moondog

Although I'm not an economist, I am informed enough on these matters to conclude that there are a lot of similarities between the current weak dollar policy its 1980s' counterpart.

During the 80s, Japan was the culprit. Now, we have China. The problem with a the weak dollar in peg situations is that devaluation does not have the desired effects. Hence, as the dollar continues to fall against the Euro, Chinese exports become increasingly stronger.

An RMB revaluation would hurt Chinese exports, but it would simultaneously enhance China's global purchasing power (obviously moreso if the revaulation is linked with an open exchange policy). Remember the Rockefeller Center contraversy?

Whatever the future holds, we've joined the "sink RMB profits into real estate" club. Beijing and Shanghai may well be bubble situations, but there's a lot more to China than these two cities.

moondog

not to split hairs, but 快 is the measure word used to describe currencies. it can be followed by any number of objects, including RMB, yuan, 钱， 美金, etc. alternatively, you can simply ommit the object, which is often the case with the vernacular. RMB is, in fact, the official name (show me a legal contract that employs 快 and i'll treat you to one bottle of decent champange at the beijing bar of your choice).

John Galt

China imports large amounts of raw materials, so a revaluation and increase in Chinese purchasing power would result in these inputs becoming cheaper (from China's perspective). Is it fair to say that the damage done to China's economy by decreased exports would be mitigated by cheaper prices for inputs?

1). If commodities (from China's perspective become cheaper, it follows that consumption will increase and commodities will become more expensive in USD$ terms?

2). If the Yuan becomes revalued, this will make Indian Rupees cheaper on a Yuan basis...will this increase Chinese imports of Indian goods/services? I've read that Sino-Indian relations have been improving of late (in the Economist, I think...). This would be good for the Indian economy but will make it more expensive for US firms outsourcing to India.

3). One factor driving down the USD$ is the trade deficit...driven in a large way by US imports of USD$ denominated oil. If oil prices rise due to #1 above, this will further weaken the USD$....

SchmeckFlyer

FYI... the dollar is gaining strength to the euro of late. Most recently because of the double rejection of the European Constitution/Treaty by France and the Netherlands, so that the euro is now "only" at around $1.22 for inter-bank trading. And it continues to strengthen against the euro.

Regarding your remarks on China (and I am no economist)... they are true, except you forget the fact that China (along with other Asian governments and central banks) essentially finances the current borrowing binge in the United States, most especially the ballooning federal budget deficit and trade deficit. China gets lots of dollars for its exports, and essentially turns right around and dumps them into T-bills and other equities that finances US debt. This has the effect for China of keeping their exports cheap and compepitive, but China cannot continue this behavior forever obviously. If the yuan is allowed to float now, however, there will be little reason for China to continue buying dollar assets. As a result, interest rates will have to rise to satisfy other lenders who will inevitably demand a higher return on their long-term investments. That is bad for house prices, consumer confidence and spending, and ultimately the economy, which is on loose foundations anyway.

But, like I said, I am no economist, those real economists amongst us, please fix the holes in my arguments.

jpatokal

While I quiver at the thought of disagreeing with sifu moondog, with a heavy heart I must:
Splitting hairs is what this sub-thread is all about! First, I agree completely that 快 is used only in spoken contexts, so your champagne is safe. However, I've always seen prices in written Chinese (including currency notes) listed in the form 17元. "17人民币" makes no sense to me, since you're not specifying the unit -- the closest Western analogy I can think of is saying "17 sterling" and not saying whether this is supposed to mean 17 pounds, shillings or pence. A quick Google search seems to back me up: I can find, for example, a reference to "10亿元人民币" (10 yi yuan RMB), but very few if any without the 元 in there.

moondog

We're really getting into some deep waters here, but what the hell! Earlier in this thread, I acknowledged that I am not an economist. So, it seems fitting that I make a similar disclaimer with respect to linguistics.

With that said, allow me to postulate more theory. I think context is key. When staring at a menu in China, it's usually pretty obvious that 元 refers to Chinese yuan (as opposed to 日元， 美元，奥元，etc), but whenever ambiguities are possible (forex boards, hotels that offer USD rates, airline tickets, etc), RMB serves as a handy differentiator.

As an aside, it seems there are strong parallells between the way the Chinese use "yuan" and the way Americans use "dollar". I think "USD" is a space-wasting (a great way to clutter up an otherwise clean powerpoint) tag because everyone knows that the American dollar is the default dollar. Perhaps the Chinese have similar feelings towards their own currency. Speaking of which, I studied my currency notes during a cab ride today looking for references to RMB and came up empty (as you told me would be the case).

SJCFlyerLG

The Aruba Florin is fixed - IIRC, at 1.71 to the dollar.

da_guy

In the 80s every dufus I knew in high school was talking about studying Japanese in college as w/o it you couldn't get a job. 20 years later where is Japan? Stuck in a 15 year old recession.

Yeah the dollar is low today and everyone's freaking out. In the late 90s everyone was freaking out because it was too strong. The value of the dollar goes up and down. It's low now for a varity of reasons including oil, China, interest rates, trade deficit, budget deficit and probably something to do with the French since they have a habit of getting their noses into everything. But give it some time and the trend will change, it always does. No need to panick.

