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Quiggen's Investment Advice
John Quiggen, writing in The Economists' Voice offers some advice:
An obvious candidate for speculative attack is the pegged value of the Chinese renminbin yuan. Speculators could sell assets denominated in U.S. dollars and buy assets in yuan. The poorly developed state of Chinese financial markets would render such an attack very risky, but also potentially highly profitable.Sadly, I don't really have the assets on hand to mount a major speculative currency attack, but if you do, you could make a killing. Relatedly, George Soros might want to consider getting out of the whole "financing the left" game and go back to his original calling of speculative currency trading. If he executed this move properly, he'd not only make a killing but, in all probability, provoke an economic crisis that would wind up booting the GOP from power. The human suffering involved, of course, would be a bit large. But if the crisis really is inevitable without a drastic move toward -- get this! -- radically reduce US oil and gas consumption, then this is more a question of when than if.
December 22, 2004 | Permalink
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Comments
That'd be really bad for the left in the long term. Letting republican economics (borrow and spend) fail on their own will be superior to having a known left winger use his power to force a crisis.
If you think the radical right is paranoid now wait until a Jewish guy with a lot of money causes the dollar to devalue rapidly...
Posted by: John Kealy | Dec 22, 2004 2:42:33 PM
1) Well, going into a full war economy could distract...and the threat of going there could delay the inevitable
2) Otherwise, probably next year. I suspect Bush is in blitzkrieg mode on SS because he needs it passed before the war or the stock market/housing bubbles collapse.
3) And it is a stock market bubble. Stocks are denominated in dollars, and dollar is 30-50% overvalued. Measure the value of a stock in how many barrels of oil in Euros it will buy.
Posted by: bob mcmanus | Dec 22, 2004 2:47:39 PM
I wonder if one of the economically-literate folks who frequent these parts could shed some light on something that's been puzzling me about the Chinese situation. To wit, although one can see why a rational, private economic actor like Goldman Sachs or Warren Buffett might be leery of getting stuck with too many US government IOUs, or other dollar-denominated assets, why would China's central bank feel any such leeriness, or "pressure" to get out of greenbacks.
After all, China's central bank is not concerned with maximizing its own wealth, but is rather primarily concerned with the Chinese government's goals (namely, promoting Chinese exports and maximizing Chinese growth lest social unrest in China grow to dangerous levels).
Why, in other words, couldn't the Chinese Central Bank finance the US government's (and the American economy's) spendthrift ways for a very, very, long time if it so chose?
Posted by: P.B. Almeida | Dec 22, 2004 3:13:18 PM
I cannot see any way that rational markets would gradually correct the imbalance. If there is an obvious imbalance, you may try to ride it out as long as possible, but once there is a shift back to balance there is no incentive in being later than the next guy (in fact there is an enormous incentive to be at the beginning of the pack). How can this not result in a stampede of rapid return to balance?
Posted by: theCoach | Dec 22, 2004 3:14:58 PM
Didn't Soros short the dollar to the tune of about a billion dollars? Or was that Warren Buffet?
Posted by: niq | Dec 22, 2004 3:55:54 PM
The human suffering involved, of course, would be a bit large.
What does he care? Obviously, he has done the same in a number of other countries, and it hasn't really bothered him that he impoverished millions upon millions. He'll still have his personal jet. Hell, he can ever fly it to Europe.
The risk, of course, is that the US might defend itself and ruin him. But you never know, maybe it wouldn't.
Posted by: Al | Dec 22, 2004 3:59:48 PM
After all, China's central bank is not concerned with maximizing its own wealth,
Well, it IS concerned about the level of its currency reserves, right?
Posted by: Al | Dec 22, 2004 4:02:08 PM
After all, China's central bank is not concerned with maximizing its own wealth, but is rather primarily concerned with the Chinese government's goals (namely, promoting Chinese exports and maximizing Chinese growth lest social unrest in China grow to dangerous levels).
While those are among the PRC government's goals, that's hardly an exhaustive list. Expanding the global influence of the PRC, securing resource flows, and reintegration with Taiwan are also on the long-term list of goals. Some of those are likely to conflict with US interests.
Why, in other words, couldn't the Chinese Central Bank finance the US government's (and the American economy's) spendthrift ways for a very, very, long time if it so chose?
It could. The question is, of course, how long the interests of the PRC will coincide with subsidizing the US government.
Posted by: cmdicely | Dec 22, 2004 4:36:14 PM
Currency speculators only take advantage of such openings as the market will allow. If the dollar is overvalued and subsequently crashes, its weakness was there to start. "Market correction" is the phrase, I believe. Blaming someone like Soros is a bit like blaming thermometers for cold temperatures at the North Pole.
Not that it won't be tried. Check out David Horowitz's frontpagemagazine.com; there's an ad for Mr. Horowitz's latest perfervid pamphlet, "The Shadow Party", featuring a caricature of Soros as a puppet-master with strings extending down to the Democratic donkey. The cartoonists at the old Nazi sheet "Voelkischer Beobachter" could scarcely have done better. Why the caricature did not sport a hooked nose and a top hat to make the resemblance complete is a mystery. Surely it was not due to inhibitions of taste on Mr. Horowitz's part. You can imagine what stereotypes would be called into play if Soros gets to take the rap for the looming failure of the Bush administration's economic policies.
