10-12-2003 00:28									#91
	Inflate your Upload Space

quote: Originally posted by DanS DAVOUT: It appears to me that China's system is meant to be pay-as-you-go. Perhaps they wish to avoid a persistent overall trade deficit.

I share this analysis; they could not afford a persistent trade deficit. The Chinese authorities presently in office and driving this astonishing conversion to capitalism are not only risking their job, but (considering China records) their skins. So, we can understand that they are cautious. But the security margin provided by their positive trade account should not be exaggerated : it was only 80$ by Chinese in 2002, and is forecasted to be reduced to 40$ in 2003, whereas the US trade deficit by American will be 2000$.

No other country in the world could experience such a deficit; it was only made possible by the role of ultimate currency reserve held by the $. If the $ has to share this role with the € in the coming years, that will reduce the ease to finance deficits.

TCO was asking a question about what Europeans are thinking; in fact, they are worrying that the US should urgently take steps in order to have their imbalances corrected before the Euro reach its full strenght.

	10-12-2003 00:51									#92
	Support Apolyton

quote: it was only 80$ by Chinese in 2002, and is forecasted to be reduced to 40$ in 2003, whereas the US trade deficit by American will be 2000$.

Do you mean $ per capita?

	10-12-2003 04:50									#93
	Support Apolyton, buy Civilization: The Boardgame

quote: Originally posted by DAVOUT TCO was asking a question about what Europeans are thinking; in fact, they are worrying that the US should urgently take steps in order to have their imbalances corrected before the Euro reach its full strenght.

Do you mean correcting the trade deficit and/or stopping the fall of the dollar?

Europe could have a problem with capital flight when the dollar stablizes. Is that what Europeans worry about?

	10-12-2003 06:07									#94
	Suffering from ads?

quote: Originally posted by DanS Do you mean $ per capita?

Yes.

	10-12-2003 06:21									#95
	Support Apolyton, pre-order Civilization IV

quote: Originally posted by Kidicious Do you mean correcting the trade deficit and/or stopping the fall of the dollar? Europe could have a problem with capital flight when the dollar stablizes. Is that what Europeans worry about?

I mean the trade deficit and the budget deficit.

We have just experienced, between the launch of the Euro and the beginning of 2002, a totally unexpected fall of the Euro against the $ (nobody had anticipated neither the fall nor its magnitude); it has not caused major troubles, I believe for two reasons : the foreign trade was balanced, and Europe appears now as a big peacefull Switzerland. The worry come from the building up of public and privates reserves moving from the dollar to the Euro, this move being considered as a way to spread the risk; presently, it would be dangerous that this move deprives the US of financing. This is why we hope that the US will help themselves in correcting the imbalances.

	10-12-2003 07:59									#96
	Support Apolyton, buy Galactic Civilizations

quote: Originally posted by DAVOUT The worry come from the building up of public and privates reserves moving from the dollar to the Euro, this move being considered as a way to spread the risk; presently, it would be dangerous that this move deprives the US of financing. This is why we hope that the US will help themselves in correcting the imbalances.

There has been no shortage in finances in the US while the dollar has continued to fall, even though people have already moved to the Euro from the dollar. The fall in the dollar has been fairly steady and there hasn't been any panic. That's not to say that people haven't traded dollars for Euros. I'm not worried about the US in the short run as long as nations like China and Japan invest here, and I don't see that changing any time soon. I'm a little worried about Europe when the dollar stops falling. Then all the people who moved to the Euro to avoid the cost of a falling dollar will trade Euros for dollars.

	10-12-2003 22:08									#97
	Support Apolyton buy from Amazon

I just read that 9.1 billion $ worth of yuan has been repatriated to China in anticipation of a repeg of the currency.

	10-12-2003 22:21									#98
	Support Apolyton, buy Civilization 2

Leaving aside China for a moment, I guess I take a more prosaic view toward the value of the dollar. Just as long as there is not a crisis in the dollar, I have no problem with the value of the dollar declining in an orderly fashion, as is happening. That's the way the economic imbalances are corrected and I think it's quite difficult to say that there is any more danger this time around than any other. If American consumption growth is less in the next couple of years than hoped, it wouldn't be a tragedy for the US. US consumption maybe grew too much, so we have to pay some of it back. No big deal. Better to pay later than earlier, but you still have to pay it eventually.

If Japan wants to continue funding this consumption at rock bottom rates, then they are more than welcome to shovel their taxpayers' money at the American consumer, as far as I'm concerned. If Japan gets tired of doing that, since China's demand is replacing US demand (which they won't, because China's imports are denominated in dollars as well), or the tide against the dollar is too high, then I expect our major trading partners to share much of the pain of receding demand growth for a couple of years.

Now that the economy is out of recession (thanks, in part to this demand growth mind you), I think the US is well positioned to correct the imbalances. I don't think we should try to micromanage our currency or imbalances. I know that economists might want to get worked up over it, and it's an imperative that politicians act like they are concerned as well, but I guess it's there job to get worked up over it. But as for me, I think the market will take care of it.

