The US economy is definitely in the sh!thole!

jazman · Apr 9, 2009

The US economy is definitely in the deep shit alright. China has been pumping lots of money in US bonds subscription to prop up the US economy.

ralphrepo · Apr 10, 2009

jazman said: ↑

The US economy is definitely in the deep shit alright. China has been pumping lots of money in US bonds subscription to prop up the US economy.
Click to expand...

What's the PRC's rationale for doing that? Why are they propping up the US economy, instead of say, Zimbabwe's (which is also in the shit hole)?

cassie_wong · Apr 10, 2009

Can someone please tell me what PRC stands for...? Public Relations of China? << just making a guess...

ralphrepo · Apr 10, 2009

cassie_wong said: ↑

Can someone please tell me what PRC stands for...? Public Relations of China? << just making a guess...
Click to expand...

It's the acronym for PEOPLE'S REPUBLIC of CHINA. :Talktohand:

Here are a few others that are commonly used:

UNITED STATES of AMERICA
UNITED KINGDOM
DEMOCRATIC PEOPLE'S REPUBLIC of KOREA (aka North Korea)
REPUBLIC of KOREA (aka South Korea)
REPUBLIC of CHINA (aka Taiwan)
FEDERAL REPUBLIC of GERMANY

siglapmoran · Apr 11, 2009

shithole!!

siglapmoran · Apr 11, 2009

it's not the end, but the start

ralphrepo · Apr 12, 2009

Interesting set of articles about the movements, pressures, and ultimate impact on global economics by US Securities. Both seem to concur that China has been overly exposed to one market and it may come back to haunt them. I knew they had a lot of investment exposure in the US, but I never realized China had put two thirds of their foreign reserve holdings into one asset. Damn, those PRC government economists sure like to gamble with their people's hard earned money.

In a rush? For a quick synopsis, just read the red highlighted lines.

China Slows Purchases of U.S. and Other Foreign Bonds
By KEITH BRADSHER
April 13, 2009

HONG KONG — Reversing its role as the world’s fastest-growing buyer of U.S. Treasuries and other foreign bonds, the Chinese government actually sold bonds heavily in January and February before resuming purchases in March, according to data released this weekend by China’s central bank. China’s foreign reserves grew in the first quarter of this year at the slowest pace in nearly eight years. For the quarter, the reserves edged up $7.7 billion, compared to a record increase of $153.9 billion in the same quarter last year. The main effect of slower bond purchases may be to weaken Beijing’s influence in Washington, by lessening the reliance of the U.S. Treasury on Chinese central bank purchases at its government bond auctions. Chinese officials from Premier Wen Jiabao on down have expressed growing nervousness over the past two months about their country’s huge exposure to America’s financial well-being. Chinese reserves fell a record $32.6 billion in January and another $1.4 billion in February before rising $41.7 billion in March, according to figures that were released by the People’s Bank for the first time over the weekend. Resumed growth in China’s reserves during March suggests that confidence in the country may be reviving, and capital flight could be slowing.

China has essentially lent vast sums to the United States — roughly two-thirds of the central bank’s $1.95 trillion in foreign reserves are believed to be in American securities.

But the Chinese government now finances a dwindling percentage of new American mortgages and government borrowing. Asked about the balance of financial power between China and the United States, one of the Chinese government’s top monetary economists, Yu Yongding, replied that, “I think it’s mainly in favor of the United States.” He cited a famous saying attributed to John Maynard Keynes: “If you owe your bank manager a thousand pounds, you are at his mercy. If you owe him a million pounds, he is at your mercy.” Private investors from around the world, including the United States, have been buying more American bonds in search of a refuge from global financial troubles. This has made the Chinese government’s cash less necessary and kept interest rates low in the United States over the winter despite the Chinese pullback. There have also been some signs that Americans may consume less and save more money in response to hard economic times. This would further lessen the American dependence on Chinese savings.

Mr. Wen voiced concern on March 13 about China’s dependence on the United States: “We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.”

