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Recently, Nobel Prize-winning economist Paul Krugman told an audience in Beijing that the US risks having a "lost decade" of Japanese-style economic stagnation because of the Obama Administration’s "half-measures," most notably a stimulus that was too small and will, in his opinion, need soon to be repeated.
I wonder how his remarks went over with that audience. The problem is that the stimulus requires America to borrow an awful lot of money, which in recent years has largely been made possible by China’s buying up American currency and Treasury bonds. And that’s something the Chinese are apparently no longer willing to do:
U.S. debt prices slid, sending the 30-year Treasury bond yield to its highest since November.
"The auction is big news because now it’s showing that maybe the Chinese don’t want our bonds. If the cost of capital for the United States becomes more expensive, then the recession is going to take that much longer to get out of," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.
[...]
The $14 billion Treasury bond auction met below-average demand from investors, who bid aggressively to force the government to pay a higher yield as it pushed ahead with plans to help finance its burgeoning budget deficit with more longer-term debt.
Now, it’s likely that fears of China leading the world’s other economies to dump the dollar are exaggerating the reality of the situation; as has been noted, China tried using a currency basket in 2005 but has essentially dropped it now that the going’s got tough; it was forced to intervene last fall to keep the yuan from rising so much it killed off their already-ailing export industry. Meanwhile, the dollar is a model of stability compared to other foreign currencies, which is why so many investors worldwide are flocking to it. However, that still doesn’t mean the US has an unlimited rein when it comes to deficit spending. It looks like Obama has to steer very carefully between a rock and a hard place to get us past the economic shoals.
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Maybe we should sweeten the deal for would-be bond holders by throwing in a Chrysler.
Until China stimulates its domestic consumption, and stops running a trade surplus, the U.S. will be the beneficiary of China’s bad economic policy. Which is twins with the the U.S. bad economic policy. Two wrongs make a unstable equilibrium right.
Well, this makes me even happier that Obama gave all our $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ for the next centuries to the banks. I’ll be ecstatic when he hands over health care to the insurance companies!!!! Can’t wait. GAD!
And that’s something the Chinese are apparently no longer willing to do
I’m not sure that could if they wanted to. Their trade surpluses paid for those Treasuries and their exports are way down. As eCahn says, this is a marriage of two bad trade policies, ours and theirs. The Chinese leadership needs money to soften the skids in its own country because they are rightly scared shitless at the political instability a prolonged downturn involves. They are also just beginning to realize that a lot of this debt they are holding in US Treasuries is going to inflate away.
The Chinese have more options than the U.S. They have the reserves and the savings. The U.S. has only the reputation and the superpower. While not denigrating that, the Chinese have more fundamental means of reconstructing the world trade system. Seems like U.S. “diplomacy” might be useful. Bwahahahahahahaha.
PW, I don’t have anything to contribute on the economic front (except that it’s weird that citibank just sent me 0% credit card checks through January), but anything new on your senator???
Sorry for the Ot. Seems like threads are moving slower since the election.
Yes, and they’re doing it as we speak. Buying up all sorta of goodies in South America….of, course, no one in America is paying attention because we’re still the best/wealthiest country in the WORLD!
” wonder how his remarks went over with that audience.”
Good thing for us that they don’t understanf English, Economics or that USA consumers are tapped out for the decade and wont be buying their crap.
America may start making things again…naw union made is just to good for us.
Be careful. Check the fine print and you will find a transfer fee added to your principal.
China and others win, they manufacture. China if it can solve the problems of the country side and million others they win. They like others still can manufacture and the only thing we made was worthless paper. It will come down to us in communties working to help one another on everything from food to ? World trade except for some raw material is Dead.
jo6pac
Buy, Trade Local
Everything is on schedule, please move along. This will be Painful for us workers.
They should invest in stocks and/or bonds and put their money to work on our economy. They would likely do very well.
I suspect that there is a certain amount of investment capital out there (in the world) which is looking for the first great opportunity to be placed on a red before the spin. Right now the US stock & bonds are a great place. Everybody knows our economy is going to recover and stocks & bonds will reflect that when it happens. Why don’t they, and all the boomers who lost 401K monies last fall, jump back in with both feet and put their money to work instead of just sitting on T-bills?
So, investment opportunities like that will exist for a while and capital will flow in quickly. After that it will slow when prices seem to be going too high. Then there will be capital in banks which can return to lending normally.
How long it takes for the investment capital to be placed and for banks to be able to return to normal lending is unclear. It could be quick since the world economy isn’t a backwater any more. But, despite quick information flow the decision-making could take a little while. I look at the stock market going up up up and I think some people have made their decisions — some may have taken economic analyses from these pages (and we wish them all luck).
What does gov’t need to do during this? Keep supporting banks and consumer credit and fix mortgages — same as they’ve been doing.
