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Stop Being Wrong About China Buying Our Bonds

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Re: Stop Being Wrong About China Buying Our Bonds

#41

Post by gameshot911 »

drcode wrote: post #33

Here'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…

>>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/assets.

To what end? Let's say this is true, and let's also say that its strategy is successful. What is achieved if the end goal is not to better it's populace? And if it's goal is to better it's populace, why keep them down now at all and not immediately trying to improve the well-being of its citizens?

Re: Stop Being Wrong About China Buying Our Bonds

#42

Post by a8da6b0c91d »

hannibal5 wrote: post #30
a8da6b0c91d wrote: post #14

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.

That would be worse for China because the value of CNY would skyrocket stopping their exports. Value of USD would plummet helping US exports. Besides, China and foreigners are not anywhere near the biggest buyers of US debt. Fed is. Chinese and Japanese had actually five month net selling period earlier this year.

It's rather tricky to predict how a Chinese decision to appreciate the rmb would play out in practice. Many export powerhouses have had very strong currencies for long periods. It's not as simple as saying US exports would go up and the Chinese economy would suffer. You have to consider that the Chinese have savings and would find themselves far richer in global commodities. You also have to consider the US economy's heavy dependence on freakishly low interest rates.

Re: Stop Being Wrong About China Buying Our Bonds

#43

Post by mathattack »

drcode wrote: post #33

Here'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…

I don't see it this way. The policy of cheap exports is actually to keep their people employed. Whatever they would be doing if they weren't exporting would keep them poorer than what they're doing today.

In addition, the large amount of foreign debt holdings gives them a claim on future output (or land, or other capital) of other countries. That gives the county geopolitical strength.

Re: Stop Being Wrong About China Buying Our Bonds

#44

Post by dageshi »

It's at least as much about control. The Chinese don't want people to be able to push their currency around because they fear the destabilising effect of money surging in and out of the country and throwing the exchange rate around.

So they have massive dollar holdings in one hand and a central bank that can print money in another. Effectively they can control their exchange rate from either side.

Re: Stop Being Wrong About China Buying Our Bonds

#45

Post by mathattack »

The author is very smart, and more trained in economics than I am, but I still disagree with some of what he says.

China is doing us two favors:

1) If they weren't buying our debt, someone else would. Without a large buyer like China, we would have to pay higher rates on our borrowing. This would trickle down to mortgages too, since China is a big investor in Fannie and Freddie debt, and mortgage backed securities.

2) Chinese goods are cheaper because of this policy. One could argue our domestic industry is less competitive, but on the surface, cheaper goods are better than more expensive goods. We benefit from the subsidy.

Re: Stop Being Wrong About China Buying Our Bonds

#46

Post by shamshiel »

a8da6b0c91d wrote: post #25
polymatter wrote: post #20

Earlier quoted context omitted.

it would also be a crisis for China (and thereafter the rest of the world)

The issue is that the global diet for treasuries artificially holds down interest rates. If purchases slowed or holdings were sold, interest rates would rise. Whether it would be a crisis or merely hurt is a marginal distinction. The government of the USA would go bankrupt in months if interest rates rose to 5%, which is an historically normal figure.

There's nothing artificial about it. That's normal economics at work.

Interest rates will remain low as long as the economy remains weak. They will rise to 5% when the economy becomes stronger and inflation rises, reducing the level of existing debt to GDP.

Re: Stop Being Wrong About China Buying Our Bonds

#47

Post by joshuahedlund »

jbooth wrote: post #16
RyanZAG wrote: post #11

Earlier 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…

> They do have the policy, so we should frankly be selling more bonds and spending the money on infrastructure, but hey, that's a hard story to sell for some reason.

Doesn't that put us at increased risk of the policy changing and then having that much more in bonds to roll over when the rates go back up? (Or are we are highly confident that the investment will pay off before the policy changes?)

Re: Stop Being Wrong About China Buying Our Bonds

#48

Post by scott_s »

dllthomas wrote: post #26
scott_s wrote: post #6

I think it's strange to talk about this without mentioning the concept of reserve currency: http://en.wikipedia.org/wiki/Reserve_currency It's not just China that has a lot of investment in US dollars - and no matter what the policy reason is, it is an investment because their wealth is tied up in the status of the US economy. Now, our reserve currency status is something that China, along with the rest of the world,…

I've not been following the connection between currency valuation and threat of default. I'm not sure if it's just my not seeing some connection (certainly possible) or others conflating things that aren't actually connected. Why should I expect less demand for my dollar a week after a US default?

US dollars are the world's currency hub. Let's pretend that there was only one airline hub in the country, and we're going to say that it's Atlanta, because I always seem to use that as my connection. (Atlanta is a hub, but it's not the hub.)

Let's also assume that you have to use the hub, no matter where you fly. It's easy to see in this scenario that Atlanta will now enjoy a special status as an airport; everyone has to use it, even if they're not sending passengers to Atlanta. Now, let's say that the Atlanta infrastructure starts doing poorly - the ground crews don't get luggage from plane to plane fast enough, the controllers aren't good at scheduling flights - anything we can think of that will cause delayed flights. If flights are delayed often enough, then Atlanta's value as a hub goes down. If Atlanta's value as a hub goes down enough, airlines may try to move to a hub somewhere else. Atlanta, then, no longer enjoys all of the perks that come with having every flight in the country routed through them.

This is a cartoon, of course. Nor is the analogy perfect. But I think it gets the big idea across: when people do international transactions, US dollars are often involved. Even when neither side of the transaction is actually in dollars. US dollars are the world's reserve currency: the US is a large, stable economy, and the main instrument for storing dollars, US Treasury bonds, is the most stable security around.

If US Treasury bonds cease to be the most stable security around, then we have violated a basic assumption of the global economy. The rest of the world may try to move away from the US dollar as the world's reserve currency, which means the US would no longer enjoy the special status of being the world's currency hub.

Adam Davidson (who does Planet Money, which I linked to above) has a NY Times column explaining that in the short term, investors may buy more Treasury bonds immediately after a default, but in the long term, we would still likely lose our reserve status. See, "Our Debt to Society": http://www.nytimes.com/2013/09/15/magazine/our-debt-to-socie...

Re: Stop Being Wrong About China Buying Our Bonds

#49

Post by scott_s »

grimtrigger wrote: post #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?

I mostly agree, but they don't really have much of a choice. They have to put the dollars somewhere, and when you're dealing with that many, Treasury bills are really the only game in town.

Re: Stop Being Wrong About China Buying Our Bonds

#50

Post by anoncowherd »

anoncowherd wrote: post #28
westicle wrote: post #2

>> Since it's not an investment, it's not an investment the Chinese can lose faith in. And it's certainly not a favor to the United States of America. I have no formal background in economics, but I'd really appreciate it if someone who does could explain this statement in some context. I would have thought as a general rule: a debtor at risk (even theoretical risk) of default constitutes a concern to its creditor. I…

>> I have no formal background in economics, but I'd really appreciate it if someone who does could explain this statement in some context. Ignore the mainstream "Talking Heads" -economists in the media - they serve two main purposes: 1) Help Wall Street fleece unsuspecting "retail investors", and 2) Maintain the illusion that everything is alright. Austrian Economics is right, and everything else is either wrong or…

Downvote me all you want, but I'm right. Yes, I do realize that's not an argument.
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