Brad Setser

Brad Setser: Follow the Money

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Creditors generally do like to lend in their own currency …

by Brad Setser
March 31, 2009

China may not be an exception after all.

A creditor than lends in its own currency doesn’t have to worry all that much about the risk that it its lending is denominated in a currency that will depreciate. The borrower assumes the risk its currency will depreciate against the currency of its creditor as a condition for getting financing.

That is good for the creditor, and not so good for the borrower.

Back its days as a large creditor, the US (both the US government and private US creditors) generally lent in dollars. That meant that if a Latin currency depreciated against the dollar, the borrower had to find the dollars it needed to repay the US – or default and accept the consequences. Latin countries couldn’t allow their currencies to fall against the dollar and, in the process, reduce the real value of their foreign debts.

China is now a major creditor. But its foreign assets though are denominated in dollars, euros and yen – not RMB. That means that if the dollar depreciates against the RMB, it is China’s problem, not the United States’ problem. The amount of dollars the US has to pay China doesn’t change. But the amount of RMB that China gets for each dollar will fall

China’s willingness to take on this risk in some sense part was a core part of the Bretton Woods 2 system where reserve growth in emerging countries like China financed the United States external deficit. Had the United States external debt not been denominated in dollars, Dr. Roubini and I would have been even more worried by the size of the United States external debt than we were back in 2004. If United States debt structure hadn’t been as favorable, the dollar’s slide from 2002 on would have generated much, much larger problems.

China seems to have woken up, belatedly, to the fact that lending to the United States – or any other country – in its borrowers currency is risky. It probably should have started to worry some time ago, before it had $1.6 trillion or so of dollar-denominated claims. As the FT noted in a recent leader, “The People’s Republic has, however, over-exposed itself to the US, piling up dollar-denominated securities.” China is currently struggling with a problem that is very much of its own making.

China could, in theory, address this problem by ending its accumulation of dollar and euro and yen denominated reserves and instead making RMB denominated loans to the rest of the world.

Internationalizing the RMB poses two problems though.

First, most debtors, including the US, currently do not issue any RMB denominated debt – and I would strongly argue that they shouldn’t start. The countries able to borrow in their own currency at low rates should do so. And countries that have to pay more to borrow to borrow in their own currency also should generally do so, to avoid dangerous currency mismatches. Brazil has benefited immensely in the recent crisis from the fact that most of its debt is now denominated in real.

Second, expanding the “international use” of the RMB is rather hard when China doesn’t want foreign investors to hold RMB denominated assets. If say Argentina had RMB denominated debts, it also might want to hold some RMB denominated reserves as well.

And that would mean allowing foreigners to buy some of the RMB debt that China’s government issues and to hold it as part of there reserves.

That is the rub. Remember, buying RMB debt is also a way of speculating on the RMB.

If China made the RMB fully convertible, anyone could buy long-term RMB denominated debt and benefit if the RMB rose over time. That isn’t something China that has wanted. Remember all the complaints about speculative capital inflows a year ago?

Still, China’s willingness to provide RMB credit to Argentina suggests that China is beginning to recalibrate its definition of its interests.

It is further evidence that China is defining its interest as a creditor – not just as an exporter willing to accept losses on the “vendor financing” it supplies on subsidized terms to those it hopes to encourage to buy its goods.

I was surprised by how conservative China was in the immediate aftermath of the crisis.

It seemed to be concerned almost exclusively with the need to minimize the credit risk in its reserve portfolio. That meant turning down requests from countries like Pakistan for bilateral financing – as well as selling Agencies and buying Treasuries. Now it seems that China has concluded that it has reduced the credit risk in its reserve portfolio to an acceptable level and is turning its eye toward reducing its currency risk.

That though may be a tougher nut to crack.

