Foreign exchange surpluses
Global trade in the slogans of politics and media means outsourcing at the moment, and currency disputes, but a global economy has implications many Americans have not experienced in any large and macro way, and suggests there are other implications to consider:
Here are some key paragraphs from an article by Michael Hudson (Hat tip reader rayllove):
China already is seeking to buy mineral, fuel and agricultural resources abroad to supply the inputs that it needs for its own growth. But these efforts still leave substantial foreign exchange surpluses. Most countries have used these surpluses to buy up key sectors of foreign economies. This is what Britain, the United States and France have done for more than a century.”
“When the US economy runs payments surpluses with foreign countries, it insists that they pay for their foreign debts and ongoing trade deficits by opening up their markets and “restore balance” by selling their key public infrastructure, industries, mineral rights and commanding heights to US investors. But the US Government has blocked foreign countries from doing the same with the United States. This asymmetry has been a major factor causing the inequality between high US private-sector returns and low foreign official returns on their dollar holdings.”
“The refusal of the US Government to behave symmetrically by not letting China buy key US companies with the dollar inflows that enter China to buy its own companies, above all its financial and banking sector, is largely responsible for the asymmetrical situation noted above, in which US investors earn 20% in China, but China earns only 1% in the US.
Michael Hudson: “”When the US economy runs payments surpluses with foreign countries, it insists that they pay for their foreign debts and ongoing trade deficits by opening up their markets and “restore balance” by selling their key public infrastructure, industries, mineral rights and commanding heights to US investors.”
What is this? I thought that the US believed in free trade.
Free for whom?
Min,
The US uses every trick in the book and then some. The essential concept of multilateral trade structuring which began with The League of Nations, and then evolved into what is now the WTO, was intended to eliminate unilateral trade agreements that were used for strategic and jingoistic purposes. But now the very nation with the most clout in the WTO and etc., is the nation with unilateral trade agreements in strategic places. For example, Colombia now has the fastest growing stock market in the world and at least in part because it has almost completely free access to US markets, and, with impunity to protect its own markets. This, while a direct trade deal with the US is ‘pending’, and while the Colombian’s allow the US to use their country as an outpost in the ‘drug-war’… and of course Venezuela just happens to be just across the border. And this type of ‘rule bending’ goes on across the globe but only the US can get away with these ‘tricks’.
There are plenty of people holding US based assets the past 10 years who’d be thrilled to have a 1% return on them.
US GDP growth the past 10 years lagged the rest of the world by as much as in any ten year period where there is data available to compare, probably going all the way back to 1776.
If there is only a 1% rate of return and an anemic economy in the US, but the Chinese government is pouring low interest rate financing at those same companies to get them to build apartments and shopping malls that may go unused, why should Chinese companies be interested in buying US companies? Similarly, foreign companies want to invest in China because China has no meaningful regulations for clean environment, abundant ability to cheaply refine (due to limited environmental legislation) key raw materials (not to mention that they’ve restricted the export of those raw materials in non-assembled form) for high tech items, huge tracts of land that don’t need to be cleaned up before they build a factory that will probably pollute the sites (not all, some), etc etc etc.
European and Japanese companies do buy US companies for import, regulatory, integration reasons, and in some cases just to keep them alive because they provide key components, so I would assume that the same would apply in China, but it seems to me that the Chinese government is more responsible for the inflow of investment and the forex issue. It is exactly what they wanted. Now they’re reaping massive inflation for it.
I guess another question would be that the Japanese for a while became renowned for buying up American assets like golf courses. How did that work out for them? My recollection is that they lost their shirts, but how much of that was the foolishness of vanity investments and how much represented actual failure is not known to me.
J,
I’m not sure if I understand your comment? But, this seems out of place: “ It is exactly what they wanted”. What the Chinese and most developing nations want is FDI. The ‘direct’ part though means long-term stuff like companies in buildings with production capabilities and etc. But investment in equities and capital markets are not wanted to varying degrees.
What Hudson is talking about though are “foreign exchange surpluses” in dollars. This though is not just their trade surplus with the US, they trade in dollars with the ROW too. But they have been quite clear that this arrangement is not “wanted”.
They are put in a situation that leaves them few choices on how they spend these savings because if they exchange such large amounts for yuans the resulting appreciation would reflect much more than their trade imbalance with the US. There is essentially a flaw in the system when a reserve currency leads to a concentration such as this, and, as Hudson explains, the historical solution has been to invest such surpluses in the nation from where the currency originates. But the US has blocked the Chinese, and others, from doing this because the US Government helps investors by flooding the US with foreign inflows, ie., cheap capital that keeps borrowing costs low, which also allow for advantages such as the Bush tax cuts. This also limits competition from foreign investment by tying-up foreign savings. This is ‘dollar hegemony’.