The main worry of Chinese officials has been that American efforts to fight the current economic downturn would result in inflation that would erode the value of American bonds, Chinese economists said in interviews in Beijing on Thursday and Friday. “They are quite nervous about the purchasing power of fixed-income assets,” said Yu Qiao, an economics professor at Tsinghua University.
Economists said that there was no sign that the Chinese government has deliberately throttled back its purchases of overseas bonds to punish the United States for pursuing monetary and fiscal policies aimed at stimulating the American economy. Those policies may run a long-term risk of triggering inflation, but the same policies could also benefit China if they rekindle economic growth in the United States and thereby revive China’s faltering exports.

The abrupt slowdown in China’s accumulation of foreign reserves instead seems to suggest that investors were sending very large sums of money out of mainland China early this year in response to worries about the country’s economic future and possibly its social stability in the face of rising unemployment. Evidence of such capital flight included a flood of cash into the Hong Kong dollar. Mainland tourists were even buying gold and diamonds during Chinese New Year holidays here in late January. China’s reserves have soared in recent years as the People’s Bank bought dollars on a massive scale to prevent China’s currency from appreciating in value as money has poured into the country from trade surpluses and heavy foreign investment. But China’s trade surpluses have narrowed slightly as exports have fallen, while foreign investment has slowed as multinationals have conserved their cash. Jun Ma, a Deutsche Bank economist in Hong Kong, predicted that China’s foreign reserves would only rise $100 billion this year after climbing $417.8 billion last year.

Some economists contend that slower growth in Chinese foreign currency reserves is not important to the economic health of the United States, even though it may be politically important. Instead of the Chinese government sending money out of the country in the first quarter to buy foreign bonds, individuals and companies in China were sending money out of the country to buy many of the same bonds. “The outflow would mostly end up in the U.S. anyway,” even if the Chinese government is no longer controlling the destination of the money, said Michael Pettis, a finance professor at Peking University, in an interview on Thursday. Heavy purchases of Hong Kong dollars by mainland Chinese residents early this year also have the indirect effect of helping the United States to borrow money. The Hong Kong government pegs its currency to the American dollar and stepped up its purchases of Treasury bonds this winter in response to strong demand for Hong Kong dollars. But China’s economy appears to be bouncing back from the global economic downturn faster than its trade partners’ economies. That could result in China pulling in more imports while exports recover less briskly. This would limit trade surpluses and leave the People’s Bank with less money to plow into foreign reserves.

Source: http://www.nytimes.com/2009/04/13/business/global/13yuan.html?_r=1&ref=global-home
Click to expand...

The basic facts and figures above seem to reflect what was stated by Xinhua (China's state run news) as quoted here by China Daily:

China's foreign reserves hit $1.95t
(Xinhua)
Updated: 2009-04-11 11:31

China's foreign exchange reserves rose 16 percent year-on-year to $1.95 trillion by the end of March, said the People's Bank of China on Saturday. It represents an increase of $7.7 billion for the first quarter, but the increase was $146.2 billion lower than the same period of last year. Outstanding foreign currency loans stood at $235.2 billion by the end of March, down 11.7 percent year-on-year. In the first quarter, foreign currency loans dropped by $8.5 billion. The decline was $57.3 billion more over the same period of last year. In March, foreign currency loans rose by $4.3 billion. The increase was $6.4 billion lower than the same period of last year. Meanwhile, outstanding foreign currency deposits rose 28.9 percent, or $7.5 billion, to $200.3 billion in the first quarter. The increase was $13 billion higher over the same period of last year. In March alone, foreign currency deposits rose by $3.3 billion. The increase was $1.8 billion higher over the same month in 2008.

Analysts said the smaller growth of foreign exchange reserves in the first quarter was related to changes in the value of non-US-dollar assets and money flows under the capital account. In March alone, the foreign exchange reserves rose by $41.7 billion. The increase was $6.7 billion higher than the corresponding period of last year. The country's foreign exchange reserves reduced to $1.914 trillion at the end of January and $1.912 trillion at the end of February. "Changes of foreign exchange reserves in the first quarter were mainly driven by non-US-dollar assets' volatile fluctuation," said Liu Yuhui, an economist with Chinese Academy of Social Sciences (CASS).

During the first quarter, especially the first two months, non-dollar foreign currencies dropped heavily against the US dollar, leaving about 40 percent of the country's non-dollar assets depreciated.

