China’s concern about its USD assets

[GoFlyKiteNow]

Record US budget deficit renews China’s concern about its USD assets
BRIC, Latest News, USA.
Last Update: February 04, 2010 03:01 ET

Chinese economists are again concerned about the value of the country’s dollar-denominated assets after the US government’s budget plan unveiled Monday forecast a record deficit for Y 2010.

The Chinese economists are worried that, if the US Congress approved the budget plan, the US federal government will issue more bonds and print more money to finance the deficit, which may prompt USD depreciation.

US Dollar depreciation erodes the value of China’s holdings of USD denominated assets.

The same fears took hold almost one year ago when the US government said it would issue up to US$2.56T of treasury bond debt to stimulate the economy to get through the recession.

This time the budget deficit is larger. The Obama administration on Monday proposed a budget of US$3.83T for fiscal Y 2011 with a forecast deficit of US$1.56T in Y 2010.

The planned fiscal deficit is 10.6% of gross domestic product (GDP), up from a 9.9%share in Y 2009, the largest deficit as measured against GDP since the second world war.

He Maochun, director of the Center for Economic Diplomacy Studies at Tsinghua University, said the deficit would be financed by those holding U.S. dollar-denominated assets with the main channel to transfer the risks caused by the deficit being the issuance of US treasury bonds.

The US is already in enormous debt, with Treasury data showing public debt topping US$12T in November 2009, the highest ever.

To pay for the deficit, the US federal government will borrow US$392B in Q-1 Y 2010, according to a Treasury Department statement released Monday. It will then issue US$268B of treasury bonds in Q-2.

Experts said the record deficit suggests the federal reserve will continue to flood more money into the market. The massive issuance of treasury bonds, the large fiscal deficit and the printing of the USD will prompt further declines in the value of the “Greenback”, they said.

In Y 2009, the “Greenback” depreciated against major currencies by 8.5%, according to China’s State Administration of Foreign Exchange (SAFE).

The US government should not transfer the problems of enormous debt to other nations or regions that are creditors like China, he added.

The SAFE said in a statement in December 2009 that China would diversify its foreign exchange reserve holdings, both currencies and securities, to reduce risk.

Liu Yuhui, an economist with the CASS, said late last month China may scale back its purchases of US debt on concern the USD will decline.

China trimmed its holdings of US government debt by US$9.3B in November last year, the biggest cut in five months, taking them down to US$789.6B.

Ding Zhijie, associate dean at the finance school at the University of International Business and Economics, said China had been securing its investment value by using its foreign exchange reserves for imports and acquisition in 2009.

“More reserves should be used for investment in materials and resources, which can reduce the risk,” he said, adding that he expects the purchasing spree to continue this year.

The deficit is expected to ease slightly to US$1.3T in Y 2011, but that still represents 8.3% of Y 2011 GDP.

But Ding said it is necessary for the US to keep its powerful fiscal stimulus policy in place, as the economic recovery is fragile and remains uncertain.

The US economy shrank 2.4% in Y 2009, but the US government is projecting GDP growth of 2.7% in Y 2010 and an unemployment rate average of 10%.

 

[longbow]

Cannot be helped if you have so much reserves.

I would prefer to be in this boat than have no money and have to borrow (see Greece). As far as I know US Treasuries are the safest investments - at least for the time being.

Record US budget deficit renews China’s concern about its USD assets
BRIC, Latest News, USA.
Last Update: February 04, 2010 03:01 ET

Chinese economists are again concerned about the value of the country’s dollar-denominated assets after the US government’s budget plan unveiled Monday forecast a record deficit for Y 2010.

The Chinese economists are worried that, if the US Congress approved the budget plan, the US federal government will issue more bonds and print more money to finance the deficit, which may prompt USD depreciation.

US Dollar depreciation erodes the value of China’s holdings of USD denominated assets.

The same fears took hold almost one year ago when the US government said it would issue up to US$2.56T of treasury bond debt to stimulate the economy to get through the recession.

This time the budget deficit is larger. The Obama administration on Monday proposed a budget of US$3.83T for fiscal Y 2011 with a forecast deficit of US$1.56T in Y 2010.

