by patdennis on 10/18/13, 12:57 PM with 132 comments
by westicle on 10/18/13, 1:24 PM
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 also don't see what giving favours has to do with buying and selling bonds.
by cs702 on 10/18/13, 3:26 PM
--
PS. If you find all of this mind-boggling, you're in good company. When asked about the value of money two centuries ago, Nathan Mayer Rothschild -- a member of the famous banking dynasty -- reportedly said that only two people in the world really understood it, but they disagreed with each other. And things were a lot simpler back then!
by drcode on 10/18/13, 2:18 PM
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.)
by scott_s on 10/18/13, 1:34 PM
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, can lose faith in. And if they lose faith - because of, say, a default - then there's a serious risk that the US is no longer the reserve currency. And if the US is no longer the world's reserve currency, then a lot less other countries will buy US Treasury bonds, and US easy credit and privileged trade status will end.
Planet Money podcast, "Why The World Still Needs Dollars": http://www.npr.org/blogs/money/2011/08/12/139583229/the-frid...
by CrunchyJams on 10/18/13, 2:55 PM
1). Interest and principle on USTs are paid in USD, so the notion that the Chinese government simply "wants to send those dollars back to the US" is bunk since they're ultimately getting more back
2). If the Chinese government wanted to directly influence USD value, they could also simply hold onto the USD as currency reserves to take it out of the market / reduce supply
By buying US debt, China is doing the same as the Fed: lowering yields/increasing prices of USTs via increased demand. This allows the government to keep borrowing large amounts, which in theory should offer the cash needed to continue buying Chinese goods.
Moreover, USTs are by far the most liquid high-grade paper available. Pretty much the only possible investment to support volume of the size China needs.
And, while not likely to be used in the near term, this is absolutely an investment in defense. Chinese officials have openly supported the notion that large holdings of Japanese debt could be used as a crippling weapon, why wouldn't that apply to the US?
http://www.telegraph.co.uk/finance/china-business/9551727/Be...
by velodrome on 10/18/13, 1:33 PM
http://web.mit.edu/~sabrevln/Public/GameTheory/Journal%20of%...
by jbooth on 10/18/13, 1:45 PM
That's why the various gold-standard fans and whoever have been saying "hyperinflation any day now" for the last 5 years and we're still rocking sub-1%.
by apostate on 10/18/13, 2:46 PM
They are still the biggest foreign owner of US debt, but the majority of treasuries are owned by US entities (households, corporations, state and local governments, the social security trust, and government agencies that purchase treasuries when they have excess revenue). Of course I would count the Fed's massive holding of treasuries as separate from all of this, and there is plenty to worry about with our debt situation. My point is that China is far from "owning" the US.
[1] http://www.treasury.gov/resource-center/data-chart-center/ti...
by ad on 10/18/13, 5:11 PM
>> It doesn't give China any leverage over the American government
They get some leverage. China's bond buying lowers rates on everything from mortgages to student loans. I agree that fear mongers overstate this, though.
>> the Chinese ... could order enormous quantities of Chipotle burritos and then throw them out. But that would be so hideously wasteful as to become politically untenable.
Even if it were tenable, it would still be a bad idea-- China want to suppress their currency now, but they're smart enough to know they may need to lift it later. That's why they buy US Bonds, similar to how the Fed buys or sells bonds depending on what effect it's going for. We've been in an extended period of buying so people forget that there are extended periods of selling, too. This gives them another tool apart from the usual raising interest rates, etc.
by JackFr on 10/18/13, 2:22 PM
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.)
by code4life on 10/18/13, 1:52 PM
What the author completely fails to understand is that this is another possible outcome: * China decides to increase the standard of living of it's citizen * 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 * The united states slowly lowers it's standard of living
Of course this is one possible outcome. However, the idea that the Chinese are forced to buy our bonds is ridiculous. They could just buy 1T in oil, copper, or other dollar based commodities. There are plenty of options besides treasuries.
by anonymous on 10/18/13, 4:04 PM
I have a question for you: "With respect to importing and exporting, how important is it to be in balance, or to have trade surplus (versus a trade deficit)?"
