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Is complaining about others’ protectionism protectionist?

by Brad Setser
February 8, 2009

Dr. Mankiw labels complaints about China’s practice of intervening in the market to hold its currency down protectionist.

But Mankiw isn’t defending a world where governments do not intervene to shape trade flows.

An undervalued exchange rate acts as a subsidy for that country’s exports – and it also protects its domestic producers from competition from imports. Ask Dr. Bernanke. Dr. Subramanian of the Peterson Institute writes: “An undervalued exchange rate is in effect a combination of export subsidies and import tariffs.”

China’s exports would not have grown as fast as they have – goods exports went from $250 billion in 2000 to $1430 billion in 2008 – if China hadn’t added about $2 trillion to its reserves over this period. If the RMB hadn’t say depreciated against the euro over this time period, I rather doubt that China’s exports to Europe would have grown even faster than China’s exports to the US. The weak RMB also created incentives to produce goods in China that might otherwise have been imported, including a lot of the components for China’s exports.

Mankiw effectively is arguing that the US benefits from China’s intervention in the market, and consequently shouldn’t object to China’s export subsidy. Europe presumably is in the same boat.

China cannot subsidize its exports without also subsidizing US consumption of Chinese goods – and US borrowing. Of course, some in the US are on the losing end of the “low-priced Chinese goods for high-priced US government bond” trade – and those losses aren’t equally distributed. Some parts of the country tend to produce more goods than compete with Chinese goods than others. But the US as a whole benefits from China’s willingness to subsidize US borrowing … and the purchase of China’s goods.

Call me skeptical.

For one, China cannot subsidize its exports through a dollar peg without also importing US monetary policy — and it isn’t clear if that is good for China or the world. For example, China didn’t need loose monetary policy at the height of its own boom in late 2007. Yet that is what it got when the subprime crisis led the Fed to cut US rates. Nor will the effects of a monetary policy that is wrong for China necessarily be confined to China. Back in 2007, the loose monetary policy China imported from the US ended up reverberating globally – as the boom fueled by negative real rates in China (and other countries pegged to the dollar) contributed to the run up in commodity prices.

And then there are thethe geopolitical implications of US reliance on China’s government for subsidized financing. China already has close to a trillion dollars of Treasury bonds. It isn’t unreasonable to think that if it bought another trillion it might think it should get a bit of influence over US policy.

Moreover, America’s basic problem is that it consumed too much and borrowed too much over the past eight years. That was unsustainable. Consumption was too high relative to US income, and household savings were too low. We are all now paying a high price for imbalances– internal as well as external — that built during this period.

Yes, the biggest current risk is that it that consumption will fall too far to fast and no one will get access to credit. Gradual adjustment is good; sharp, sudden adjustments are not.

But that doesn’t mean that the US should want China to buy its bonds rather than its goods.

No country really has a comparative advantage “as consumers.” No one gets to trade their consumption for others’ production for ever, even if it sometimes seemed that way back when many emerging market governments were willing to trade their goods for US government bonds on terms favorable to US consumers and borrowers. The US didn’t have a comparative advantage at consumption so much as a comparative advantage at selling dollar debt to emerging market central banks who were trying to hold their currencies down.

Even now, the US isn’t in such dire need for financing that it has no option but to encourage China to hold its exchange rate down and in the process guarantee a captive Chinese market for US Treasury issuance.

The US Treasury can sell ten year debt in the market for less than 3%. That is a bit higher than a few years ago, but it is still a very low rate. So far demand for bonds has grown commensurately with bond issuance. By contrast, global demand for goods is shrinking.

China cannot stop buying more of the world’s bonds (Mankiw’s widely shared fear) unless it starts buying more of the world’s goods. And a world where global demand for US exports allows the US to generate needed jobs without running sustained fiscal deficits is very much in the United States long-run interest.

I would hope that China also would want a world where less of China’s savings is invested in the US. There are already signs that China’s leadership isn’t totally comfortable with its growing financial exposure to the US. And it isn’t clear that China’s public accepts that China’s government will take losses – at least in RMB terms – on all the money it channeled into the US, even though that is a logical byproduct of its policy of holding the RMB down to subsidize its exports.

Should China get credit for letting its currency appreciate 20% against the dollar?

