Obsessed with the trade deficit and oblivious to real economic fundamentals, George Shultz and John Taylor are happy about the falling dollar, the subprime mess, Wall Street volatility, $100-oil, and $820-gold: Turmoil in the US’s financial markets got the top billing in news reports about the recent meetings of the world’s leading international policymakers in Washington. Virtually everyone expressed concern that the housing slump and the financial crisis triggered by the subprime mortgage market would significantly slow down the US economy, and perhaps the world economy. But there is a surprising silver lining. Signs of it were revealed by the absence of reporting on the big bugaboo of the past few years: the US current account deficit. The good news Read More ›
This morning Ambrose Evans-Pritchard of the London Daily Telegraph dropped a bomb by writing that China is considering the “nuclear option” of dumping its several hundred billion dollars worth of foreign reserves if the U.S. goes ahead with protectionist policies. Treasury Secretary Hank Paulson, who just returned from a week of high-level meetings in China, called this idea “absurd.” Bruce Bartlett offers a good summary of why China wouldn’t — and won’t — exercise the “nuclear option” here. Quite simply, it would be against their best interest: As economist John Maynard Keynes once explained, “Owe your banker 1,000 pounds and you are at his mercy; owe him one million pounds and the position is reversed” (Collected Writings, vol. 24, p. Read More ›
This news proves our point of just how risky it is for someone of Ben Bernanke’s deservedly high stature to get in the middle of a currency/trade debate. Mr. Bernanke dropped … references in the original text of his speech that called China’s suppression of the yuan’s value an “effective subsidy” for firms that “focus on exporting rather than producing for the domestic market.” The chairman had used the word “subsidy” to describe China’s currency practices three times in the written text, which was released before his appearance and posted to the Fed’s Web site. … But with the specter of the mushrooming U.S.-China trade imbalance hanging over the talks, Mr. Bernanke’s flirtation with the term “subsidy” took on heightened Read More ›
Delivering a major address in Beijing, Fed Chairman Ben Bernanke today jumped headlong into the dollar-yuan debate. In many ways the speech is erudite and illuminating. But on the key policy question of the day, it falls short. Bernanke says forcefully that the RMB (yuan) needs to appreciate, or strengthen, against the dollar. In the next breath, Bernanke says the foreign exchange value of the RMB should be set by the market. But if the vast and impersonal global market should set the rate, how does Bernanke know — and advocate — that the RMB should strengthen? Which is it, Mr. Chairman? Nobel economist Robert Mundell believes that depending on the two nations’ monetary policies and other macro factors, the Read More ›
Don’t Asian nations have nefarious motives for accumulating OUR currency? Not at all. It’s simply an outgrowth of the extraordinarily widespread use of the U.S. dollar as the world’s trade and reserve currency. Here’s more on that phenomenon.
posted to: Telecosm Lounge
date: 12/8/06 9:30:34 AM
Here’s yet another way to think about the China dollar reserve situation. Asian nations accumulate lots of dollar reserves because, simply, the dollar is the most-used currency in Asia.
Most Asian trade is invoiced in U.S. dollars. For example, 80% of Korea’s imports are invoiced in U.S. dollars. It invoices 87% of its own exports in U.S. dollars. Korea’s use of the
Japanese yen is surprisingly low — just 12% of imports and 5% of exports.
Do China’s dollar reserves give them huge power over the U.S.? I don’t think so. Here’s another post from gildertech.com, aswering that widespread worry.
posted to: Telecosm Lounge
date: 12/7/06 2:19:07 PM
I don’t think China’s large reserves give them much power over the U.S. The Chinese hold these Treasuries because they are safe, liquid assets. It is true China will diversify its dollar reserves, but when China sells Treasuries someone else must buy them. China would not precipitously dump Treasuries in a way that would lead to a price plummet. After all, even with diversification into euros, yen, or won, they will still hold lots of dollars. Why would they want a Treasury plunge that would cut the value of their remaining dollar reserves?
With the Paulson-Bernanke delegation heading to Beijing for the first in a series of semiannual high-level talks, the China-Dollar question is getting lots of attention. We’ve been discussing it over at the Gilder Telecosm Lounge — www.gildertech.com — and I thought I’d repost some of my thoughts contained in three items here at Disco-Tech.
posted to: Telecosm Lounge
date: 12/6/06 6:11:13 PM
Inflation, I believe, is the key variable in the economic outlook. Fed Chairman Bernanke seems to agree. Last week he gave his first big speech in four months to shake the complacency out of the bond market. He said the risks for inflation are to the upside. The problem, as Don Luskin of TrendMacro has observed, is that Bernanke is only “talking the talk, not walking the hawk.”
Richard Fisher of the Dallas Federal Reserve says bad data led to Fed rate mistakes over the last five years. He says the Fed held rates too low for too long, leading to wild price swings. “[P]oor data,” Fisher says, “led to a policy action that amplified speculative activity in the housing and other markets.” Markets like oil. In August I wrote in The Wall Street Journal that the spike in energy prices is mostly a function of the Fed’s inflationary monetary policy, which is also the key factor in swings across the global economy, from cattle prices to home values to the spike in Chinese foreign reserves. Referring to the CPI and PCE price indeces, which constantly disappoint, Fisher Read More ›
The importance of assets (stocks) versus incomes (flows) in economics cannot be overstated, yet it is not well understood. Michael Milken this morning in The Wall Street Journal explains why Baby Boom retirements won’t, as many believe, cause financial market instability, let alone a crash. Baby boomer asset liquidation isn’t really a financial market issue because (1) there’s plenty of liquidity in the global economy; (2) as the rest of the world becomes wealthier, people outside the U.S. will own a greater percentage of global assets and they’ll want to keep a share of their net worth in America; (3) liquidity will grow in both developed and developing nations as they adopt recent American financial innovations and market structures; (4) Read More ›
Yesterday’s Wall Street Journal pre-view of Treasury Secretary Hank Paulson’s China speech was encouraging. Paulson emphasized the long-term “generational” relationship that we must develop with China and emphatically rebuffed the ideas and promoters of protectionism.
at the Intl Finance Forum in “Great Epoch City”
But today’s New York Times re-view of Paulson’s speech is more ominous. The story is titled, “Treasury chief delivers new warning to China.” It emphasizes the contentious dollar-yuan exchange rate issue, asserting that Paulson “used unusually forceful language in saying that China has kept the value of its currency artificially low relative to the dollar.”
We talk about the dollar-yuan here because the success or failure of American technology and the world economy often depends on these currency and trade issues. Exchange rates may seem like arcane stuff, but when grandstanding politicians — like Senators Lindsey Graham and Chuck Schumer — threaten to blow up international trade, and thus our livelihoods and security, with their 27.5% tariff on China, we should all pay attention.