Meanwhile, the country's trade surplus had reduced during the first quarter due to a weakening external demand. Exports fell 17.5 percent in January, 25.7 percent in February and 17.1 percent in March. In February, trade surplus plummeted by $34.3 billion to 4.8 billion.

"The $7.7-billion increase in foreign exchange reserves for the first quarter showed the country's economy still depends heavily on external demand," said Mei Xinyu, an economist with the Ministry of Commerce (MOC).

Yuan Gangming, a researcher with the CASS, said the smaller increase in foreign exchange reserves might also be caused by capital flight. Official statistics show during the first two months, the actually-utilized foreign direct investment dropped by 26.2 percent. A large proportion of the country's foreign exchange reserves are invested in US treasuries and notes. Last month, the US Federal Reserve announced a plan to buy up to $300 billion in long-term treasuries. That added to worries in the value stability of the country's foreign exchange reserves.Mei said the slower growth in foreign exchange reserves could be conducive to the national economic security because less capital would be exposed to devaluation risks. "The top priority should be to keep the value of foreign exchange reserves stable," said Yuan. He suggested relevant authorities should keep a close eye on flows of foreign reserves and prevent a similar capital flight that happened after the Asian financial crisis.

Source: http://www.chinadaily.com.cn/bizchina/2009-04/11/content_7668924.htm
Click to expand...

China to the rescue? More like China goes to Vegas... IMHO, the US economy is indeed in the Shit Hole; and rising out of that Shit Hole, is a 1.2 Trillion Dollar rope tied securely to China's waist. It's no wonder that Wen is shitting bricks.

It's Deja Vu all over again; I sort of alluded to this last year in another thread about US and Chinese financial leanings.

Dragonslayer · Apr 13, 2009

mobidoo said: ↑

There is a trend now in World Affairs. Its call the "Blame it on China" strategy. There are many articles about, and I would be starting another thread about this in a few days time.

Right now let me provide you with an article from FT that stoutly analyze the trade and currency situation between China and the US with FACTS.

This article completely denounce those Rednecks racist squirts who choose to blame China for the current economic crisis.

In all their pretension, they would then shore up their crap thesis and say that there are other factors that have contributed to the crisis, but the motive cannot be more clear. Why talk about China with all the singularity in focus blaming her and then try to play down the other factors with a few scant lines ?

I call this the Weapons of Mass Distraction that the US have always been employing, and when it is delivered with the slogans of advancing democracy and their unique brand of freakanomics to save the world, the US can never do any wrong. Right, so they have to find a whipping boy. China seems like such a wonderful target. Big, Bright Red and beautiful for its lashings.

Here is the article. Have a read.

http://blogs.ft.com/maverecon/2009/01/when-all-else-fails-blame-china/

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Is the liquidity management of the Eurosystem balkanising along national lines?

When all else fails, blame China

January 24, 2009 9:43am

Timothy Geithner, the nominee for US Treasury Secretary, has risked damaging the global economy even before his confirmation by the full Senate. In a written answer to questions from US senators, Geithner said: “President Obama - backed by the conclusions of a broad range of economists - believes that China is manipulating its currency”. In the US, the words “currency manipulation” are fighting words. If the US administration were to formally name China as a currency manipulator, a range of trade sanctions could be imposed by the US government.

The threat to world trade comes from the Omnibus Trade and Competitiveness Act of 1988. The section dealing with the exchange rate, bilateral current account balances and the overall current account balance is a monument to economic illiteracy.

Under the Omnibus Trade and Competitiveness Act of 1988, “The Secretary of the Treasury shall analyze on an annual basis the exchange rate policies of foreign countries, in consultation with the International Monetary Fund, and consider whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.”
“If the Secretary considers that such manipulation is occurring with respect to countries that (1) have material global current account surpluses; and (2) have significant bilateral trade surpluses with the United States, the Secretary of the Treasury shall take action to initiate negotiations with such foreign countries on an expedited basis, in the International Monetary Fund or bilaterally, for the purpose of ensuring that such countries regularly and promptly adjust the rate of exchange between their currencies and the United States dollar to permit effective balance of payments adjustments and to eliminate the unfair advantage.”