Posted by: Cassandra | Dec 22, 2004 4:43:34 PM
P.B. Almeida - The issue is not the Chinese liquidating their holdings to push down the value of the dollar, it's that they will stop adding to their holdings. If they think the dollar is going to fall, then basically they're throwing away money. It also drags down the value of the yuan. Now a cheap yuan is good for their export-driven economy, but the yuan can become too cheap (against the euro, etc.), for the same reason they don't just give their exports away -- you want something in return. Right now the impact isn't that big, but if oil markets switch to euros, then a constant devaluing of the yuan against the euro will make oil steadily more expensive for them.
Posted by: Walt Pohl | Dec 22, 2004 4:55:09 PM
The issue is not the Chinese liquidating their holdings to push down the value of the dollar, it's that they will stop adding to their holdings.
Yes, this I know.
If they think the dollar is going to fall, then basically they're throwing away money.
Well, they're not "throwing money away" in the sense that they're not getting anything. They are getting something valuable, namely export-enhancing downward pressure on the yuan.
Right now the impact isn't that big, but if oil markets switch to euros, then a constant devaluing of the yuan against the euro will make oil steadily more expensive for them.
Yes, I suspect you're on to something there.
The question is, of course, how long the interests of the PRC will coincide with subsidizing the US government.
Yes, this is the key question. The more I think about it, I realize it's a matter of looking at the costs to the Chinese economy of current central bank policy. There's no "magic solution" economic policy. There's no free lunch. China may already be paying a price for the stimulus of a cheap currency via inflation, shortages, and economic imbalances. There's more than one way to piss off the masses. One way is to fail to deliver enough growth to soak up the folks leaving the farms and state enterprises. But another way is to allow inflation to get out of hand. At some point Beijing could reluctantly decide that growing boom-related problems and imbalances must be addressed via a stronger yuan, and that's the day American consumers and borrowers will pay the price.
Posted by: P.B. Almeida | Dec 22, 2004 5:19:01 PM
I'm pretty sure it's not spelt "Quiggen".
Posted by: Nick Caldwell | Dec 22, 2004 6:18:09 PM
What does [Soros] care? Obviously, he has [made massive amounts of money in currency speculation] in a number of other countries, and it hasn't really bothered him that he impoverished millions upon millions. He'll still have his personal jet. Hell, he can ever [sic] fly it to Europe.
Hey Al, just because Man Bit Dog once doesn't mean that dogs don't bite man every damn day.
Posted by: Hamilton Lovecraft | Dec 22, 2004 7:08:50 PM
Enhancing exports by devaluing the yuan is not unconditionally good. Think how much they could export if they set the yuan to be one billionth of a euro! But then they would basically be giving their stuff away to Europe, not getting much in return.
Posted by: Walt Pohl | Dec 22, 2004 7:23:33 PM
Quiggin.
Posted by: D | Dec 23, 2004 2:13:51 AM
Walt Pohl,
Maybe they are willing to give stuff away to the west -- for getting the west to build factories in their country, factories with modern technology, supply/distribution channels and all that.
Maybe it goes something like this: you build a factory and organize production/distribution and we'll give you some (or most) of the stuff produced there for free (or rather in exchange for a few tons of half-useless paper called T-Bills).
In fact, this is the very basic Marxist idea: capitalist system raises productivity to the extent when most stuff is produced by machines and almost no manual labor is required -- and then the communists take over and worker's paradise commences.
Don't underestimate ideology. Was it Lenin who said: the capitalists are so greedy - they'll sell us the rope we'll hang them with?
Posted by: abb1 | Dec 23, 2004 7:04:38 AM
Matt. China's capital account is closed, which makes it harder to short the dollar/ go long renminbi. The easier way to do that would be to go to a US bank, borrow a bunch of dollars, sell then for renminbi, and then put the renminbi in a Chinese bank. Alas, you cannot do this -- the renminbi is not freely convertible. Chinese citizens cannot sell renminbi for dollars when they want, foreigners cannot buy renminbi for dollars when they want either. There are ways around China's capital controls, but they have significant transaction costs (China's fast reserve accumulation implies some people are getting around the controls and putting funds in). Foreigners can also use the non-deliverable forward market, (NDF), but as I understand that market, in that market you have to find another foreigner willing to take the opposite bet -- you cannot speculate against the PBOC.
Posted by: brad | Dec 23, 2004 11:49:35 PM
PB --
One component of the People's Dank of China (PBOC)'s current dilemma is worth drawing out a bit more. The PBOC is probably willing to subsidize China's exports by buying some dollars to keep the exchange rate stable -- right now China's global trade surplus is around $50 billion, so that implies that China would need to buy $50 billion of US assets to keep its current peg in the absence of any capital flows. They might even be willing to subsidize some foreign direct investment as a form of technology transfer -- if China is attracting $50 billion in FDI, that means $100 billion in total reserve accumulation -- $50 billion from trade, and $50 billion to keep the inflow of FDI from leading the renminibi to appreciate.
On the other hand, the PBOC clearly does not want to subsidize those speculating on the renminbi. Yet people (often overseas chinese) are increasingly finding ways around the capital controls. Hot speculative money is finding its way into China -- Andy Xie of Morgan Stanley estimated speculative inflows into all emerging Asia (one assumes mostly China) of $100 billion in this quarter. Say China is getting $100 billion a year in hot money flows. Then its global reserves would increase by $200 billion, 1/2 to subsidize China's exporters/ encourage technology transfer via FDI, and 1/2 to let speculators betting against the dollar.
The PBOC would really rather not be giving speculators renminbi at the current undervalued rate -- yet it has yet to find a way of avoiding doing this. So China clearly would like to slow its pace of reserve accumulation, though so far it has had no success doing so. The United States need for financing, on the other hand, continues to increase.
Posted by: brad | Dec 24, 2004 12:04:11 AM
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