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Suez Moment - You Heard it Here First

by ChrisCook Mon May 3rd, 2010 at 06:00:38 AM EST

Niall Ferguson raises an issue here that I wrote about in October 2008.

Q&A with Niall Ferguson - Vancouver Sun May 1st

Q Do you think China's threats to sell U.S. T-bills to inflict financial pain are real?

A I don't think they are going to pull a lever as harsh as that over Taiwan. I think if the stakes were high enough, they might very well. If China announced tomorrow `we're selling our Treasuries,' the effect on the bond market would be explosive. And it would cost the Chinese because their dollar reserves would be worthless. But you have to remember most of China's wealth is not in dollars, it is in renminbi. So they would lose on their international reserves, but they would gain on every other asset that they own. I think the question is: What issue is big enough to play that card?

Q What would prompt them to play it?

A There would need to be a major breakdown over something. For example, let's conjure up a scenario where the United States finds itself having to support Israeli attacks on Iran's nuclear facilities. Now, the Chinese would have some good options there. One would be to just let it play out and watch. Another would be to very publicly seek to [exert] their leverage over the United States by saying `no, no you can't do this.' And that would be a very high-risk strategy, but I could imagine how that would work

So, I think at some point, the currency issue and the U.S. debt issue does give the Chinese real power, just as the currency issue and the debt issue gave the United States power over Britain in the 1950s, particularly at the time of the Suez Crisis. So, you have to imagine a Suez Crisis -- where the U.S. does something and the Chinese just decide `we're not going to support that because by not supporting it we will make many friends.' [T-bills] are a strategic lever and they can be used to deter military and other actions.

Q Is it one of their most powerful levers to deter action?

A Yes.


I referred to the 'Suez Moment' in Asia Times and here in October 2008, at the time of my participation in a  major conference in Tehran.

Asia Times Online :: Middle East News, Iraq, Iran current affairs

The problem - 'Peak Credit'
The dollar-based global financial system is continuing a slow, and irreversible, collapse from the point - I call it "peak credit" - in August 2007 when the unsustainable US property price "bubble" finally burst.

The problem is not one of liquidity - that is, the absence of money - central banks can print as much of that as necessary. The problem is a terminal shortage of capital or equity in the global banking system - a solvency problem. The US government was previously able to resolve such a problem, as they did in the 1930s, by deploying unused domestic resources.

The US has brought forward, through its catastrophic waste of resources in Iraq, its "Suez moment". This is the realization forced on Britain by the US in 1956 that economic realities require an end to empire. The US cannot resolve the insolvency of the dollar-based global financial system without the assistance of their international creditors, and this requires a new global settlement - a Bretton Woods II.

It is ironic that Iran has been protected from being infected by the "Anglo disease" by the very sanctions which were aimed at damaging it.

In fact, I believe that China - for whom energy security is every bit as much the same imperative as it is for the US - may actually have discreetly played the card in the first half of 2007, probably in conversation with someone financial like Paulson. I doubt whether China, who tend to operate quietly behind the scenes, would ever take the sort of high profile approach Ferguson suggests

My purely circumstantial evidence for saying so is that I do not believe that the US would ever have allowed this to happen

 Iraq revives Saddam oil deal with China - China Institute - University of Alberta

23 June 2007 Financial Times

Baghdad has revived a contract signed by the Saddam Hussein administration allowing a state-owned Chinese oil company to develop an Iraqi oil field, the Iraqi oil minister told the Financial Times in Beijing yesterday.

unless the Chinese had made them 'an offer they could not refuse'.

So I believe the US's Suez Moment and the moment of Peak Credit were pretty much simultaneous.

Oh, and as an afterthought I have been wondering ever since about the Curious Episode Of The Wandering Nukes later that year.

AFP: B-52 carried nuclear missiles over US by mistake: military

WASHINGTON (AFP) The US military said on Wednesday it was investigating an alarming security lapse when a B-52 bomber flew the length of the country last week loaded with six nuclear-armed cruise missiles.

