America has China over a barrel, not the other way around.

I glanced through that piece, and it doesn't seem to be long, not much technical (throwing around 2 balance equation doesn't really make it technical).

Disclaimer: I am not questioning his expertise, just I don't see much technical in this piece.

The section caught my eyes is the one titled as "Political Economy".

"Here’s how the initial phases of a confrontation would play out – this is actually Fred Bergsten’s scenario, and I think he’s right. First, the United States declares that China is a currency manipulator, and demands that China stop its massive intervention. If China refuses, the United States imposes a countervailing duty on Chinese exports, say 25 percent. The EU quickly follows suit, arguing that if it doesn’t, China’s surplus will be diverted to Europe. I don’t know what Japan does."

I don't see much economic here, and nothing of political either. His exciting conclusion was based on 3 faulty premises (or in his own words early, "speculative"). He intentionally left out the impact on US domestic inflation and US exports to China (with his expertise he could not possibly forget, so it was intentional to "make his point"), would caused by such drastic measure. Then, he assumes that EU quickly follows suit, and refused to entertain the idea that EURO has a chance and intention to overtake USD's position as world currency, especially at the time US facing domestic credit crisis and going to a currency/trade war with China.

Again, he could be right. But this piece is not helping.

 

A panel discussion on this issue:

http://economistsview.typepad.com/e...pulation-the-case-for-change-in-uspolicy.html

 

And then the US will be dealing with a new (or old) bunch of currency manipulators, trade imbalances and all of the same issues it has with China. Does the US start raising tariffs on them too?

 

Not economically feasible to build an infastructure when an equally cheap one (china) already exists.

But, if you take that away.....Mexico will quickly rise.

DD

 

Well, it's more technical than any New York Times Op/Ed Column, which generally contains zero equations. Ever.

Umm, no - US exports going up is the point of the whole piece and is mentioned several times. Second, we're in a period of zero inflation right now, what's so bad about it going from zero to low or moderate.

You're mixing a few things up.

First, the EU would have to follow suit unless it wants to get slammed by an undervalued yuan as well. Essentially the big pool of chinese capital that is overvaluing the dollar would look for somewhere else to go, and if it went to the euro, it would choke off their exports as well. They could either allow that to happen or not.

Second- those things are exterior to the actual equation itself. We're talking about a pretty modest yuan/dollar revaluation. And effectively you just circulated us back to the heart of the issue - the Chinese are the ones over the barrel and are the ones hurt most by an extreme dollar crash, so why would they provoke it? .

I doubt it would - those countries don't have the same motives or abilities to do the same and generally allow their currencies to float (save Vietnam which i thnk also operates on a dollar peg, IIRC)

 

Thanks for the link. Definitely a lot to absorb.

 

You're welcome.

I think the economic jargon makes the absorption much more difficult than it has to be. Plus it causes terrible gas.

 

Peter Schiff's response to the article:

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The fact that this video has worse production values than DaDakota's Rocket Talk should clue you in as to how much credence it deserves.

edit: I should say I listened to a few of his arguments and didn't find too much there of note.

He seems to just be arguing semantics for the most part, and second one of his main objectiosn is "elasticity pessimism" - which was discussed earlier and does not appear to be a valid concern.

 

If he does believe it, then he's truly an idiot.

The United States financial picture is in a most precarious state right now. If those interest rates on the long bonds rise, then the mountain of DEBT piled up by our government becomes that much more difficult to pay off every month. And those interest rates can easily rise at the slightest decrease in global confidence in the dollar. It doesn't even have to involve China. Any country that suddenly stops drinking the kool-aid and begins diversifying out will create perception that the dollar is no longer a safe haven. And then it's just a matter of the dominoes falling. Sure China will get hurt if the dollar falls. But they will only lose value on their savings. We would lose value on everything we have denominated in dollars (pretty much everything) and at the same time be forced to pay out huge interest payments on our debt. What are we going to do then, nuke every country that tries to unload its dollars?

 

While reading Krugman's article yesterday, I noticed this one in the Times...

Corporate Debt Coming Due May Squeeze Credit

...

Indeed, worries about the growth of national, or sovereign, debt prompted Moody’s Investors Service to warn on Monday that the United States and other Western nations were moving “substantially” closer to losing their top-notch Aaa credit ratings.

Sovereign debt aside, the approaching scramble for corporate financing could strain the broader economy as jobs are cut, consumer spending is scaled back and credit is tightened for both consumers and businesses.

The apocalyptic talk is not limited to perpetual bears and the rest of the doom-and-gloom crowd.

Even Moody’s, which is known for its sober public statements, is sounding the alarm.

“An avalanche is brewing in 2012 and beyond if companies don’t get out in front of this,” said Kevin Cassidy, a senior credit officer at Moody’s.

Private equity firms and many nonfinancial companies were able to borrow on easy terms until the credit crisis hit in 2007, but not until 2012 does the long-delayed reckoning begin for a series of leveraged buyouts and other deals that preceded the crisis.

That is because the record number of bonds and loans that were issued to finance those transactions typically come due in five to seven years, said Diane Vazza, head of global fixed-income research at Standard & Poor’s.

In addition, she said, many companies whose debt matured in 2009 and 2010 have been able to extend their loans, but the extra breathing room is only adding to the bill for 2012 and after.

The result is a potential financial doomsday, or what bond analysts call a maturity wall. From $21 billion due this year, junk bonds are set to mature at a rate of $155 billion in 2012, $212 billion in 2013 and $338 billion in 2014.