Perhaps the state council was spooked by a memo the PBoC sent up the food chain laying out all of the risks that remained in China’s portfolio. If the rumors that China’s leaders were surprised to discover the extent of their exposure to Fanny and Freddie are true, the PBoC has every incentive now to make sure that China’s top leaders aren’t surprised by any future currency losses on China’s reserves.

But the state council has also historically been response to the concerns of China’s exporters – and the core tension between China’s interest as an exporter and its interest as a creditor remains.

Moreover, I am not exactly sure it would be a good thing for China to replace a lot of dollar lending to the world with a lot of RMB lending to the world. China would take on less currency risk to be sure, but all the problems created by China’s large surplus would remain. Actually, they would get worse — as more risk would be in the hands of the world’s big borrowers.

The FT leader again: “[China] must not just replace its mountain of dollar assets with heaps of other currencies.” Exactly right.

28 Comments

  • Posted by craig

    This is probably a stupid question, but since I do not know enough to be sure …

    Is there a way China can borrow dollars to buy stuff. If they could borrow dollars in the same amount as a desired reduction in dollar reserves, and if they spend the borrowed dollars on externally sourced commodities, manufacturing resources, or foreign acquisitions, they lock in the RMB value of the purchases. In the short term they can still lend to the US. As a matter of fact, tying up dollar reserves in treasuries of some duration could be a good excuse to borrow dollars instead of drawing down reserves. It could work something like this. China buys some medium term treasuries. It then borrows the same amount ( may be over time ) with notes of the same duration as the balancing treasuries purchase. This increases the demand for dollars. They spend the money on external assets. This reduces the demand for dollars. Net short term effect on currency rates should be neutral. The previous external assets are now valued in RMB and the Dollar reserves are hedged against currency risk. The cost of the hedge is the cost of the loan, but it is now a known cost.

  • Posted by Daniel

    Hi all,

    I have bet for a while that the international money markets – aka security markets – will enter glaciation mode within a couple of years.

    Lending massive amounts of money to foreign debtors – even sovereign ones – make no sense. There is no “security” (protection against danger, loss, and criminals …) on the international “security” market.

    What are the chances to get your money back AS A FOREIGN DEBTOR on these markets when :
    - currencies are handled the way they currently are,
    - law is applied the way it currently is,

    By the way, credit applies to investments, and money-making ones. Not speculative ones. What money-making investments are we talking about?

    May I invite people to rethink about international security payment in view of what happened during the thirties.

    A disillusioned witness of the 1929-1932 events, Garett Fitzerald, wrote in “A bubble that broke the world”. (http://www.mises.org/books/bubbleworld.pdf) on bond mania. A superb read by the way.

    “The Lord giveth increase, but man devised credit.

    Mass delusions are not rare. They salt the human story. The hallucinatory types are well known; so also is the sudden variation called mania, generally localized, like the tulip mania in Holland many years ago or the common-stock mania of a recent time in Wall Street. But a delusion affecting the mentality of the entire world at one time was hitherto unknown. All our experience with it is original.

    This is a delusion about credit. And whereas from the nature of credit it is to be expected that a certain line will divide the view between creditor and debtor, the irrational fact in this case is that for more than ten years debtors and creditors together have pursued the same deceptions.
    In many ways, as will appear, the folly of the lender has exceeded the extravagance of the borrower.”

    The current securitisation bubble certainly has a lot in common with the 1920s bond mania.

    Do not be fooled, China is in the boots of the US of 1929 not the US that moved the UK seat in some way.

    China is the one super-power delivering on the faith of credit. And disillusioned on international credit it will be. May I quote Garett again. I invite you to read it with to-day perspective where most hard working producers and creditors are certainly not in
    the US:

    “Obsessed with the thought of having a surplus of goods and a surplus of credit that we were obliged to lend, only to be rid of them, still there was no surplus in this country of good housing for people of low income in the cities. There was and is enormous need for such housing.