The planned fiscal deficit is 10.6% of gross domestic product (GDP), up from a 9.9%share in Y 2009, the largest deficit as measured against GDP since the second world war.

He Maochun, director of the Center for Economic Diplomacy Studies at Tsinghua University, said the deficit would be financed by those holding U.S. dollar-denominated assets with the main channel to transfer the risks caused by the deficit being the issuance of US treasury bonds.

The US is already in enormous debt, with Treasury data showing public debt topping US$12T in November 2009, the highest ever.

To pay for the deficit, the US federal government will borrow US$392B in Q-1 Y 2010, according to a Treasury Department statement released Monday. It will then issue US$268B of treasury bonds in Q-2.

Experts said the record deficit suggests the federal reserve will continue to flood more money into the market. The massive issuance of treasury bonds, the large fiscal deficit and the printing of the USD will prompt further declines in the value of the “Greenback”, they said.

In Y 2009, the “Greenback” depreciated against major currencies by 8.5%, according to China’s State Administration of Foreign Exchange (SAFE).

The US government should not transfer the problems of enormous debt to other nations or regions that are creditors like China, he added.

The SAFE said in a statement in December 2009 that China would diversify its foreign exchange reserve holdings, both currencies and securities, to reduce risk.

Liu Yuhui, an economist with the CASS, said late last month China may scale back its purchases of US debt on concern the USD will decline.

China trimmed its holdings of US government debt by US$9.3B in November last year, the biggest cut in five months, taking them down to US$789.6B.

Ding Zhijie, associate dean at the finance school at the University of International Business and Economics, said China had been securing its investment value by using its foreign exchange reserves for imports and acquisition in 2009.

“More reserves should be used for investment in materials and resources, which can reduce the risk,” he said, adding that he expects the purchasing spree to continue this year.

The deficit is expected to ease slightly to US$1.3T in Y 2011, but that still represents 8.3% of Y 2011 GDP.

But Ding said it is necessary for the US to keep its powerful fiscal stimulus policy in place, as the economic recovery is fragile and remains uncertain.

The US economy shrank 2.4% in Y 2009, but the US government is projecting GDP growth of 2.7% in Y 2010 and an unemployment rate average of 10%.

 

[newyorker88]

"My currency, your problem".

China with the largest holding reserves of USD will have to bite the bullet then.

 

[Cestbon]

China must slowly take out money in US and develop their own country.
Eg. Build more transport , school, nuclear power station, buy technology........................

 

[Sperminator]

China must slowly take out money in US and develop their own country.
Eg. Build more transport , school, nuclear power station, buy technology........................

Hi Cestbon,

When it comes to financial world, I am a total idiot at this.

I just want to find out what are the major repercussions when USA prints more USD, to finance it's budget of Trillions, and at the same time issue more T-Bills and "force" sell it to the rest of the world.

What I understand in economics 101 (long long time ago) is that when a government prints money agressively under monetary policy, it'll cause a massive inflation...

And at the same time, what I observed from USA's Fiscal Policy is that they are not creating enough industries for productions, for global export... what they have is at least 300 Million people depended on easy credit for massive consumerism... (not to mention that their Trade Imbalance is the largest NEGATIVE in the world, making USA the POOREST NATION on earth)

This repercussion have already caused many factories in China to close down.

Last heard in 2009 alone, 30,000 factories in DONG GUAN producing low end segment Toys, Home Appliances, etc... focusing on the USA + CANADA + EUROPE market were closed, many bosses run away with the money.

Many Contract Manufacturers were affected...

Some have to eliminate 50% of their staffs during this period, whereas some have to close down.

Here are some of the biggest problem that I foresee;

1. When Inflation of the GreenBack happens;

i. ALL MAJOR CURRENCY of EXPORT DRIVEN NATIONS will appear to be MORE EXPENSIVE; as Currency is relative, when USD devalues, it appears that the other CURRENCY are growing in value.

Taking everything in constant, and only viewing the CURRENCY factor, the inflation alone could cause EXPORT DRIVEN NATIONS to be non-competitive...

Forcing these Export Driven Nation to increase their pricing in USD...

