But what if the devaluation became self-sustaining, via hot-money flows, so there wasn’t a need for China to purchase treasuries?

In early 2007 the Vietnamese dong was considered one of the undervalued currencies (http://online.wsj.com/article/SB116793845922667338.html) and a year later it was toast. How many treasuries has Korea needed to buy recently?

I had 5% of my liquid assets in an rmb account until February until I saw how quickly things turned with the dong and yanked it out.

China is headed for something really bad and it has about as good a safety net as we had in 1930 (in some ways worse), why wouldn’t people pull their money out?

Again, I’m not confident you’re wrong, I just see it as one possible outcome.

Clearly the game has changed and there’s little doubt that the Bretton Woods II system won’t survive. The question is just when and how will it die?

My argument is a bit more nuanced than you give it credit for tho. I fully expect the pace of the government of China’s purchases of treasuries to fall as reserve growth slows. right now it is being held by by the reallocation out of agencies to treasuries. Current purchases (50-70b a month — they are HUGE) are unsustainable.

At the same time I don’t see china’s trade surplus or its dollar peg going away soon (the dollar peg seems to be tightening) and barring a large policy shift in china, i suspect that limits China’s options …

a deval of the rmb might increase hot money flows and reduce reserve growth, but it would tend to push up the trade surplus and thus sustain high levels of chinese financing of the world.

But not necessarily into Treasuries, more likely banks. My understanding is a lot is heading to Hong Kong banks. (Which may provide support for the US$ indirectly because of the hard peg of the HK$?)

But it doesn’t help us peddle $1.3T in Treasuries.

I think you are a little too sanguine in your expectations about China continuing to buy Treasuries. Let’s face it, no one knows what sorts of jolts are ahead of us. The scenario whereby China keeps buying hundreds of billions of $ in Treasuries is just one of many possibilities.

Try to work this out and you will be surprised.

Who are you going to sell the $ to and what is the other party going to do with the $? If China sells $ and buys € then it still has reserve accumulation, no? Or is the US going to sell its gold for its own printed paper? Or must they buy foreign assets with their dollars, but does it solve the problem because then someone else is stuck with the $ and must do something with it. Or maybe the FED can start printing Yuans.

The accumulation of $ is the evidence that the US has the perverse privilege of being able to print international money (the Gaulle knew already). All the rest is a decoy to hide that privilege.

Oil Marketing companies can sell OIL BONDS which are bought by RBI so that marketers wont suffer when prices are too high in international markets.