The right answer likely depends in part on what the dollar is doing against other currencies. The 20% appreciation from mid 05 to mid 2008 came after the dollar already had depreciated heavily against a host of currencies. It was never enough to push the RMB back up against say the euro. Moreover, during the period when the RMB was appreciating most rapidly against the dollar, the dollar was still depreciating against a host of currencies: the RMB never moved much against a basket of the currencies of China’s trade partners then. The RMB only started to appreciate in nominal terms against such a basket when the dollar started to appreciate last fall.

The strongest argument against focusing on China’s currency right now is that the dollar’s appreciation at a time when the RMB has been tightly pegged to the dollar has finally generated a significant real appreciation. The RMB is still only a bit above its 2000 level in real terms, despite a huge increase in China’s productivity and a big increase in China’s current account surplus. That suggests the RMB remains under its long-term equilibrium value (more on this later). But the combination of a rising dollar-RMB and China’s own slowdown has led to a dramatic increase in capital outflows from China.

Some of these “hot” outflows are just the reversal of past “hot” inflows. But if China enters into a prolonged slump that leads to sustained capital outflows of around 10% of China’s GDP, China wouldn’t need to intervene in the currency market to offset a 10% of GDP current account surplus. And that would be evidence that the RMB isn’t being held below its current equilibrium level.

Large sustained capital outflows from China though do not strike as a likely outcome — in large part because it doesn’t strike me as an outcome that is neither in China’s interest (sustained capital outflows of this scale would be a vote of no confidence in China) or in the interest of China’s trading partners (as it implies structural RMB weakness). But at this stage it also cannot be entirely ruled out. The entire world economy is in flux.

There consequently is an argument for giving China a bit of time to adjust to the recent real appreciation of the RMB before pressing for more appreciation against the dollar.

But it doesn’t mean that the US shouldn’t be talking to China about whether China’s peg to the dollar creates the basis for a stable global monetary architecture …

82 Comments

  • Posted by Indian Investor

    Talking of protectionism, here’s an brief extract and link to an interesting FT article:

    “China’s biggest investment deal in Africa is faltering as western donors create pressure to renegotiate a minerals-for-infrastructure contract in the Democratic Republic of Congo valued at $9bn (€6.9bn, £6bn).

    Under the deal, a consortium of state-owned Chinese companies agreed to build roads, railways, hospitals and universities in return for the right to develop a copper and cobalt mine.”

    http://www.ft.com/cms/s/0/f4d34d3a-f6d9-11dd-8a1f-0000779fd2ac.html

  • Posted by Twofish

    Cedric: Savings accounts and CDs are exempted from the reserve requirement, presumably because they are time deposits. I found these facts in Wiki somewhere.

    You are talking about reserve requirement that the Fed requires, but there are additional reserve requirements that bank regulators require to cover non-performing loans and market fluctuations in loan value above the requirements that the Fed has.

    Cedric: Banks are are allowed to hold CDOs as their reserve requirement, per the FDIC articles I read.

    Which turns out to be an utterly stupid idea, and part of the reason we got into this mess. This was really hit German banks hard. Most American banks got hit less hard by this because US regulators on this issue tended to be more conservative than German ones.

    However, just because the government allows you to shoot yourself in the head, doesn’t mean that you should.

    Cedric: So with some judicial use of bond ladders, starting with 3 month t-bills, and probably not going too far into the future since that doesn’t pay right now, we could get far more short term liquidity(you can sell t-bills without a significant loss almost always) and keep maturity mis-match within acceptable tolerance.

    You have to be careful about the term “acceptable tolerance.” If you make a mistake then your bank collapses. If enough banks make the same mistake, then the banking system collapses.

    The other problem with all of this is that don’t provide much value added. Someone that wants to write checks against T-bills can get an mutual fund account.

    Cedric: We don’t need stockholders. A capital structure of depositors is enough.

    That’s what Citibank thought in the early 1980’s. The trouble is that if something unexpected bad happens and you have no equity shareholders to absorb some of the loss, your depositors get hit, and that is bad. And something unexpected bad will happen.

    Cedric: Then there still is the lending biz, broker-dealers, and M&A wheeler dealers. We can have lots of small enough to fail companies fill that niche. Stockholders for them too.

