of agency securities are Student Loan Marketing Association (Sallie Mae), Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac). Agency securities are usually exempt from state and local taxes, but not federal tax. Agency debt is also called an agency security.
@2fish: “They aren’t [trying to bring down morgage interest rates]. They are bringing down all interest rates since this is the standard medicine for a recession. Once interest rates go down enough, people will start refinancing, and this will mean that some extra cash gets spent.”
Whenever the Fed sells Treasuries to buy Agencies, its purpose is to bring down mortgate interest rates. The spread between Agencies and Treasuries is due to risk of mortgage lending, during a bubble, as determined by the market.
@2fish: “The trouble with [the idea that American consumers are borrowed out] is that this is inconsistent with the fact that 30 year treasuries are at 3% and 3 month treasuries are negative. Also this isn’t true for the US, since the US can finance imports by printing money which the rest of the world seems to want.”
We are talking about two different things. I am talking about borrowed-out American consumers borrowing more to finance imports without more income. You are talking about the American government borrowing more to finance imports.
Indeed you are correct that the U.S. government strategy is to continue to borrow more and more mercantilist government money in order to finance imports. That’s the current stimulus strategy: (1) February’s $150 billion stimulus package, (2) October’s $850 billion TARP plus giveaways, and (3) Obama’s planned stimulus package that some think will be $1000 billion.
This strategy, if it continues, will end in a dollar collapse.
Howard Richman
http://www.tradeandtaxes.blogspot.com
Fresno Dan,
The term “Agencies” refers to Fanny Mae and Freddie Mac, two semi-private government agencies that were set up in order to make mortgage money more readily available to house buyers.
Brad’s posting and my comments refer to the fact that foreign central banks have been pulling their money out of Agencies and switching it to US Treasury bonds which drives up US mortgage rates.
My posting refers to the fact that the Federal Reserve (the US Central Bank) is pulling its money out of US Treasuries and switching it to Agencies in an attempt to drive down interest rates for mortgages.
We are seeing a closing of the loop of the ‘mercantilist’ trade transaction. It is where the folks who have forced their currency lower over time to ‘aid’ their manufacturing sector find out the folly of the policy.
The micro transaction is very simple. China (or any other entity accumulating vast amounts of ‘reserves’ denominated in foreign fiat currency sells a barbie doll (or car or airplane or computer or anything) to a US consumer for a dollar (or a treasury bill, note or bond) and then holds onto that dollar in the mattress (or citibank or the fed or wherever). This process can go on for as long as both parties are happy. The US can never run out of dollars as they simply print up some more (which they are doing quite rapidly at the moment) At some point in time one would think that the Chinese would get tired of the arrangement. At that time they would try to by some ‘stuff’ from the US. If the US does not have any stuff they want they are out of luck. If China has way more dollars than the US has stuff then the price of the stuff will go as high as needed to accommodate the stuff.
In the aggregate both economies are ‘hurt’ somewhat in the sense that hurt means that from an economic standpoint they have operated in a less than optimal manner because the market price has been distorted thus cause some mis-allocation of resources. Most of the mis-allocation pain is be born by the Chinese worker for she is the one doing the work at artificially low wages.
Bernanke, if he has his way will simply keep printing money until he can cause the price level of something to rise enough so that it pays for someone to produce it. It is possible that the thing that rises first is gold followed by other commodities as the investment world figures out that the dollar (or any other fiat currency) in the end is not a ‘safe’ place to store your wealth.
The key to fixing the whole shebang is to rid the world of central banks and replace them by a simple algorithm which deterministically increases the supply of base money by some amount over time and removes the ability of banks of any kind to create this money. Then the supply of money having its present and future quantity well known will find an accurate price. The price will be more volatile than now but the bubble cycles will have much faster circuit breakers because the price of credit will go up much quicker if the supply is constrained by the known money quantity.
Unfortunately there is way too much political power attached to currency and central banks for this ever to be adopted.
