all is back to normal on the economic front | 24 comments (24 topical, editorial, 0 hidden)

Re: all is back to normal on the economic front (4.00 / 3)

Remember that the Bank of China is not accumulating reserves as an investment strategy ... its a side effect of keeping the currency discounted, which are necessary in part because Bretton Woods collapsed ... under the current system, a low-income country can only maintain stable exchange rates by pursuing heavily discounted exchange rates.

Investing in offshore windparks in Europe would work to maintain low exchange rates with the Euro, but buying resources in Africa and Latin America is not going to help very much with depressing the Yuan/Renminbi against the hard currencies.

Obviously, if the Chinese decide that the US$ has shifted from the category of hard currencies to the category of soft currencies, they'll switch from buying US$ to peg the exchange rate to buying US$ for the natural resources they want to buy from the US.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Jun 2nd, 2009 at 09:35:18 AM EST
[ Parent ]

Re: all is back to normal on the economic front (4.00 / 2)

good point regarding the exchange rate system,, but there was talk not too long ago about diversifying their currency reserves (e.g. when the Euro was introduced), so I do think they have at least partially an investment view on their reserves, not just an exchange rate mechanism.

And if they want to /must purchase USD assets, then I think they should also invest in "real" stuff like perhaps wind farms (I presume they are not as polticially sensitive as when Cnooc tried to overtake Unocal).

Then build a huge HVDC line to China across the Pacific to transfer the electricity to China, because MWh are a more stable currency than the USD ;-))

by crankykarsten (cranky (where?) gmx dot organisation) on Tue Jun 2nd, 2009 at 11:23:44 AM EST
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Re: all is back to normal on the economic front (4.00 / 2)

That is also trade driven ... when the EU overtook the US as their largest export market, pegging to the US$ was no longer the most sensible approach. So they shifted to the Singapore peg, pegging to a basket of currencies, without advertising either the peg or the make-up of the basket, which allows them to shift their peg without generating shock waves that would interfere with maintaining stable exchange rates.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Jun 2nd, 2009 at 12:40:31 PM EST
[ Parent ]

Re: all is back to normal on the economic front (none / 1)

Here's the data:

(from my diary on the "savings glut theory")

The brainless should not be in banking. — Willem Buitler

by Carrie (migeru at eurotrib dot com) on Tue Jun 2nd, 2009 at 12:43:55 PM EST
[ Parent ]

Re: all is back to normal on the economic front (4.00 / 2)

The tricky thing about the Singapore peg is if you guess the composition and weights, you can do the composite exchange rate against the basket and see the peg as one or more straight lines (like the 1995/2005 period) ... until they change the composition.

But once you have three or four currencies in the basket that float against each other, the individual exchange rates start fluctuating simply due to internal movements within the basket.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Jun 2nd, 2009 at 02:33:28 PM EST
[ Parent ]

Re: all is back to normal on the economic front (4.00 / 2)

what is the driving force behind which currencies I invest in? The gross or net amout I export to a country?

If it is gross, then I must buy assets in just about any currency.

If it is net, then I must only buy assets in the country I have the biggest trade surplus in (I believe this is what you mean?)

What I really wanted to say was that whatever currencies I must invest in as the central bank of China, I can still chose the asset class. If that is the case then something besides government bonds or quasi government bonds such as Freddie Mac and Fannie Mae might be the smarter choice, depending on what I think will happen regarding inflation, GDP growth etc.

When I buy government debt of a country which can do whatever it wants with its monetary base, I am betting that they are prudent and don't do anything stupid and preserve the value of the fiat money. And currently I would be worried about that.

I would rather invest, no sorry, lend, my savings to things which I might have more or real use of (e.g. natural resources, energy, arable land,...) or to governemnts where I can be sure that they don't screw me through inflation.

And with that in mind I would rather invest in EUR because the ECB is a lot harder to manipulate / armtwist and in control of (chose: wall street, main street, lobbyists, congress, elections, whatever) than the ecb.

So in the end I think the US goverment is going to have a tough time finding lenders (unless it is the Fed which will then only compound the whole problem of inflation and in the end hurt China again)...

If you spend too much, you're in debt and usually you have to pay it back. Or you're a government which can control money supply, then there's an easy way out, just watch out who you screw...