Unemployment is getting bad and the stimulus isn’t going to solve all of that problem. If there are narrow areas to focus it’s on consumer credit to help people keep the economy going and on unemployment benefits. Perhaps one area which could be over-stimulated (not certain) is any policy which pushes HELOC credit. Fixing up houses is great, but we have to ensure spending across the economy is balanced, so that retailers and all the rest don’t suffer unduly.
I certainly expect the Treasury to have better detail information of where monies are being spent or where they’re lacking. Patch all the leaks as well as possible and we survive ’til the bank capital becomes sufficient to rebuild the economy.
Gotta make that capital work. Get it moving!
The ‘moderate’ Dems and the GOoPers would be happy to see the country on the rocks. They’re more interested in what’s in it for them, not so much for the rest of us – and the rest of the world might as well not exist, if they didn’t need those cheap imported goods.
W*lm*rt will be in a world of hurt, though: just about everything they sell is imported, and a lot of it is crappy quality as well.
Actually, most of that was done under Bush, per the Grover Norquist ‘make sure your opponent has no room to maneuver’ theory.
One good thing that’s actually happened is the rebirth, to an extent, of certain US industries. Some furniture companies, hit first by the soaring cost of container shipments (which went from $2000 a container in 2005 to $9000 last summer) and then by the global downturn, found it better and cheaper to make their stuff here. That’s one reason why durable goods aren’t as flat as expected.
Niall Ferguson has analyzed this very well and is the co-author of the phrase ‘Chimerica’.
It is also of note that China has extended credit lines from it’s banks to many others nations allowing them and other nations to conduct trade not using the dollar.
The Federal reserve is monetizing debt. At some point that likely leads to inflation.
Yuan-denominated lending and yuan convertablity is still quite limited (mainly to Hong Kong). In the future, however, we can expect a lot of bilateral contracts in yuan. Also the yuan’s de facto peg to the dollar could fade away as the significance of the US in China’s foreign trade diminishes. For example, China and Australia have a flourishing trade that defies the global recession. It could well be that a struggling dollar would encourage Aussie commodities suppliers to accept delinking of the yuan and dollar.
good to see people coming onside with the Japanfication scenario as likely. Something myself, Oldman and Stirling were talking about 5 years ago. Yes, “I told you so” is tiresome, but, well, we told you so.
I wouldn’t make too much of the quarterly figures on Chinese dollar accumulations. The short-term numbers are extremely sensitive to fluctuations in the US balance of trade, which is improving because the new Great Depression is cutting our demand for imports, and the fall in the price of oil is reducing the dollar price of our most important import. So in the short-run it would not be surprising to see some endogenous disinvestment by the Chinese authorities. The long run is another issue altogether. The US has got to gets its aggregate saving rate up to the point where at full employment we don’t spend more than we produce. Right now that’s not a problem, but if and when there is a recovery (I’m not holding my breath on this one), the Chinese will have to make a big choice whether to finance it or put their saving in some other venue, like Africa.
A person could make a lot of money sorting this all out and getting it right. I’m not that person.
For the same reason that investors in 1932 didn’t jump back in. They would have waited to the early 50s to get their money back.
Thanks PW.
There’s a larger institutional memory at work here. China was traumatized in 1841 when it learned that the old ways of the past 3,000 years could not stand up to Western approaches. With the disaster of 1900, and a large portion of humble pie, the Chinese decided if you can’t beat the West, it would be best to adopt and adapt their ways and ideas. Even with the split of governments in 1949, there was no diminishing of enthusiasm for Western ideas (even though some were now coming from a guy named Karl Marx). In contrast, Westerners have been less eager to embrace Chinese ideas. Being on the short end of the economic stick, it would seem, has provided a good motivation.
OT Loo Hoo, I recommend that you call the credit card compay and use the zero percent card to pay off your balances on any higher interest rate balances you carry. Just make sure to get the details of the transaction via the phone so that you do not exceed your credit limit (i.e. if you limit is 15K, you can only take out about $14.5K because of the fee to conduct the transaction). I used this to pay off one of my vaation bills. I had a year to pay off the bill at zero percent interest plus the $75 transaction fee.
If the Chinese stop buying US dollars, there are only so many other places that they can put their money, such as commodities, investing in their own economy. If short this is a tight rope for both economies.
Excellent point above about escalating shipping costs. The “China price” has gone up with greater increases in future, thereby making American homegrown a better bargain.
Add to that a whole extra “welfare class” layer of Communist Party members and cadres that the economy must support, including armies of internet censors and secret police–and the guanxi requirements that must be greased. Then there’s the environmental cost of poisoning water, air, food, etc., and concomitant health issues. (Not to mention the expense here of recalling adulterated baby formula, lead painted toys, etc.; the lost opportunity of transferring technology and appropriation of patents and trademarks without royalties; and lack of a just and transparent legal system to resolve disputes.)
America was able to go through growing pains while expanding into our manifest destiny, but we had a relatively unpopulated continent to absorb our mistakes and over indulgence–the PRC (and India) is packed with people already. While there is a great upside for PRC domestic markets, you have to wonder if the lack of an open political system will prevent the PRC from ever becoming a great superpower in the long run.