    Small enough to fail doesn’t always save you. Witness the Savings and Loan crisis of the 1980’s. Also there are regulatory issues to worry about. It takes fewer regulators to manage a small number of large companies than to manage a large number of small companies. You can argue (correctly) that small numbers of large companies may have too much influence on the regulators, but you see similar things with large numbers of small companies.

  • Posted by Indian Investor

    Brad: There consequently is an argument for giving China a bit of time to adjust to the recent real appreciation of the RMB before pressing for more appreciation against the dollar.

    Me: I have a question. If the RMB appreciates a lot, does it have the potential to become an alternative to the USD as a forex reserve currency? Given that China has better Govt. finances, won’t this make China get much farther ahead of the US in terms of geopolitical influence?

  • Posted by Cedric Regula

    2fish:”The other problem with all of this is that don’t provide much value added. Someone that wants to write checks against T-bills can get an mutual fund account.”

    That’s why I do it that way. I was just trying to come up with a way to keep everyone else from being terrified of banks blowing away their checking accounts.

  • Posted by Cedric Regula

    indian:Me: I have a question. If the RMB appreciates a lot, does it have the potential to become an alternative to the USD as a forex reserve currency? Given that China has better Govt. finances, won’t this make China get much farther ahead of the US in terms of geopolitical influence?

    I can even answer that one.If you are a reserve currency, you lose control over it. China would have to want to give up the ability to peg, not only against the dollar, but the euro and yen too.

    Being a reserve currency is generally not good for manufacturers.

    Milton Friedman pointed out that a CB can manage the domestic economy thru interest rate policy, or the external value of the dollar, but not both at the same time.

    So this is why foreign countries get mad at us when the Fed raises rates in response to a overheated US economy. The buck goes up, dollars loans get expensive.

    But on another off topic subject, quarterly refunding starts tomorrow. 67B of treasuries for sale this week.

    Here’s the market pre-game report.
    http://www.guardian.co.uk/business/feedarticle/8349693

  • Posted by Twofish

    Cedric: That’s why I do it that way. I was just trying to come up with a way to keep everyone else from being terrified of banks blowing away their checking accounts.

    But then you have to ask the question of how your mutual fund company converts its T-bills into cash and back, and where does it keeps its money….

    The attitude I’m hearing a lot is I don’t have to worry about the power grid going out because I’ve got this 1000 Watt lamp that will keep me in daylight. So if the power goes out, all I have to do is to plug my light into a wall socket, and I don’t have to worry about a thing……

  • Posted by Twofish

    Investor: If the RMB appreciates a lot, does it have the potential to become an alternative to the USD as a forex reserve currency?

    It’s very unlikely in the next 20 years or so that China will be able or willing to make the RMB a reserve currency. Being a reserve currency means that you lose far more control that I think the government is willing to relinquish right now.

    Investor: Given that China has better Govt. finances.

    I don’t think that China does have better government finances than the United States. The taxation and public finance system is a mess. Better than it was a decade ago, but still a mess. Also, China has this huge unfunded pension and social security problem, that is going to get much more severe over the coming decades.

    Investor: Won’t this make China get much farther ahead of the US in terms of geopolitical influence?

    No. People are making the Japanese, Russian, Southeast Asian mistake. When you have a country in China’s current phase of development, you get extremely rapid growth, and people assume that the nation has found a new magic economic formula when all they are doing is generating growth by pouring concrete.

    It is real growth, but eventually it *will* stall. Over the next few decades, Chinese growth is going to rapidly decrease, and at what level it does stall at will determine the relative influence of China and the United States in the late 21st century.

    That’s something for my kids and grandkids to worry about.

    Also one thing I do find interesting is that in Chinese discussions of economics most of the discussion isn’t about the next year. There are crises, but it is assumed that China will muddle through them. The focus of the discussion is what happens in ten to thirty years.

  • Posted by Cedric Regula

    2fish:”But then you have to ask the question of how your mutual fund company converts its T-bills into cash and back, and where does it keeps its money….”

    I worry about that too, but not as much as I would if I opened up a checking account at Goldman Saks, now that they turned themselves into a “commercial” bank.