Should the US Treasury officially determine China to be a currency manipulator, the US Administration can unleash a range of remedies, including antidumping measures, countervailing duties, and safeguards. Although the World Trade Organization permits certain retaliatory responses from importing nations which can prove that they suffered material injury due to unfair trade practices, much of what the US Congress and some members of the Obama administration have in mind is likely to be in clear violation of the United States’ WTO obligations. It would certainly provoke a response from China. The bilateral trade war that is likely to result could easily spread to the EU, Japan and emerging markets outside China.

Overall and bilateral current account imbalances and nominal and real, bilateral and effective exchange rates

The overall current account deficit of the US is the excess of US domestic investment over US national saving. The overall current account surplus of China is the excess of China’s national saving over China’s domestic investment. Bilateral trade balances are of no economic interest, unless there are only two countries in the world. Note that the first quote from the Omnibus Trade and Competitiveness Act of 1988 slides seamlessly from overall current account imbalances to bilateral trade imbalances, ignoring the transfer payments and foreign investment income items that are included in the current account but not in the trade balance. Trade balances and current account balances (bilateral or aggregate) can and do move in opposite directions.

There is no reason in economic theory or empirical fact why there should be any reliable correlation, between nominal exchange rates (bilateral or trade-weighted (effective) ) and the bilateral or aggregage trade balance, let alone a clear causal connection from any nominal exchange rate to the trade balance. Certain kinds of shocks and policy actions may produce an empirical association (not a causal relation) between a depreciation of the effective (trade-weighted) real exchange rate and an increase in the aggregate trade surplus. This is the case, for instance, for most aggregate demand shocks, e.g those produced by contractionary Keynesian fiscal policies. But supply shocks may produce the opposite correlation, that is, a depreciation of the effective real exchange rate and a reduction in the aggregate trade balance surplus.

In any case, as Chart 1 below shows, there has been a steady appreciation of the real effective exchange rate of the Yuan since the beginning of 2005. JP Morgan’s broad real effective exchange rate index for the Yuan shows a 27 percent real appreciation since December 2004. The from a macroeconomic perspective uninteresting nominal bilateral US$-Yuan exchange rate appreciated 21 percent over the same period.

Chart 1

Every fixed or managed nominal exchange rate is, by definition, ‘manipulated’. But only the most bone-headed of ultra-Keynesians believes that a country can influence its effective real exchange rate in a lasting manner by managing/manipulating its effective nominal exchange rate, let alone some bilateral nominal exchange rate. China is now enough of a market economy that its domestic prices and costs (in Yuan) are no longer controlled by the Chinese authorities.

Instead they are driven by the same kind of monetary and other macroeconomic forces that drive US dollar prices and costs in the USA.

China still controls its capital account to a significant extent. Judging from the havoc created by wide-open capital accounts in other emerging markets, the Chinese decision to liberalise its capital account gradually and slowly is a wise one. Most gross external investment by Chinese residents is done by the state. With capital inflows (mainly in the form of FDI) policy controlled, the large current account surplus of China has meant a massive increase in the external assets of the state. The state has, unwisely, allocated most of the task of managing its foreign assets to the central bank, which has been a terrible foreign investor. By choosing to invest well over a trillion US dollar’s worth of foreign assets in US Treasury bills, the Chines central bank has produced horrible real returns for the Chinese government and the Chinese people, and made a large capital gift to the US government and the US people. The returns on Chinese foreign investment through its sovereign wealth fund have not been any better of course. Like the Japanese before them, great manufacturers and exporters often turn out to be terrible portfolio investors, even when their own FDI investments abroad have done well.

The accumulation of China’s external assets in the accounts of the Chinese central banks shows up statistically as an increase in official foreign exchange reserves. The Chinese authorities have been unable to sterilise this massive increase in reserves and China has seen rates of domestic cost and price inflation that have at times been uncomfortably high. This is the normal way in which management/manipulation of the nominal exchange rate fails to prevent the changes in the real exchange rate warranted by fundamentals. China is enough of a market economy that it cannot manipulate its real effective exchange rate.