Last edited by DanS on 10-12-2003 at 22:42

	10-12-2003 23:18									#99
	Get a bigger avatar today!

An interesting wrinkle in the value of the dollar is that since China's reserves (some $400 billion) are denominated in dollars, they will have taken a bath on the reserves as the value of the dollar declines. Going forward, when they want to import stuff from other countries, they will also have to pay more for the goods and services.

	10-12-2003 23:39									#100
	Browse Apolyton AD-FREE

quote: presently, it would be dangerous that this move deprives the US of financing

Why would it be dangerous? This stuff doesn't often happen overnight, after all. Also, does the Euro area have an asset of the size, liquidity, and quality of the US treasury market?

quote: But the security margin provided by their positive trade account should not be exaggerated

Now that China is importing a lot of raw materials, such as oil, I wonder how a pay-as-you-go system could hold up, even when the trade account is negative for a short time. It seems a no-brainer that it would be worthwhile for China to be able to finance a trade debt of some size.

	10-12-2003 23:44									#101
	Enter the AD-FREE zone

quote: Originally posted by DanS If American consumption growth is less in the next couple of years than hoped, it wouldn't be a tragedy for the US. US consumption maybe grew too much, so we have to pay some of it back. No big deal. Better to pay later than earlier, but you still have to pay it eventually.

Consumption certainly did not grow too much. In fact, it didn't grow enough. How do you expect to reach full capacity and full employment without growth in consumption? It's investment that grew too much. Consumers won't be able to pay off their debt until we start utilizing our full capacity. Bush administration should have been aware of this when they designed the tax cuts. Only proper fiscal policy can help us here.

	10-12-2003 23:52									#102
	Enter the AD-FREE zone

quote: Originally posted by DanS An interesting wrinkle in the value of the dollar is that since China's reserves (some $400 billion) are denominated in dollars, they will have taken a bath on the reserves as the value of the dollar declines. Going forward, when they want to import stuff from other countries, they will also have to pay more for the goods and services.

This is the case for all the Central Banks of the whole planet which for some reason have the unfortunate habit to maintain 50% or more of their reserves in US$.

Some of them which sold most of their gold reserves three or four years ago must feel sorry now. But Central Bank reserves are usually very long term holdings, and such variations of the dollar (and worse ones) have already been experienced; they just have to sleep, the $ will recover one day or the other ...

The effect on their imports is a direct consequence of the peg, and it could induce them to hasten their evolution toward a more flexible currency. But nothing is sure in this respect, because they have already faced the $ almost as low as it is to-day.

	11-12-2003 00:05									#103
	Support Apolyton, buy Civilization: The Boardgame

quote: But Central Bank reserves are usually very long term holdings, and such variations of the dollar (and worse ones) have already been experienced; they just have to sleep, the $ will recover one day or the other ...

Yes, this is true. But China is different in that its reserves also have to directly cover fluctuations in their trade accounts. Don't we expect their reserve to be drawn down in the next couple of years? This leads me to consider China's dollar reserves as more short-term.

quote: The effect on their imports is a direct consequence of the peg, and it could induce them to hasten their evolution toward a more flexible currency. But nothing is sure in this respect, because they have already faced the $ almost as low as it is to-day.

Yes, the situation would seem to dictate that, from China's perspective. This is the way Greenspan looks at it and you could say that the Bush administration is only a couple of months or years ahead in its rhetoric. And yes, China recently have faced the $ as low as it is today. But its situation is much different now. Trade with the US skyrocketed during the late 90s.

	11-12-2003 03:13									#104
	Support Apolyton buy from Amazon

It seems that you both agree that a more flexible currency would allow China to afford trade debt. Why is that?

	11-12-2003 17:20									#105
	Support Apolyton or Terrorists Win

quote: Originally posted by DanS But China is different in that its reserves also have to directly cover fluctuations in their trade accounts. Don't we expect their reserve to be drawn down in the next couple of years? This leads me to consider China's dollar reserves as more short-term.

I would not say that China is different, because the main purpose of the reserves of all Central Banks is to make sure that the nation is able to repay its foreign debts, whatever they are, and under any circumstance. This is why the size of reserves is often expressed in number of monthly imports. In China case, the reserves are currently amounting to more that 9 months of imports which means that it would take 9 months without any exports and with the same amount of imports (which is practically impossible) for China to reach bankruptcy. But what is definitely possible, not to say probable, is temporary deficit; it would be easily covered, but needs nevertheless to be corrected.

And it is at this point that more flexibility, Kidicious, would be usefull. It would make possible a smooth fall of the yuan, untill it reachs a level where 1) the reduced price of Chinese goods triggers an increase of the exports, or stop the fall, and 2) the increased price of foreign goods triggers a reduction of the imports, or stop their growth.

