China ‘worried’ about U.S. Treasury holdings

[Tyr]

I'd say the mouse has the cat by the short and curlies when China starts dictating American fiscal policy

Premier Wen: U.S. must honor its words and ensure safety of China's assets

MSNBC

BEIJING - China's premier didn't say it in so many words, but the implied warning to Washington was blunt: Don't devalue the dollar through reckless spending.

Premier Wen Jiabao's message is unlikely to be misunderstood at the White House, which responded by asserting there is no safer investment in the world than the United States. It is counting on Beijing to help pay for its stimulus package by buying U.S. bonds. China already is Washington's biggest foreign creditor, with an estimated $1 trillion in U.S. government debt. A weaker dollar would erode the value of those assets.

"Of course we are concerned about the safety of our assets. To be honest, I'm a little bit worried," Wen said at a news conference Friday after the closing of China's annual legislative session. "I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets."

What would happen if they decided that "oops, we made and mistake and we'd like our money back"?

 

[earth_as_one]

If the US starts printing money to pay for their stimulus package, that would devalue the dollar. That would cause China and other nations holding the US dollar to convert their US dollars to other currencies, further accelerating the devaluation. That would be the worst case scenario.

China and the US have to trust each other.

 

[Scott Free]

Wall street will screw China as easily as it screws everyone else.

Just that Wen would call on the "USA" to stay a credible nation demonstrates a fundamental error in understanding of how the US economic system works. There is no choice to be made by either the people, the nation or its president, the choice is entirely up to the Federal Reserve and the monsters that own it.

 

[Machjo]

If the US starts printing money to pay for their stimulus package, that would devalue the dollar. That would cause China and other nations holding the US dollar to convert their US dollars to other currencies, further accelerating the devaluation. That would be the worst case scenario.

China and the US have to trust each other.

Then again, if the US' plan is to create more jobs, then a devalued US dollar would be just what they'd want. With a devalued US dollar, foreign products would become too expensive for the average American, while US products would become cheap abroad. This could increase the risk of inflation though, but it would ameliorate the American employment statistics.

 

[Machjo]

And a suddenly devalued US dollar would hurt Canadian exports to the US too.

 

[Spade]

"Printing" (electronic creation) of money to create inflation is a classic method of devaluing debt. China should be worried!

 

[Scott Free]

"Printing" (electronic creation) of money to create inflation is a classic method of devaluing debt. China should be worried!

Exactly.

 

[Socrates the Greek]

50 cents on the dollar it will be hard lamp to swallow for China.
They must be really worried and they should be because we are in the era of down sizing and underrating = depreciation = no one exempt of depreciation @ BAD global economic times.

 

[Kreskin]

False economies can't go on forever. For years the US has asked China unpeg their currency. It will come back to roost one way or another.

 

[Lester]

I wonder what would happen to US debt if China increased the value of the Yuan? the US debt would go up proportionally would it not? China has been lending cash reserves, not debt. if the US defaulted China would still have plenty of cash- 2,000,000,000,000.00 if I'm not mistaken. If they really wanted to stick it to the west they could dump all the US treasuries and put a run on the greenback. so many different things could happen if cooler heads don't prevail.

 

[Spade]

The debt is held in US dollars. Printing them to pay China off is a terror too horrible for China to contemplate.

 

[Lester]

Yes , the issuance of treasury bonds that makes sense- If I was China I would not answer the phone for the fear of it being the US wanting to bum more money. "If it's Uncle Sam I'm not here"

 

[china]

Lester ,

I wonder what would happen to US debt if China increased the value of the Yuan? the US debt would go up proportionally would it not? China has been lending cash reserves, not debt. if the US defaulted China would still have plenty of cash- 2,000,000,000,000.00 if I'm not mistaken. If they really wanted to stick it to the west they could dump all the US treasuries and put a run on the greenback. so many different things could happen if cooler heads don't prevail.

I think that allot of countries can learn allot of things from China .

 

[Kreskin]

It only stands to reason that if there is a substantial difference in industrial productivity between countries, sooner or later that will correct especially if they are trading partners. Look at when the Canadian dollar was 1.10 to the US. Who would buy a second hand car in Canada when they could cross the line and get it for 20% less? Currencies will correct themselves in time unless there is a mechanism like pegging stopping it.

Here you've got a situation where one is acting like a bank and it's chief borrower is also one who the 'bank' relies on to keep it's company running. The banker could call the loan or turn off the credit but if it does what happens to the lender's primary business of exporting to that borrower?