The credit markets have gradually returned to normal since the financial crisis, particularly in recent months, making more loans available to companies and signaling confidence in the pace of economic recovery. But the issue is whether they can absorb the coming surge in demand for credit.

As was the case with the collapse of the subprime mortgage market three years ago, derivatives played a big role in the explosion of risky corporate debt. In this case the culprit was a financial instrument called a collateralized loan obligation, which helped issuers repackage corporate loans much as subprime mortgages were sliced, diced and then resold to other investors. That made many more risky loans available.

“The question is, ‘Should these deals have ever been financed in the first place?’ ” asked Anders J. Maxwell, a corporate restructuring specialist at Peter J. Solomon Company in New York.

The period from 2012 to 2014 represents payback time for a Who’s Who of private equity firms and the now highly leveraged companies they helped buy in the precrisis boom years.

...

Not everyone is convinced that 2012 will spell catastrophe for the junk bond market, however.

Optimists like Martin Fridson, a veteran high-yield strategist, note that investors seeking high yields snapped up speculative-grade bonds last year and early this year, and he suggests that continued demand will allow companies to refinance before their loans come due.

“The companies have nearly two years to push out the 2012 maturity wall,” he said. “Of course, the ability to refinance will depend upon the state of the economy.”

That is still a wild card, but even if the economy improves, companies with a lot of debt will be competing with a raft of better-rated borrowers that are expected to seek buyers of their debt at around the same time.

Chief among those is the best-rated borrower of all: the United States government. The Treasury Department estimates that the federal budget deficit in 2012 will total $974 billion, down from this year’s $1.8 trillion, but still huge by historical standards.

Most critics of deficit spending have focused on the budget gap alone, but Washington will actually have to borrow $1.8 trillion in 2012, because $859 billion in old bonds will come due and have to be refinanced in addition to the deficit. By 2013 and 2014, $1.4 trillion will have to be raised annually.

In the late 1990s, the federal government ran a surplus and actually paid down a small portion of the national debt. But with the huge deficits of the last few years, the national debt has grown to more than $12 trillion.

Next in line are companies with investment-grade credit ratings. They must refinance $1.2 trillion in loans between 2012 and 2014, including $526 billion in 2012. Finally, there is the looming rollover of commercial mortgage-backed securities, which will double in the next three years, hitting $59.7 billion in 2012.

Even if most of the debt does get refinanced, companies may have to pay more, if heavy government borrowing causes rates for all borrowers to rise.

“These are huge numbers,” said Tom Atteberry, who manages $5.6 billion in bonds for First Pacific Advisors, and is particularly alarmed by Washington’s borrowing. “Other players will get crowded out or have to pay significantly more, because the government is borrowing so much.”
http://graphics8.nytimes.com/images...ic/20090316_DEBT_190graphic-articleInline.jpg
Entire Article

 

I love how you guys are unable to discuss any scenario except one in which all dollars are globally sold off en masse destroying everybody's savings.

The yuan must be kept artificially high and chinese mercantilisim must endure forever or else DOOOOOOOOOOMSDAY.

 

Pretty sure the Malaysian ringgit is pegged to the dollar as well.

 

Not anymore:

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aj5L_Ti88plI&refer=asia-redirectoldpage

 

Alright I stand corrected on the peg, but the article says it is now a "managed float", doesn't this mean the central bank still manipulates it? If it was advantageous for Malaysia to peg it to the dollar again, I have no doubt they will. Did a quick wiki on the baht, it used to be pegged to the dollar as well, but floated after the Asian financial crisis when it halved in value against USD...

But the larger point about other countries filling the cheap producer void left by China if tariffs are put in place still stands. Wages in these countries are much lower. A trade war with China isn't going to bring back those US jobs. They will still be offshored, just to a different country.


Even if the US is in a position to "win" a trade war in the long term with China, does it have the political will to go through with it? For political reasons does "victory" have to come within 4 years? Eg. if the democrat govt raises tariffs now, China hits back protecting its domestic markets as well, both countries' economies do badly for 4 years, I can see the Repubs campaigning to end the trade war and when they get back into power, reverse everything before China caves and revalues the Yuan (same applies if repubs were in power now and the opposition is a demo).

 

^
One more thing to add about political will is that with McCain-Feingold no longer in effect(?), and US corporations not named Google wanting to keep access to Chinese markets, pushing for trade war could be very difficult to do.

 

...in some cases they would, in some cases they wouldn't, at least we wouldn't have the distortionary effects of Chinese mercantilism shoveling them all to China and hurting both the US and the other countries. I mean let's say that Mexican imports began to replace Chinese ones - a buoyed Mexico economy would be a big plus to the US for obvious reasons.

Well, US exports to China are a small fraction of US total exports (due in part to chinese protectionism), so it really is quite difficult for China to hit back here with any retaliatory tariffs.

 

Quick comment on your concern about US debt service, for the EXISTING debts, are interest rates on t-bonds fixed?

I am not convinced by your argument that fallen dollar will create a BIGGER problem for US than China.

This is Krugman side of view.

 

Did you see the Schiff vid and his responses regarding the bolded parts? What do you think about Schiff's criticisms that:

1) The Fed printing more money to purchase bonds would crash the US dollar
2) If the US dollar crashes, it will have a bigger impact on US assets. China still has RMB to fall back on.