As nobody knows precisely where the equilibrium point is, flexibility is a better solution than the brutal fix rate devaluations.

	11-12-2003 18:04									#106
	Get a bigger avatar today!

quote: Originally posted by DanS Why would it be dangerous? This stuff doesn't often happen overnight, after all. Also, does the Euro area have an asset of the size, liquidity, and quality of the US treasury market?

Dangerous was referring to the consequences, but I am prepared to replace dangerous by*less than desirable* if we refer to the event.

I have not the figure over several years, so my fear could be misplaced, but I have in mind that in september the trade deficit was about 40 billions when the foreign investments were only of 5 billions. Till now, the two figures where about equal, the foreign trade deficit was entirely financed by foreign investments. If the september situation was to last, dont you believe that it would have *less than desirable* consequences?

I dont want to trouble your confidence in the US Treasury market, but I would rather name it a liability than an asset. Its liquidity is not immune, as for any piece of paper, to come close to evanescence.

	11-12-2003 22:10									#107
	Suffering from ads?

quote: Originally posted by DAVOUT And it is at this point that more flexibility, Kidicious, would be usefull. It would make possible a smooth fall of the yuan, untill it reachs a level where 1) the reduced price of Chinese goods triggers an increase of the exports, or stop the fall, and 2) the increased price of foreign goods triggers a reduction of the imports, or stop their growth.

Wait. Isn't the yuan undervalued? Why would it fall in value?

	11-12-2003 22:43									#108
	Inflate your Upload Space

quote: Originally posted by Kidicious Wait. Isn't the yuan undervalued? Why would it fall in value?

I was answering to the hypothesis made by DanS that China could have a foreign trade deficit in the future, and how it could be corrected, and to your question.

As far as the value of the yuan is concerned, I personnaly dont know whether it is over or undervalued; all what I know is that the US claims that it is scandalously undervalued, and the IMF says that there is no evidence of significant undervaluation. Until somebody more qualified in these matters tell the contrary, I stick to the IMF statement.

	11-12-2003 23:12									#109
	Support Apolyton, buy GURPS/ Alpha Centauri

quote: Originally posted by DAVOUT I was answering to the hypothesis made by DanS that China could have a foreign trade deficit in the future, and how it could be corrected, and to your question. As far as the value of the yuan is concerned, I personnaly dont know whether it is over or undervalued; all what I know is that the US claims that it is scandalously undervalued, and the IMF says that there is no evidence of significant undervaluation. Until somebody more qualified in these matters tell the contrary, I stick to the IMF statement.

It doesn't seem in the interest of the Chinese to have a overvalued currency, especially since everyone here seems to agree that foreign exchange earnings are so important for them.

	11-12-2003 23:39									#110
	Tired of ads?

quote: Originally posted by Kidicious It doesn't seem in the interest of the Chinese to have a overvalued currency, especially since everyone here seems to agree that foreign exchange earnings are so important for them.

The main advantage of the peg to the dollar is that they are automatically protected against an overvaluation of their currency with their biggest client.

	12-12-2003 00:01									#111
	Support Apolyton, buy Civilization 2

Here's an article about Greenspan's Dallas speech, which dealt with this topic.

http://news.ft.com/servlet/ContentS...p=1045050946495

	12-12-2003 01:07									#112
	Support Apolyton, buy Alpha Centauri

quote: Originally posted by DanS Here's an article about Greenspan's Dallas speech, which dealt with this topic. http://news.ft.com/servlet/ContentS...p=1045050946495

Well, a stronger yuan would at least increase demand for US goods in China, and China is contributing more to global growth than any other nation. So, I have to disagree.

The figures on the money supply growth in China are disturbing though. 20% a year, yikes!

	12-12-2003 01:41									#113
	Support Apolyton buy from Amazon

quote: Originally posted by DAVOUT I have not the figure over several years, so my fear could be misplaced, but I have in mind that in september the trade deficit was about 40 billions when the foreign investments were only of 5 billions. Till now, the two figures where about equal, the foreign trade deficit was entirely financed by foreign investments. If the september situation was to last, dont you believe that it would have *less than desirable* consequences?

According to the flow of funds account at the Fed, there has been an increase in the flow of capital out of the US. I'm looking at line 9 of F.107 Rest of the World. It show a net $559.1 billion net outflow, adjusted annually, for Q2 2003. That number is up from $375.9 billion in 2001 and and $199 billion in 1988.

I don't know how to tell if the outflow can continue to increase at this rate without adverse effect for long, but I saw on the financial channel yesterday that Citibank predicted the dollar to stablize next yeat.

	14-12-2003 02:03									#114
	Support Apolyton buy from Amazon

If China's economy does overheat it could be very bad. Both the US and China with over capacity. The US will still be trying to stop its trade deficit from getting bigger, and China desperate to export its way out of its problem. It could get nasty.