    So my good bank idea would be better yet. It puts a firewall between the power grid tentacles the banks have grown everywhere, and provides the closest thing to zero risk/zero return we could hope for.

  • Posted by Cedric Regula

    2fish:”Small enough to fail doesn’t always save you. Witness the Savings and Loan crisis of the 1980’s. Also there are regulatory issues to worry about. It takes fewer regulators to manage a small number of large companies than to manage a large number of small companies. You can argue (correctly) that small numbers of large companies may have too much influence on the regulators, but you see similar things with large numbers of small companies.”

    The other problem with this one is that now that banks have all interlinked themselves together with insuring each others default risk and interest rate risk is that effectively they are all one big bank now.

    So if either the market or Bernanke touches the interest rate lever, whats left of the system goes KABOOM !

    Bet that thought crossed Ben’s mind and may be part of the reason he he’s willing to buy long term treasuries to try and keep rates down.

  • Posted by don

    Brad –
    A really excellent post. Mankiw is turning into a bit of a kook, despite his considerable intellect and economic knowledge.

  • Posted by Ying

    Albion:

    “The private sector is meeting with the fate of financial strategies as opposed to industrial strategy.”

    I always enjoyed your insightful comments. Could you explain a little bit more about what you meant for the above sentence?

    I guess that the private sector has been successful in lowing cost (especially wages) by relocating production overseas. But they haven’t spend lots of resources on improving quality of products, research and development?

    I guess that US stimulus money won’t go into multinational firms. In the face of exchange rate adjustment pressure, what is the fate of multinational companies in the future? Will they scale back to home countries or find even cheaper places to reduce cost?

    thank you

  • Posted by Indian Investor

    In 2008, the Wall Street Bull passed away; and it was embalmed, mummified and buried under reams of the current account imbalance propaganda. Thus was the custom of the ancient Egyptian bull cults.
    After the good bank, bad bank, ‘ugly bailout’ debates are through, The Sacred Wall Street Bull will be re-inaugurated in a new Avatar. Dr.Roubini will hopefully take an Istan-bull vacation.
    A Framingham biotech company has just won FDA approval to extract A Tryn, an anti-clotting drug from genetically modified goats.This could clear the way for more “pharming” (producing drugs with genetically modified animals), even as the Industrial Production Paganism postulates more “farming” as a good industry for the United States.

  • Posted by Howard Richman

    Mankiw is saying exactly the opposite of what Keynes wrote during World War II when he tried to set up global institutions that would keep trade in balance.

    Keynes advocated that trade surplus countries be required to stimulate their economies and that trade deficit countries engage be permitted to engage in protectionist measures. He realized that balanced trade would be necessary for sustained globalization.

    Mankiw advocates that a trade surplus country (China) engage in import restriction and export subsidies, while a trade deficit country (U.S.) stimulates the world economy. He doesn’t yet understand that trade imbalances caused this great recession because the trade deficit country consumers could no longer increased amounts without increased income.

    Check out my blog entry from Saturday for some quotes on this subject from Volume 25 of Keynes collected works.

  • Posted by Albion

    One may wonder whether at this stage of the economic cycle, Keynes or Friedman therapies, theories are relevant ?
    Interest rates do not cure anymore they could have prevented, money supply in abnormal use has been more a deterrent than a help to the economies.
    Solvency is impaired by a lack of revenues and profits, consumption by decreasing and weak real incomes all of these in relation to prices. The rest is trivial good sense omitted by central banks and their partners.

  • Posted by Twofish

    Cedric: I worry about that too, but not as much as I would if I opened up a checking account at Goldman Sachs, now that they turned themselves into a “commercial” bank.

    If is FDIC insured then it’s backed by the same level as guarantee as your Treasury bonds. It’s been extended to all checking and savings accounts.

    Cedric: So my good bank idea would be better yet. It puts a firewall between the power grid tentacles the banks have grown everywhere, and provides the closest thing to zero risk/zero return we could hope for.

    No better than a FDIC insured checking account.

    Then you have a new problem. If the US government is the only one that any dares lend to that means that Lucy’s Ice Cream shop doesn’t get the bank loan to buy the new ice cream machine.

  • Posted by Albion

    Ying@
    This growth cycle was led through finance and not technological innovation or population growth. The mantra of these past years, was leverage the balance sheet, rig prices (book value as opposed to cash flows multiples).
    Central banks and public entities, my bonds against your oil, my bonds against your goods and now my bonds against your will.