This price increase reduces their competitiveness, and if not managed properly, it may cause a reduction of jobs in the country.

ii. Stocks and Shares may appear to rise... giving a false sense that the market is growing... but it's due to inflation.

(This one I am totally a financial idiot... do not know what, and why, what some things will happen)

iii. Properties Market begin to SURGE in pricing... giving a false sense that the demand and supply is robust...

Bubbles are forming due to generous Credits given...

Take China for example, last year, when the Government of China have released a rescue package to help the nation, there were so much money injected then, and only some companies turn these rescue packages into useable / guaranteed Credits from the government, and they begin to pick up business "Literially Giving Goods on Credit Away!"

What most bosses do is that they would take these Bank Loans in the name of their business first...

What they do next is to buy more and more properties for speculation purposes... big gamble, but this year, the property pricing is rising SKY HIGH... and the major cities of CHINA, Beijing, Shanghai, Guangzhou, Shenzhen, even Hainan Island's properties are MORE expensive than SINGAPORE properties...

For the Gamblers of the Property Casino, those who see their gains at 20% start to sell, and for the greedy, they will bear the losses...

From my thinking... the inflation of the USD will cause a rippling effect / butterfly effect...

It'll force the entire world into a GREATEST DEPRESSION since 1920s...

Leading to the first point on USA, they are already raising taxes here and there, and the people are already taxed dry dry already. There is a feeling of abandonment by the Government. (hey, this is not uniquely Singapore... haha, but in a monumental sense)

Without taxes to finance the Inflation, the Budget... what can the USA think of?

--> Emergence of a new Global Currency?

--> Play Political Games, and Get Resources for Free?

--> Dominate Gold, Oil, Natural Reserves?

just some of my views. hopefully to receive some pointers, and advise.

 

[GoFlyKiteNow]

"My currency, your problem".

China with the largest holding reserves of USD will have to bite the bullet then.

There has to be reciprocal trade balance.
Rule 101 of international trade among nations.

The consequences of unbalanced free trade.
If you stockpile your money ( like what China did )
then that money simply evaporates till a balance is struck.

Now, the end result:
USA will have ultimately got most of its imports from China FOC
till all the reserves are evaporated.

 

[Zombie]

The consequences of unbalanced free trade.

China - US => free trade?
How Economics 101 defines free trade?

 

[GoFlyKiteNow]

China - US => free trade?
How Economics 101 defines free trade?

Exports vs Imports
Healthy balance of trade. Rule 101.

 

[Sperminator]

Exports vs Imports
Healthy balance of trade. Rule 101.

Dear GoFlyKiteNow,

I've personally seen some nations that wanted to do a Healthy Balance of Trade.

Their Strategy for their Nation is Export - Imports = 0

What is the result of such macro economics strategy implemented?

Disaster.

Some years, when their economy could export say USD 100 Million, they can only import USD 100 Million...

So, this strategy of trade balance is just theory....

I've seen it with my own eyes what happened in those kind of nations.

What you will have is the following;

1. Black Market Exchange Rates of Local Currency

2. Hyper Inflation of Local Currency

3. Black Markets Channels Rampant

4. Stagnantation of the Economy... putting their economy at low gear.

5. Losing confidence of the local Banks
(no one keeps money in banks anymore)

6. Controlled Exchange Rate for USD to Local Currency & vice versa

7. Controlled Importations, with USD being controlled.

8. Importation Taxes Raised High High, to protect domestic business, however, no domestic business exist --> ways of earning $$$

so, the concept of trade balance is easier said than done...

 

[GoFlyKiteNow]

Dear GoFlyKiteNow,

I've personally seen some nations that wanted to do a Healthy Balance of Trade.

Their Strategy for their Nation is Export - Imports = 0

What is the result of such macro economics strategy implemented?

Disaster.

Some years, when their economy could export say USD 100 Million, they can only import USD 100 Million...

So, this strategy of trade balance is just theory....

I've seen it with my own eyes what happened in those kind of nations.