    The credit with which to meet it is difficult to command. Yet American credit was loaned freely to other countries for that purpose, notably to Germany. Capital borrowed on public credit to replace slum dwellings with model tenements may not be very profitable. It seldom is. But if we use our own capital for that purpose, even though it be lost, still we have the model tenements. If we build pyramids with our own credit at least we have the pyramids to enjoy; if we use our credit for works of
    private profit that turn out badly, the creditors who loaned the credit may send the sheriff to sell the property into new hands for what it will bring, and although we have wasted some credit, we have the externalized corporality of it entire.

    But if we lend our credit to foreign countries and they build pyramids with it, we have to spend money in foreign travel even to look at them; and if we lend our credit for skyscrapers and railroads and power plants to be built in foreign countries and these turn out badly we cannot send the sheriff to seize them. Where is the State of Minas Geraes ? You would not be expected to know. We loaned sixteen millions of American credit to the State of Minas Geraes, and all we know about it is that the bonds of Minas Geraes are in default. If Amarillo, Texas, had lost sixteen millions of American credit we should at least know where to go to look for it.”

  • Posted by DJC

    The US, encouraged by the likes of President Barack Obama’s advisor Larry Summers, has for decades mismanaged its finances by exploiting the hegemonic character of the dollar in international trade. Beijing, for one, needs to forge an economic strategy independent of Washington’s.

    US Dollar Hegemony needs to be eliminated for the benefit of the rest of the world’s population.

    http://www.atimes.com/atimes/China_Business/KD01Cb01.html

  • Posted by DJC

    Economic Meltdown: US Dollar Hegemony Finances America’s Global Military

    Strange as it may seem and irrational as it would be in a more logical system of world diplomacy the “US Dollar hegemony” is what finances America’s global military build-up. It forces foreign central banks to bear the costs of America’s expanding military empire effective “taxation without representation.” Keeping international reserves in “dollars” means recycling their dollar inflows to buy U.S. Treasury bills U.S. government debt issued largely to finance the military.

    To date, countries have been as powerless to defend themselves against the fact that this compulsory financing of U.S. military spending is built into the global financial system. Neoliberal economists applaud this as “equilibrium,” as if it is part of economic nature and “free markets” rather than bare-knuckle diplomacy wielded with increasing aggressiveness by U.S. officials. The mass media chime in, pretending that recycling the dollar glut to finance U.S. military spending is “showing their faith in U.S. economic strength” by sending “their” dollars here to “invest.” It is as if a choice is involved, not financial and diplomatic compulsion to choose merely between “Yes” (from China, reluctantly), “Yes, please” (from Japan and the European Union) and “Yes, thank you” (Britain, Georgia and Australia).

    It is not “foreign faith in the U.S. economy” that leads foreigners to “put their money here.” This is a silly anthropomorphic picture of a more sinister dynamic. The “foreigners” in question are not consumers buying U.S. exports, nor are they private-sector “investors” buying U.S. stocks and bonds. The largest and most important foreign entities putting “their money” here are central banks, and it is not “their money” at all. They are sending back the dollars that foreign exporters and other recipients turn over to their central banks for domestic currency.

    When the U.S. payments deficit pumps dollars into foreign economies, these banks are being given little option except to buy U.S. Treasury bills and bonds which the Treasury spends on financing an enormous, hostile military build-up to encircle the major dollar-recyclers China, Japan and Arab OPEC oil producers. Yet these governments are forced to recycle dollar inflows in a way that funds U.S. military policies in which they have no say in formulating, and which threaten them more and more belligerently. That is why China and Russia took the lead in forming the Shanghai Cooperation Organization (SCO) a few years ago.

    http://www.globalresearch.ca/index.php?context=va&aid=12944

  • Posted by Rajesh

    This is generally a good sign that China is beginning to consider other policy options. But if they are swapping Yuan for Argentine Peso, there is a good chance of losing the entire value of the loan. The current government has already defaulted once on international loans and is in danger of having the economy spin out of control.