@dave_in_ct: “We are seeing a closing of the loop of the ‘mercantilist’ trade transaction. It is where the folks who have forced their currency lower over time to ‘aid’ their manufacturing sector find out the folly of the policy.”
This is just the first paragraph of an excellent posting, but I disagree as to whether China will be hurt in the long-run. They got the factories and the investment. All we got were consumer goods and debt.
Howard
Federal Reserve sets stage for Weimar-style Hyperinflation
by F. William Engdahl
http://www.globalresearch.ca/index.php?context=va&aid=11401
The Federal Reserve has bluntly refused a request by a major US financial news service to disclose the recipients of more than $2 trillion of emergency loans from US taxpayers and to reveal the assets the central bank is accepting as collateral. Their lawyers resorted to the bizarre argument that they did so to protect ‘trade secrets.’ Is the secret that the US financial system is de facto bankrupt? The latest Fed move is further indication of the degree of panic and lack of clear strategy within the highest ranks of the US financial institutions. Unprecedented Federal Reserve expansion of the Monetary Base in recent weeks sets the stage for a future Weimar-style hyperinflation perhaps before 2010.
In response to the deepening crisis, the Bernanke Fed has decided to expand what is technically called the Monetary Base, defined as total bank reserves plus cash in circulation, the basis for potential further high-powered bank lending into the economy. Since the Lehman Bros. default, this money expansion rose dramatically by end October at a year-year rate of growth of 38%, has been without precedent in the 95 year history of the Federal Reserve since its creation in 1913. The previous high growth rate, according to US Federal Reserve data, was 28% in September 1939, as the US was building up industry for the evolving war in Europe.
By the first week of December, that expansion of the monetary base had jumped to a staggering 76% rate in just 3 months. It has gone from $836 billion in December 2007 when the crisis appeared contained, to $1,479 billion in December 2008, an explosion of 76% year-on-year. Moreover, until September 2008, the month of the Lehman Brothers collapse, the Federal Reserve had held the expansion of the Monetary Base virtually flat. The 76% expansion has almost entirely taken place within the past three months, which implies an annualized expansion rate of more than 300%.
Congress is demanding more transparency from the Federal Reserve and US Treasury on its bailout lending. On December 10 in Congressional hearings by the House Financial Services Committee, Representative David Scott, a Georgia Democrat, said Americans had ‘been bamboozled,’ slang for defrauded.
As well, the Federal Reserve’s panic actions since September, by their explosive expansion of the monetary base, has set the stage for a Zimbabwe-style hyperinflation. The new money is not being ‘sterilized’ by offsetting actions by the Fed, a highly unusual move indicating their desperation. Prior to September the Fed’s infusions of money were sterilized, making the potential inflation effect ‘neutral.’
Twofish: what rhetoric?
The on-going rhetoric from policy-makers, academics and market watchers about the need for structural adjustment. I consider topics like protectionism and shrinkage in global trade to be variations of this rhetoric.
Brad,
A basic question: what is on the Y-Axis of the first 2 figures?
thankyou for the replies about japan. today’s asia times has an article -
Japan to live with yen burden
By Kosuke Takahashi
the writer’s opinion is that japan will quietly suffer gradual yen appreciation because of the alliance with the united states. my question really was – what happens if that changes ?
@gillies: “the writer’s opinion is that japan will quietly suffer gradual yen appreciation because of the alliance with the united states.”
Here are the goals that the Japanese, Chinese, and US governments are persuing:
1. Japan wants the U.S. to survive as a great power as a counterweight to China. In order for that to happen, US manufacturing must be able to compete. Japan they will let their currency rise so that American products can compete with their products.
2. China wants to destroy the United States as a counterweight to their power. In order to do so, they must destroy US manufacturing. As a result, they will experience a depression rather than let their currency rise.
3. US government wants to borrow money from China to pay for stimulus packages. US policy makers haven’t thought any further ahead than that.
Howard
y-axis is $ billion.
Richman: They got the factories and the investment. All we got were consumer goods and debt.
You know. The US could have spent all of the money that is being loaned to it on something more useful than new houses.