There are indeed global macroeconomic imbalances. The US saves too little or invests too much (I would argue the former) and has an unsustainable current account deficit. China saves too much or invests too little (I would argue the former) and has an unsustainable current account surplus. China is taking policy measures that will reduce its external surplus, mainly through expansionary fiscal policy measures aimed at boosting public sector investment (infrastructure) and at reducing private and corporate saving.

The US is proposing policy measures that will increase its external deficit. The $825bn fiscal stimulus over two years proposed by the Obama administration will increase the US current account deficit. It will also strengthen the real effective exchange rate of the US dollar, unless there is a loss of faith in the ability of the US sovereign to service its debt in the future through higher taxes or lower public spending. In that case the nominal exchange rate could decline sharply, taking the real exchange rate with it in the short run, as market participants dump the US dollar and US dollar-denominated securities because they fear either a monetisation of public debt and deficits or a sovereign default.
So China is undertaking actions to remedy its own external imbalances and global imbalances. The US is proposing measures to increase its external imbalances and aggravate global imbalances. Instead of saving more, the US government is desperately trying to get the already over-leveraged US consumer to save less. And just in case the US consumer balks at the fiscal carrots dangled in front of him, the already fiscally challenged US government is proposing to reduce its own saving and increase its own investment.
The last thing the US economy needs is a large fiscal stimulus, or indeed any fiscal stimulus at all. A good argument can even be made for a US fiscal tightening. Expansionary monetary policy is the only instrument available to the authorities that will both boost the US economy and correct its external imbalance. With the Federal Funds target rate as close to zero as makes no difference, only aggressive quantitative easing and qualitative easing (what Bernanke calls credit easing) are available and the magnitude and timing of their impact is uncertain. That’s tough, but that’s the way it is. The belief- the faith almost - that there has to be a painless way out of the US economic dilemma is naive and will be disproven by economic record of the coming years. The notion that currency manipulation by China is a material contributor to America’s external trade deficit is either a dangerous form of self-delusion, or an even more dangerous form of pandering to xenophobic Congressional opinion, or both.

Conclusion

One reason I still nurture the hope that the current global recession will not become a second Great Depression, is that there has been no significant recourse to trade restrictions by countries trying to export their domestic demand deficiencies to their neighbours. There has been increased use of anti-dumping measures - the first recourse of the modern protectionist, beggar-thy-neighbour scoundrel - but less than might have been expected given the prevailing spineless political leadership around the globe. As unemployment and excess capacity increase, and corporate bankruptcies multiply, the calls for protection against ‘unfair’ foreign competition will multiply. Any excuse - environmental, social, labour standards, phyto-sanitary, national security - will be used to allow domestic industry and labour to find shelter from the storm. Old-style protectionists like Sarkozy find new converts such as Merkel, to push protectionist measures, including state aid for non-systemically important industries like automobile manufacturing.

So while the protectionist genie is not yet out of the bottle, it is kicking and pushing against the cork, trying to escape. The verbal sabre rattling by US Treasury Secretary Geithner is a threat to the open global trading system. More stupidities along the same lines could bring us the global trade conflict that we have been fortunate to avoid thus far.

January 24, 2009 9:43am
Click to expand...

This is just one sign of USA in decline and in serious decline I am sure many people will agree with this.
They are desperately doing everything to try and stop the inevitable decline. I hope this desperation won't lead to WW 3.

USA will not be the only superpower in 15 to 20 years, it will lose most of her influence in the world (Japan, Europe, Middle East) soon (if 20 years is short in human history).

And keep in mind I repeat only once today USA can and will only be defeated by herself INTERNALLY not only in the economic sense but mainly by her extremely mixed races (Africans and Latinos).

Dragonslayer · Apr 13, 2009

ralphrepo said: ↑

Interesting set of articles about the movements, pressures, and ultimate impact on global economics by US Securities. Both seem to concur that China has been overly exposed to one market and it may come back to haunt them. I knew they had a lot of investment exposure in the US, but I never realized China had put two thirds of their foreign reserve holdings into one asset. Damn, those PRC government economists sure like to gamble with their people's hard earned money.

In a rush? For a quick synopsis, just read the red highlighted lines.