Although, it has little to do with the examples you mentioned involving private investment, nor do China’s domestic investments apply. As Hudson points out, the Chinese spend as many dollars as possible on what they are limited to, but they still have trillions invested in t-bills. They are though establishing direct trade deals with many countries with no dollars involved. The ROW did join forces at the last G-20 meetings and dollar hegemony is very probably about to be eliminated by popular demand. Of course the MSM didn’t say much about any of this.
I’ve a Levono computer on my desktop. It’s got an IBM logo painted on the front, but the reality is that it’s a Chinese-made computer sold by a Chinese firm, which bought out IBM’s PC division. I’d be much surprised if this is only purchase of a US firm’s assets by a Chinese firm to ever occur.
mike,
It is assets within the US that have been denied the Chinese. I don’t remember which investments exactly, but they tried to buy an energy company and some mines. Hudson is also talking about the use of surplus dollars held by the Chinese Government, not private investments. Think in trillions.
Dan ,
I find it odd that Angry Bear is promoting this tripe from Michael Hudson on the same day that the thug communist leaders in China threatened actions against the nations of the world which had representatives in attendance at the Nobel Peace Prize ceremony for Liu Xiaobo in Norway. And not a word has been said at Angry Bear about the recent threats of China’s communist leaders with regard to Nobel Peace Prize award. So much for balance.
Hudson made a number of phony and misleading statements in his lengthy letter supposedly forwarded to the premier of China. I am sure that the communist leader and his assistants, if they read this letter online or received it, found some passages to be fully in line with China’s communist communications internally and to the world.
Anyway, thanks for the laugh. I’ll try to follow up with a few comments and articles that address some of Hudson’s assertions. There is enough bull in that article to sink a boat.
Dan ,
I find it odd that Angry Bear is promoting this tripe from Michael Hudson on the same day that the thug communist leaders in China threatened actions against the nations of the world which had representatives in attendance at the Nobel Peace Prize ceremony for Liu Xiaobo in Norway. And not a word has been said at Angry Bear about the threats of China’s communist leaders against other nations regarding the Nobel Peace Prize and ceremony attendance. So much for balance.
Hudson made a number of phony and misleading statements in his lengthy letter supposedly forwarded to the premier of China. I am sure that the communist leader and his assistants, if they read this letter online or received it, found some passages to be fully in line with China’s communist communications internally and to the world.
Anyway, thanks for the laugh. I’ll try to follow up with a few comments and articles that address some of Hudson’s assertions. There is enough bull in that article to sink a boat.
Here is a current article on the role and achievement of CFIUS.
Foreign direct investment and U.S. national security: CFIUS under the Obama Administration
by Mark E. Plotkin and David N. Fagan
Columbia University
June 7, 2010
http://www.vcc.columbia.edu/content/foreign-direct-investment-and-us-national-security-cfius-under-obama-administration
“There was considerable public scrutiny of the Obama Administration’s performance in its inaugural year, but comparatively little focus on one of the Administration’s key processes governing the flow of investment into the United States ― namely, the Committee on Foreign Investment in the United States (CFIUS). Yet, this is a frequent question we receive from foreign investors — has the change in the administration affected CFIUS?
The good news for investors and U.S. transaction parties alike is that the overall CFIUS process continues to function well under the Obama Administration and has been faithful to the principles of open investment. At the same time, there have been several notable developments in the volume and pace of CFIUS reviews over the past year that should be of interest to those who watch the cross-border M&A market closely.
The slowdown in overall M&A activity contributed to a reduction in filings with CFIUS.1 In 2008, CFIUS reviewed 155 cases; CFIUS reviewed fewer than half as many transactions in 2009. This is the lowest number of notices since 2005 and the first reversal of an upward trend in nearly a decade.
Perhaps the most significant development for investorswas that CFIUS’s pace for completing its reviews also slowed materially in 2009. While official figures have not been released, CFIUS escalated a much higher percentage of matters under review to a second-stage 45-day “investigation” to the point that, by percentage, investigation nearly became the rule rather than the exception in 2009. By contrast, through 2007, fewer than two percent of all cases reviewed by CFIUS had proceeded to the investigation phase and, in 2008 (a year in which CFIUS received the most filings in nearly two decades), the number of investigations still was fewer than 15 percent of all cases.
The slower pace of CFIUS reviews and corresponding increase in investigations may be attributed to several factors. First, there was a natural bureaucratic lag that results from any change in Administration and turnover in senior positions in key agencies. The Treasury Department and other CFIUS agencies worked valiantly to move CFIUS cases along for review but often the necessary policy-level approvals were slow in coming.