  • Posted by Howard Richman

    Albion wrote: “One may wonder whether at this stage of the economic cycle, Keynes or Friedman therapies, theories are relevant?”

    It is necessary to differentiate between Keynes real theory and the comic-book-version practiced by economists who never even take the time to read Keynes.

    Keynes understood trade deficits. Check out the December report from the Keynesian economists at the Levy Economics Institute at Bard College?

  • Posted by bsetser

    Benign — focus on the difference between china’s exports and its imports, not just the fall in its exports. china’s trade surplus is going up not down.

    Gillies. I may be saying through darts at China (really its exchange rate regime), as i do believe that the massive purchases of us assets required to sustain that regime contributed to a host of problems in the us — and ultimately won’t be good for China.

    but please don’t tar the CFR with my personal views.

    indian investor — the rmb is not a potential reserve currency until it is freely convertible and other countries are able to hold rmb debt as a reserve asset. i.e. being a reserve currency means accepting inflows form countries wanting to hold your debt as a reserve asset …

  • Posted by Off the boil

    Brad – Repeatedly, why are you not addressing the US issuing loads of debt every other week ?

    Indian Investor has said the problem starts with US ISSUING DEBT.

    HAd it been controlled the whole implosion that is waiting to happen could have been avoided.

    Someday the auctions are going to fail and all hell break lose.

  • Posted by Cedric Regula

    2fish:”Then you have a new problem. If the US government is the only one that any dares lend to that means that Lucy’s Ice Cream shop doesn’t get the bank loan to buy the new ice cream machine.’

    I’m OK with that.

  • Posted by bsetser

    off the boil — i have addressed the issue. see my post arguing that china hasn’t been the main buyer of treasuries and my post arguing that the us placed $1.6 trillion of debt in the market in 08. i have argued that the stimulus necessarily will be financed far more by domestic than foreign investors, as the aggregate current account surplus (and thus their abiltiy to finance the us) is shrinking. and yes, i support the stimulus — as my previous post made clear.

    giving an answer that not everyone agrees with isn’t quite the same as ignoring an argument.

  • Posted by Glen Mikkelsen

    It is rather surreal seeing someone post frequently here with pretty much exactly the same name as mine. I seem to recall that posting style from before, and I hope I am not being hit by some impersonator (very sorry for offending you, Glen M., it this is not so).

    I find myself agreeing with Twofish’s first post a lot, but apart from currency not being a genuine concern right now in Washington or Beijing (other than for media purposes and politicking) the status of the dollar remains the elephant in the room.
    It is bizarre that it is currently appreciating again and the combination of present valuations, bond yields, the deficit and the economic outlook really should cause everyone to take a good long hard look at some of Trevor Manuel’s comments at Davos and Justin Liu’s very ‘professional’ remarks too. Its a house of cards having the global economy this tied to the dollar, and eventually we will all have to face up to that.

  • Posted by Indian Investor

    Brad: giving an answer that not everyone agrees with isn’t quite the same as ignoring an argument.

    Me: I’ve been repeatedly advising people that the current series of Treasury issuance will be successful, and that an effective US banking system will soon be created. However, the long term stability of the US Govt. is at risk due to unsustainably high levels of US Govt. Debt. The reason for a $10 trillion public debt of the US Govt. is its long compulsions of borrowing money from foreign governments to meet defence expenditures. Given the current levels of Govt. debt, continued policy of global military domination, continued control of relevant Govt. organs by the weapons conglomerates; The US Govt. is inexorably heading for a sovereign default, as simple arithmetic on the USG finances will show.

    I expect another big crisis to occur by around 2014 or so, and at that time the US dollar will truly have nowhere to hide. In the immediate future I expect a stock market rally and a general recovery of major economies.

  • Posted by DOR

    Greetings after a prolonged absence.

    .

    If we ever actually had a consensus that China’s renminbi is undervalued – as opposed to, say the US dollar being overvalued – then the entire annual exercise that Congress and the Treasury engage in might be of some interest.