I believe that if China wants to forever operate with it's partners having one hand tied behind their backs it will eventually correct, and the longer the wait for that correction the harder it will feel when it happens. These gravy trains don't go on forever.

 

[Kreskin]

And a suddenly devalued US dollar would hurt Canadian exports to the US too.

Our market based currencies will correct themelves. What's to say we wouldn't devalue with them over a relatively similar period.

 

[Spade]

From the NY Times:
Quote:

"Much of the Treasury debt China purchased in recent years carries a low interest rate and would plunge in value if interest rates were to rise sharply in the United States. Some financial experts have warned that measures taken to combat the financial crisis — running large budget deficits and expanding the money supply — may eventually lead to higher interest rates.

“ 'The United States government is going to have to sell a huge amount of paper, and the market may react by demanding a higher interest rate,' said Nicholas R. Lardy, an expert in the Chinese economy at the Peterson Institute for International Economics. 'This will force down the price of outstanding treasuries, imposing large paper losses on the Chinese.'"

 

[Tyr]

If the US starts printing money to pay for their stimulus package, that would devalue the dollar. That would cause China and other nations holding the US dollar to convert their US dollars to other currencies, further accelerating the devaluation. That would be the worst case scenario.

China and the US have to trust each other.

China and the US have to trust each other

Ah yes. Trust. The checks in the mail, it wasn't me and that spy ship the US had parked off the Chinese coast was researching mollusk reproduction trends.... honest!!!

 

[Machjo]

Our market based currencies will correct themelves. What's to say we wouldn't devalue with them over a relatively similar period.

They're carrying alot more debt than we are. If they decided to inflate their way out of debt and recesion, with the amount of foreign money taking being taken back by foreign investors (which would involve taking their money back in US dollars and then converting it to their own currencies) could cause a considerable drop in the value of the US dollar. With Canada holding less debt, even if we did try to inflate our way out of debt, the impact wouldn't be nearly as severe. Now of course Canada could compensate by printing money like crazy, but inflation is no better than recession. We'd ust be walking out of one problem and straight into another.

As for the US, with its debt the way it is, it's a trade off that might be worth it. For Canada, it's just not worth it with the small debt we do have. So yes, we could print enough to devalue our own currency, but it would probably be preferable to just pull our investments out of the US now and cut our losses, let the US dollar fall, and then bite the bullet. As for job creation, Canada could eliminate the minimum wage (with the drop in the US dollar, products should be less expensive anyway), shift taxes from income to resources (this would reduce the tax burden on labour-dependent industries by shifting it onto more resource-dependent ones. After all, more jobs are created if we go onto building more labour-intensive products and just exporting our raw materials to be processed elsewhere). We'd still suffer, but I think this would be more rational than to just inflate our economy copycat-style.

 

[Machjo]

From the NY Times:
Quote:

"Much of the Treasury debt China purchased in recent years carries a low interest rate and would plunge in value if interest rates were to rise sharply in the United States. Some financial experts have warned that measures taken to combat the financial crisis — running large budget deficits and expanding the money supply — may eventually lead to higher interest rates.

“ 'The United States government is going to have to sell a huge amount of paper, and the market may react by demanding a higher interest rate,' said Nicholas R. Lardy, an expert in the Chinese economy at the Peterson Institute for International Economics. 'This will force down the price of outstanding treasuries, imposing large paper losses on the Chinese.'"

An irrisponsible government could choose to manipulate interest rates by ordering the Central Bank to keep interest rates low. Of course since there's no profit in investing in an inflating currency at low interest, everyone, including Americans, start investing abroad. Now this would create plenty of jobs in the US, but poverty too. Essentially jobs would be created by destroying any trust in the uS currency, resulting in everyone bailing, and so the US dollar falling drastically. A surefire way to create full-employment nationwide and reduce debt while making inflation hit the roof and foreign products simply unaffordable to the average American. In fact, since US products would suddenly be so cheap abroad, with so manypeople buying American, Americans would find themselves having to compete with foreign consumers for their own goods, another contributor to inflation. But with the drop in the US dollar, chances are their salaries are not going to be rising as fast as the prices, if at all, depending on the kind of inflation or devaluation stratey chosen.

But they would have full employment.

 

[Machjo]

Overall though, inflating your way out of recession is not a wise move. Yes, it does create jobs. But it creates poverty too as people's purchassing power is eroded. And this just defies the very purpose of job creation. After all, if we createjobs while still remaining just as poor, then what's the purpose of creating jobs? The idea is to create jobs while still keeping inflation and interest rates and debt in check.