Second, the Foreign Investment and National Security Act of 2007 (FINSA), which “reformed” CFIUS and codified its review authority, established a presumption of investigation for foreign government transactions and transactions involving critical infrastructure. The number of investigations in 2009 partially reflects the continued role of state-owned enterprises and other sovereign investors even in the slower 2009 M&A market.
Third, and most important, the Executive Order (EO) adopted by the Bush Administration to implement FINSA included several provisions aimed at tightening CFIUS’s internal administration. In particular, the EO established a more rigorous internal process that CFIUS must undertake before it proposes measures directed at “risk mitigation” for a particular transaction. This internal process, while more […]
This article is hot off the press. It offers a different perspective.
Why Chinese Companies Buying US Companies Matters
Chinese companies serve Chinese state, exploit Chinese people
By Frank Xie
Dec 7, 2010
http://www.theepochtimes.com/n2/content/view/47131/
EXCERPT:
“Investment by foreign companies tends to stir nationalist feelings but that does not mean that all opposition to foreign investment rests on mere emotion.
Take, for example, the opposition to China’s Huawei Technologies attempt to purchase the U.S.-based 3Leaf Systems. U.S. Congress was worried that this purchase may be a threat to national security.
Huawei has received tens of billions of U.S. dollars from the Chinese state in the past few years and became one of the largest telecoms in the world. Congress has urged the Obama administration several times to review the risks of purchasing telecommunication equipment from China, believing that doing business with Huawei will harm the country’s safety.
Mr. Li Ruogu, chairman and president of the Export-Import Bank of China, claimed that the United States would reject on the grounds of national security every proposal from one of China’s state-owned enterprises to invest in the United States. Only investment in some private sectors has been allowed, and this has angered Beijing.
Beijing’s anger (and Beijing’s officials are skillful at using a show of anger to advance their interests) is reasonable if Chinese investment is similar in kind to that of other countries whose companies do invest freely in the United States. The truth, though, is China is not a normal capitalist country—it is not even a true market economy.
The “Dalai Lama Effect,” a study done at the University of Gottingen in Germany, documents how the Chinese regime interferes in economic activity. German researchers tracked the exports to China from 159 countries from 1991 to 2008, as published by the United Nations. The study found that if a country’s top leadership met with the Dalai Lama, Tibet’s exiled spiritual leader, that country lost on average 8.1 percent in exports to China in the two years following the meeting. The negative impact began in 2002, when President Hu Jintao took office.
The German study shows how the Chinese regime controls the Chinese economy to advance its political goals. The division between private companies and the state that is familiar in the United States hardly exists in China.
The private investments from individuals in China are mostly state-owned assets that have been embezzled by the princelings — the favored children of the Communist Party’s revolutionary generation. As for Chinese companies, which company can say that it is truly privately owned, without an official connection in the background, and when private property rights are not protected?
When Chinese companies offer to acquire a U.S. company, in effect the Chinese state is offering to buy that company.
It is not surprising that U.S. lawmakers would sound a warning.”
I guess we read the particulars of the post differently. Please take aim at the post that addresses the issue presented. I know nothing about Hudson’s issues on the peace prize, but I do know some of the issues on Chinese sensitivities. And yes they are thugs, much the preference our multinationals appear to approve of so far.
The irony and blatant lies of the multinational companies and political allies selling myths of a free trade scenario were what I had in mind.
I also have just obtained permission to re-post an article by Andrea Hayley from The Epoch Times on China as suggested by Stormy, and am in contact with Andrea for more, as part of rounding out the compexities of our place in the world for other countries and transnational operations.
Dan,
Who gives a damn about Hudson’s views on the Nobel Peace Prize? Screw that.
The issue is how China’s thug communist government has been throwing its weight around threatening other nations. That play has economic implications.
As for Hudson’s article, I went directy after his phony presentation on matters related to China’s desire to purchase U.S. corporations and other assets. The guy pretends that CFIUS doesn’t exist and that there are no concerns regarding national security and problems associated with state-owned companies and corporations trying to snap up assets around the world. He put on a clown show.
There is nothing that prevents citizens and private company interests in China from pursuing purchases in the United States other than the possible review of sales subject to the CFUIS. And the CFIUS has blocked very few such acquisitions. The CFIUS reports are available for review.
There is nothing on the U.S. side of potential legal transactions that prevents citizens and private company interests in China from pursuing purchases in the United States other than the possible review of sales subject to the CFUIS. And the CFIUS has blocked very few such acquisitions. The CFIUS reports are available for review.
You have painted a lopsided picture that doesn’t hold up.
Rll,
There is nothing on the U.S. side of potential legal transactions that prevents citizens and private company interests in China from pursuing purchases in the United States other than the possible review of sales subject to the CFUIS. And the CFIUS has blocked very few such acquisitions. The CFIUS reports are available for review.