    There wasn’t a consensus back 7-8 years ago when the first report was produced (the infamous 27% solution: average a bunch of numbers that contradict each other). And, even after a 20% rise in the exchange rate and cumulative 11% inflation (both since June 2005), this nonsense remains one of the key issues between the two countries.

    .

    Of course the US benefits from cheaper Chinese goods! Just ask anyone who shops at Wal-Mart, K-Mart, Target or other low-price stores out of necessity, rather than out of choice. Why in the world would any politician want to punish those consumers?

    Of course “some in the US are on the losing end of the ‘low-priced Chinese goods for high-priced US government bond’ trade. They are the people working for companies that haven’t upgraded their productivity in far too long. They are people who expect to get by on the same skill sets and the same education as they did 20 or 30 years ago. They are also, people seem to forget, about 3% of the US population . . .

    Of course China cannot subsidize US consumers forever, but do we really want this to be the centerpiece of Sino-US economic relations?

    Isn’t it time to move on?

    (And, forgive the analogy, but isn’t blaming China’s influence on US interest rates for the American consumption binge a lot like blaming screw top caps for alcoholism? Access, after all, does not necessitate over indulgence.)

  • Posted by Off the boil

    Indian Investor – why 2014 ? Why not a part of the recession period ? Surely 2010 appears to be a good bet.

    I dont think we can emerge from this recession unscathed.

  • Posted by Indian Investor

    @Off the boil: Fortunately my views on the US Govt. finances aren’t controversial at all and I’m just repeating what something called the accountability office has been repeatedly warning for quite some time.
    USG has a total debt of $10 trillion plus and the lowest estimate of this year’s deficit is “more than $1 trillion”, from Brad Setser. Other commentators are guessing anywhere from $2 trillion to $ 3 trillion.
    If the US Govt. is paying interest on its $10 trillion debt, that interest is being paid out of more borrowings, rather than from its own surplus.
    The US latest annual trade deficit with China is close to $20 billion. Even if you assume trade deficits with China have been at the same level for the last 8 years, you’re only accounting for a max of $ 160 b in USG Govt. debt, with an assumption that each dollar of China trade deficit leads to a dollar of USG debt.
    Where’s $160 billion over EIGHT years and where’s a TOTAL USG debt of more than $ 10,000 billion?
    In this analysis we’re ignoring the estimates that very soon trillions in medicare and social security are going to fall due in the next few years, so the USG deficits are likely to widen further rather than soften.
    Despite these terrible looking numbers I don’t expect the USG to default in the immediate future. To paraphrase Dr. Roubini, let me now explain in detail why.

  • Posted by Indian Investor

    Sorry small correction: China has a trade surplus of around $200 billion and around 40% of its exports are to the US. So the latest US trade deficit with China is likely closer to $ 80 billion, and not $ 20 billion as I mentioned above. The trade deficit with China accounts for something like 45% of the overall US trade deficit.
    Even with this correction, it’s easy to see that the level of total USG debt can’t be explained by China imports, or imports overall, over the last 8 years.

  • Posted by Indian Investor

    Why at least 2014?
    As of now the US dollar has a “unique role in international trade” and thereby offers “an exorbitant previlege” to the US Govt. to run “painless deficits”. (These are official terminologies so there’s nothing controversial in using them.)
    The dollar’s unique role is that most of the international trade amongst third-party nations is settled in USD. Of this, the most compelling is the trade in crude oil, a commodity that most countries import.
    Till recently around 63% of foreign central bank reserves were held in USD. Combined these together, and you get a realistic explanation for why the USD is overvalued more than 1000% in most exchange rates.
    This situation never came about as a result of “mercantilism”.
    This is more a result of US foreign policy objectives since the 1970s, starting with Middle-East military agreements, and the exercise of other geopolitical influence to make sure that the surplus of oil-exporting nations can be accumulated in USD and recycled.
    The USG will stop receiving foreign funding only when foreign central banks shift away from the USD for their reserves. That requires a shift away from trade settlement in USD. This process requires a widespread perception and understanding that the US geopolitical influence is at an end. That influence is derived from the US military.
    Unless the US military loses its ability to dominate the world, there will be no complete drain on foreign funding for the USG.
    Secure in this knowledge, advantages can be gained by asking China to strengthen its RMB, so that the Chinese economy can suffer a further pandemonium, and just as in the case of Argentina in 2001-2002, larger chunks of the local equity market can be purchased by foreign investors at 10 cents on the dollar.