China's strategy is aimed at ensuring it maintains a trade surplus. They have succeeded for centuries. China will export more than it imports.
And the US? Its strategy is to look for the cheapest labor and goods to "exploit", whereever those may be found.
What do you think? Which is the better strategy? Does trade balance matter?
As for this article, I have no idea what this guy is on about.
The US is primarily a buyer. China is primarily a seller.
If you accept that as true, then the US's "credit" is important. And who do you think decides whether a buyer's credit is good?
Would you keep shipping goods to a buyer who could not pay?
by grimtrigger on 10/18/13, 2:20 PM
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?
by lazydon on 10/18/13, 2:22 PM
Also, Sal Khan has this video on the topic: https://www.khanacademy.org/economics-finance-domain/core-fi...
by mathattack on 10/18/13, 2:30 PM
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.
by dageshi on 10/18/13, 2:27 PM
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.
by dnm on 10/18/13, 1:36 PM
Isn't "purchase debt" the same as "give a loan?" Is he saying China is not buying US T-Notes and Bonds? I don't understand how the US Treasury would not be liable for paying back the principal and interest on the bond. And not paying it back is the definition of a default.
by ck2 on 10/18/13, 1:41 PM
by w_t_payne on 10/18/13, 2:20 PM
by Fuxy on 10/18/13, 1:39 PM
by ausjke on 10/18/13, 2:23 PM
by DougWebb on 10/18/13, 6:20 PM
If China is getting lots of dollars from selling goods to the US, and then buying lots of US Bonds to keep those dollars out of the Chinese economy, presumably the bonds are just being held somewhere. They represent a promise from the US to China that says "Those goods you sold us? We haven't really paid for them yet, but at some point in the future we will, with a bit of interest."
So at this point the goods have changed hands, the Chinese workers have been paid in Yuan, and the Chinese government is holding the excess USD value of those goods in a big pile of paper.
What happens if the US says to China "You know what? We're not going to be paying you for those goods afterall. Sorry about that."
Obviously, this will piss off China, but let's ignore the political ramifications. What are the economic consequences? The pile of paper is now worthless, so the net worth of the Chinese government drops. Does that matter? The dollars aren't part of the Chinese economy, so there shouldn't be an impact there. Is the Chinese government using their US Bond portfolio as an asset to back borrowing from other countries? Is it counting on the interest to fund future spending? (Risky gamble if they are.)
Going forward, the Chinese probably won't be so willing to buy more US Bonds, which would be understandable, and other countries and individuals might be wary as well. But maybe not, if it's framed as a one-time reset of our debt (kind of like a bankruptcy) and there's some changes to the way our debt is managed to make sure it doesn't get out of control again. (Maybe an amendment to hold all living US politicians, past and present, personally accountable for a proportion of the US debt weighted by the height and duration of their office.)
So, maybe we could still sell bonds, and maybe not. If the Chinese stop buying, they're going to have to come up with another way to keep USD out of their economy if they want to continue selling goods to the US. That makes me think they'll keep buying the bonds, especially if there's no material impact from writing off the value of the existing bonds. Or maybe they'll buy other things from us. They want a navy, and we've got a bunch of ships mothballed in various states of disrepair and a need to earn revenue without selling bonds, so maybe a deal can be struck there. It's got to be cheaper to cleanup and retrofit an old ship than building a new one from scratch, even if it's less impressive. They can use the old ones for support ships or something.
Here in the US, I don't think we'd be likely to see fewer Chinese goods coming in or their prices raised, because both of those would be detrimental to the Chinese. We'd definitely have to get government spending under control because we couldn't sell so many bonds (if any), but we need to do that anyway. Zeroing out a big chunk of the existing debt will eliminate a lot of interest payments, which would help a lot.
So, does the reluctance to do this all come down to the reputation of the US Government and the US People's ability to pay back the debt we've accumulated?
by a8da6b0c91d on 10/18/13, 1:47 PM