As you say, if they dont want to own $ they sell them to someone who doeas, ultimately someone has the dollars and they HAVE to make the decission to spend it or save it. wHEN THEY DECIDE TO SAVE, THEY BUY OUR BONDS!!

2-The U.S. govt does not need to borrow in order to spend

But to fix this problem required a massive reform of the tax system, the industrial system, and the financial system. Now that the SOE’s are in reasonably good shape, it’s time to start pulling out dividends to pay for public goods like health and education.

Ying: If the majority of Chinese do like to save more than the rest of the world, it is not because that they love to save. If you have to worry about next meal, medical bills, place to sleep, you end up saving more. The lack of social safety net and poor prospect of getting a decent job push most people to save more.

Which means that the number one priority is to keep the banks operating so that Chinese peasants don’t lose their savings. Also the interesting thing is that household savings have been more or less constant over the last 30 years. The huge increases in savings have been due to corporate savings.

The logical thing for the state to do is to take the corporate earnings and then use them to pay for public goods. The problem with doing that is that if you take corporate earnings the second that they make a profit, corporations will no longer want to make a profit.

Also the fact that Chinese (and Indian) people save is because they have a stable banking system and relatively low inflation. If you look at places with unstable banks and high inflation, the poor do not even try to save because there is no point, at which point the countries just get trapped.

The Chinese economic system is not a particularly good one. It’s just better than anything anyone else has been able to come up with.

40% of an expanding pie is better than 60% of a shrinking one.

Josh: And the excess amoung of savings led to low global interest rates and overproduction. In that case the fed’s response would be to lower rates to attempt increase aggregate demand to achieve its inflation and employment targets.

The problem is not increasing aggregate demand, but how aggregate demand was increased. A much more interventionist government that spent more on infrastructure and had very tight rules to keep the money from being spend on subprimes would have left the United States in a much better situation than what actually happened.

http://www.cbr.ru/Eng/statistics/credit_statistics/print.asp?file=inter_res_08_e.htm#week

the bounce back to $450b was due to the euro’s bounce v the $. Russia does mark its reserves to market so they will also reflect bond market moves, but russia’s reserves have a fairly short duration (Russia has pretty strict guidelines on permissable reserve assets) so this is less of a factor …

as far as I know, the reported value of China’s reserves reflect fx moves but are otherwise valued at book, not marked to market. Otherwise there should have been a bigger fall in sept, when the value of SAFE’s equities took a big hit … frankly tho with SAFE no one really knows. or at least I don’t.

ving — i strongly hope that China uses some of its stimulus to tilt policy toward rural areas (tho not by holding the rmb down to protect the farms from low-cost imported rice; that helps the farms to be sure but it really is geared at supporting exports — and it generates huge spillovers) and adopts a slew of new initiatives intended to build a stronger safety net and especially to improve rural education and health care.