You have painted a lopsided picture that doesn’t hold up under scrutiny.
Rll,
You fail to acknowledge that the CFIUS has only conducted a vey limited number of reviews. There have been no blocked transactions by the U.S. Government in the last few years.
Citing a small handful of examples of denied transactions ignores the reality that the vast majority of acquisition opportunities in the United States are not challenged by the CFIUS. Playing your sympathetic violin for the communist government of China doesn’t change the facts on the ground. Private firm and individual acquisitions have encountered very few challenges in the United States. President Clinton cited a couple of Chinese firms which own facilities in the United States this afternoon during a press conference at the White House.
I cant believe that Rdan allows cowboys riding such large straw-horses to ride roughshod across his threads. Rdan must be a “tripe” monger because MG and I have had the same reaction to this thread for ‘independent reasons’ (I think a ‘German’ study is warranted).
To begin with, what Hudson says here has nothing to do with private investment, yet that very thing is used for straw again and again: here is the cowboy with his guns a blazin:
“This is very misleading. In fact, it’s worse than that. ” (very, very, very, very, very misleading, perhaps [maybe even more ‘verys’?])
“The simple truth is that China’s private citizens and private companies have many opportunities to invest in the United States. The only assets that China’s private companies or citizens would have any legal difficulty in purchasing are those which would receive a review by the U.S. Government’s Committee on Foreign Investment in U.S. (CFIUS). The annual list of reviews by CFIUS is very short.”
So I suppose it should come as no surprise that support comes as protein-free horseshit:
“The “Dalai Lama Effect,” a study done at the University of Gottingen in Germany, documents how the Chinese regime interferes in economic activity. German researchers tracked the exports to China from 159 countries from 1991 to 2008, as published by the United Nations. The study found that if a country’s top leadership met with the Dalai Lama, Tibet’s exiled spiritual leader, that country lost on average 8.1 percent in exports to China in the two years following the meeting. The negative impact began in 2002, when President Hu Jintao took office.”
“The German study shows how the Chinese regime controls the Chinese economy to advance its political goals. The division between private companies and the state that is familiar in the United States hardly exists in China.”
As if the US Government doesn’t interfere with the economic activity of foreign nations. Or foreign elections, or the deposing of leaders who are less than ‘business friendly’.
If there is a speck of Cuban lead in a 2 ton steel beam made in England, that beam can only be sold in nations that are willing to defy US sanctions, and that is assuming England would take that chance, which it wouldn’t. Anyway, silly cowboy, the US has 17 intelligence agencies and nearly 800 military bases around the world and all that you can come up with is the “Dalai Lama Effect”, as if the US has never been guilty of ‘any’ wrongdoing, like trying to kill Castro for example. And as if the US doesn’t try to control the entire global “economy to advance its political goals”. Have you been drinkin’, cowboy?
And you think this site lacks balance?
Yelling at me will get you exactly nothing from me.
Rll,
Hudson and you are pretending that the Chinese communist government doesn’t have sovereign wealth funds that are actively engaged in global acquisitions, including equity positions. Similarly, Hudson fails to acknowledge that the Chinese communist government could loan out monies to private Chinese corporate interests for the purposes of global acquisition. It’s laughable that he pretends that the option doesn’t exist.
Hudson, ever the fool, has a problem with trying to present the case for the Chinese communist government and make direct comparisons with the activiities of foreign private investors. It’s a farce. The entire paper is riddled with that crap. Hudson dances back and forth, playing that game. He is a lousy writer as the con is obvious. It’s absolutely hilarious reading.
No Western European, North American, or major Asian power is going to allow China’s communist government to suck up huge piles of assets in their nations whereby the Chinese communist government will have controlling interest in major corporations, their assets, or other holdings. It’s not going to happen and all the whining that you and Hudson engage in will not change that fact. Get a clue.
Hudson’s failure to address other options that the Chinese communist government has at its disposal is hilarious. It’s a sloppy con piece, apparently provided to the Chinese communist leader for whatever purposes…perhaps a retainer considering that Hudson already has an employment relationship in China.
The information that I presented on the CFIUS is accurate to the best of my knowledge. The CFIUS reports speak for themselves. No amount of pretending by Hudson or you will change those facts.
The Chinese communist government has already tried its hand at direct communist state-owned acquisition in the U.S. and learned its lesson. It wouldn’t be difficult for the communist government to provide loanable funds to private interests in China to pursue similar non-state controlled opportunities in the open marketplace. China’s arrogance to retain central communist control over so many elements of its economy has cost the nation many commercial opportunities.