The blunder was reported to President George W. Bush after the nuclear warheads were discovered when the aircraft landed at Barksdale Air Force Base in Louisiana, a military official said on condition of anonymity.

An air force official, who also asked to remain unnamed, said the B-52, which originated at Minot Air Base in North Dakota, had six cruise missiles with nuclear warheads loaded on pylons under its wings.

Could this have been Darth Vader attempting to create several hundred kilotons of realities on the Iranian ground? Just because they're paranoid.......

Display:
Well, according to Krugman, China selling T-bond would be actually helping the United States to escape the current slump.

But now ask the question: what would the effect be if China decided to sell a chunk of its Treasury bill holdings and put them in other currencies? The answer is that China would, in effect, be engaging in quantitative easing on behalf of the Fed. The Chinese would be doing us a favor! (And doing the Europeans and Japanese a lot of harm.)

This might not be the strategic lever Ferguson speaks of.
"Obey us, or we will give you prosperity"...

by Xavier in Paris on Mon May 3rd, 2010 at 08:18:26 AM EST
Perhaps i just don't understand Krugman's point, partly because I have yet to understand quantitative easing.  How would China selling T-bills have the same effect as if the Treasury did?  and what if it was done with a revaluation of rmb, as seems very possible?

"Life shrinks or expands in proportion to one's courage." - Anas Nin
by Crazy Horse on Mon May 3rd, 2010 at 08:56:51 AM EST
[ Parent ]
The assumption is that China would sell those T-bills for non-US currencies. Assuming these bonds don't end up in the vault of some other central bank, they would have the effect of increasing the amount of circulating dollars, while reducing the circulating amount of the currency used to buy these bonds. And this effect would be obtained without the US treasury having to actually issue more debt into circulation.

In addition, China's act of selling T-bills for (presumably bonds denominated in) non-US currencies would have the effect of lowering the US exchange rate with respect to those other currencies.

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Mon May 3rd, 2010 at 09:12:55 AM EST
[ Parent ]
The assumption is that China would sell those T-bills for non-US currencies.

If China sold those T-bills and investors bought them with US dollars, this would be monetarily neutral (given the very low US dollar interest rates) or even a drain of liquid cash in exchange for less liquid bonds (very slightly less liquid than cash in the case of short maturities, but more illiquid in the case of long-term bonds).

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Mon May 3rd, 2010 at 09:24:10 AM EST
[ Parent ]
Danke.  And what if the rmb is revalued upward at the same time?


"Life shrinks or expands in proportion to one's courage." - Anas Nin
by Crazy Horse on Mon May 3rd, 2010 at 09:37:20 AM EST
[ Parent ]
Yeah, what if?

The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Mon May 3rd, 2010 at 09:48:05 AM EST
[ Parent ]
A month ago I wrote
the only thing that China might do is start borrowing dollars (whether the public or private sector does this is immaterial) to fund its economic or military activity, using its currency reserves to back that debt (basically, the Chinese central bank can safely allow the Chinese economy to accumulate an amount of dollar-denominated debt equal to its dollar reserve holdings
Selling off their T-bills is the same thing as borrowing dollars...

The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Mon May 3rd, 2010 at 09:51:56 AM EST
[ Parent ]
It's a pretty wonkish post by Krugman.  Arguably more so than it needs to be in a blog post.

Essentially Niall Ferguson is saying, "The Chinese will revalue the yuan and make American exports more competitive.  SUCK IT, LIBTARDS."

It would obviously make no sense to put it in those terms.  And that's because Ferguson is an idiot who's suffering from English Empire Destruction Disorder and believes all kinds of bullshit about strong currencies and politics rendering economic law ineffective because...well...FUCK IT, WE'RE GOIN' TO MARS!

