But fiscal policy everywhere tends to be loosely regulated, to the risk of national currencies. Another example of the lack of regulation comes from Kevin Wright, who says that Canada’s debt level is similar to the US’s. A couple of years ago, the Economist (I think) had a table that showed official country debt as a proportion of GDP; then it showed the debt adjusted for off-Balance Sheet liabilities such as pensions and health care. The differences were astounding: US debt at the time was 45% of GDP, but after adjustment 265%; Canada debt was 48%, adjusted to 420%.

Some say it’s because oil is priced in dollars. This article thinks that this regime might change to euros.

“Beginning in March 2006, the Tehran government has plans to begin competing with New York’s NYMEX and London’s IPE with respect to international oil trades ““ using a euro-based international oil-trading mechanism. . . While central bankers throughout the world community would be extremely reluctant to ‘dump the dollar,’ the reasons for any such drastic reaction are likely straightforward from their perspective ““ the global community is dependent on the oil and gas energy supplies found in the Persian Gulf.”

http://simonworld.mu.nu/archives/110871.php

From what I understand Canada now has the best showing of all G8 countries on debt vs. GDP. Here is an article from just before Canada overtook the U.K. for top spot – http://fcpp.org/main/publication_detail.php?PubID=628.

However, less than 10 years ago Canada had the second worst among the G8. It was was bad enough that some began to consider Canada only a small step away from becoming another Argentina – once wealthy but gone sour.

Debt is a serious issue for the United States – when it comes time to pay the piper where will the money come from? Take out another loan?

“China has chosen to maintain an autonomous monetary policy and stabilize its exchange rate by pegging it to the dollar. In exchange, it has given up freedom of capital movement.”

Is it possible that they realize this completely, and deliberately let the currency black market flourish out in the open (and as we saw, it is very open) so that they can take advantage of both capital flow and strict control of official exchange rates? This kind of two-faced strategy seems very Chinese to me. And I dont necessarily mean ‘two-faced’ in an insulting way, just that they have a tendency to say one thing and do another, like in their treatment of intellectual property.

In the 1960s wasn’t it about 300-400 yen to the dollar?

Sort of. Actually, if the Chinese government chose to do so, they could open their capital account and still manage to keep the exchange rate pegged to the dollar. Governments generally share three macroeconomic policy goals: 1) exchange rate stability 2) freedom of capital movement 3) monetary policy autonomy. At most, they can only acheive two of these goals. This is the macroeconomic trilemma. China has chosen to maintain an autonomous monetary policy and stabilize its exchange rate by pegging it to the dollar. In exchange, it has given up freedom of capital movement. Pegging does require intervention in fx markets to lessen pressure on the RMB as I said above. Think about it this way – the Japanese and Koreans are still able to affect the values of their currencies, but both have open capital accounts.

On the subject of black market currency conversions. Recently I’ve seen a number of articles on the Chinese economy mention that there is a rather large amount of capital that is flowing into China in expectation of a RMB revaluation. This is taking place in spite of capital controls. I don’t fully understand how this works, but it seems that currency speculators, after getting the capital into the country are then snapping up real-estate, which is in turn helping to drive a real-estate bubble. But this is a little beyond my range of knowledge at the moment.

It’s important to remember that the primary way that China controls the exchange value of the RMB, as compared to how other countries attempt to control their own currency, is by strictly regulating the export of RMB. You may remember how when we were in China and exchanged foreign currency for RMB we were issued a receipt? Upon leaving China again, without that receipt we would have been completely unable to sell back any excess RMB we had, and if we were carrying a large amount of Chinese currency, we would have gotten into serious trouble as customs. Chinese law only allows for the export of amount of currency that they consider to bepocket change, and they regulate this so carefully that even Chinese tourists going abroad are only licensed to exchange a fairly limited amount of funds.

By keeping virtually all Renmenbi inside China the government manages to keep an independent market for their currency from developing. I’m sure you also remember the black market currency traders that we used in Urumqi? They are the direct result of China’s currency policy. Because RMB cannot be exported or traded by private citizens, Chinese businessmen (apparently especially in the Shenzhen area, according to what we were told) who want to invest abroad, or make large foreign purchases, may have to acquire foreign currency indirectly.

For the others, I’ll tell the story briefly. When Saru and I (and Younghusband as well, but he didn’t actually make it on the bus to Almaty with us) were at the international bus station in Urumqi we were greeted outside the building, in a neighborhood where the signs were more likely to be writtein in a Cyrillic-script language than in the local Chinese or Arabic alphabet using Urumqi language, by a throng of dark coated men of dubious nationalities standing around the crowded parking lot fanning huge stacks of RMB in the open air. Seeing a pair of confused white boys, they immediately jumped into business mode and started offering to buy our US$ in a variety of incomprehensible languages. Although I didn’t have many dollars on me (having come from Japan, and already been in China for three weeks besides) I did exchange the little I had left, as did Saru. Since we were going to Kazakhstan later that day, I also asked around and found one fellow who had some Kazhak Tenge in his wallet and was grudginly willing to sell them to in exchange for more Chinese RMB.