Migeru, I will give your saving glut story a thorough read. Maybe I will be smarter.

by crankykarsten (cranky (where?) gmx dot organisation) on Tue Jun 2nd, 2009 at 03:29:17 PM EST
[ Parent ]

Re: all is back to normal on the economic front (none / 1)

sorry, I meant "...armtwist than the FED" (of course, and not the ECB!) Sorry

by crankykarsten (cranky (where?) gmx dot organisation) on Tue Jun 2nd, 2009 at 03:45:02 PM EST
[ Parent ]

Re: all is back to normal on the economic front (4.00 / 3)

When I buy government debt of a country which can do whatever it wants with its monetary base, I am betting that they are prudent and don't do anything stupid and preserve the value of the fiat money. And currently I would be worried about that.

But if you invest in physical plant and resources, you have to worry about the government of that country taking them away from you.

Don't be fooled by the fact that the official American religion is worship of the free market - that's just bullcrap for public consumption. As soon as the wheels hit the rail, the free market goes out of the window if it's inconvenient.

Welcome to ET by the way.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Jun 2nd, 2009 at 06:21:50 PM EST
[ Parent ]

Re: all is back to normal on the economic front (none / 0)

I was just thinking of hyperinflation. In Germany hyperfinlfation led to savings being destroyed, but anyone who had his savings (or better debt) in his house was ok. The government only expropriated savers, not owners of real stuff. Afterall, in most countries exporpiration by the government is illegal, inflation not.

An ex-colleague of mine in Munich had a grandfather who owned a whole street in Munich. During the height of the hyperinflation he sold it for many many millions. They actually found a whole chest full of money after he died tucked away in the basement. Everytime my colleague tells that story he gets really sad because today the rent would suffice to easily pay for anything he could ever dream of. So he is still working and paying off his house...

by crankykarsten (cranky (where?) gmx dot organisation) on Thu Jun 4th, 2009 at 09:27:10 AM EST
[ Parent ]

Re: all is back to normal on the economic front (none / 0)

Well, the Wiemar hyperinflation is a story of an exceptionally dysfunctional society. But in the case of the US, there has been previous rounds of nationalisations - such as the gold expropriation during Roosevelt.

And those took stuff away from citizens, nevermind furriners who speak funny.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Jun 4th, 2009 at 02:23:37 PM EST
[ Parent ]

Re: all is back to normal on the economic front (none / 0)

Make sure to read the comment thread - on this blog they are often better than the diaries.

The brainless should not be in banking. — Willem Buitler

by Carrie (migeru at eurotrib dot com) on Tue Jun 2nd, 2009 at 06:21:57 PM EST
[ Parent ]

Currency does not fall into boxes ... (none / 1)

... one set of dollars used in capital transactions, another set of dollars used in current account transactions.

The sum total of the domestic currency used for financial investment into, foreign direct investment into receipt of incomes, and purchase of exports from a country is the sum total of domestic currency used for financial investment by, foreign direct investment by, payment of foreign incomes, and imports.

And for the main world currencies, over 90% of the transactions are the capital flows. So treating the exchange rates as being driven by trade flows is a gross oversimplification.

For the pegged currencies, what determines the exchange rate is that if total demand and supply for the currency results in an exchange rate "above the peg", new domestic currency is issued and used to purchase assets in the foreign exchange. Doing that "accumulates foreign exchange", but its a side effect.

If total demand for and supply of the currency results in an exchange rate "below the peg", existing foreign exchange reserves must be sold for domestic currency.

Since new domestic currency can be created, but existing foreign exchange must be used, an undervalued exchange rate is easier to maintain at a stable level than a neutral (or overvalued) exchange rate.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Jun 2nd, 2009 at 06:25:34 PM EST
[ Parent ]

Re: all is back to normal on the economic front (4.00 / 3)

re the land buying, they're already at it big time, see e.g. http://www.economist.com/opinion/displayStory.cfm?story_id=13697274

by crankykarsten (cranky (where?) gmx dot organisation) on Tue Jun 2nd, 2009 at 11:25:10 AM EST
[ Parent ]

all is back to normal on the economic front | 24 comments (24 topical, 0 editorial, 0 hidden)

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