Called on this Ferguson will (and has) retreat to his "I'm a Harvard Historian and You're Not!" position in an effort to distract from being so laughably and routinely wrong.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Mon May 3rd, 2010 at 05:23:32 PM EST
[ Parent ]
Now you're being unserious.

Write out 100 times 'I shall not dis a Harvard professor'.

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Mon May 3rd, 2010 at 05:35:56 PM EST
[ Parent ]
Niall knows about as much about economics as he knows about Felix the Cat http://www.theatlantic.com/science/archive/2009/08/ferguson-obama-felix-the-cat-and-pluto/23412/].

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Mon May 3rd, 2010 at 05:41:04 PM EST
[ Parent ]
Damn, typeFAIL.  Let's try that again.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Mon May 3rd, 2010 at 05:41:36 PM EST
[ Parent ]
You forget Felix the Cat is Niall's favourite cartoon character.

The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Mon May 3rd, 2010 at 05:47:16 PM EST
[ Parent ]
Before 2008 people would run around screaming the sky might fall if China decided to sell its T-bills and "crash the dollar". But now that "quantitiative easing", fiscal stimulus and competitive devaluation are the order of the day, China would actually be helping the US Treasury and Fed while at the same time providing a convenient foreign scapegoat for any ill effects of dollar devaluation.

The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Mon May 3rd, 2010 at 09:16:35 AM EST
[ Parent ]
Are you basically saying that Ferguson has it wrong, as Xavier says?

"Life shrinks or expands in proportion to one's courage." - Anas Nin
by Crazy Horse on Mon May 3rd, 2010 at 09:38:57 AM EST
[ Parent ]
I was tempted to say he was wrong on the UK this morning as well:
The trajectory of U.K. public debt over the next 30 years, absent a major change of policy, will take it to a mind-blowing 500% of GDP, which is about 100 percentage points worse than Greece.
Since when does Greece have 400% percent debt-to-GDP? When did extrapolating current trends 30 years out stop leading to nonsensical results? When did Ferguson stop being an ideologue?

The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Mon May 3rd, 2010 at 09:47:41 AM EST
[ Parent ]
I call bullshit.  If that had really been written by Ferguson, he would've reminded us that he is a Very Important Professor of History at Harvard at least a dozen times in that sentence.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Mon May 3rd, 2010 at 02:19:41 PM EST
[ Parent ]
The article does mention his relationship with  Ayaan Hirsi Ali, which may have taken over in importance from his Harvard professorship. And the article does say
The problem is that in the realm of politics, China's [position] is not necessarily benign. They [do not] remotely share our ambitions to improve the quality of governance in Africa.
which sure sounds like Ferguson to me.
by gk (gk (gk quattro due due sette @gmail.com)) on Mon May 3rd, 2010 at 04:11:51 PM EST
[ Parent ]
I don't know what his economic experience is, but he certainly has a talent for comedy.
by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon May 3rd, 2010 at 05:36:47 PM EST
[ Parent ]
No, no, he's very serious.

The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Mon May 3rd, 2010 at 05:44:25 PM EST
[ Parent ]
Ferguson is a genius of revisionist incompetence.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Mon May 3rd, 2010 at 05:47:46 PM EST
[ Parent ]
(Krugman) The answer is that China would, in effect, be engaging in quantitative easing on behalf of the Fed.

I don't see it that way: the Chinese would be selling T-Bills in exchange for existing dollars, not new, as with QE.

The monetary effect would be neutral as I see it, but the fiscal effect dramatic, since it would crash the dollar against the currencies for which China exchanges the dollar proceeds.

That would have a nominally inflationary effect in dollar terms on the price of essential imports which would have a contracting effect on the economy.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon May 3rd, 2010 at 09:56:54 AM EST
[ Parent ]
the Chinese would be selling T-Bills in exchange for existing dollars, not new

It depends on who buys those T-Bills, investors holding US dollars or those holding other currencies.

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Mon May 3rd, 2010 at 10:04:26 AM EST
[ Parent ]
The Chinese sell T Bills and get dollars for them: they then sell those dollars for another currency.