What you will have is the following;

1. Black Market Exchange Rates of Local Currency

2. Hyper Inflation of Local Currency

3. Black Markets Channels Rampant

4. Stagnantation of the Economy... putting their economy at low gear.

5. Losing confidence of the local Banks
(no one keeps money in banks anymore)

6. Controlled Exchange Rate for USD to Local Currency & vice versa

7. Controlled Importations, with USD being controlled.

8. Importation Taxes Raised High High, to protect domestic business, however, no domestic business exist --> ways of earning $$$

so, the concept of trade balance is easier said than done...

hmmm..I am a bit puzzled by your listing of negative effects on nations that adopt normal balance of trade strategies.

It would be a help if you could name two or more nations that have
endured such negative effects as listed above by you.
I may be able to explain further then.

 

[Sperminator]

hmmm..I am a bit puzzled by your listing of negative effects on nations that adopt normal balance of trade strategies.

It would be a help if you could name two or more nations that have
endured such negative effects as listed above by you.
I may be able to explain further then.

as mentioned, I'm an idiot when it comes to the finance world... just stating some observations.

When you look at USA, there is no such thing as trade balance....

When you look at China, there is no such thing as trade balance...

I don't know, but I'm confused by how the world works now.

As for the negative impacts, perhaps could take Zimbabwe's Hyper-Inflation into account.

Most parts of Africa do not have a good financial system in place...

What I am trying to point out is that for a trade balance to happen, the trading partners must be on par for the exchange of goods and services...

Meaning to say, Country A must have the goods & services for Country B, and Country B have the goods & services to Country A...

But when it's only one way... balance is hard to achieve...

i.e. USA, is a consumerism society, importation way beyond exports.

i.e. CHINA, is a export based country, exportation way beyond imports.

so... GoFlyKiteNow, do advise me, as I am really keen to know.

Perhaps you have some good examples on what could have been done to prevent the Economic Crisis that the world is facing?

It's for my selfish understanding only, nothing else.

 

[Zombie]

China - US => free trade?
How Economics 101 defines free trade?

Exports vs Imports
Healthy balance of trade. Rule 101.

sorry but I think you do not even know the basic differences between the two terms

1) Free Trade, and
2) Balance of Trade...

 

[Sperminator]

sorry but I think you do not even know the basic differences between the two terms

1) Free Trade, and
2) Balance of Trade...

Please enlighten me, the ignorant

Keen to learn. Please advise the difference.

 

[GoFlyKiteNow]

as mentioned, I'm an idiot when it comes to the finance world... just stating some observations.

When you look at USA, there is no such thing as trade balance....

When you look at China, there is no such thing as trade balance...

I don't know, but I'm confused by how the world works now.

As for the negative impacts, perhaps could take Zimbabwe's Hyper-Inflation into account.

Most parts of Africa do not have a good financial system in place...

What I am trying to point out is that for a trade balance to happen, the trading partners must be on par for the exchange of goods and services...

Meaning to say, Country A must have the goods & services for Country B, and Country B have the goods & services to Country A...

But when it's only one way... balance is hard to achieve...

i.e. USA, is a consumerism society, importation way beyond exports.

i.e. CHINA, is a export based country, exportation way beyond imports.

so... GoFlyKiteNow, do advise me, as I am really keen to know.

Perhaps you have some good examples on what could have been done to prevent the Economic Crisis that the world is facing?

It's for my selfish understanding only, nothing else.

Zimbabwe - Its troubles are related to its internal policies. The leader Mugabe nationalized most of the private business, farms and trade , owned and operated the White people. But there were no local people to replace them. Hence the economy collapsed. Nothing to do with balance of trade.

The USA. It has the freest open market economies in the world. Almost every country exports to it. Overall the USA has a trade deficit. But it more than makes up for this deficit by its institutionalized commitment to safeguard the dollar as a international currency. Hence most of the nations send back their trade earnings to the US dollar.

In China's case the amounts were much larger. It had a huge unsustainable trade imbalance in its favor causing large deficits in the US economy, which evolved as debts. One way to offset the external debts is by lowering the value of the dollar. With the recent financial crisis, this trade imbalance highlighted the point that the Chinese currency was deliberately kept below its value to enhance the price advantage of China's exports.
Thus, the balance was struck by lowering the value of the US dollar as an equivalent measure that offset the lower peg value of the Chinese currency. Which makes the holder of the US notes a loser over a period of time.