    The advantage of keeping reserves in U.S. dollars is there is only one creditor to watch. If you start making loans in the sub-prime neighborhood, you need to check the credit history of the people you lend to, skills I do not think China has developed yet.

  • Posted by charlie

    China doesn’t have a problem with holding over a trillion dollars of USD denominated debt. Why do they care if they take a monetary loss in RMB? They can freely print as much RMB as they want.

    The whole game is silly. China prints RMB and exchanges it for USD. They then loan the USD back to the US. The US can print as much USD as they want to pay them back plus interest. Basically both sides are just trading pieces of paper (Not even that really. They just change some 1′s and 0′s in databases).

    The whole time China protests what the US is doing when they’re doing the same thing. Japan is in on the action too.

    China, like the US and Japan, has now reached a point where they can do whatever they want economically and as long as they have goods the rest of the world wants, their currency will be accepted.

    The US was the first to figure this out and the gov’t decided it’s better to print dollars than to try to get the populace to give some the dollars back via taxes. Japan figured this out starting in the late 80′s/early 90′s. China will soon realize this too. You don’t hear Japan complaining about the US printing money. They realize it doesn’t matter. What matters is your having an economy that produces things that are in demand.

    I kind of agree with DJC in that at some point this silliness will have to come to an end and people will have to trade goods for goods instead of swapping computer digits.

  • Posted by Twofish

    There are two different issues here. All of the currency deals that I’m aware have been currency swaps intended to allow trade settlement to occur without being intermediated through dollars.

    This is quite different from having nations hold RMB in their capital accounts.

  • Posted by Twofish

    charlie: I kind of agree with DJC in that at some point this silliness will have to come to an end and people will have to trade goods for goods instead of swapping computer digits.

    Why? As manufacturing costs drop and technology improves, economies become increasingly service and information based.

    If I’m a country, I don’t want you to give me laptops or washing machines. I want you to give me information (i.e. computer digits) so that I can build my own laptops or washing machines.

  • Posted by DJC.

    The US has repeatedly mismanaged its finances for decades by exploiting the hegemonic character of the fiat dollar as a global reserve currency for international trade. US unemployment rate is set by US monetary policy, not by China. Neo-liberalism economic and trade policies have transferred wealth from US workers to Wall Street, not to China, only via China.

    China Needs an Independent Economic Strategy

    As for China, following the US model of economic growth through unregulated market fundamentalism will create the same income disparity and social inequality that US political culture concedes as natural and US ideology accepts as structural in a market economy, but such blatant inequality would cause widespread sociopolitical discontent and instability for a socialist political culture that forms the ideological foundation of modern China.

    Worse yet, the efficiency that supporters of free market fundamentalism claim as inherent in the market system turned out to be a mirage of a castle in the sky build by debt. It is a house of cards held together by systemic fraud. Wealth in market fundamentalism had not been created by honest work in recent decades, but by systemic manipulation of credit to turn risks into safety and debt into assets. From the central bank down to the average home owner, every participant in the market economy was abusing the false effect of unearned wealth as the miracle of finance capitalism. Many are now realizing that the Federal Reserve has been the biggest Ponzi scheme operator, not Bernie Madoff.

    The fantasy mirage of debt capitalism has been brought back to earth fundamentally by the current unprecedented financial crisis to show that the US neoliberal model of miracle growth and debt prosperity via free markets is unsustainable. As predatory dollar hegemony turns international trade into a process of spreading dollar denominate debt around the world that ends in sudden bankruptcy and prolonged depression.

    http://henryckliu.com/page184.html

  • Posted by Twofish

    The US has been mismanaging its economy for only about a decade, and I think people that look at the current economy crisis as the end of US power are in for a major shock. The US will bounce back from this crisis stronger than ever.

  • Posted by jonathan

    “Future currency losses on China’s reserves”

    Have you read Dick Cavett’s NYT blog about Slydini, the great sleight-of-hand magician? There’s video too. They could use Slydini. So could we. I wonder if we could work together to make the coins travel magically through the table.