Richman: China wants to destroy the United States as a counterweight to their power. In order to do so, they must destroy US manufacturing. As a result, they will experience a depression rather than let their currency rise.
China doesn’t want to destroy the United States. Other than the Taiwan situation, China really doesn’t care what the United States does. This seems to be a very hard concept for some people to grasp. China cares about China, and really doesn’t care if the US is more or less powerful.
If propping up the US helps China be a great power, China will prop up the US. If destroying the US helps China be a great power, China will destroy the US. Since the US has 12 carrier battle groups and 3000 nuclear missiles, a GDP that is eight times China, and owes China $2 trillion, they are going with Plan A.
What you are suggesting is that China lends the US lots of money to build a house with the intention of burning the house down. That assumes an astonishing level of stupidity on the part of Beijing.
They just aren’t that dumb, and you’ve been watching too many James Bond movies. (You know the type where the villain comes up with a complex, convoluted *EVVVVEEEELLL* plan that falls apart because they try to kill Bond with a laser rather than shoot him the second he enters the complex.)
Richman: US government wants to borrow money from China to pay for stimulus packages. US policy makers haven’t thought any further ahead than that
Actually they have. Bush thought really far ahead. The plan was to invade Iraq, have freedom and democracy rule the world, and have the US keep its status as the most powerful nation in the world as the defender of freedom and democracy. Sounds great in 2002. Voters rejected it in 2008.
This is not too surprising. History has shown that people turn against grand plans to “rule the world” once they find out how expensive in blood and treasure “ruling the world” is. That’s why China has very limited ambitions.
Obama’s foreign policy is likely to have the US try to regain world support through soft power.
howard,
I think that your whole premise of manufacturing output equating to wealth is not correct and is getting less correct as time goes on. most manufacturing done in low wage countries is a purchase of capital equipment (which is available worldwide) followed on by low wages to operate the equipment. the ‘power’ is in the intellectual capital required to produce the equipment in the first place.
Imagine tomorrow that all manufactured goods trade between the US and the rest of the world ceased. Is there any reason to believe that the know how to produce the lost products resides completely within the shores of the US so it would be a pretty short while before the shelves were restocked with barbie dolls or frying pans or chop saws or whatever. Economic power these days is more and more associated with intellectual property. In this matter the US still is the repository of the greatest quantity of this stuff by far. Whether that remains true longer term is certainly up for discussion but at the moment no country is even a close second.
Richman: China wants to destroy the United States as a counterweight to their power. In order to do so, they must destroy US manufacturing. As a result, they will experience a depression rather than let their currency rise.
DJC: Honestly Howard, the Chinese bureaucrats in Beijing don’t really think about destroying the United States. They are really much more concerned about their political survival when there are potentially 200 million unemployed in the streets rioting about jobs and food. At the highest levels of the Chinese leadership, with the exception of the US constant interference in the Taiwan independence issue, they really don’t care very much about the United States. It is really hard for Americans to believe they aren’t in the center of the world, but the Chinese foreign policy is regionally oriented toward economic development Southeast Asia and neighboring countries. With Chinese participation, Shanghai Cooperative Organization and the ASEAN+3 excludes the United States or any Western powers. As an economic power, the United States is slowly fading in importance; Europe is China’s largest trading partner today, India is China’s fastest growing trade partner, and inter-regional Asian trade far exceeds Sino-US trade.
Restoring China’s national destiny
By Henry C K Liu
http://www.atimes.com/atimes/Global_Economy/JL16Dj04.html
Currency hegemony distorts distributional equity in trade. Under dollar hegemony, the distribution of the benefits of trade is distorted mainly because dollar is scarce in all trading economies except the US which can produce dollars at will by fiat. Dollar hegemony emerges when the US discover how to transfer the cost of fiat dollar creation to her trading partners. This dollar-based international finance architecture allows the US to become the world’s largest debtor nation by assuming debts denominated in dollar that the US can produce endlessly at no cost to itself. The cost of dollar depreciation from oversupply is transferred to foreign holders of dollars. The question is seldom asked why a country that can produces dollars at will needs to borrow dollars from its trade partners. The answer is of course that the US borrows not out of its need for dollars, but to reinforce the need for dollars on the part of her trading partners. This dollar-denominated debt owed by the US to her trade partners is a debt the US never has to pay back, or if forced to do so, the US can pay this debt with more dollars she can print at will.
