Second of all, German bondholders would be more than happy to sell their Spanish bond holdings to China.
In this connection, remember the nightmare of a balanced budget
A decision was taken recently in Berlin to introduce a balanced-budget law in the German constitution. It was a hugely important decision. It may not have received due attention outside Germany given the flood of other economic and financial news. From 2016, it will be illegal for the federal government to run a deficit of more than 0.35 per cent of gross domestic product. From 2020, the federal states will not be allowed to run any deficit at all. Unlike Europe's stability and growth pact, which was first circumvented, later softened and then ignored, this unilateral constitutional law will stick. I would expect that for the next 20 or 30 years, deficit reduction will be the first, second and third priority of German economic policy.
What is the rationale for such a decision? It cannot be economic, for there is no rule in economics to suggest that zero is the correct level of debt, which is what a balanced budget would effectively imply in the very long run. The optimal debt-to-GDP ratio might be lower for Germany than for some other countries, but it surely is not zero.
Asdf is probably familiar with this, as Colorado is one of the more amusing offenders (and if you listen closely, all the way from Ohio you can still hear my former colleague shouting, "How can you report no fucking debt?!?!"). Conservatives want live babies so they can raise them to be dead soldiers. - George Carlin
It means that the Chinese central bank rather than the German treasury will be bailing out the German banksters.
- Jake If you only spend 20 minutes of the rest of your life on economics, go spend them here.
Does this development with China buying Spanish bonds mean that China is, in effect, using more of the accumulated US paper to deal with a USD/EUR currency imbalance that threatened their own interests?
You cited some analysis from Jesse's Café Américain in support of your argument. Jesse has also been predicting a re-alignment of international currencies that will come to the fore with the revision of the definition of the Special Drawing Rights regime this fall, which Jesse had noted includes a gold component.
Do you see this entering into the developing GFC story and if so how? As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
China wants to stop accumulating reserves and possibly unwind the ones they already hold. They might do this by allowing the Yuan to appreciate against other currencies, notably the dollar, but they don't just want that - they want to import high-tech goods from the US which at the moment is restricted by US policy. So, my interpretation of these words is that China intends to use their dollar reserves to pressure the US government to allow what amounts to technology transfer from the US to China. In fact, the way the Washington Post headlines their coverage (China's leader blames U.S. for bilateral tensions, rejects call to adjust currency) indicates that China is not about to give in on US calls to revalue their currency without access to the imports of their choice. The situation right now goes in the opposite direction, with both countries erecting mutual trade barriers.
If China decides to start lending to Europe it might get us out of the recession but here they are puching against the EU's policy stance of deficit and debt reduction. I guess instead of owing money to each other Europeans can owe it to China and still remain austere...
The problem with this is that Europe might get too comfortable and fall into the same trap the US fell into over the last couple of decade of unsustainable debt-fuelled economic activity... By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
Who publishes statistics of foreign currency reserve holdings? The Bank of International Settlements? The IMF? By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
COFER is an IMF database that keeps end-of-period quarterly data on the currency composition of official foreign exchange reserves. ... COFER data are reported on a voluntary basis. At present, there are 140 reporters, consisting of member countries of the IMF, non-member countries/economies, and other foreign exchange reserves holding entities. The classification of countries in COFER (as advanced economies or emerging and developing economies) follows that currently used in IFS world tables. ... COFER data for individual countries are strictly confidential. The data presented in the attached tables are aggregated data for each currency for three groupings of countries
...
COFER data are reported on a voluntary basis. At present, there are 140 reporters, consisting of member countries of the IMF, non-member countries/economies, and other foreign exchange reserves holding entities. The classification of countries in COFER (as advanced economies or emerging and developing economies) follows that currently used in IFS world tables.
COFER data for individual countries are strictly confidential. The data presented in the attached tables are aggregated data for each currency for three groupings of countries
But this is just speculation.
yours or china's? ~"When an inner situation is not made conscious, it appears outside as fate." Karl Jung~
Only if a substantial minority of EU countries rejected austerity. Wait this is important. Someone is wrong on the Internet.