If China had revalued its yuan 2 years ago, it would not be in this position today. No doubt, its growth would have been slower, but it would be more robust and evenly balanced between an export driven economy and internal consumption economy. And not be caught in this dollar trap.

It is like this. You want to remove your car from the parking lot because the bad weather is spoiling its appearance and lowering its value. But you can't do it, because there is no other place to park your car.
.

 

[Sperminator]

Zimbabwe - Its troubles are related to its internal policies. The leader Mugabe nationalized most of the private business, farms and trade , owned and operated the White people. But there were no local people to replace them. Hence the economy collapsed. Nothing to do with balance of trade.

The USA. It has the freest open market economies in the world. Almost every country exports to it. Overall the USA has a trade deficit. But it more than makes up for this deficit by its institutionalized commitment to safeguard the dollar as a international currency. Hence most of the nations send back their trade earnings to the US dollar.

In China's case the amounts were much larger. It had a huge unsustainable trade imbalance in its favor causing large deficits in the US economy, which evolved as debts. One way to offset the external debts is by lowering the value of the dollar. With the recent financial crisis, this trade imbalance highlighted the point that the Chinese currency was deliberately kept below its value to enhance the price advantage of China's exports.
Thus, the balance was struck by lowering the value of the US dollar as an equivalent measure that offset the lower peg value of the Chinese currency. Which makes the holder of the US notes a loser over a period of time.

If China had revalued its yuan 2 years ago, it would not be in this position today. No doubt, its growth would have been slower, but it would be more robust and evenly balanced between an export driven economy and internal consumption economy. And not be caught in this dollar trap.

It is like this. You want to remove your car from the parking lot because the bad weather is spoiling its appearance and lowering its value. But you can't do it, because there is no other place to park your car.
.

Dear Mr. GoFlyKiteNow Sir,

Thank you so much for pointing it out.

Okay, for the zimbabwe's deal, I do have some friends who lost millions of USD in that market... so, anyways, I am totally ignorant about what is going on there.

So, what I understand from you is that Zimbabwe is due to mismanagement of the economy by the government, I get you loud and clear.

I have some more questions which I am puzzled.

When you state that USA is the freest open market, there is something that I don't understand...

i. They themselves are imposing alot of tax tariffs for China's goods in USA, and at the same time, they are going around the world to point fingers that other countries are practising market protectionism, using WORLD TRADE ORGANISATION... where they themselves have their own NATO (No Action Talk Only), where it favours only neigbouring countries' production & imports.

So, how can we say that USA is the freest open market?

ii. Next, what kind of commitment is the USA giving to the world in promise that it's T-Bill is secured? And what what assurance does it give to the world that it's DOLLARS is the defacto currency of the world?

Please help me understand, as I am a total idiot to this... I don't come from a financial background, and I do intend to correct this problem of my own.

Okay for the case of China, I have some confusing points to clarify with you.

So, when China have a huge surplus in it's trade account, how does it affect the USA market? What I know is that China exports alot to USA, but buys little from USA (due to high prices etc...) How can it be evolved into debts? When you have CASH in your accounts? (This is always a puzzling point for me)

Okay, what I understand from you is that, in order to create a trade balance, USA can decide to devalue it's dollar, so as to reduce external debts... but isn't this the same as ROBBING? STEALING???

What I understand is that when USA is devaluing it's USD, meaning to say those holding dollars are holding a fast depreciating Dollar Value, and those countries which hold alot of T-Bills and Foreign Reserve in USD would end up paying the bills of USA??? That's ROBBING in Broad Day Light!

China need to be competitive, thus to keep it's RMB value at a low position, do allow their factories to export with competitive prices (using USD as the trade currency), but this is done out of necessity don't you think?

If their RMB value is allowed to grow too fast, this means that their Exports would be too uncompetitive, and causing a larger problem of unemployment. If I am not mistaken, China's Factory Capacity is measured as OVER CAPACITY, and it's more than enough to produce for the world's consumption.

