http://shadowbankers.wordpress.com/2009/05/26/the-yuan-takes-another-step/

Now that s Diplomatic.

Now that s quite HeavyWeight!

I think we have two issues here:

China’s economic policy, essentially that its positive net exports position is not going to shrink soon, despite an announced stimulus package (but importing raw materials in excess of current processing needs helps -assuming that much of it will not lead to lower imports later on, but used for domestic purposes). But what else can China do to reduce its net exports in the short run. I am not so sure anything short of a macro revaluation will do the trick and even then it may cause more CPI inflation in the West than import substitution there. It would be nice if the US treasury would model this (which it probably has done repeatedly) and publish the associated sensitivities. China appears to know its own sensitivity to US parameters..

The other point is simply that the vastly expanding pool of public sector liabilities, partially crated to replace liabilities of the private sctor, mat have inflationary effects further down the road. As China’s exchange rate objectives can be satisfied by holding short term USD claims, and it may -behaving like a textbook rational investor under these circumstances- be waiting to see if those inflationary effects materialize and lead to higher interest in the future- be more interested in waiting and staying short. Nothing unusual, but one of the many perverse effects of Keynesian policies in an open economy surrounded by fairly large economies with heterogeneous policies: one started, stimulus and especially its financing, tends to become slef-perpetuating..

I guess Mr Geithner will have meaningful discussions, as it is not in China’s interest to se the US languishing in Japanese style (you wish the average American could afford to languish in that style), but return to confident consumption growth. As the US has little to offer in the way of goods exports, something that would enhance China’s status internationally, like SDR inclusion of the RMB would of course be appreciated, but only with “Chinese characteristics”, like a very limited convertibility. The resulting effect on the USd would not please the Japanese or Europeans (silly London real estate dramer?) but their opinion does not count.

Who knows. though, my best guess remains business as usual.

Taxes – maybe if there is a will to tax, jobs – not so much… 2002-2006:
“corporate profitability is soaring. Corporate profits have grown at a double-digit rate for 16 of the past 17 quarters. As a share of GDP, corporate profits are at their highest level in 40 years and exceed corporate investment for the first time since the early 1960s. (Deloitte Research, 2006).

All the while job creation was at best anemic. The way out of the present calamity is through a change in the mindset and return to investment in innovation and human capital.

As to transportation, I went to a car museum not long ago. First observation, all that talk about modern cars being very big – not true: even Hummers seem small in comparison with family vehicles of the bygone years. Second, electric cars used to be more widespread in the 1920s than now: the wealthy preferred electricity to internal combustion and steam because of quietness and cleanliness. Three, the car is a living fossil; it has hardly changed in over 100 years!

Dollar Index looked like it would go down another 1%, but closed down only a half.

If the buck keeps dropping at this rate, the Dollar/RMB might trade at parity in about 65 days.

http://quotes.ino.com/chart/?s=NYBOT_DX

Next week the Treasury sales goal is $101B in the 2-7 year range. That’s why the drop this week, but will it continue next week?

Odd things the past few days: Both Japan and Britain got downgrades from AAA. Both currencies increased against the buck!?