  • Posted by Indian Investor

    Why at least 2014?
    I’ve mentioned this in other deleted comments, but: Since 2008: German foreign minister Steinbruck said in media interviews that he prefers a combination of USD, EUR, JPY and RMB as forex reserves rather than predominantly USD. GBP was conspicuously absent in his list. At Davos, Russia’ Putin warned against excessive reliance on one reserve currency. Iran’s Ahmedinijad made self congratulatory speeches in which he claimed that his decision to replace the USD with EUR in Iran’s reserves was both politically and economically advantageous. Even French President Sarkozy expressed misgivings about the USD prior to the 1st G-20 crisis summit.
    The update is that Russia seems to be rapidly exchanging USD from its reserves for trade & political advantages, a move that Dr. Roubini predicted in his writing with the topic something like “Decline of the American Empire” in late 2008 which is there on his web site.
    Last week, Russia made out a $350 million loan to Cuba in exchange for information and drilling rights in the Cuban part of the Gulf of Mexico. At a summit of the newly rejuventated CSTO (Collective Security Treaty Organization), Dmitry Medvedev offered a full $2.15 billion to Krygystan, $ 2 billion in loans and the rest in aid.
    Now I have given you the direction in which you need to reason to know when the USG may at all be forced to default. You have to know the geopolitics from Darfur to Afghanistan, and it’s no joke. My guess is that it will take at least a few more years for the ROW to come to any drastic conclusions about the “value of the US dollar”.

  • Posted by cdr

    With regard to bonds and the will, why then don’t Europeans just sell the complete collection of their Treasuries and refrain from any further flow in this direction ’cause we are all getting fed up here with US and EU »talking« through BoE, Ponzi, China and both types of commodities (WoT inclusive).

  • Posted by cdr

    and stop the stupid Ponzi prolonging swap

  • Posted by bsetser

    Indian investor — china’s current account surplus is now arond $400b, and its reserve growth is over that b/c f net capital inflows. I published estimates of China’s holdings of US assets/ past purchases grounded in the bop data and the TIC that you clearly didn’t read. Please don’t post inaccurate data.

    DOR — I strongly disagree. There was a consensus that the RMB was undervalued in 06 and 07. The IMF’s analysis consistently reached that conclusion. China’s huge current account surplus amid an investment boom also supports that conclusion. As does China’s reserves growth.

    that consensus isn’t as solid now for a simple reason — the dollar’s rally finally pushed the RMB up in real terms. the 20% nominal appreciation of the rmb over that time never matched the dollar’s depreciation. Your analysis left out a key fact, namely what the dollar is doing v other currencies.

    and the notion that the only reason the us cannot compete with China is because the us hasn’t upgraded its skills is false. furniture production rather clearly moved to china because of the undervalued exchange rate — once wages and transportation costs rose, there were economic incentives to move production back to the US (the raw material inputs are found in n. america, not china … ). Moreover, china is upgrading its skills — as it should. the basic reality is that so long as China maintains an exchange rate that generates a 10% of GDP current account surplus, other countries will be producing fewer tradable goods and shifting the composition of output away from the tradables sector to make space of the excess tradables production generated by china’s undervalued exchange rate. the composition of output globally and in the US changes. I don’t usually agree with Lawrence Lindsey but he got this absolutely right.

    I’ll do a post on the real value of the RMB soon.

    incidentally, the dollar is overvalued — and it can only be overvalued if some other currencies are undervalued. and if china pegs to the dollar and the dollar resumes its slide, the net result is an undervalued rmb. that is the core problem. the us currency and china’s currency should be moving — based on their respective external positions — in different directions.

  • Posted by Glen M

    Glen Mikkelsen,

    No intended impersonation. The similarities in name end at Glen M.

  • Posted by Kaushal

    Hey, I am really benefitted by you Guys. Thank you all.

  • Posted by don

    Brad, In your answer to DOR, reserve accumulation automatically means an undervalued currency. China is doing no service to an aggregated-demand-challenged world by forcing domestic saving, which is exactly what its currency interventions are doing. Time to start strongly discouraging this policy.