Utah Reps call for Constitutional Convention

[sirkickyass]

That's up to Chinese to decide whatever they want us to produce. More ag products would be a great start IMO. Despite popular thought, we're still the production powerhouse of the world. We could also start producing and selling the products we're currently importing.

Can anyone tell me with a straight face what is so bad about China dumping USD? It would be one of the greatest wealth transfers the world has ever seen (to the US). It would also go a long way to balance the current account and bring all those jobs back home [that we've been screaming about for a couple of decades]. People who keep chanting this dumping line need a lesson in FX, and more than a bit of insight into how sovereign purchasers of USD are the ones creating huge distortions by acting against the system.

Won't ever happen. Totally kills the Chinese growth model they've set up for themselves that relies on cheap exports.

The ugly truth about China is that they need us just as much, if not more, than we need them.

 

[franklin]

I think if these were actual problems the rates on US Treasuries would be higher. As is, bond vigilantes haven't appeared and the markets judge US debt as "safe."

The vigilantes are active, although mostly muted for the time being. They've effectively shut down Bernanke's perceived purpose of lowering rates (I think it's about forcing surplus economies to balance, but the idea is more elaborate than average observers care to entertain).

You also have to look at the end lenders such as the mREIT's that have de-levered to the lowest level on record. Not that they consider debt non-investment grade, but because the insecurity and instability liquidity causes. They cannot hedge the risk. This lowers loan availability while raising loan demand. That's not a recipe for recovery.

From a Keynesian perspective, the sudden halt in spending or raises in taxes that would be required if the debt ceiling were not raised would be 1937 all over again with no ability for the Fed to lower rates because we're already at the zero bound (preventing the Friedman hypothesis on 1937's downturn from applying). It's an instance where both Friedman and Keynes would agree it's a disastrous move.

Purely from a perspective of balancing risks I regard the risks and impacts of a significant downturn from failing to raise the debt ceiling as significantly greater than the emergence of hypothetical bond vigilantes.

As long as you realize it's just an idea filled with speculation and holes that a model would readily expose. It's easy to support these notions, and Keynes and Friedman add plenty of credit to them (although Friedman's ideas kind of dead ended without any workable proposals), but the truth is they're much too complex to model. You've focused only on the bond vigilantes, which I agree are not a major issue (and would be more than countered given higher rates), but the effects on the individual are ignored. Policy hits the animal spirits. How are you sure your policy choices aren't counter effective?

--The little old lady who is getting barely 1% return instead of the 4% isn't going to be kick started by loose policy. You'll see the opposite effect.

--The 50 something saving for retirement is going to buckle down tighter as conservative investments are chosen in response to policy. The lower return will be accommodated in higher savings rate.

--Chinese consumers have learned the hard way that the middle class is hurt by interest rates set by government for the purpose of recapitalizing banks. In effect, the small guy is floating the large guy. This isn't exactly good for the middle class but it is for, say, a securities lawyer.

Please let me know when you find a model that accounts for the negatives that are ignored more often than not. I haven't found one yet. I'm sure something will pop up sooner or later.

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Back to China, don't ever say never. They're slowly shifting their model, but it'll take time. A lot in power still want their cake (exports) and to eat it too (low inflation). I believe the real purpose of QE1&2 is to cause hot money inflows and inflation as a way of hitting China with it's own tool (dollar purchases cause inflation). We're forcing their hand by overheating them. The trade gap must balance eventually and China is the main player getting in the way.

I say let's convince them to "dump dollars" by spending some of their holdings. That would provide the necessary liquidity, while jump starting US industry and inflation, and raising government receipts. Inflation would be easy to control as the dollar strengthens due to current account balancing, output expanding, and rates reverting to more normal levels.