My point is that the sale of T Bills in itself does not give rise to an increase in dollars in existence (unless the buyer from the Chinese is the Fed, with new money) As I recall, you said yourself upthread that the effect of the Chinese cashing out their T Bills is neutral in monetary terms, and I agree with that.

Hence the distinction from QE, which is NOT neutral in monetary terms, and the reason why Krugman is wrong.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon May 3rd, 2010 at 12:54:36 PM EST
[ Parent ]
I guess my point was to consider any central bank held T-bills as not circulating. In other words, the effect of the Chinese central bank selling T-bills would be the same as that of the Fed selling them, as far as the money supply is concerned.

If the Chinese central bank sells dollars for other currencies it effectively increases the dollar money supply and reduces that of the other currencies.

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Mon May 3rd, 2010 at 12:59:40 PM EST
[ Parent ]
QE, which is NOT neutral in monetary terms

So for there to be QE by your definition there must be new money created?

I agree but it seems some people don't think of QE that way.

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Mon May 3rd, 2010 at 01:00:49 PM EST
[ Parent ]
If QE isn't new money, then what is it?

It's not debt, any more than notes and coin are debt, and in my view notes and coin are equivalent to 'bearer'/anonymous QE. As an aside, I came across a useful distinction between digital cash and digital money, which was that the former is anonymous and the latter 'knows who owns it'.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon May 3rd, 2010 at 01:53:57 PM EST
[ Parent ]
There's also when you call it QE but you do it with existing money so it doesn't work. :P

The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Mon May 3rd, 2010 at 03:01:10 PM EST
[ Parent ]
My point is that the sale of T Bills in itself does not give rise to an increase in dollars in existence (unless the buyer from the Chinese is the Fed, with new money)

No, that's not quite right.  There is no real difference between dollars retired from circulation (or withheld from new issuance) by the Fed and dollars retired from circulation by private individuals or foreign treasuries.  This is where Niall Ferguson seems to display his characteristically superficial understanding of money that Krugman criticizes him so much for. (And I think he also misunderstands the Suez events as well:  It wasn't debt and currency that gave the US power over Britain and France.  It was the fact that the US had just won WWII and owned the world because of it while the French and British had essentially lost control of their colonial empires in the War, becoming dependent upon US charity and interest for their continued existence. Money isn't the explanatory variable in Suez-- war and empire are.)

The Fed creates new money by buying securities (Treasuries usually), thus raising the price of securities, and issuing dollar notes printed by the Treasury in exchange for them.  If people want to hold cash instead of assets, like now, they will sell assets, eventually to the Fed, and hide the cash they receive in bank vaults, lock boxes, and under mattresses.  That's what happened last year and that's where all the extra dollars that were printed in exchange for assets that the Fed bought went.

However, given that people have all of these dollars saved up and retired from circulation, it means that anyone with such a savings stuffed away somewhere can privately act like a mini-central bank whenever they stop being so risk averse. Since the money is not in circulation, it cannot be counted as cash in existence for purposes of calculating QE.  But as soon as all those private savers buy something with that money, it is the exact same thing as if the Fed just printed new money.  Therefore, if the Chinese were to sell T-bills for the purpose of spending the cash on stuff or other currencies (it really doesn't matter) they would be doing so by getting those same highly risk averse people who have kept cash in vaults and mattresses for the last two years to put it into circulation.  It's the exact same thing as new money in terms of stimulative effects on spending and prices are concerned.  That's why they would be doing the world a favor right now by selling their US treasuries.

I think Migeru's right on this: Ferguson's analysis is just plain wrong.

by santiago on Mon May 3rd, 2010 at 04:55:57 PM EST
[ Parent ]
I don't think this analysis is correct.

Dollars held whether as cash and notes or as demand deposits by private individuals, businesses or even by foreign central banks, are 'in circulation' because they are instantaneously available to spend or lend.