It’s laughable to know that Hudson failed to even mention the possibility that the Chinese communist government could loan monies to Chinese private firms and interests for the specific purpose of seeking global acquisitions. Instead, he stipulates the need for the Chinese communist government to not loan monies to banks for the purpose of supporting acquisitions of domestic “assets already in place.”
Hudson has written, in part, a fiction wrapped around political theater. But you seem to love it.
I haven’t asked you for anything recently except open threads on Wednesday and Friday.
Participants are scoring a big zero on Wednesdays and Fridays are a mixed bag as far as open threads go.
Besdies, I wasn’t yelling at you. I’m laughing at Hudson for his communist love affair piece. Priceless, that!
yea, yea, yea, don’t you have a pep-rally or an ROTC meeting to go to?
Hudson is one of the most respected economists in the world, and you are ‘MG’, a guy who misses the obvious fact that the Chinese have been turning capital over to a bully nation, for next to nothing, and for decades, as if they need investment guidance from a nation with a dubious reputation for underhanded currency deeds. As if nearly every person above the age of 17 doesn’t know that the US does whatever it takes to get its way.
Hudson is also the person who wrote the cover story for Harpers giving a detailed forecast of the impending housing collapse in May of 2006. That was some 3+ months before Dean I-saw-it-first Baker made his claim to fame for a paragraph he wrote in some obscure publication that has a readership of about zero. Then, Hudson wrote two follow-up articles for Harpers which laid out the implications of the first article, all of it telling and accurate. Hudson has also written some books that are highly regarded by people across the planet, I in fact read SUPERIMPERIALISM about 30 years ago, and in some circles it is considered to be a classic. But you, ‘MG’, describe his writing as “lousy”. You being nothing more that some uninformed annoyance of a blogger.
Hudson too is an adviser to nations all over the world… and here you are attacking him with hyperbolic rants with words like “laughable”(repeatedly), and “hilarious” and “fiction”. While intermittently accusing the Chinese of doing the same things that all governments do, working the angles. Duh!
Anyway, if there is anything humorous involved here it is your hubris and lack of understanding.
rll,
I am very familiar with Hudson’s background, his writings, and his blog. That is not central to the issues that I addressed. I would have made the same observations had Robert Mundel (a China government advisor)l, another economist, or analyst written such a letter to the Chinese communist premier. Credentials aren’t the issue nor the excuse for some of the nonsense in the letter.
Hudson’s letter fails to acknowledge options that China’s communist leadership has pursued as well as options that the government could pursue. I have identified a few of those options. You have failed to acknowledge that those opportunities are in play at this time or do exist. No surprise in my opinion.
This is a fine little letter to kick over to the communist premier of China. But it’s a letter that fails miserably at addressing alternatives to those Hudson puts forth. You can whine and play all of your standard long-winded blowhard games, but that doesn’t answer the mail. You failed to acknowledge that other options do exist, that the CFIUS exists for specific reasons as outlined in U.S. law, and that the U.S. nor any other free nation is not responsible for all of communist China’s internal problems. Hudson painted a particular picture for a reason. Omissions from his letter appear to be intentional.
I frequently enjoy some of Hudson’s writings, but this is a disgusting letter that serves no purpose other than to pat the communist Chinese leadership on the back. There is no new information in the letter, and it certainly missed the boat on potential alternatives that can be pursued. Moreover, it misrepresents the available path of opportunities by which U.S. assets can be acquired in the open marketplace.
The letter is absolutely laughable as is your personal attack.
rll,
I am very familiar with Hudson’s background, his writings, and his blog. That is not central to the issues that I addressed. I would have made the same observations had Robert Mundel (a China government advisor)l, another economist, or analyst written such a letter to the Chinese communist premier. Credentials aren’t the issue nor the excuse for some of the nonsense in the letter.
Hudson’s letter fails to acknowledge options that China’s communist leadership has pursued as well as options that the government could pursue. I have identified a few of those options. You have failed to acknowledge that those opportunities are in play at this time or do exist. No surprise in my opinion.
This is a fine little letter to kick over to the communist premier of China. But it’s a letter that fails miserably at addressing alternatives to those Hudson puts forth. You can whine and play all of your standard long-winded blowhard games, but that doesn’t answer the mail. You failed to acknowledge that other options do exist, that the CFIUS exists for specific reasons as outlined in U.S. law, and that the U.S. nor any other free nation is not responsible for all of communist China’s internal problems. Hudson painted a particular picture for a reason. Omissions from his letter appear to be intentional.
I frequently enjoy some of Hudson’s writings, but this is a disgusting letter that serves no purpose other than to pat the communist Chinese leadership on the back. There is no new information in the letter, and it certainly missed the boat on potential alternatives that can be pursued. Moreover, it misrepresents the available path of opportunities by which U.S. assets can be acquired in the open marketplace.
