China and the $US

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Looks like China is pretty much keeping its currency stable vs the dollar and depreciating against the rest of the world, probably to support it’s exporters.

(Note the recent rise in exports and rhetoric regarding the importance of exports.)

This means if the currency is ‘naturally’ strong China is buying $US financial assets to keep it fixed to the $US. The second chart shows holding of tsy secs but China could also be adding agencies and other $US financial assets now that ‘agency credibility’ has been restored.

Seems they are quietly testing the waters to see if Geithner will come down on them as Paulson did.

If we had an administration that understood the monetary system we’d encourage them to do this and export without limit, while sustaining domestic demand with fiscal adjustments (lower taxes and/or higher spending, depending on your politics) which obviously ‘good things’ (again, if you understand the monetary system).

In fact, with the entire world seeming desirous of exporting to the US if only we would let them, a serious level of prosperity is there to be had.


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11 Responses to China and the $US

  1. Jim Baird says:

    Curious –

    I’d recommend picking up some of Jane Jacob’s work, particularly:

    She was from outside of academic economics (and thus uncontaminated by its foolishness), and thought that the most relevant economic unit was the metropolitan region, not the (largely artificial) political borders of countries. She advocated every Metro region having it’s own floating currency.


  2. Warren Mosler says:

    how about, they don’t understand their monetary systems?

    no leadership I’ve ever talked to understands it.


  3. Curious says:

    I was hoping to hear some rational argument on why is it happening. :-)

    Afterall, the fact that it is happening means that there must be a reason, no?


  4. Warren Mosler says:

    all sad but true


  5. Curious says:

    Of course price imbalances don’t happen just on international scale, they happen intra-nationally too.

    Any region in the US, having a trade surplus with the rest of the US, could thus benefit from having its own currency.

    And while it’s perhaps not practical for every town and village to have their own currency, why don’t the states create their own currencies?

    And why are the European countries moving in the exactly opposite direction and giving up their currencies and euroizing?


  6. warren mosler says:


    and with real costs.

    and, as a policy tool, the export driven model is to keep fiscal tight and buy fx to keep the currency stable and real domestic wages low, and support exports that way.

    so there is no adjustment in prices due to the fiscal leg of the policy that keeps domestic demand down.


  7. Curious says:

    Floating a currency allows for a very fast way to level real prices between 2 regions.

    Pegging the currency (or using 1 currency in both regions) forces the market to make the adjustment through changes in nominal prices of goods/services.

    It seems to me, that in the end, real prices in both regions will be leveled 1 way or another, the only difference is the speed at which it will happen.


  8. Warren Mosler says:

    the significance is imports to the US lower US agg demand and allow lower taxes for a given amount of govt spending- a good thing in my book.


  9. Keith Newman says:

    Thanks for the reply. I have one last question. Is there any significance to the large quantity of US financial assets the Bank of Canada would accumulate?
    The Bank would be stuck with them since converting them back into Canadian dollars would defeat the whole purpose of the exercise. If it diversified into other currencies, the other countries would be very unhappy as their currencies would rise. I suppose the Bank could buy US real assets on behalf of the Canadian government but that seems pretty unlikely.


  10. warren mosler says:

    Yes, it amounts to a subsidy for exporters, at the expense of the macro economy/general standard of living as you state. And yes, it would be better to support domestic demand and consumption directly.

    Yes, the intervention is ‘cost free’ nominally, but in real terms Canada loses as you also described and i agreed.

    no, the canadian gov in no case gives up its ‘autonamy to direct fiscal policy’ as spending is not revenue constrained in any case.

    and, yes they amount to the same thing. i call it off balance sheet deficit spending.

    good post, thanks!


  11. Keith Newman says:

    Re your posts of the yesterday and today regarding currency pegs:
    South Africa and China. I note as well that Brazil has imposed a 2% `capital inflow tax` this week after a 30%+ increase in its currency. The Bank of Canada has also stated it will intervene to stop the Canadian dollar rise because it’s slowing the Canadian economic recovery:

    Bank of Canada talks tough on rising dollar
    Kevin Carmichael
    20:15 EST Thursday, Oct 22, 2009

    Ottawa — Bank of Canada Governor Mark Carney is done with nuance. His new message for those who doubt he’s prepared to weaken the dollar if Canada’s recovery veers too far off track: Just watch me.

    Despite stronger than expected growth in the second half, the central bank has actually reduced its outlook for the next two years, saying that’s when the current appreciation of the currency will show up in growth figures.

    Given that backdrop, Mr. Carney said he would have no choice but to act if international investors continue to push the dollar higher – something they’ve been quite willing to do, in part because most analysts and investors are skeptical a central bank that hasn’t intervened in currency markets since 1998 is willing to back up its talk with action.

    But if the currency continues to surge, Mr. Carney stressed that he retains “considerable flexibility” to stoke the demand required to get inflation back to the 2-per-cent target. His options would include creating money to buy U.S.-dollar denominated assets or direct intervention in foreign exchange markets.

    There are a few implications of this I am unclear on. Of course I realize countries would do this to support exports to the U.S.and create export-based jobs at home. They might also get some import substitution and further increase domestic economic activity in the longer term.

    However I am uneasy with this as a longer run solution to their problems. For instance it makes imports more expensive, reducing people’s standard of living. It also makes imports of foreign capital equipment more expensive, so discourages investment. In the case of Canada, it would increase the profitability of the oil and gas sector which accounts for one quarter of Canada’s exports and would induce it to increase output further thereby putting additional upward pressure on the Canadian dollar and defeating the purpose of the currency intervention.

    Since the intervention is to sell the country’s fiat currency there is no limit to how much could be devoted to this. The central bank would be constrained to keep its interest rate lower than US rate to avoid US dollar flows into Canada, although this is probably a good thing. Nonetheless the Bank of Canada could be required to accumulate very large quantities of US financial assets to maintain it’s ‘dirty peg’.

    Does this intervention amount to a subsidy for exporting industries and a tax on imports? But what exactly is its cost? If it is a subsidy/tax, would it not be better for the government to spend in Canada and rely on increased imports by Canadians to devalue the currency? This does beg the question of how to help export industries that are in trouble unless fiscal policy is targeted to them, at least to workers and communities.

    If the Canadian currency used to buy US dollars remains in foreign-held financial assets then is the intervention essentially free of cost? If the money does come back to Canada to be spent as foreign holders wish, hasn’t the Canadian government given up its autonomy to direct fiscal policy?

    Finally the governor of the bank says his options include ‘creating money to buy U.S.-dollar denominated assets or direct intervention in foreign exchange markets’. Don’t these amount to the same thing? Surely the Bank of Canada wouldn’t just buy stacks of US currency and store it somewhere?

    I hope I haven’t asked too many questions.


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