The basic facts and figures above seem to reflect what was stated by Xinhua (China's state run news) as quoted here by China Daily:

China to the rescue? More like China goes to Vegas... IMHO, the US economy is indeed in the Shit Hole; and rising out of that Shit Hole, is a 1.2 Trillion Dollar rope tied securely to China's waist. It's no wonder that Wen is shitting bricks.

It's Deja Vu all over again; I sort of alluded to this last year in another thread about US and Chinese financial leanings.
Click to expand...

It's called Chimerica - google it.
anyway, things will be back to normal, everything goes in cycles like cosine waves.
it's like wall street, london or asian stock exchanges,, until such time that all of these
goes down to zero, nothing to worry about. when things go back to normal, then perhaps china
will unload step by step these investments to other assets.

a4agent · Apr 15, 2009

mobidoo said: ↑

There is a trend now in World Affairs. Its call the "Blame it on China" strategy. There are many articles about, and I would be starting another thread about this in a few days time.

Right now let me provide you with an article from FT that stoutly analyze the trade and currency situation between China and the US with FACTS.

This article completely denounce those Rednecks racist squirts who choose to blame China for the current economic crisis.

In all their pretension, they would then shore up their crap thesis and say that there are other factors that have contributed to the crisis, but the motive cannot be more clear. Why talk about China with all the singularity in focus blaming her and then try to play down the other factors with a few scant lines ?

I call this the Weapons of Mass Distraction that the US have always been employing, and when it is delivered with the slogans of advancing democracy and their unique brand of freakanomics to save the world, the US can never do any wrong. Right, so they have to find a whipping boy. China seems like such a wonderful target. Big, Bright Red and beautiful for its lashings.

Here is the article. Have a read.

http://blogs.ft.com/maverecon/2009/01/when-all-else-fails-blame-china/

Subscribe User name Password Remember me on this computer
Help,I forgot my username or password

Back to Willem Buiter's Maverecon homepage
Is the liquidity management of the Eurosystem balkanising along national lines?

When all else fails, blame China

January 24, 2009 9:43am

Timothy Geithner, the nominee for US Treasury Secretary, has risked damaging the global economy even before his confirmation by the full Senate. In a written answer to questions from US senators, Geithner said: “President Obama - backed by the conclusions of a broad range of economists - believes that China is manipulating its currency”. In the US, the words “currency manipulation” are fighting words. If the US administration were to formally name China as a currency manipulator, a range of trade sanctions could be imposed by the US government.

The threat to world trade comes from the Omnibus Trade and Competitiveness Act of 1988. The section dealing with the exchange rate, bilateral current account balances and the overall current account balance is a monument to economic illiteracy.

Under the Omnibus Trade and Competitiveness Act of 1988, “The Secretary of the Treasury shall analyze on an annual basis the exchange rate policies of foreign countries, in consultation with the International Monetary Fund, and consider whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.”
“If the Secretary considers that such manipulation is occurring with respect to countries that (1) have material global current account surpluses; and (2) have significant bilateral trade surpluses with the United States, the Secretary of the Treasury shall take action to initiate negotiations with such foreign countries on an expedited basis, in the International Monetary Fund or bilaterally, for the purpose of ensuring that such countries regularly and promptly adjust the rate of exchange between their currencies and the United States dollar to permit effective balance of payments adjustments and to eliminate the unfair advantage.”

Should the US Treasury officially determine China to be a currency manipulator, the US Administration can unleash a range of remedies, including antidumping measures, countervailing duties, and safeguards. Although the World Trade Organization permits certain retaliatory responses from importing nations which can prove that they suffered material injury due to unfair trade practices, much of what the US Congress and some members of the Obama administration have in mind is likely to be in clear violation of the United States’ WTO obligations. It would certainly provoke a response from China. The bilateral trade war that is likely to result could easily spread to the EU, Japan and emerging markets outside China.

Overall and bilateral current account imbalances and nominal and real, bilateral and effective exchange rates

The overall current account deficit of the US is the excess of US domestic investment over US national saving. The overall current account surplus of China is the excess of China’s national saving over China’s domestic investment. Bilateral trade balances are of no economic interest, unless there are only two countries in the world. Note that the first quote from the Omnibus Trade and Competitiveness Act of 1988 slides seamlessly from overall current account imbalances to bilateral trade imbalances, ignoring the transfer payments and foreign investment income items that are included in the current account but not in the trade balance. Trade balances and current account balances (bilateral or aggregate) can and do move in opposite directions.