Suppose all debt that EU countries would otherwise buy from each other is instead bought by China. This frees up a substantial fraction of GDP to invest within the EU (or to spend buying iPods). By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
We could also make a determined push to change our economic model. That requires the political will to direct the economy in a particular direction, and to invest.
But, in any case, we would be allowing China to do our deleveraging for us.
In other words, borrowing from china what we'd otherwise borrow form each other (even if that borrowing is just rolling over of past debt) is a net positive. But we can use this for our long-term benefit or just piss it away and have another crisis a few years down the line. By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
Suppose all debt that EU countries would otherwise buy from each other is instead bought by China. This frees up a substantial fraction of GDP to invest within the EU (or to spend buying iPods).
I'm not so sure. Let's go over the mechanics.
First, the Chinese central bank converts European legal tender into Chinese legal tender through open market operations. Then, having obtained credit for an amount of European legal tender, it can convert some European sovereign bonds into European legal tender. The net effect of this process is to convert European sovereign bonds into Chinese legal tender.
This process makes the cost of liquidity - that is, the risk-free interest rate - go down in both Europe (because the price of bonds goes up, which decreases the effective compensation paid to providers of liquidity for their service) and China (because there is more liquidity available). But on the other hand, it creates a fiscal contraction in Europe, by lowering the overall monetary mass (since the Chinese legal tender will swiftly find its way back to China).
The main consequence of decreasing the price of liquidity is that it allows a going concern to convert its highly illiquid equity into highly liquid legal tender, though the magic of fractional reserve banking. Now, if you have a business environment in which equities are great or growing, the reduction in the cost of liquidity will prompt a great conversion of illiquid equity into liquid legal tender, thus increasing the average circulation velocity of the money supply greatly. This increase in average circulation velocity can then greatly outweigh the reduction in monetary mass. If, on the other hand, you have a depressed business environment where equities are small or decreasing, very little such conversion can take place - and the reduction of total monetary mass will dominate over the increase in velocity.
So the beneficial effect for Europe is not that these Chinese debt purchases stimulate our economy. It is actually contractionary under the current business environment. The benefit is that they are importing our inflation, which gives us more room for expansionary fiscal policy. However, this underwriting of the option for expansionary fiscal policy comes at the cost of impairing our foreign trade balance. So the fiscal expansion must be of a sort that comes with a reasonable story about how it will mitigate and reverse the de-industrialisation that goes with a trade deficit.
Which means that we have three basic options:
If the people who sold those bonds would otherwise have liquidated them and bought stuff for them, then it reduces domestic demand, by taking the liquid cash out of the economy (because the cash in question is Chinese and can therefore only be spent in China).
But the alternative to recycling those euros is not to keep them in mattresses in China - it is to allow the people who earned them to buy European stuff with them (or, which comes to the same thing, to sell them for Chinese currency that some European merchant got from selling stuff to China).
Being against the zero lower bound on interest rates means it makes no difference whether Chinal holds Euros or bonds. However, the widening spreads among Eurozone bond issuers mean that it now makes sense for China to hold (say) Spanish bonds rather than Euro cash. This partly offsets the liquidity drain from any EU trade deficit with China, as China releases Euro cash into circulation and holds illiquid bonds.
But if the fiscal policy is tight and you have a trade deficit the overall effect is still one of monetary drain.
However, China's trade balance with the US dwarfs the trade balance with the EU, so most of the action should be there, By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
If China wishes to re-weight their basket peg toward the Euro, the result would be more purchases of Euro assets and fewer purchases of US$ assets. The information in the diary suggests that.
If they wish to re-weight their basket peg toward the Euro, of course they would take the opportunity to buy risk-inflated returns even as their action reduces the objective risk. That improves their return, but more importantly reduces the risk of holding Euro assets in general. If a policy shift is large enough that it cannot be hidden, then be sure that there is a benefit to the actions that are visible. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