It's only when dollars return home to the Fed eg as payment of taxes or as grubby notes for burning that they are 'retired'. It's only if dollars get tied up in dated (term) loans or in equity claims over property that they actually go out of circulation, and of course there are a gazillion dollars which are tied up in exactly this way which aren't going anywhere - ever.

In fact - and I am not alone in thinking this - in my view if 'money' exists at all, it is in dynamic form, and only in the transient instant of exchange.

What we think of as 'money' is in fact currency or 'money's worth' which is exchanged for other money's worth on credit terms by reference to a value standard/unit of measure, and within a suitable legal trust framework.

ie Money is in fact a relationship, not an object.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon May 3rd, 2010 at 07:12:32 PM EST
[ Parent ]
Dollars held whether as cash and notes or as demand deposits by private individuals, businesses or even by foreign central banks, are 'in circulation' because they are instantaneously available to spend or lend.

It's only when dollars return home to the Fed eg as payment of taxes or as grubby notes for burning that they are 'retired'.

So there is no such thing as 'hoarding'? You're assuming that any dollar that is available to spend or lend will be spend or lend. That's probably true under standard conditions of pressure and temperature but it ignores liquidity preference and goes against the understanding that central bank foreign currency reserves are not a stock of wealth that can be spent. Are we falling into the Loanable funds fallacy here?

See Krugman on the issue.

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Tue May 4th, 2010 at 05:12:19 AM EST
[ Parent ]
You can call the holding of cash/demand deposits 'hoarding' if you like. But my point is that notes and coin held, and credit balances held with the central bank are functionally different from the investment at interest of such cash/credit money over time.

I assume nothing about the linked questions of willingness to lend or spend and capacity to borrow - which latter point is the problem due to the vast and unsustainable inequality of wealth and income.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue May 4th, 2010 at 09:07:37 AM EST
[ Parent ]
But savings is NOT equal to investment.  If people, or banks, have cash and keep in hidden in drawers or vaults or even central bank reserves they are not investing that money, and they retain the same capacity as a central bank or treasury does to spend that money in the future.  That's why if the Chinese sell foreign t-bonds the Chinese will be effectively putting new money into circulation. It wasn't in circulation before; it was just hidden away, the same as if it were never in existence.  
by santiago on Tue May 4th, 2010 at 09:58:01 AM EST
[ Parent ]
That's why it can be claimed that Chinese monetary policy was putting a deflationary pressure on the US dollar.

The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Tue May 4th, 2010 at 10:13:12 AM EST
[ Parent ]
Go with your money is a relationship theme and you'll see that there is a difference, then, between money that is being used for exchange and money that is being, as Migeru says, hoarded -- that is, not invested or earning interest, just kept buried or hidden. Private individuals can act like central banks when they save pieces of currency because they are simply not engaging in a money relationship with anyone when they hoard cash, but they retain the power to do so in the future when they hoard cash -- just like a central bank or national treasury does.

I don't think you're seeing the significance of your belief that money is a dynamic relationship instead of a static thing. It's only if you think of money as a static thing, instead of a dynamic relationship, that you can continue to hold onto the simple quantity theory of money account that argues that money is just the sum total of what central banks, and only central banks, emit or retire, regardless of whether people save, spend, or invest those currency units.

by santiago on Tue May 4th, 2010 at 10:03:10 AM EST
[ Parent ]
I think of Money as Dynamic Value, and Capital as Static Value where Value is definable only in relative terms.

Currency is a credit obligation/object/thing, ownership of which may or may not be recorded and attributed to individuals in a generalised accounting system 'AR/AP cloud' (AR = Accounts Receivable; AP = Accounts Payable) which I have read described as a 'ledger of ledgers'.

The sum total of oblgations is collectively what we think of as 'working capital'.

Apart from this generalised repository of obligations there also exists a generalised repository of who owns or has rights of use in what productive assets. ie a balance sheet of balance sheets or generalised title repository.