There is no reason in economic theory or empirical fact why there should be any reliable correlation, between nominal exchange rates (bilateral or trade-weighted (effective) ) and the bilateral or aggregage trade balance, let alone a clear causal connection from any nominal exchange rate to the trade balance. Certain kinds of shocks and policy actions may produce an empirical association (not a causal relation) between a depreciation of the effective (trade-weighted) real exchange rate and an increase in the aggregate trade surplus. This is the case, for instance, for most aggregate demand shocks, e.g those produced by contractionary Keynesian fiscal policies. But supply shocks may produce the opposite correlation, that is, a depreciation of the effective real exchange rate and a reduction in the aggregate trade balance surplus.

In any case, as Chart 1 below shows, there has been a steady appreciation of the real effective exchange rate of the Yuan since the beginning of 2005. JP Morgan’s broad real effective exchange rate index for the Yuan shows a 27 percent real appreciation since December 2004. The from a macroeconomic perspective uninteresting nominal bilateral US$-Yuan exchange rate appreciated 21 percent over the same period.

Chart 1

Every fixed or managed nominal exchange rate is, by definition, ‘manipulated’. But only the most bone-headed of ultra-Keynesians believes that a country can influence its effective real exchange rate in a lasting manner by managing/manipulating its effective nominal exchange rate, let alone some bilateral nominal exchange rate. China is now enough of a market economy that its domestic prices and costs (in Yuan) are no longer controlled by the Chinese authorities.

Instead they are driven by the same kind of monetary and other macroeconomic forces that drive US dollar prices and costs in the USA.

China still controls its capital account to a significant extent. Judging from the havoc created by wide-open capital accounts in other emerging markets, the Chinese decision to liberalise its capital account gradually and slowly is a wise one. Most gross external investment by Chinese residents is done by the state. With capital inflows (mainly in the form of FDI) policy controlled, the large current account surplus of China has meant a massive increase in the external assets of the state. The state has, unwisely, allocated most of the task of managing its foreign assets to the central bank, which has been a terrible foreign investor. By choosing to invest well over a trillion US dollar’s worth of foreign assets in US Treasury bills, the Chines central bank has produced horrible real returns for the Chinese government and the Chinese people, and made a large capital gift to the US government and the US people. The returns on Chinese foreign investment through its sovereign wealth fund have not been any better of course. Like the Japanese before them, great manufacturers and exporters often turn out to be terrible portfolio investors, even when their own FDI investments abroad have done well.

The accumulation of China’s external assets in the accounts of the Chinese central banks shows up statistically as an increase in official foreign exchange reserves. The Chinese authorities have been unable to sterilise this massive increase in reserves and China has seen rates of domestic cost and price inflation that have at times been uncomfortably high. This is the normal way in which management/manipulation of the nominal exchange rate fails to prevent the changes in the real exchange rate warranted by fundamentals. China is enough of a market economy that it cannot manipulate its real effective exchange rate.

There are indeed global macroeconomic imbalances. The US saves too little or invests too much (I would argue the former) and has an unsustainable current account deficit. China saves too much or invests too little (I would argue the former) and has an unsustainable current account surplus. China is taking policy measures that will reduce its external surplus, mainly through expansionary fiscal policy measures aimed at boosting public sector investment (infrastructure) and at reducing private and corporate saving.