  • Posted by q

    > The US has been mismanaging its economy for only about a decade, and I think people that look at the current economy crisis as the end of US power are in for a major shock. The US will bounce back from this crisis stronger than ever.

    what puzzles me is that — given the international demand for dollars — US investors are not demanding ownership / equity in foreign economies in return for dollars.

  • Posted by fatbrick

    Seriously, Brad you ignored that China lending to Argentina is a move to reduce trade surplus and increase external demand to the world. Just ask this question: How is Argentina going to repay the debts in RMB to China? It ultimately needs to export to China and get RMB in order to make the payment. So China increases import from Argentina and provides demand for another EM country. You are complaining about imbalance for so long time. What is your objection to this move again?

  • Posted by joe

    Brad, I apologize for being off topic, but I’m very interested in your reaction to this article that accuses Geithner of completely mishandling the Asian crisis in 97/98, setting the stage for the much larger imbalances that emerged this decade:

    “In a speech to a closed gathering at the Lowy Institute in Sydney on Thursday, Paul Keating gave a starkly different account of Geithner’s record in handling the Asian crisis: “Tim Geithner was the Treasury line officer who wrote the IMF [International Monetary Fund] program for Indonesia in 1997-98, which was to apply current account solutions to a capital account crisis.”

    In other words, Geithner fundamentally misdiagnosed the problem. And his misdiagnosis led to a dreadfully wrong prescription.”

    I’m particularly interested in whether you agree that Geithner misdiagnosed a capital account problem as a current account problem.

    http://www.smh.com.au/opinion/obamas-economic-saviour-savaged-as-keating-lets-rip-20090306-8rk7.html?page=-1

  • Posted by Glen M

    The loss on China’s currency reserves has already happened. It happened the moment that under-priced Chinese goods were exchanged for overpriced US dollars. What hasn’t happened is a mark to market to realise the loss.

    BTW the common sentiment that China loaned the US all this money is misleading. The US never asked China, or Japan before them, to loan it anything. China willing bought these assets, unsolicited. The US simply took advantage of it.

  • Posted by newyorker

    Terrific article. This really explains why China wants SDRs -> they get to hedge currency risk without allowing full convertability of the Yuan.

  • Posted by CJ

    Very interesting. In some ways, though, it seems to me that way debt is denominated changes the means of default more than its likelihood. If the US borrows too much in dollars, it can default by devaluing the currency. If it borrows too much in RMB, it can default by not paying the debts.

    Maybe the USD devaluation is less explicit, and maybe changing to a RMB denomination would increase the risk of a panic, but ultimately it seems that China’s only protection is making wise decisions on how much to lend. Just as with homeowners, you can layer a bunch of complex calculations on top of a debt, but ultimately the question is whether the debtor has both the capacity and willingness to pay you back. I am somewhat skeptical the US really intends to pay back this money at face value.

  • Posted by fatbrick

    CJ, currently I am not too worried about the default risks of Argentina. Yes, I know Argentina defaulted its USD debt several times. But unlike U.S., China can always ask Argentina to pay back with goods, such as agricultural products and raw materials. Unlike U.S., itself a big agricultural exporter, China needs a back up line of food supply just in case. This deal is a cheap way to lock resources as I see.

  • Posted by gillies

    twofish : ” As manufacturing costs drop and technology improves, economies become increasingly service and information based.”

    no. that is an illusion. economies are based upon soil, water, agriculture, horticulture, mining and basic industries. the service and information sector may become disproportionately large, but that only makes them top heavy – it does not invert the pyramid. a town with 99 estate agents (realtors) and 3 bricklayers is in trouble.

    if you produce nothing but services and information – you have become the upper floors of somebody else’s pyramid.

  • Posted by Ying

    “China is currently struggling with a problem that is very much of its own making.”