Later on we got an explanation from our Uyghur friend who had been helping us arrange our transportation. Black market currency traders like the ones we met operate throughout market areas along the Chinese borders, where foreign currency is more easily avaliable, and then buy US$ at a better exchange rate than the bank. It might seem like a money losing proposition, but then once they have accumulated a decent amount of money (about $1 million) they hire a courier to take it to the rich areas of Eastern China. The usual method is to pay a commericial airline pilot to carry the money with him as he makes his ordinary flight, in exchange for a sizable fee of about $5000. When the money reaches the East, it is bought by businessmen at far higher rates than the official market value, because as I mentioned before, this is only way for them to acquire large volumes of foreign currency without a difficult to obtain government license.

As a footnote, when we got to Almaty I was astonished to see little currency trading stands all over the place, sometimes within only a couple of blocks of each other in the busier areas. Each one had a slightly different selection of advertised currencies, but they all took Dollars, Euros, and Rubels plus a few others. There were none that took Chinese RMB.

http://www.bloomberg.com/apps/news?pid=10000101&sid=aLiN2CsGfTn0&refer=japan

Thank God it was the Prime Minister and not the head of the Central Bank!

Buy less
Sell more
Or both

and that will have secondary effects on economies that are dependent on high levels of consumption in the United States.

First of all, I totally agree with you that the link you posted (ie leftist economic fearmongering) is garbage. I-Banker the guy may be, but it’s totally misleading to say that foreigners “demand higher interest rates for our bonds.” Foreign investors don’t “demand” anything. The interest rate on bonds, or the yeild, is determined not by the bond’s coupon rate, but by what investors are willing to pay for the bond either in initial auctions or in secondary markets. Bond yeilds are inversely related to that price, which is set by market forces. The higher the demand, the higher the price, and thus the lower the yeild. Yeilds on lon-term treasuries are linked to domestic long-term interest rates. That is the reason that long term interest rates in the United States are so low right now (though I should admit that some economist might argue a bit with this). And that is the reason that domestic consumption is so cheap right now.

Second, although most investors seek to park their money in an asset that will yeild the highest return, I seriously doubt that the Chinese, Japanese, and South Korean central bankers are terribly concerned about the return on their investment. In fact, they are probably going to see rather large negative returns on investment in any kind of long term dollar denominated security because long term interest rates are going up sooner or later. By the mechanism described above, that means that the price of those bonds is going to fall resulting in either paper losses if the central banks hold the assets, or real losses if they sell them.

Third, I don’t think the purchase of dollar assets (I say this because US government securities come in a variety of maturities and forms – it ain’t all just relatively illiquid long-term treasury bonds being bought.) has anything to do with maintaining a US presence in the region or any other hard security concern. No country buys our debt to keep us happy as friends. Judging by the posts and comments here daily, everyone should have enough cynicysm to recognize that. However, there is a great concern over economics, which is indirectly linked to security. And it is true that they finance our debt so that we will keep buying their products.

Fourth, the matter of currency and trade must also be kept in mind. In order to keep the RMB pegged to the dollar, the Chinese central bank must intervene in the currency markets to counter upward or downward pressure on the RMB against the dollar. As demand for China’s exports rise, there is upward pressure on the RMB, which the central bank counters by buying dollars, which props “lowers” the value of the RMB against the dollar. (I don’t understand the finer details of these operations, but this general explaination should be sufficient to get the point across.) The same thing goes for the Koreans and the Japanese. They don’t have a formal peg, but they do intervene in the currency market by buying dollars in order to keep the value of the dollar higher against the Won and Yen respectivly. Thus, their exports are cheaper in dollar terms. Since both countries also have significant trade with China, and the RMB is pegged to the dollar, there is an added bonus because their exports to China are cheaper as well. The central banks have to do something with these dollars, otherwise they are just sitting there not earning any interest, and unless you happen to be a Japanese bank (heh, heh, heh…) this is not a viable way of conducting business, because you aren’t earning a profit. So, they park these dollars in treasuries and other dollar denomonated assets. And again through the above described mechanism, interest rates are low, and the financing of consumption is cheap. Could these banks find a more profitable place to invest, probably so. But why bother?

Will comment on economist’s jones about the personal savings rate tomorrow if I have time.

Cheers.

China

There’s only one reason tht the Chinese oligarchs do anything: to retain power. Stability is more important to them than we can possibly comprehend. Think about a country with a billion people in it and what could happen if things got really unstable and you may have some idea. In addition to the reasons given in the post there’s the most obvious reason: stability. The Chinese oligarchs buy U. S. bonds so that the U. S. will continue the (on our side) open trade relationship and Americans will buy Chinese-made goods and workers in Shanghai will continue to be employed.

Japan

I have a rather mad notion about Japan. My reading of Japanese history and culture suggests to me that the people who really run Japan (whom no Westerners and few Japanese have ever met) have their reasons. What are they? Who can know?

By the way your Point #3 above is why I have serious misgivings about the jones that economists have these days about the national savings rate. Saying we should increase savings is just another way of saying we should reduce consumption. And even a very small decrease in U. S. consumption could have a disastrous effect on all of those economies you mentioned who are dependent on Americans buying their shoes and T-shirts and consumer electronics.

We need to do more to make globalization truly global. A consumption-oriented world economy is like 1950s/1960s Keynesian America — an inflationary problem in the making. Hopefully the world can shift gears to a better system with a minimum of trouble.