The letter is absolutely laughable as is your personal attack.
Dan,
I cited the problems with the three paragraphs from Hudson’s letter to the Chinese communist premier that you quoted in the main post. I see no reason for complaint as that was part of the main post.
Please express to your Zero Hedge contacts I’m very much so on their side. They are a bit over protective. Yen Crx sup-res as screen names. Emails hot and hart FX @ymail. I trade currencies very well. I don’t want any support. Quite the contrary. China this week end and opening yields on thin mrkets Sun/Mon Sydney Markets. I’m american in San Diego. Thank You
Thank you my well minded new Constituants (sp) That XaU @ the 23.6 FIBI is still on. Help me with Tyler. Or his hench girl. You know me by first and last name now. Get long GBP on your swing trades. Swiss bank IMF and believe it or not rince and wash ACB Aisian Central Banks. I’m dumb though Merry EVERYTHING MY WONDERFULL MINDS! Am I dumb?
Ladies and Gents I need to re-Write this post. I would be long USD into late Europe. I would look @ the E/U 1.34 and sub area . It’s the yen crosses I like. Eur/jpy and AUD/JPY bounces off of the 20 sma band. e/j is close behind. short some smalls. NO stops. Let em run. Then run trailing stops. Aussie news is done for 2 weeks. I am short Aussie. I like as a hedge on Euro.
I read the entire Hudson letter linked to here, and I gots lots of laughs, chuckles and a few gurgles out of it too. My capacity for bullfighting is limited, and whenever I peruse anything from MMT Land the task seems almost insurmountable. But I’ll try and share a few light notes, just so I won’t get accused of doing a lazy hit and run.
For starters, the real way China has taken over multinationals is to tell them the Chinese government owns 51% of any subsidiaries they wish to open up there. The government did not necessarily kick in any cash into the deal.
Then the real reason they have a Dollar surplus is due to the long running peg they have maintained.
Hudson ignores history here and his preferred solution he proposes is that the Chinese government buy out foreign multinationals at “book value”. That’s really funny….anyone who has paid the least attention to how we try and value stocks, or a healthy growing business in a M&A deal, spinoff, LBO or startup IPO, would say “What? I gonna sell at book value?”
China can and is using it’s surplus Dollars to buy Africa and parts of S. America. They still like Dollars in those places better than whatever they use for money now. The problem for the Chinese is that they can’t buy t-bills and peg in that case, and the problem for the US is they lose a big t-bill customer.
Then there is blatant ignorance of mixing up the behaviors of a central bank and private sector investors. The PBoC buys 1% t-bills because they want to peg, and they also have the central bank responsibility of providing liquidity in Dollars to their banking system (hot money outflow problem). The US private investor has been taking risk buying Bidu and China Mobile ADRs on the NYSE and making 20%. But not so well on some of the newer China IPO listings. They do this because they don’t like the crappy interest the USG pays.
Lots of problems with the little details he tosses out too. He claims currency speculative attacks by Soros and others are launched when CB foreign reserves are HIGH. Hehe. Soros would be eating in a soup kitchen if he did that. They attack them when reserves are LOW.
He then went on to pontificate that Malaysia solved this dire problem with currency controls. I assume he means during the Asian currency crisis. The way the history went there was the Asian Tigers adopted the Asian Export Model, complete with pegging undervalued currencies, local biz got way overextended with foreign loans denominated in Dollars, the economy grew like crazy for a while, gaining the attention of foreign stock investors creating hot money inflows and more FDI, then as usual boom turns to bust (I don’t have all the gory details, but one problem was over leveraged companies had trouble paying back dollar loans as the local currency began to weaken) which then starts the hot money outflows, then comes the demand on CB dollar reserves to pay the outflows…and voila they have a currency crisis and the currency speculators arrive because for them the time is ripe.
He also notes that the exiting half of the US Balance of Payments (BOP is sum of trade balance and capital flows) may no longer be increasing solely due to US military payroll going to offshore military bases, but may be increasing due to capital flows leaving the US (and let’s add the trade deficit for completeness, mike). I’m sure MG finds that enormously funny when he compares his bank account to the BOP data I’m sure he looks at.
Oh, what else. There’s the quick dissertation on Japan. Hudson claims that Japan did a massive credit expansion (low interest rates) after the Plaza Accord forced them to double the value of the […]
Cedric,
Thanks for stepping up. You covered a lot of areas.
Appreciate what you did.
Cedric,
If nation A has a surplus of nation B’s currency, when that surplus is exchanged for nation A’s currency it increases supply of that currency, and that causes depreciation of currency B, consequently, nation A’s currency, in being removed from supply, causes that currency to appreciate in kind. This is how currencies find their relative balance in a fiat system.