    It is a lame claim. It echoes very much the claim of US media that it’s creditor’s problem and they chose to put all eggs in one basket. Brad failed to address the underlying global industry structure and financial structure that leads to such consequence.

  • Posted by Twofish

    gilles: no. that is an illusion. economies are based upon soil, water, agriculture,
    horticulture, mining and basic industries.

    Which employ about 5% of the population and are extremely information dependent. Agriculture, horiculture, mining, and basic industries are all based on information, where and what to plant and mine and how to plant and mine.

    gilles: It does not invert the pyramid. a town with 99 estate agents (realtors) and 3 bricklayers is in trouble.

    The world that I hope to leave to my grandkids has 95 artists and philosophers, five people to maintain the robots, and robots and machines doing all the heavy work.

    We live in a world in which there are 30 people for each farmer and no one is starving. As you improve technology, there is less and less need for factory line workers.

  • Posted by Twofish

    joe: Brad, I apologize for being off topic, but I’m very interested in your reaction to this article that accuses Geithner of completely mishandling the Asian crisis in 97/98, setting the stage for the much larger imbalances that emerged this decade.

    Personally I think that Geithner *did* rather badly mishandle the 97/98 and most of the criticisms that the article makes are perfectly valid. That’s why I’m quite happy that for the most part Geithner is doing completely the opposite for the United States the policies that were undertaken for Indonesia. Big deficits? Flood the banks with capital? Sure thing. Just about every single thing that was done for an emerging market financial crisis, Geithner is doing the total opposite now.

    People aren’t perfect. If you look for saints and saviors in this game, you are just setting yourself up for disaster. What you want is someone that has made mistakes (i.e. is human) but has learned from them. Given that the Geithner plan is basically 180 degrees from what the IMF proposed for Indonesia, I think this is what has happened.

  • Posted by Dennis Redmond

    Twofish wrote:

    The US has been mismanaging its economy for only about a decade, and I think people that look at the current economy crisis as the end of US power are in for a major shock. The US will bounce back from this crisis stronger than ever.

    Unfortunately, we’re facing the crisis of an entire economic model, not a one-time speed bump.

    The rot began with Reaganomics — after 1980, the US began to raze its industrial base, smash its unions, slash real wages, immiserate its middle class, throw money at the rich, and waste taxpayer funds on a corrupt military-industrial complex. What kept the consumption machine going: gargantuan current account deficits (yesterday from Japan, today from China) and a vast credit bubble (yesterday S & Ls, today housing). Our problems today are the result of thirty-five years of market fundamentalism — exacerbated by the extreme malice and stupidity of the Bush crowd, to be sure, but hardly created by such.

    The US can still rebound, but it’s going to take a fundamental shift away from market fundamentalism and Cold War megalomania, and towards social democracy and multipolar diplomacy. That’s why it’s so important to negotiate with China, Russia and other creditor nations as equals. We urgently need negotiated solutions to the imbalances of the world economy. Hopefully the G-20 is working on this overtime…

  • Posted by Judy Yeo

    My guess is they’ll take a slow approach, maybe even selective approach. Those they think would most likely pose problems would have their debt denominated in rmb and those who cannot mess up due to political and other concerns will probably continue to see their debt denominated in the borrower’s currency. Curiously though, could this be the indirect way of weighing up that basket of currencies that China has always stated (at least theoretically) it wanted its currency to be measured against in the long term. Full exchangeability of the rmb with the risk of speculators is hardly what China wants to face either now or in the near future.

  • Posted by Twofish

    DJC: When the U.S. payments deficit pumps dollars into foreign economies, these banks are being given little option except to buy U.S. Treasury bills and bonds which the Treasury spends on financing an enormous, hostile military build-up to encircle the major dollar-recyclers China, Japan and Arab OPEC oil producers. Yet these governments are forced to recycle dollar inflows in a way that funds U.S. military policies in which they have no say in formulating, and which threaten them more and more belligerently.