The US is proposing policy measures that will increase its external deficit. The $825bn fiscal stimulus over two years proposed by the Obama administration will increase the US current account deficit. It will also strengthen the real effective exchange rate of the US dollar, unless there is a loss of faith in the ability of the US sovereign to service its debt in the future through higher taxes or lower public spending. In that case the nominal exchange rate could decline sharply, taking the real exchange rate with it in the short run, as market participants dump the US dollar and US dollar-denominated securities because they fear either a monetisation of public debt and deficits or a sovereign default.
So China is undertaking actions to remedy its own external imbalances and global imbalances. The US is proposing measures to increase its external imbalances and aggravate global imbalances. Instead of saving more, the US government is desperately trying to get the already over-leveraged US consumer to save less. And just in case the US consumer balks at the fiscal carrots dangled in front of him, the already fiscally challenged US government is proposing to reduce its own saving and increase its own investment.
The last thing the US economy needs is a large fiscal stimulus, or indeed any fiscal stimulus at all. A good argument can even be made for a US fiscal tightening. Expansionary monetary policy is the only instrument available to the authorities that will both boost the US economy and correct its external imbalance. With the Federal Funds target rate as close to zero as makes no difference, only aggressive quantitative easing and qualitative easing (what Bernanke calls credit easing) are available and the magnitude and timing of their impact is uncertain. That’s tough, but that’s the way it is. The belief- the faith almost - that there has to be a painless way out of the US economic dilemma is naive and will be disproven by economic record of the coming years. The notion that currency manipulation by China is a material contributor to America’s external trade deficit is either a dangerous form of self-delusion, or an even more dangerous form of pandering to xenophobic Congressional opinion, or both.

Conclusion

One reason I still nurture the hope that the current global recession will not become a second Great Depression, is that there has been no significant recourse to trade restrictions by countries trying to export their domestic demand deficiencies to their neighbours. There has been increased use of anti-dumping measures - the first recourse of the modern protectionist, beggar-thy-neighbour scoundrel - but less than might have been expected given the prevailing spineless political leadership around the globe. As unemployment and excess capacity increase, and corporate bankruptcies multiply, the calls for protection against ‘unfair’ foreign competition will multiply. Any excuse - environmental, social, labour standards, phyto-sanitary, national security - will be used to allow domestic industry and labour to find shelter from the storm. Old-style protectionists like Sarkozy find new converts such as Merkel, to push protectionist measures, including state aid for non-systemically important industries like automobile manufacturing.

So while the protectionist genie is not yet out of the bottle, it is kicking and pushing against the cork, trying to escape. The verbal sabre rattling by US Treasury Secretary Geithner is a threat to the open global trading system. More stupidities along the same lines could bring us the global trade conflict that we have been fortunate to avoid thus far.

January 24, 2009 9:43am
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Thanks mobidoo, and please create the thread ASAP =), We wouldn't want some self-hating white azs kisser mislead inocent people. And you can forget about this
self-hating white azs kisser coming out man to man and debate with you, cause he knows you'll rip his azs apart and run him over. What a sissy! LOL

Some self-hating white azs kisser somewhere tries to hint the Chinese economy is based on exports. LOL

Anyone who knows China actually has a massive consumer class. A consumer class that is actually greater than any other outside the US. Chinese could actually buy what it produces, only some self-hating white azs kisser coud make such claim. LOL

You can't have the world's largest refrigerator and air conditioner markets in China if Chinese can't consume (air conditioners and refrigerators are large household goods that nearly all consumed inside China.)

Think about it, China has the world's largest auto market, largest internet market, largest cellphone market, largest motorcycle market ... largest rice, wheat, pork, etc. markets.

China even raises and buys more horses than any other country in the world. LOL

This economy consumes in massive quantities.

negiqboyz · Apr 15, 2009

I hope the US economy continues to be like this .. lol .. only this time will it give us poor people a chance to play the stock market ... lol .. i am loving it .. lol come on .. goldman sachs for $44 or GE for $5 .. never dreamed of such a day would come ...lol

magicguitar · Apr 20, 2009

does anyone still trust Wall Street ? Or your 401 K savings for that long awaited dream to come ? That log cabin up in the Ozarks drinking your favorite tea in the front porch ? Click link to watch video.

http://www.cbsnews.com/video/watch/?id=4955194n

ab289 · Apr 20, 2009

-sleep so tell me, what's new? US does not produce anything, imports everything everyone in US uses from mainly China; of course US will have a trade deficit and owe more money to China.

tell me something I don't know ...

Edit:
This is an example of 'Do not trust everything you see on youtube'. make a big fuss about mortgaging US people's property and public domain blah blah blah only to find out she's mistaken. what a load of crap.
[youtube]mGx6XmH10j0[/youtube].

jieuw · Apr 29, 2009

the american economy is indeed a mess. The war and the greed consumed to much..

The US economy is definitely in the sh!thole!

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