Don't you think this will cause a even severe problem by allowing RMB to rise (against USD)?

Sounds like all of us have been trading with MONOPOLY money all the while?

Please help me understand Mr. GoFlyKiteNow, I really appreciate your answers. (I'll like to up you some points, but I think I've already given to you before...)

 

[GoFlyKiteNow]

Dear Mr. GoFlyKiteNow Sir,

Thank you so much for pointing it out.

Okay, for the zimbabwe's deal, I do have some friends who lost millions of USD in that market... so, anyways, I am totally ignorant about what is going on there.

So, what I understand from you is that Zimbabwe is due to mismanagement of the economy by the government, I get you loud and clear.

I have some more questions which I am puzzled.

When you state that USA is the freest open market, there is something that I don't understand...

i. They themselves are imposing alot of tax tariffs for China's goods in USA, and at the same time, they are going around the world to point fingers that other countries are practising market protectionism, using WORLD TRADE ORGANISATION... where they themselves have their own NATO (No Action Talk Only), where it favours only neigbouring countries' production & imports.

So, how can we say that USA is the freest open market?

If you try to export something to USA (food items included) and then try export to other nations, (developed and developing) you will know from the comparison, what I mean by free markets. The rules, laws are clear, transparent and customs clearance is smooth. So many surveys and reports will bear this out.

ii. Next, what kind of commitment is the USA giving to the world in promise that it's T-Bill is secured? And what what assurance does it give to the world that it's DOLLARS is the defacto currency of the world?

It is guaranteed by the US laws. The rule of law. As enshrined in the US constitution. The courts that interpret and deliver judgments. The country's stability and ruggedness of the institutions that make sure the laws are not changed arbitrarily as one likes. There is therefore a large measure of confidence by people that the laws will be observed by the US government and its banks, Feds, departments etc

Please help me understand, as I am a total idiot to this... I don't come from a financial background, and I do intend to correct this problem of my own.

Okay for the case of China, I have some confusing points to clarify with you.

So, when China have a huge surplus in it's trade account, how does it affect the USA market? What I know is that China exports alot to USA, but buys little from USA (due to high prices etc...) How can it be evolved into debts? When you have CASH in your accounts? (This is always a puzzling point for me)

Look at it this way. If China exports toys, consumer articles etc to USA, it also imply that China does not need the same to be imported from USA. Even if it wanted to, the prices cannot be competitive. But, the USA can export to China ( like it do to Germany, UK , Japan etc) computer software, movies, songs etc. But China does not enforce IPR. Its companies pirates these items and sell them. Hence there is no return trade to USA. It is a one way street and to cap it, very unfair to the US companies and their staff and shareholders and (to USA), that have spent time and money creating these products. Even American bran products like tools, machinery, clothing, hand phones etc were counterfeited and exported overseas. And in international legal terms an open case of theft. If China had enforced IPR, then all these items would have been purchased by its people from USA, which would have created a return trade and probably a trade balance.

Okay, what I understand from you is that, in order to create a trade balance, USA can decide to devalue it's dollar, so as to reduce external debts... but isn't this the same as ROBBING? STEALING???

Apparently NOT. In the first place, The US Treasury bills and currency was not forced onto anyone. There is not even a hint that the other countries must accept or buy US dollars or treasury notes. The choice is 100% that of the buyers. Hence, if one is willing to buy a share of a listed company ( knowing it can go down in value ), then buys it anyway, then it is accepted that the buyer knows and understands the risk. And should not complain, if the shares go down in value, due to some decisions made by the management. The buyer does have the option to buy shares from a whole range of shares in the stock market, and usually if you notice the so called blue chip shares cost a lot more than the others. Similarly. the exporter country has the option to buy US dollars or Zimbabwean dollars or 100 other currencies.


What I understand is that when USA is devaluing it's USD, meaning to say those holding dollars are holding a fast depreciating Dollar Value, and those countries which hold alot of T-Bills and Foreign Reserve in USD would end up paying the bills of USA??? That's ROBBING in Broad Day Light!