    It’s hardly true that anyone is forced to buy US debt, and it’s even less true that the China, Saudi Arabia, or Japan find a powerful US military fundamentally objectionable, and by funding the US military, they get some influence over how it is used. The US military protects Saudi from Iran and China and Japan from each other.

    Also there is no particular interest in Beijing to create a confrontational policy with the US in either economics or military spheres. Beijing’s only issue with the US, is Taiwan, and people have come to agreements with that.

  • Posted by Twofish

    q: what puzzles me is that — given the international demand for dollars — US investors are not demanding ownership / equity in foreign economies in return for dollars.

    The US is. Pretty much every nation in the world has some US subsidary in it somewhere.

    Redmond: Unfortunately, we’re facing the crisis of an entire economic model, not a one-time speed bump.

    That’s happened before. It’s a pendulum swinging. Things get fixed, it works for a few years, things eventually go too far, it gets broken, the pendulum moves back.

    Redmond: The rot began with Reaganomics — after 1980, the US began to raze its industrial base, smash its unions, slash real wages, immiserate its middle class, throw money at the rich, and waste taxpayer funds on a corrupt military-industrial complex.

    Personally, I think that Reagan was a great man. One of the best Presidents in US history, because the country was a mess in the 1970′s and needing fixing. In 1980, the US really *did* need deregulation and tax cuts, but eventually you run to the point where you deregulate too far and cut taxes too much, and that is where we are right now. All of Obama’s changes, even if they work, people will carry them too far, and things need to change. Two party systems are good at adjusting to this.

    Real wages did rise in the 1980′s and 1990′s, but you didn’t have these huge differences in wealth until the W’s administration.

    Redmond: Our problems today are the result of thirty-five years of market fundamentalism

    And a lot of good things came out of it. I think we found a happy medium under Clinton.

    Redmond: The US can still rebound, but it’s going to take a fundamental shift away from market fundamentalism and Cold War megalomania.

    The Cold War ended a long, long time ago. As far as market fundamentalism, that’s a theory that was flawed because it never really described how the US economic actually worked. The notion that markets can completely self-regulate is totally dead, and the big fight is how going to over how deep the changes need to be in order to get things to work. I’m in the Geithner, Summers, Bernanke, Rubin camp that thinks that the changes that need to be made are relatively small.

    If it works, great. If it doesn’t, it will be obvious, and then the US will try something else, and keep trying different things until it finds something that works.

    Redmond: social democracy and multipolar diplomacy

    I don’t think at the end of this the US will look anything like Europe. There are lots of ways that work, and lots of ways that don’t work.

  • Posted by HZ

    Lend to potential future suppliers: currency risk will be minimized since you could just run a bilateral trade deficit.
    Lend inflation indexed in local currency: so the borrower doesn’t have to bear currency risk; China won’t have credit risk; and monetary policy doesn’t change the real return.
    Tie the real rate to the GDP: so that the debt burden on the borrower goes down as GDP grows and the debt does not balloon out relative to borrower GDP and becomes a political nightmare (also impossible to collect any way).

  • Posted by techy

    isnt the whole reason china has so much USD is to support its cheap exports??

    unless it can find other consumers for its exports, these exporting countries like india, china, brazil etc.. will like the USD to be overpriced compared to their currency.

    but its also true that it hurts when things go too far….when all the money china made by exporting is becoming a burden and the future looks bleak due fall in consumption buy usa.

    i can gaurantee that china would have continued their increase USD collection as long as USA continued to buy stuff from them.

    but now china is facing falling exports due to this recession and the pain gets worse when you add loss of value in its reserves.

    its a sad thing that it is so hard to create consumption habits…..why do these countries with so much population not able to generate local consumption??

    as soon as they make some money….they make real estate touch the sky…instead of spending on stuff they like to buy hard assets at high prices.

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