As for the argument that China won't buy US Teasuries anymore..what else will they buy? US Teasuries are risk free with a not too shaby return even in the 4-5 % range. Where else in the world will you get that? Japan? Not a chance as their nominal interest rates are close to 0. Europe where economic growth has been 1/2 that of the US for the past 5 years? Asia? If you can stomach the risk of another '98 meltdown but I would think conservative Chinese government officials don;t

So at the end of the day, the Chinese will buy US paper no matter what.

jpatokal

You're missing a key bit here: the Chinese are buying US paper now to keep their currency stable (export stuff, import Treasury notes, cash flows balance out). If they want to have their currency appreciate, as the US is telling them to, they have to keep exporting and stop importing so demand for yuan goes up. And how will they stop imports? By ceasing to buy Treasury notes!

da_guy

If that were to happen one of two scenarios would occur:

1. Another country picks up the slack and we start importing all of our goods from them, whcih in turn gives them the extra $ to buy US debt.

or

2. We make the goods here, which increases economic stimulus, increases tax revenues, causes a decrease in the demand for US debt .

Either way yields are not affected and the sky does not fall.

jpatokal

I think you missed out one key bit in the scenario: China doesn't stop exporting, they're still shipping goods to the US as fast as you buy 'em. They just stop buying Treasury bills.

Now, this is to a certain extent self-limiting because the yuan will appreciate and China's exports will thus become less competitive (which is why the US is begging for China to do it). The 64,000 yuan question is, at what point will this happen? If China can stop buying US paper but keep its currency down by importing lots of raw materials and goods from elsewhere, which is precisely what they're doing (China's trade to most of Asia is much better balanced than to the US), then the dollar is really up the Three Gorges without a paddle.

John Galt

Great post.

Reminds me of a comment Winston Churchill made about democracy, that it's the worst form of government except for all other forms of government. Where else are you gonna invest?

--Western Europe--Bad demographics, business-unfriendly laws
--Africa--Puh-leeze. Corruption, poverty, disease, no infrastructure, no rule of law....
--China--Corruption, cronyism, imploding demographics (one-child policy means more retirees than workers), overbought, no robust institutions (stock exchange, banks, etc.).
--Russia--Communism, no rule of law
--India--Red tape, no infrastructure, exploding AIDS population, overbought.
--Central America--Squeezed between VERY POOR countries and rich countries, unable to compete with either...

This leaves, what?

Turkey, which will benefit from EU membership and a more stable Iraq/Iran after the Ayatollahs are tossed out?
Australia/New Zealand as an Anglophone play on East Asia?
The Phillipines, possibly the next Asian Tiger?
Brazil, with natural resources and a pretty good high-tech infrastructure?
Dubai, the Switzerland of the Gulf, for trade between the Subcontinent and Europe?

blueDC

T-bills will never go out of style for all of the reasons mentioned - stable, backed by a robust economy the size of the rest of the world combined with a currency that's still the default global currency for everything (if the Euro is so strong, why isn't OPEC repricing oil barrels in Euros to get more dollars?). It's just a matter of who will buy them in the future (somebody will).

China buys T-bills because it soaks up lots of USD in the forex market to defend the yuan against speculators. Where to put all the dollars? Back into the T-bills of course - safest form of investment around. So does Japan (and the rest of Asia) who keeps the yen in lockstep with the yuan in order to remain competitive with China. Hence, the notion that foreigners are financing the US's gigantic twin deficits through currency manipulation.

If China floats the yuan (unlikely), they'll stop buying dollars and therefore T-bills. And if the yuan rises, the yen, won, baht, ringgit, sing$, etc. will all rise in lockstep (as they dramatically did when a clerical error pushed the Chinese currency up by a blip last month which caused speculators to push up all the other Asian currencies). That will reduce the need for Asia to soak up dollars to defend their own currencies; and therefore lose appetite for T-bills.

[To whiplash back to the original topic , much of Asia is "pegged" to the dollar because of the yuan's rigid peg to the dollar. And since the yuan is undervalued, Asia is a bargain paradise for dollar tourists.]

But China won't float the yuan, it'll probably be repegged and China will still need to mop up excess yuan by buying USD, therefore T-bills. And the rest of Asia will still keep their currencies in lockstep with China to maintain competitiveness, and by doing so will need to retain their current large purchases of USD/T-bills.

Even if they all stopped, domestic investors (personal and institutional) coupled with Europeans who are despondent about the anemic state of returns on investment in their own country will pick up the slack.

Why do we care about the T-bills? Oh right, the dollar. "Gradual rebalancing" should be used in place of "crashing". Even if China and Japan are one day dumb enough to unload all their USD reserves thus causing the dollar to crash which only devalues their own dollar reserves (yes, vicious cycle), somebody else will pick up the slack. There really is no alternative... Yet.

But the US is playing Russian roulette with all this excess liquidity and borrowing/spending binge. We've essentially mortgaged our (and the globe's) financial future to countries that may or may not act in our (or their) best interest. That's as unacceptable as ceding our nation's security to the UN.

mosburger

Not getting into the argument otherwise, but I would replace Turkey with Iran on the prospective investment targets list. Turkey has no resources, the government is linked with organized crime and right-wing thugs and politically going towards fanatical nationalism. I think the US might be the only country really wanting them inside the EU.

Iran it is, they can only get better and are doing a good job in economic terms even now.

moondog

i don't think so (no one, save ~15 families, makes coin there).