China with one fifth of the world’s population should have a GNP equaling to one fifth of world 2007 GDP of $54.6 trillion, or $11 trillion instead of $3.3 trillion. China’s 2007 GDP was below its asset potential by a factor of three by world average standard. By advanced economy standard, China’s GDP should be five time that of the US ($14.5 trillion in 2008), or $72,5 trillion. Yet China holds a foreign exchange reserve of $2 trillion, about 60% of which is in the form of US sovereign and agency debt. The US, with the world largest GDP economy, and the world largest debtor nation, has no foreign debt denominated in foreign currency. All debts owed by the US to foreigners are US sovereign debts denominated in dollars, not foreign debts denominated in foreign currencies.
The Chinese Communist Party (CCP) when it came into power in 1949 inherited this high mortality rate and a population level fluctuating under the scourge of disease and malnutrition. A primary goal of the CCP since its founding was to improve the condition of the population, over 80% of which are rural peasants. Population is the most valuable national asset. Economic policy must aim at maximizing the full potential of this national asset by ensuring the provision of food, housing, health care, education and employment for all. A socialist nation should not permit poverty anywhere within its borders, more so if income disparity contributes to the existence of poverty.
@DJC: “Honestly Howard, the Chinese bureaucrats in Beijing don’t really think about destroying the United States. They are really much more concerned about their political survival when there are potentially 200 million unemployed in the streets rioting about jobs and food.”
China has the reserves to start importing goods galore from the United States. They could start with pre-fab homes that would house their people. They could continue with hospital equipment so that their people could get good healthcare. Need I continue?
Doing so would cause China’s export market to recover because Americans would start having enough income to grow along with them. Both countries would grow in tandem.
Instead, here’s their strategy to deal with the depression:
1. Export Subsidies.
2. Lowering their currency versus the dollar.
3. Accellerating their infrastructure spending.
I rest my case.
Howard
david_in_ct: Economic power these days is more and more associated with intellectual property. In this matter the US still is the repository of the greatest quantity of this stuff by far.
Intellectual property consists of people and people have legs. The fact that the US has a massive trade deficit and is losing manufacturing jobs does not worry me. There could be no manufacturing jobs in the US and the country would do fine.
What does worry me is that last weekend you have a delegation of banks from Shanghai holding a jobs fair, and it was attended by 1000 people.
What worries me even more is that overseas Chinese with freshly minted US business and finance degrees are being told by Chinese employers that without job experience in the US, that they don’t have any edge over people with freshly minted Chinese business and finance degrees, and if Chinese graduate students stop coming over to the United States, you are going to see research universities collapse.
The connection between currency value and labor is something interesting. The salaries that Chinese banks are offering are comparable to what US banks offer (i.e. US$200K-$300K for an experienced portfolio manager). It has to be.
The problem with this fixation on the trade deficit is that it fixed a non-problem and makes a real problem worse. If you depreciate the US dollar, then a Chinese bank can offer a higher salary than a US one. So you end up attracting low skill, low wage jobs, but you end up pushing away high skill, high wage ones.
This is a seriously bad deal.
Richman: China has the reserves to start importing goods galore from the United States. They could start with pre-fab homes that would house their people. They could continue with hospital equipment so that their people could get good healthcare. Need I continue?
Goods are useless without people. You can import tons of equipment and all it will do is rust if you don’t have the doctors that know how to use it.
Pre-fab house make no economic sense at all since you have vast pools of people that can work as construction workers.
What China wants to import is technology and skills.
Richman: 1. Export Subsidies. 2. Lowering their currency versus the dollar. 3. Accellerating their infrastructure spending.