It is the right of any country to manage its currency rates as they deem fit. The risks are inherent. It is called exchange risks. China was doing the same and other countries complained - nothing more. There is no law to force countries to change their exchange rates. However such actions to alter the value undermine the trust and confidence of that country's currency.

China need to be competitive, thus to keep it's RMB value at a low position, do allow their factories to export with competitive prices (using USD as the trade currency), but this is done out of necessity don't you think?

Up to an extent it was necessity. But the overall perception is that since China is a totalitarian state, market forces that should be allowed to play out is prevented from exerting their role. Hence the people of the country has little leeway to demand more than what the party decides to give them..hence wage rises to the people, are kept down by force, while the money is supposedly saved in US treasuries and bonds.

If their RMB value is allowed to grow too fast, this means that their Exports would be too uncompetitive, and causing a larger problem of unemployment. If I am not mistaken, China's Factory Capacity is measured as OVER CAPACITY, and it's more than enough to produce for the world's consumption.

Don't you think this will cause a even severe problem by allowing RMB to rise (against USD)?

Not true. If the currency was allowed to appreciate gradually, there would not be any shock related problems. The people would have had a higher income . The growth rate would have slowed to maybe half of what it was those days ( as mandated by the communist party who seemed in a hurry to have growth at any cost or effort, regardless of all other concerns ). The internal economy would have become a substantial contributor to the GDP. And the serious problem of overcapacity would not have been there. There are so many nations that have done this appreciation one time or other.

Sounds like all of us have been trading with MONOPOLY money all the while?

Please help me understand Mr. GoFlyKiteNow, I really appreciate your answers. (I'll like to up you some points, but I think I've already given to you before...)

Well, one can say, the economy itself is a MAYA.

 

[GoFlyKiteNow]

Dear Mr. GoFlyKiteNow Sir,

Thank you so much for pointing it out.

Okay, for the zimbabwe's deal, I do have some friends who lost millions of USD in that market... so, anyways, I am totally ignorant about what is going on there.

So, what I understand from you is that Zimbabwe is due to mismanagement of the economy by the government, I get you loud and clear.

I have some more questions which I am puzzled.

When you state that USA is the freest open market, there is something that I don't understand...

i. They themselves are imposing alot of tax tariffs for China's goods in USA, and at the same time, they are going around the world to point fingers that other countries are practising market protectionism, using WORLD TRADE ORGANISATION... where they themselves have their own NATO (No Action Talk Only), where it favours only neigbouring countries' production & imports.

So, how can we say that USA is the freest open market?

If you try to export something to USA (food items included) and then try export to other nations, (developed and developing) you will know from the comparison, what I mean by free markets. The rules, laws are clear, transparent and customs clearance is smooth. So many surveys and reports will bear this out.

ii. Next, what kind of commitment is the USA giving to the world in promise that it's T-Bill is secured? And what what assurance does it give to the world that it's DOLLARS is the defacto currency of the world?

It is guaranteed by the US laws. The rule of law. As enshrined in the US constitution. The courts that interpret and deliver judgments. The country's stability and ruggedness of the institutions that make sure the laws are not changed arbitrarily as one likes. There is therefore a large measure of confidence by people that the laws will be observed by the US government and its banks, Feds, departments etc

Please help me understand, as I am a total idiot to this... I don't come from a financial background, and I do intend to correct this problem of my own.

Okay for the case of China, I have some confusing points to clarify with you.

So, when China have a huge surplus in it's trade account, how does it affect the USA market? What I know is that China exports alot to USA, but buys little from USA (due to high prices etc...) How can it be evolved into debts? When you have CASH in your accounts? (This is always a puzzling point for me)

Look at it this way. If China exports toys, consumer articles etc to USA, it also imply that China does not need the same to be imported from USA. Even if it wanted to, the prices cannot be competitive. But, the USA can export to China ( like it do to Germany, UK , Japan etc) computer software, movies, songs etc. But China does not enforce IPR. Its companies pirates these items and sell them. Hence there is no return trade to USA. It is a one way street and to cap it, very unfair to the US companies and their staff and shareholders and (to USA), that have spent time and money creating these products. Even American bran products like tools, machinery, clothing, hand phones etc were counterfeited and exported overseas. And in international legal terms an open case of theft. If China had enforced IPR, then all these items would have been purchased by its people from USA, which would have created a return trade and probably a trade balance.

