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2009-02-22 Home Front: Politix

Known Unknowns: Unconventional "Strategic Shocks" - Nathan Freier

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Posted by Besoeker 2009-02-22 16:59|| || Front Page|| [3 views ] Top

#1 China could if it wanted manipulate the US Treasury market to its own financial gain and to the serious detriment of the USA.

Might happen as soon as this week with the first big Treasury sale to fund the Obama spending spree.

Posted by phil_b 2009-02-22 19:12|| 2009-02-22 19:12|| Front Page Top

#2 I'm an economist; I study international finance.

It really isn't so clear what the Chinese could do to harm the US without also shooting themselves in the foot.

They could certainly slow down or stop the accumulation of US assets, which would tend to raise long term US rates and lower the prices (in dollars) of the bonds they already hold. It would also tend to reduce the value of the dollar and increase the value of the yuan vs. the dollar.

They could dump USD, which would have similar effects but worse, maybe much worse.

If the Chinese did stop accumulating or dumped US assets, one could expect higher US interest rates, a lower dollar, perhaps lower US investment and certainly higher US net exports.

The Chinese portfolio choice could certainly affect the US markets but they would also affect the international value of their own portfolio and their own exports.

So it wouldn't be painless to try to harm the US through dumping Treasuries. There would be significant costs for the Chinese.

Posted by Some guy">Some guy 2009-02-22 19:38|| 2009-02-22 19:38|| Front Page Top

#3 By manipulate, I meant push prices up and down by buying and selling treasuries over relatively short periods. That would seriously unnerve the market and push up interest rates.

Otherwise I agree with you. China faces a much bigger risk of the USA deliberately devaluing its currency. Effectively sticking China with the bill for the Stimulus.

Posted by phil_b 2009-02-22 20:21|| 2009-02-22 20:21|| Front Page Top

#4 It's a very simple question: If you believe that all the dollars you hold will somehow maintain their value, selling is the more painful option since by selling you devaluate them yourself.

If instead you believe that the dollar is going to plunge anyway, then you'd sell, even if you hurt yourself.

The U.S. should not give the impression that they are going to inflate themselves out of debt... that would trigger the push on the panic button.

Everyone loses.

Posted by European Conservative 2009-02-22 20:28|| 2009-02-22 20:28|| Front Page Top

#5 The reason why 3% of GDP is consider the 'safe' upper limit for a deficit is that the maximum a developed economy can grow over the long term. A deficit of 3% and GDP growth of 3% means debt stays the same as a %age of GDP and is in theory repayable.

Once the deficit goes over 3% or growth drops below 3% the prospect is the debt will never be repaid in uninflated dollars.

Most the world's developed countries are already in this situation and most of the rest are not far behind.

I really don't see how we can escape a period of severe inflation as everyone tries to depreciate their currencies. Hence my references to Zimbabwe.

Posted by phil_b 2009-02-22 21:03|| 2009-02-22 21:03|| Front Page Top

#6 We're in Eisenhower territory, "If a problem cannot be solved, enlarge it."

It will work only if we keep our freedom.

Posted by Halliburton - Mysterious Conspiracy Division 2009-02-22 22:11|| 2009-02-22 22:11|| Front Page Top

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