“On the other hand a rise in Chinese consumption could cause both the Chinese current account surplus and the US current account deficit to decline. In that case of course China would buy fewer US dollar assets and so fewer US government bonds. This is more or less Martin Feldstein’s scenario.
“But in that case the reduction in the US current account deficit would be expansionary for the economy in a way similar to an increase in the fiscal deficit. Both are expansionary. So the impact on the current account would probably be offset by a reduction in fiscal spending.
“So yes, the PBoC, and foreigners more generally, would be buying fewer US government bonds, but the US government would also be issuing fewer government bonds, in which case it is not at all obvious whether US interest rates will rise or not. In fact I don’t think it would make any difference, except to the extent that it impacts US growth. If a consequence of a reduction in China’s current account surplus is much faster US growth, then probably interest rates would indeed rise in the US, but this doesn’t seem like a bad thing at all to me. At any rate whether or not interest rates do indeed rise would depend on Washington’s fiscal and monetary reactions to the growth.
“Regular readers of my newsletter might wonder if I am not just making a variation of my old Beijing-is-not-Washington’s-banker argument. In fact I am. The idea that PBoC purchases of US government bonds is part of a discrete lending decision by Beijing, and that Washington must worry that one day Beijing might pull the plug on this lending, is almost utter nonsense. Chinese purchases of US assets are an automatic consequence of the trade balance between the two countries.”
Commentary & Analysis
A Strong and Stable Dollar-Crisis
What the hell does it mean anymore? Really? “A Strong and stable dollar is in the best interest of the US and global economy.” What does it mean?
Because it certainly does not mean the Federal Reserve or the US Treasury is acting to strengthen the value of the dollar – it is argued every day that they are doing the exact opposite. So if they are merely lying to us, and they’re intention now is to devalue the US dollar for one or many undisclosed reasons, then at least we can take solace in the fact that they’re doing a damn good job at it.
Looking at the other end of the propaganda spectrum, are we experiencing or about to experience a dollar crisis?
Because we can’t go a day without hearing that the US dollar will collapse and bring down the US economy. We are told the weakening dollar is hollowing out the US middle class. We are told that losing the world reserve currency edge means the US is destine to unravel into nothingness.
I was recently surfing around the website of a competing newsletter house where I used to work. When I was there four years ago the declining value of the US dollar was their biggest promotional tool. Guess what? Nothing has changed. It doesn’t matter what type of newsletter or service you’re interested in – everything they sell is hinged upon the coming collapse of the US dollar.
It is believed by many right-wing pundits that Barrack Obama is intentionally steering America down the road to ruin (e.g. socialism, Marxism, communism, etc.) It is believed by many economic and market pundits that Ben Bernanke is steering the American economy, via the US dollar, down the road to ruin.
The direction is worrisome, on both counts, but I suppose I can just hope that is not the case that each of these men seeks the destruction of the US.
I do not believe Obama is a brilliant mind with solutions to our problems, now or any time down the road. But I’d like to think Bernanke has at least a roundabout plan that will stabilize the US economy now, despite his unorthodox and near-desperate measures, and open the door to longer-term economic sustainability. [As a side note, if the eurozone does not make progress very soon on bringing the periphery countries in from the edge of the cliff, officials there are going to be praying for a weaker currency.]
At best, the “strong and stable” rhetoric is a feel-good tool aimed at balancing out the doomsdayers’ incessant warnings of an imminent dollar crisis. Because, after all, a stable currency is vital to a country’s long-term prosperity; but a weaker currency may be vital in shoring up an economy in the short-run.
Can Bernanke, or the US for that matter, avert a dollar crisis?
Yes. Granted the US is losing some of its superpower flexibility and muscle as its debt and deficit profile worsens. Right now, the biggest risk is that Bernanke’s looseness creates the unintended consequence of boom-goes-bust, where easy-money driven asset bubbles implode and confidence is consequently sucked out of the economy. Bernanke has tripled the monetary base since 2008. Let’s hope he’s using all that money to buy time. It’s one thing to have a currency on the decline; it’s another thing to have GDP on the decline.
In the FOMC announcement and Bernanke’s press conference yesterday, there was little change in the expected direction of the Federal Reserve. As a result, risk assets are back higher again; the US dollar has sunk to new lows since 2008, when it made its all-time low in March of that year.
Keep in mind, though, that the US dollar has been on a downward slope for the better part of the last ten years. And, technically speaking, looking at a quarterly chart of the US dollar it wouldn’t be a surprise to see the dollar slide further to new all-time lows. Still, that wouldn’t necessarily equate to a dollar crisis:
Over the last decade there have been periods of rising and falling interest rates as well as rising and falling growth. Still, the dollar has maintained a downward bias, falling roughly 40% from its peak in 2001. The reason has been the changing composition of its growth model and the leveraging up on debt. China has been a big influence on both counts … and is the reason why global rebalancing is so critical toward the outlook on the US and China.
No one likes thinking they’re inferior to someone else; no country is going to feel good about sporting a weak currency (well, maybe China). A weaker US dollar, however, could go a long way toward reworking the composition of the US economy and brightening up its long-term growth prospects. Of course, Barrack Obama could help relieve the pressure on the middle class that a weaker currency might bring by creating an environment conducive to growing the private sector and reducing the budget deficit. (Don’t laugh.)
Be advised: a strategically lower dollar probably won’t stop too many from yelling ‘dollar crisis’ in a crowded conference room.