But China is being compensated in dollars from many different nations. So the surplus of dollars held by China is much, much, larger than its trade balance with the US. Therefore, if China were to exchange its glut of dollars for yuans the resulting appreciation would not be in keeping with its trade surplus with the US. If all of the nations trading with China had been using their respective currencies, the yuan’s exchange rate would have followed fiat principles and that would have put far less upward pressure on the yuan. The reserve currency system is essentially flawed.
The point is… that makes the following flawed too:
“Then the real reason they have a Dollar surplus is due to the long running peg they have maintained.” (Cedric)
That is the result of brainwashing, I suppose, but bs nonetheless. In fact nearly all of your comment here has the smell of bs about it. There is an absence of direct quotes in your comment that made me suspicious, and sure enough when I tried to check the validity of the positions that you ascribed to Hudson, I found nothing but stench:
Hudson: “The effect is to create a financial bubble, derailing industrial competitiveness and leaving the banking system in a debt-ridden shambles. Japan was willing to flood its economy with enough credit to destabilize its industry and real estate markets with debt that has remained for the twenty years since its bubble burst in 1990. China should avoid this kind of policy at all costs. To avoid the debt overhead now stifling the Western economies, it should minimize debt leveraging and limit the banking system’s ability to create credit to buy assets already in place. Foreign-owned banks in particular need to be restricted from aiding parent-country currency speculation and related financial extraction of revenue from China’s economy.”
Cedric: “ Hudson claims that Japan did a massive credit expansion (low interest rates) after the Plaza Accord forced them to double the value of the yen. His odd reason the Japanese government did that is to get capital outflow. It couldn’t be to stimulate local spending and real estate investment and replace AD lost due to falling exports as a result of a revalued currency, could it? (I’m looking for some Keynsian and/or Monetarist input here) Not in Hudson’s version. The BOJ did it to drive private outflows looking for better returns and weaken the yen back down again! Course it didn’t work whatever the thinking was and Japan went on to blow up 5 years later”
I italicized the sentence pertaining to what Hudson said, and, the sentence in which you refer to what he said because other than that one reference to his claim, the rest seems totally unrelated. It in fact seems that you just fabricated the entire criticism, because, what you claim he said here: “His odd reason the Japanese government did that is to get capital outflow. It couldn’t be to stimulate local spending and real estate investment and replace AD lost due to falling exports as a result of a revalued currency, could it?” Has absolutely nothing to do with what he actually says. In fact, this is not even a distortion but instead just an outright lie.
So, even though I […]
Also, for the benefit of economists, non-economists and Chinese Premiers here that don’t want to use poetic license while tossing around terms like Balance of Payments, here’s the wiki def:
—————–
When all components of the BOP sheet are included it must balance – that is, it must sum to zero – there can be no overall surplus or deficit. For example, if a country is importing more than it exports, its trade balance will be in deficit, but the shortfall will have to be counter balanced in other ways – such as by funds earned from its foreign investments, by running down reserves or by receiving loans from other countries.
http://en.wikipedia.org/wiki/Balance_of_payments
____________
We will have to assume that Hudson can’t “increase it”, since it is an accounting identity.
And here is another Mike, Mike Pettis, with his take on the China issue. I’ve already thought of all these things myself over the years, but he summarizes it all here for me, and he is a real economist living in Bejing, so he is much more credible than I am.
http://mpettis.com/2010/11/will-trade-action-bring-back-american-jobs/
Note here that I’ve also read that politics favors the exporter class, so the obvious solutions seem to go overlooked by the People’s Party.
http://mpettis.com/2010/09/the-politics-of-chinese-adjustment/
Cedric,
I do know how the Chinese manage their peg but the surplus must come first, it is you who doesn’t understand what is a basic function of fiat currencies.
Your comment is confusing. You seem to accuse Hudson of not knowing that the Plaza Accords “made” the Japanese allow the yen to appreciate but he says “…what it was in the Plaza and Louvre accords that US diplomats forced on Japan…”, in the very sentence that you quote. And you claim that I “omitted his first paragraph which was what I [you] was commenting on.” But there is only the word “outflow” in what you wrote from the paragraph that you claim to be criticizing and then the bulk of the claim you say he makes is from the paragraph that I presented. You essentially plucked a few words from 2 places and then made up the rest and that doesn’t address what he actually says. To make things even more confusing you have the “world” at the Plaza Hotel when that was a G-5 meeting.
That is as far as I could force myself to read. Your twisted argument is giving me a headache. I surrender.