Which is your standard textbook method for dealing with a recession.
@2fish: “Goods are useless without people.”
People can be trained to use the new hospital equipment.
@2fish: “Pre-fab house make no economic sense at all since you have vast pools of people that can work as construction workers.”
Rural Chinese need housing. America’s pre-fab house construction industry is very efficient and out of work.
@2fish: “[Export subsidies, currency manipulation, and accellerating infrastructure spending are] your standard textbook method for dealing with a recession.”
Infrastructure investment is, but the others are only standard when the strategy is beggar-thy-neighbor.
When does fear turn to greed?
If foreign CB’s are buying agency paper ANYWAY (indirectly) when they buy t-bills, why not just get the higher yield directly and buy agencies?
I think the REAL key is for the Fed to make foreign CB’s GREEDY again, and once they entice them into the agency market, the US will be able to stage a pretty amazing recovery… but at the foreign CB’s expense, of course
“3. US government wants to borrow money from China to pay for stimulus packages. US policy makers haven’t thought any further ahead than that.”
That would be very counterproductive. If the U.S. borrows the stimulus from abroad, then all of it will leak out through an increase in the current account deficit.
Why does Chinese banks want investment banking professionals on wall street? Isn’t that enough that these people were doing such an good job that destroyed the world economy? Do Chinese banks really want these specialists to learn how to get around regulation and make huge amount of money for themselves? They should be paid as plumbers get from their wages. They know how to make money, but not benefiting the people.
@credulous_prole: “If foreign CB’s are buying agency paper ANYWAY (indirectly) when they buy t-bills, why not just get the higher yield directly and buy agencies?”
The reason is simple. Risk. They expect US house prices to continue to fall toward their fundamental levels. As a result, Fanny Mae and Freddie Mac will lose massive amounts of money on the new loans that they make. Lending to US home buyers is extremely risky right now. Check out my blog posting about where we are in the house price bubble right now.
@credulous_prole: “I think the REAL key is for the Fed to make foreign CB’s GREEDY again, and once they entice them into the agency market, the US will be able to stage a pretty.”
Brad wants the foreign Central Banks to switch away from Treasuries toward Agencies. That would be fine. But, if the foreign Central Banks simply buy up more US assets including Agency bonds, that would make our economy worse since it would drive up the dollar, thus decreasing our exports and thereby increasing our trade deficit, which is already a huge drag upon our economy. The effect of lower interest rates on house prices at this point in the house price bubble would be negligible.
The solution is for the United States to balance trade.
Ying: Why does Chinese banks want investment banking professionals on wall street?
Because capital doesn’t allocate itself, and Chinese leadership realizes that you need a strong financial sector for economic growth.
Ying: Isn’t that enough that these people were doing such an good job that destroyed the world economy?
There are competent bankers, there are incompetent bankers. Hire the competent ones. Bad bankers can do a lot of damage, but so can bad doctors. The fact that bad doctors exist doesn’t mean that you should get rid of all doctors.
Ying: Do Chinese banks really want these specialists to learn how to get around regulation and make huge amount of money for themselves?
Actually part of the people that are doing the recruiting are Chinese financial regulators that want specialists who know how to get around the rules to be part of designing the rules so that people don’t get around them.
Ying: They should be paid as plumbers get from their wages. They know how to make money, but not benefiting the people.
How do you go about deciding who gets paid what or what exactly benefits the people? It’s tempting to shoot the businessmen, and then let decisions be made by saints. But that doesn’t work that well, and saints turn out to have their own self interest.
Any prospect of the US rebuilding its lost manufacturing base, balancing imports with exports is going to be overtaken by much stronger forces. Between 2020 and 2030 nanotechnology will obsolete much of manufacturing with the same inevitability that the mechanisation of the Industrial Revolution marginalised manual labour and handcraft. Countries like China will have little time to benefit from their enormous investment in their new manuacturing base.
Fortunately for the US – it will indeed be the hub of this technological revolution. However, the democratisation of information through the internet will mean that all other countries will swiftly engage in this process.