Okay, what I understand from you is that, in order to create a trade balance, USA can decide to devalue it's dollar, so as to reduce external debts... but isn't this the same as ROBBING? STEALING???

Apparently NOT. In the first place, The US Treasury bills and currency was not forced onto anyone. There is not even a hint that the other countries must accept or buy US dollars or treasury notes. The choice is 100% that of the buyers. Hence, if one is willing to buy a share of a listed company ( knowing it can go down in value ), then buys it anyway, then it is accepted that the buyer knows and understands the risk. And should not complain, if the shares go down in value, due to some decisions made by the management. The buyer does have the option to buy shares from a whole range of shares in the stock market, and usually if you notice the so called blue chip shares cost a lot more than the others. Similarly. the exporter country has the option to buy US dollars or Zimbabwean dollars or 100 other currencies.


What I understand is that when USA is devaluing it's USD, meaning to say those holding dollars are holding a fast depreciating Dollar Value, and those countries which hold alot of T-Bills and Foreign Reserve in USD would end up paying the bills of USA??? That's ROBBING in Broad Day Light!

It is the right of any country to manage its currency rates as they deem fit. The risks are inherent. It is called exchange risks. China was doing the same and other countries complained - nothing more. There is no law to force countries to change their exchange rates. However such actions to alter the value undermine the trust and confidence of that country's currency.

China need to be competitive, thus to keep it's RMB value at a low position, do allow their factories to export with competitive prices (using USD as the trade currency), but this is done out of necessity don't you think?

Up to an extent it was necessity. But the overall perception is that since China is a totalitarian state, market forces that should be allowed to play out is prevented from exerting their role. Hence the people of the country has little leeway to demand more than what the party decides to give them..hence wage rises to the people, are kept down by force, while the money is supposedly saved in US treasuries and bonds.

If their RMB value is allowed to grow too fast, this means that their Exports would be too uncompetitive, and causing a larger problem of unemployment. If I am not mistaken, China's Factory Capacity is measured as OVER CAPACITY, and it's more than enough to produce for the world's consumption.

Don't you think this will cause a even severe problem by allowing RMB to rise (against USD)?

Not true. If the currency was allowed to appreciate gradually, there would not be any shock related problems. The people would have had a higher income . The growth rate would have slowed to maybe half of what it was those days ( as mandated by the communist party who seemed in a hurry to have growth at any cost or effort, regardless of all other concerns ). The internal economy would have become a substantial contributor to the GDP. And the serious problem of overcapacity would not have been there. There are so many nations that have done this appreciation one time or other.

Sounds like all of us have been trading with MONOPOLY money all the while?

Please help me understand Mr. GoFlyKiteNow, I really appreciate your answers. (I'll like to up you some points, but I think I've already given to you before...)

Well, one can say, the all economy itself is a MAYA.

 

[Sperminator]

Well, one can say, the all economy itself is a MAYA.

Dear Mr. GoFlyKiteNow,

Thank you for your unselfish response.

I really learn alot from your answers, and now, I have a better understanding... although still confused, but a better understanding of the complex world...

And I fully agree with what you say "All economy itself is a MAYA"

No one is right, and no one is wrong... it's all subjective... besides, the economic system is man made, and it's not natural...

I-CHING says it best, what ever is NOT Natural, will not be lasting... whatever IS Natural, is lasting...

I've just read a news from CNN Money;

http://money.cnn.com/video/news/2010/01/22/n_sheila_bair_bank_failures.cnnmoney/

More banks are expected to close in 2010 in USA.... get ready

 

[Cestbon]

US killing itself by spending too much in the defend about 30% of the annual budget use up for defend. Just to maintain it will cost nearly 50% of the defend budget. So the way out of it to reduce the force. That what China have been doing reduce their PLA force head count to reduce cost at the same time use the extra budget to upgrade weapon.
Want to be world leader in arm force that high price to pay.
That what killing USSR economy and then collapse.