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There's always a flight to security after a stock market crash ... I don't know what else there is to explain.

There doesn't need to be an interest rate return when its a winning bet either way ... either the RMB drops against the dollar and there is a FOREX profit on the US treasuries, or else the Chinese economy strengthens, the RMB stays the same and rises, and then the losses on the FOREX are offset by gains in doing business in the Chinese economy.

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 Wed Aug 26th, 2015 at 05:41:01 PM EST
[ Parent ]
I am talking about action of a single agent - the Chinese government. Its role is very different than running for security. China is trying to manage the stock market (pretty desperately) for quite a while already. This year is also special for their AIIB leadership. The chronology, causation of international agreements, yuan swings, stock markets, wretched measures is not clear. There are speculative talks on internet tubes that the Chinese stock markets are attacked for "reserve currency threats" (and even this).
by das monde on Thu Aug 27th, 2015 at 02:30:25 AM EST
[ Parent ]
The Chinese government decided to push down the exchange rate against the US$, when previously they had not been pressing down very hard ... in order to reverse the appreciation against the Euro, ASEAN, Latin American and African currencies. That was a reverse of their policy which was previously prioritizing getting placed into the IMF SDR basket.

That operation requires buying US$ denominated assets.


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 Thu Aug 27th, 2015 at 10:29:28 AM EST
[ Parent ]
What's being claimed is that China is selling its holdings of US assets...

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Aug 27th, 2015 at 11:06:44 AM EST
[ Parent ]
They bought originally when they dropped the target ... since the stock market crash, they have to prop up the RMB to hit their current target ... they are basically offsetting private RMB capital outflow, so in effect mostly selling US Treasury securities to Chinese citizens.

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 Thu Aug 27th, 2015 at 08:20:28 PM EST
[ Parent ]
So many Chinese ARE dumping their savings INTO US Treasuries, and forcing their government to sell Treasuries from their foreign exchange reserves (which are not in any useful sense "savings").

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 Sat Aug 29th, 2015 at 12:01:26 PM EST
[ Parent ]
Thus savings glut rules, after all :-)

What about the investment glut, which is basically savings glut in exponential?

by das monde on Mon Aug 31st, 2015 at 07:37:33 AM EST
[ Parent ]
But its investment droughts in the US and the EU, which create the imbalance ... the savings accumulation in China is a necessary result of the Chinese government managing to keep growth going while those investment droughts were cemented in place by misguided US and EU policies.

The notion that investment and savings are two independent factors that come together in a market for loanable funds is the fairy tale that is used to distract from the investment drought and blame it on (1) a consequence, rather than a cause and (2) in a different country from the countries that the imbalance originates.

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 Thu Sep 3rd, 2015 at 05:25:53 AM EST
[ Parent ]
The investment drought is a consequence of investor expectations of ~15% return on equity.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Sep 3rd, 2015 at 05:37:27 AM EST
[ Parent ]
Which underlines the madness of ideologically rejecting public investment with quite different expectations.

I used to be afew. I'm still not many.
by john_evans (john(dot)evans(dot)et(at)gmail(dot)com) on Thu Sep 3rd, 2015 at 05:50:23 AM EST
[ Parent ]
Keynes: The Marginal Propensity to Consume and the Multiplier
When involuntary unemployment exists, the marginal disutility of labour is necessarily less than the utility of the marginal product. Indeed it may be much less. For a man who has been long unemployed some measure of labour, instead of involving disutility, may have a positive utility. If this is accepted, the above reasoning shows how "wasteful" loan expenditure[8] may nevertheless enrich the community on balance. Pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen on the principles of the classical economics stands in the way of anything better.

It is curious how common sense, wriggling for an escape from absurd conclusions, has been apt to reach a preference for wholly "wasteful" forms of loan expenditure rather than for partly wasteful forms, which, because they are not wholly wasteful, tend to be judged on strict "business" principles. For example, unemployment relief financed by loans is more readily accepted than the financing of improvements at a charge below the current rate of interest; whilst the form of digging holes in the ground known as gold-mining, which not only adds nothing whatever to the real wealth of the world but involves the disutility of labour, is the most acceptable of all solutions.

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.

Also: Concluding Notes on the Social Philosophy towards which the General Theory might Lead
I feel sure that the demand for capital is strictly limited in the sense that it would not be difficult to increase the stock of capital up to a point where its marginal efficiency had fallen to a very low figure. This would not mean that the use of capital instruments would cost almost nothing, but only that the return from them would have to cover little more than their exhaustion by wastage and obsolescence together with some margin to cover risk and the exercise of skill and judgment. In short, the aggregate return from durable goods in the course of their life would, as in the case of short-lived goods, just cover their labour costs of production plus an allowance for risk and the costs of skill and supervision.

Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital. An intrinsic reason for such scarcity, in the sense of a genuine sacrifice which could only be called forth by the offer of a reward in the shape of interest, would not exist, in the long run, except in the event of the individual propensity to consume proving to be of such a character that net saving in conditions of full employment comes to an end before capital has become sufficiently abundant. But even so, it will still be possible for communal saving through the agency of the State to be maintained at a level which will allow the growth of capital up to the point where it ceases to be scarce.

I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution.

One could say that the "Japanization" or long-term "Zero Interest Rate Policy" is a sort of "suicide of the rentier". But it leads to "secular stagnation" because of the refusal to allow fiscal expansion, or rather the demand that restrictive fiscal policy compensate for expansionary monetary policy.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Sep 3rd, 2015 at 06:15:15 AM EST
[ Parent ]
But I am still waiting to find out just what harm is done to the USA by China holding >US $1Trillion in the form, mostly, of US Treasury Notes paying less than 1% per annum. How does China holding these notes as a shock absorber or whatever, including hypothecating them, differ from the TARP money, which was supposed to have been 'sterilized'? How does, (per Wiki), "the conflict of economic interests that arises between short-term domestic and long-term international objectives for countries whose currencies serve as global reserve currencies..." play out under current circumstances or does it do so?

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Aug 31st, 2015 at 10:35:44 PM EST
[ Parent ]
There's no harm to it ... its not being held in order to accomplish something, its being held as a side-effect of maintaining the exchange rate at the pegged level. If there is any damage done, it was already done when the bonds were purchased.

If the Chinese were to sell them into a market without a strong Chinese demand for them, the result would be an appreciation of the Chinese currency relative to the U$, and if it was done in the kind of massive way raised by fear mongers, would result in a US export boom to China.

And that would not be a harm to the US as such, though it would be a harm to those interests within the US who believe they benefit from a sluggish labor market, and who raise funds in US$ in order to actually invest them  elsewhere.

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 Thu Sep 3rd, 2015 at 09:33:41 PM EST
[ Parent ]
I suppose it would at least cause a hefty bout of inflation since you can't relocate halve the global supply chain over night.
by generic on Fri Sep 4th, 2015 at 03:10:54 AM EST
[ Parent ]
Yes, there would be a supply-shock round of inflation, but except for the private interest of those with massive amounts of inherited wealth denominated in US dollar terms, tight labor markets offset most of common negative impacts of a supply-shock round of inflation.

While the US economy is far more open than it once was, it is still under 1/5 of GDP imported, and substantially less than that imported from China and any nations likely to be dragged along with the Chinese action.

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 Fri Sep 4th, 2015 at 06:23:47 PM EST
[ Parent ]
The Fed's alleged inflation target is 3%, though they are chronically unable to even come close since 2008. And, arguably, the most serious threat to the world economy is deflation. If the USA experienced even 4% wage push inflation for two years that would not likely exceed the difference between the alleged 3% Fed goal and the actuality of the annual inflation rates since 2008. 4% inflation for five years would start to whittle down the debt/GDP ratio about which conservatives obsess. It could also pull the world back from the threat of a debt-deflation death spiral. Having the USA again be an engine of world economic growth would be a good thing!

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Sep 4th, 2015 at 08:38:32 PM EST
[ Parent ]
When interest rates are close to their functional floor, there is not a lot that the Fed on its own can do to inflate the economy. Paralyzed fiscal policy from a paralyzed Federal Government seems likely to ensure that the sluggish growth will continue until the US has a damp squib of a recession.

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 Sep 8th, 2015 at 02:04:08 AM EST
[ Parent ]
Agreed. It is what an administration could do that interests me. Treassury doesn't issue bonds in order to pay Social Security obligations. It issues checks directly to the accounts of recipients. (I know -there is an SS Trust Fund.) So the mechanism is there. The administration could find ways to increase benefits and use that to inject additional benefits. The big obstacle is the widely but erroneously held notion that federal expenditures must be funded.

In 2017 a Sanders administration could revisit the 'Trillion dollar coin' idea or employ many other mechanisms to increase economic activity. A National Infrastructure Bond Authority could issue 2% bonds that Treasury could purchase with money freshly created by the Fed. The proceeds from these bonds could be used to pay for the infrastructure. Taxes on uses of the infrastructure so created could be used to retire the bonds. This should work for infrastructure to electrify the rail network, to generate renewable energy, etc. Those proceeds could be put into a perpetual trust to finance needed expenditures that do not offer such an immediate payback - such as child care, assistance to the elderly, etc. Sort of like a very limited form of a nationally chartered bank.

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

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Sep 8th, 2015 at 01:55:20 PM EST
[ Parent ]

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