If the Chinese dumped their bonds interest rates would spike and this would be a crisis for the USA. This guy doesn't seem to get that.
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Stop Being Wrong About China Buying Our Bonds
31–40 of 137 posts
Re: Stop Being Wrong About China Buying Our Bonds
#32Hehe.
Re: Stop Being Wrong About China Buying Our Bonds
#33Here's my simplified way of thinking about it:
The Chinese government wants its citizens to be relatively poor. Why? because then it can use them as cheap labor that is a valuable tool to leverage on the world stage. Plus, poverty stifles political activism.
How does it keep its people poor? Well, by making sure a USD spent in China can buy 4x as much rice/milk/chicken/etc in China as it can in the US. This will mean income of Chinese workers and merchants will also remain low. How does it do this? By keeping the value of the yuan low, by direct manipulation of the currency, which it pays for by a high import tariff. (Which, again, makes Chinese people poorer by making things coming from outside the country very expensive.)
By using this strategy, the Chinese government uses its people as underpriced laborers that give it a huge export surplus and which it can use to influence world events, as well as to generate vast government capital (essentially capital it is withholding from its citizens) it can use to invest in foreign companies/governments.
(Of course now the picture is muddying somewhat because the extreme GDP growth is making many Chinese wealthy anyway, despite all these obstacles.)
Re: Stop Being Wrong About China Buying Our Bonds
#34Isn't it also an artefact of the way that the Chinese financial industry is regulated?
Re: Stop Being Wrong About China Buying Our Bonds
#35Earlier quoted context omitted.
Some people believe that China buying US government bonds is a favour to USA as it allows the US government to spend all of this money coming in on various government projects, such as military spending and social security. If China stopped supplying that money, the US government would have to print it themselves (for free), which would lower the value of US currency. Some people believe this is a good thing, and oth…
A favor? There's no such thing as a favor. The US offers bonds in $ at a certain very low interest rate and China buys them in order to maintain their low yuan valuation. As stated in the article, this is to manipulate currency prices for domestic reasons to keep their exported goods "cheap" in terms of the global reserve currency, dollars. Your cons are all messed up. They're making the dollar stronger and the yuan…
I might be misunderstanding the nature of the bond market, but the treasury's website says 30 years are at > 3%.
http://www.treasury.gov/resource-center/data-chart-center/in...
Re: Stop Being Wrong About China Buying Our Bonds
#36> But that's all it is. It's not an investment.
Ridiculous, simply untrue.
Currency manipulation explains the conversion from yuan to dollars, but not from dollars to t-bills.
Why would China convert dollars to t-bills if they didn't see t-bills as a better investment than dollars?
Re: Stop Being Wrong About China Buying Our Bonds
#37Peter Schiff explains this by taking example of two trading islands in his book: http://www.amazon.com/How-Economy-Grows-Why-Crashes/dp/04705... It's a fascinating book that mostly appeals to Austrians though but a good one to grasp fundamentals.
Also, Sal Khan has this video on the topic: https://www.khanacademy.org/economics-finance-domain/core-fi...
Re: Stop Being Wrong About China Buying Our Bonds
#38As an identity, the capital account between two countries -- payments made for capital: land, buildings, financial assets, etc. must equal the current account payments made for goods and services.
When we buy stuff from China, they get dollars. If you have a surplus of dollars you want to invest them in something, and that something has to be dollar denominated. Treasury bonds are safe, liquid and politically palatable for all sides.
If we stopped buying their stuff, they would stop buying our bonds. If they stopped buying our bonds, they would have to find somewhere else to invest dollars.
(Interesting side note -- this dilemma is what led to the creation of the Eurodollar market -- in the early 1970's the Soviet Union had dollars from oil sales (the international crude oil market is dollar denominated) and they did not want to put the money into US domiciled banks -- so the London banks said we will accept dollar deposits, but are not accountable to the Fed or other US authorities in these accounts (nor can we borrow at the Fed window) and thus was born the eurodollar.)
Re: Stop Being Wrong About China Buying Our Bonds
#39Today China in essence suppresses the standard of living of it's productive sector. They do this by not allowing the exporters to keep the dollars they earn. Instead the exporters are forced to trade those dollars in for Chinese currency which is artificially pegged against the dollar. This means the exporters immediately lose value. What the author completely fails to understand is that this is another possible outc…
> China slowly increases their currency peg to be closer to the value of the dollar -- The exporters slowly have a higher profit, and thus the people a higher standard of living
Exporters can't export if the price of their goods increase. It's not that easy to unroll their current scheme.
> They could just buy 1T in oil, copper, or other dollar based commodities. There are plenty of options besides treasuries.
How does one transport and store trillions of dollars of commodities (someone has to store them even if they are ETFs)? Besides, these commodities have a lot more risk compared to t-bonds. If the were able to get the same security as t-bonds in something else, you know they'd be buying those as well.
Re: Stop Being Wrong About China Buying Our Bonds
#40when you owe too much, you become the one in absolute control, the loaner will pray for your good health before he goes to bed every night, that says it all.