Cedric,
Michael Pettis is sharp. He also wrote this excellent piece what isn’t posted at his blog:
Here’s Why The Yuan Will Never Be The World’s Reserve Currency
Michael Pettis | Oct. 26, 2010
http://www.businessinsider.com/yuan-wont-be-worlds-reserve-currency-2010-10
The Forexblog summarized it: (note the FDI chart)
Chinese Yuan Will Not Be Reserve Currency?
November 18, 2010
http://www.forexblog.org/2010/11/chinese-yuan-will-not-be-reserve-currency.html
Cedric,
Michael Pettis is sharp. He also wrote this excellent piece what isn’t posted at his blog:
Here’s Why The Yuan Will Never Be The World’s Reserve Currency
Michael Pettis | Oct. 26, 2010
http://www.businessinsider.com/yuan-wont-be-worlds-reserve-currency-2010-10
The Forexblog summarized it: (note the FDI chart)
Chinese Yuan Will Not Be Reserve Currency?
November 18, 2010
http://www.forexblog.org/2010/11/chinese-yuan-will-not-be-reserve-currency.html
Other articles by Michael Pettis:
http://www.businessinsider.com/author/michael-pettis
Cedric,
As you noticed below, Ray Love is a know-it-all who isn’t above being a complete snotty ass. He has whined on other blogs when some people got after him for his arrogance. Here he just throws it out. Typical Killeen, Texas area guy in his mid 50s.
He’s smart but not particularly open-minded or up to speed on real world actions and what actually led to those actions. Quite biased in his thinking.
MG,
Yup. We discussed this stuff years ago on Setzer’s and Pettis’s blog (you may have been there) and Pettis would comment on Setzer’s blog too. That’s how I learned how the peg was really implemented. Then we also kicked around the dilemma of how can the RMB become a reserve and trade currency if China won’t let us have any?
Of course they have been making small moves in that direction. They completed a recent deal where Russia will take RMB for oil, and China will reciprocate and take RMB for Chinese stuff. They have been working on similar bi-lateral deals with Brazil and some other S. American commodity exporters, I believe.
They also let some Chinese government bonds, denominated in RMB, trade in Hong Kong. I had a bond fund that owned some of them.
Cedric,
Now that I’ve had a good night’s sleep, maybe I can find the energy to sort out what is essentially an elaborate and hypocritical lie, hypocritical because you accuse Hudson and the MMTers of a lack of integrity in the midst of just that. Here are both of the paragraphs that you claim to be drawing from:
Hudson:”The follow-up to a renminbi revaluation is likely to be what it was in the Plaza and Louvre accords that US diplomats forced on Japan after 1985. Payments-surplus economies are told to restore “equilibrium” by easing credit to spur a balance-of-payments outflow.”
“The effect is to create a financial bubble, derailing industrial competitiveness and leaving the banking system in a debt-ridden shambles. Japan was willing to flood its economy with enough credit to destabilize its industry and real estate markets with debt that has remained for the twenty years since its bubble burst in 1990. China should avoid this kind of policy at all costs. To avoid the debt overhead now stifling the Western economies, it should minimize debt leveraging and limit the banking system’s ability to create credit to buy assets already in place. Foreign-owned banks in particular need to be restricted from aiding parent-country currency speculation and related financial extraction of revenue from China’s economy.”
And here is your original criticism of those paragraphs:
Cedric: “ Hudson claims that Japan did a massive credit expansion (low interest rates) after the Plaza Accord forced them to double the value of the yen. His odd reason the Japanese government did that is to get capital outflow. It couldn’t be to stimulate local spending and real estate investment and replace AD lost due to falling exports as a result of a revalued currency, could it? (I’m looking for some Keynsian and/or Monetarist input here) Not in Hudson’s version. The BOJ did it to drive private outflows looking for better returns and weaken the yen back down again! Course it didn’t work whatever the thinking was and Japan went on to blow up 5 years later”
And then, in your most recent defense (not the original) of what I referred to as an “outright lie”, here is where you show why I am wrong:
Cedric: “This is the typical modus operandi of the MMT gang from Kansas City, MO”
“Hudson states an assertion like this ” Payments-surplus economies are told to restore “equilibrium” by easing credit to spur a balance-of-payments outflow. “”
“They are told no such thing. It might be suggested that they boost imports, but why would an economists use the term “BOP”, which refers to both trade and financial flows, if he really means increase imports? If a doctor is going to prescribe something, I would hope he could do better than say “take a pill”, and at least say which one? “
But… this is just an effort to make your lie about something other than what it is about, these sentences are what I brought into question:
Cedric: “His odd reason the Japanese government did that is to get capital outflow. It couldn’t be to stimulate local spending and real estate investment and replace AD lost due to falling exports as a result of a revalued currency, could it?“
But of course Hudson doesn’t actually offer “capital outflow” as a […]