This is collectively what we think of as Fixed Capital.

The point I am getting to is that none of this finance capital is actually money, but merely potential money that manifests as money only in the transient instant of exchange.

I have already annoyed migeru mightily in the past by saying there is a meaningful analogy between value and energy, so that potential energy and kinetic energy are analogous to capital and money.

In fact I think that an absolute Unit of energy is the optimal candidate for a Unit of Measure or 'Value Standard' for exchange, in the same way that a kilogramme is a unit of measure for mass, and a metre for length.

It is possible to conceive of money as a credit object/thing issued by anyone, not just banks, and it is only the restriction placed upon bank lending by their capital base (by regulation) that actually gives rise to the limitations as to quantity, I suggest.

ie the quantity theory is based ideologically upon the assumption that private banks, and only private banks, may issue credit objects. Which is bollocks because any individual or business (and come to that, any productive asset) may do so, the difficulty lying in getting them generally accepted.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue May 4th, 2010 at 11:23:00 AM EST
[ Parent ]
Yes, I get that, and while I might quibble about details of your idea, I think you'll find that if you think  through the logic of money as a relationship and not a physical object you'll see how Ferguson is arguing something completely contrary to what you believe yourself about money. He's accepting the old quantity theory of money heuristic when he should be taking into account, instead, the fact that if people don't feel confident enough to spend or invest the currency units (or anything else) they do have, it is the exact same thing as having less money in existence.  Ergo, if the Chinese can coax more people to invest in something, even something as low risk as a US T-bill, it is the same thing as putting more US dollars into circulation, just as if the Fed had purchased the T-bills from the Chinese instead.
by santiago on Tue May 4th, 2010 at 12:36:39 PM EST
[ Parent ]
santiago:
I think you'll find that if you think  through the logic of money as a relationship and not a physical object you'll see how Ferguson is arguing something completely contrary to what you believe yourself about money.

Of course.

I'm not sure what 'school' he belongs to, presumably Austrian, which AFAIK is the most faith-based/ideological school of economics and therefore the most detached from reality.

santiago:

instead, the fact that if people don't feel confident enough to spend or invest the currency units (or anything else) they do have, it is the exact same thing as having less money in existence.

That's a bit of a truism, though, isn't it? You may as well say that anything that is static is not dynamic?

The mere fact that people are liquid does not mean that they are economically active


"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue May 4th, 2010 at 02:13:23 PM EST
[ Parent ]
Not a truism, because we are talking about causal agents. What can induce a person to change the way the way he or she looks at his resources, social, physical, or other?

In our discussion here, we have, on the one hand, the case a person who has a certain, socially accepted quantity of negotiable wealth stashed somewhere and not being used -- cash in US dollars. On another hand, we have a central bank that has the capacity, if not the will, to create more of that kind of organizing tool for generating wealth (another way to think of currency).  Because both the bank and the person have the capacity, but not necessarily the will, to use inactive currency in order to organize others to generate usable wealth, both represent the same kind of potential agency.  

Finally, on the third hand, we have the Chinese, who possess a wealth generating asset called T-bills, which creates claims on resources that the US government has committed to give the bearer of those negotiable bills.  By selling those T-bills to the private person in the above paragraph, The Chinese would be organizing that person to engage in wealth-generating behavior with other people due to the social acceptability of US dollars, i.e., putting those dollars into circulation to organize people to make more things that people can use, exactly what we want out of a stimulative fiscal or monetary policy, aka QE.

Agency is what explains the difference between a static and dynamic view of the world, so you have to specify what kind of agency you're talking about.  In money creation, we're talking about organizing people to stop hiding, out of fear, their resources by themselves and to start relating with others to create wealth by entering into risky relationships. It makes no difference whether it is the Fed who organizes people that way by printing even more currency bills or if private individuals or businesses do it themselves with the resources they already have, whether it's real resources or social ones such as stashed-away currency notes. Either way, it adds to up QE if the Chinese were to sell their Treasuries to either party.

by santiago on Tue May 4th, 2010 at 03:09:44 PM EST
[ Parent ]
This might not be the strategic lever Ferguson speaks of.
"Obey us, or we will give you prosperity"...

If they reduce their accumulation at a rate that is consistent with American industrial policy.

There is a non-trivial difference between devaluing on your own time table and devaluing on somebody else's time table. In the same way that there is a difference between weaning yourself off oil on your own time table and weaning yourself off oil on a time table set by the laws of physics...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 4th, 2010 at 04:20:34 PM EST
[ Parent ]
You may allude to the fact that a country needs time to build up an industrial tool.

But in the case of western countries, we have already been in the case that our EXISTING industrial tool is not used to 100%. This would give some quick online capacity, which of course I agree to say that some countries may lack (eg: Cameroon, Bolivia or Pakistan...)

by Xavier in Paris on Wed May 5th, 2010 at 11:46:15 AM EST
[ Parent ]
The problem with that is that existing plant has been shipped out of the country in great volume.

Furthermore, even if plant exists, the political organisation - at all levels, not just in Washington - may not exist. Even if all the necessary plant exists, making it go from idle to producing at capacity is a non-trivial exercise in logistics and organisation.

Of course, there is another possibility - that Krugman et al are right about the US' ability to withstand a sudden and unplanned devaluation, but the State Department and the Pentagun don't trust that analysis and therefore have no particular desire to put it to the test...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 6th, 2010 at 10:59:11 AM EST
[ Parent ]
If China announced tomorrow `we're selling our Treasuries,' the effect on the bond market would be explosive. And it would cost the Chinese because their dollar reserves would be worthless. But you have to remember most of China's wealth is not in dollars, it is in renminbi.

One thing I have learned here on ET is that reserves are not a stock of wealth but a signature of past monetary policy. So China's dollar reserves are not "wealth" - they are a lever they can use to push the value of the USD down, just as accumulating dollar reserves is the way to push the value of the renminbi down...

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Mon May 3rd, 2010 at 09:19:33 AM EST
See also:


The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Mon May 3rd, 2010 at 09:21:35 AM EST
Perhaps another question is: What is the perceived effect of China selling US Treasuries in large quantities? Regardless of what might actually happen were significant players concerned about other consequences then the threat could be effective. If investors in large numbers fled the dollar the cost of US imports from China would certainly go up and oil, even though denominated in dollars, would certainly go up in price. These effects would be immediate and negative.

While a cheap dollar would be good for US exports it would take time for the US to sufficiently avail itself of those opportunities by producing more things to sell. And the investment in domestic manufacturing, especially absent clear government policy support, would be undercut by market instability and investor uncertainty as to the duration of the new currency regime. Krugman may be insensitive to these timing factors given that his framework revolves around equilibrium analysis and large scale sale of US Treasuries by China could be a decidedly dynamic event.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon May 3rd, 2010 at 11:09:22 AM EST
What is the perceived effect of China selling US Treasuries in large quantities?

As long as we believe China is propping up the Yuan (as it must if it's keeping it pegged while maintaining a very skewed bilateral trade balance) then the first thing China would do is reduce the rate at which it accumulates dollar reserves.

We're a long way away from China actually selling US Treasuries in any amount.

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Mon May 3rd, 2010 at 11:14:31 AM EST
[ Parent ]
They very well may have reduced their purchases of US Treasuries, etc. very significantly this year, from what I have read. But they may be still purchasing, but through London, Hong Kong, Singapore etc. intermediaries. It is likely no accident that these markets are opaque.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon May 3rd, 2010 at 11:45:05 AM EST
[ Parent ]
And my reference to the effect of China selling US Treasuries was to the possibility, not to a present established fact, which was not clearly stated.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon May 3rd, 2010 at 11:47:00 AM EST
[ Parent ]


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