So how can you still be optimistic that China won't say "enough": pay back your bond debt and the whole house of cards won't come crashing down? It's hard to see how we keep this up without the economy going back to recession.
Suppose the Chinese refused to buy any more of our debt. Or suppose they decided to sell a lot of the dollar debt they own, and to switch into euro-denominated debt. Could they sell hundreds of billions worth of Treasuries? Why not? Treasury is selling hundreds of billions of Treasury bonds every few months and interest rates are still near historically low levels.
But in any event, the Chinese are still running up huge trade surpluses, and the funds being generated have to be spent somewhere. If they don't buy US debt, they have to buy someone else's debt, and the dollars they get from trade surpluses have to be recycled back into the global economy. Someone has to end up with the dollars at the end of the day. That someone might be the one who buys Treasuries instead of the Chinese.
If the Chinese figure out a way to reduce their trade surplus so as not to have the problem of what to do with all their dollars, this would inevitably result in an increase in their purchases of dollar-denominated goods and services. Same goes for selling their dollar bonds--it means buying more of our exports, and that's not exactly a bad thing.
Even if we found a way to pay back the bond debt, the Chinese would still have to do something with the dollars we gave them, and ultimately the dollars would have to be spent on our goods and services.
Interesting side-note: dollars never really leave the US. Dollars received by those who export to us must be spent here on something we have: bonds, stocks, real estate, goods or services.
Bottom line: China can't exit its huge position in dollar debt without causing a major increase in the demand for US exports. And it's not in their interest to trash the US economy anyway, since that would lower the dollar and that would erode the value of their dollar-denominated reserves.
"Interesting side-note: dollars never really leave the US. Dollars received by those who export to us must be spent here on something we have: bonds, stocks, real estate, goods or services."
Scott can you elaborate? I thought Chinese exporter receives the dollars, goes to Chinese CB exchanges dollars for yuan. Then Chinese CB buys US treasuries with those dollars. How come export dollars never leave the US? Btw you have a great blog! Thanks.
burak: Your description of the process is accurate. When the central bank buys Treasuries the dollars earned by the exporter are effectively spent in the U.S. The dollars never leave the US for all intents and purposes. Most likely they are always held by a US bank, but they do of course change hands. First from the importer to the exporter, then from the exporter to the PBoC, then to Treasury.
I saw that in today's Rasmussen poll Obama is back down to -17 and overall approval down again. Do you see this as a good sign for the economy in general and the market specifically? I had actually expected a nice rally after Brown won in Mass but it seems like the market is going in the other direction. Could the market be saying that it really prefers less uncertainty about the composition of the Congress come November?
Bill: I too had expected a rally after Brown's election. But in retrospect at appears that the rally occurred in the weeks leading up to his victory. So what has caused the recent selloff? Earnings disappointments, jobs disappointments (e.g., the uptick in weekly claims), housing disappointments, PIIGS problems, fears of a dissolution of the Euro, fears of central bank tightenings, fears that stimulus plans were being threatened, etc. It was also disconcerting that Obama doesn't seem to have understood the message of the Brown election. As a shorthand for all this, the "carry trade" was challenged, with all risk assets declining and the dollar rising. There was a lot of fear behind this, as seen in the VIX rising and credit spreads rising. I think this all fits into the general category of a "correction" to what has been a pretty substantial rally.
I would think that in the long run that Brown's win, Obama's refusal to accept/understand/acknowledge the consequences and Obama's continued fall in the Rasmussen polls will ultimately be good for the markets.
My hopes are that Obama continues his arrogant stance all the way through November, further alienating the democratic agenda from the voters.
While the market trend hasn't been good the last week or two, the political trend has certainly been good.
As always, thanks for taking your time to post your thoughts. I always enjoy reading your blog, learning new things daily.
Bill: I think Cabodog says it nicely. The economic fundamentals continue to improve, and although the political fundamentals were horrible a year ago they have gotten far less horrible over the past year and especially in recent weeks. On balance I see things moving in the right direction on almost all fronts.
As you know Scott, I am critical of Obama, from the opposite direction and mostly for non-economic reasons. It is also my opinion that Obama is no more clueless than anyone else about what is happening with The Economy which includes Economists, who are possibly more clueless than anyone, primarily because they really believe they understand the basis for any economy.
Anyway, my point is that, as a resident of Massachusetts, I don't think the election of Scott Brown (as distressing as it is that he is occupying the seat so long held by Ted Kennedy) is as big a deal as everyone outside of Mass is making it; and I don't know what it is that Obama is supposed to "understand" about it. From the point of view generally held here, as I see it, one of the main issues is that we here are horrified that the Massachusetts Health Insurance Company Giveaway Program is being used as a National Model. Enough already with pouring vast sums of money into the coffers of one of the largest parasites on the body politic there is! What in the world makes anyone think it is better to shift large amounts of money into the Insurance sector profits than it is to have a single-payer with more money going into care?? Good Grief, it is completely illogical. Ideology rules again!
Doug: the message from the Mass. vote that Obama fails to understand is that the people don't want more government-managed healthcare, and they don't want more and more big government. I think you are saying the same thing. It was a vote against government healthcare, and it was a vote against him in particular.
Instead, Obama is trying to spin the vote as being all about voters upset by the past 10 years.
Scott,
ReplyDeleteSo how can you still be optimistic that China won't say "enough": pay back your bond debt and the whole house of cards won't come crashing down? It's hard to see how we keep this up without the economy going back to recession.
Suppose the Chinese refused to buy any more of our debt. Or suppose they decided to sell a lot of the dollar debt they own, and to switch into euro-denominated debt. Could they sell hundreds of billions worth of Treasuries? Why not? Treasury is selling hundreds of billions of Treasury bonds every few months and interest rates are still near historically low levels.
ReplyDeleteBut in any event, the Chinese are still running up huge trade surpluses, and the funds being generated have to be spent somewhere. If they don't buy US debt, they have to buy someone else's debt, and the dollars they get from trade surpluses have to be recycled back into the global economy. Someone has to end up with the dollars at the end of the day. That someone might be the one who buys Treasuries instead of the Chinese.
If the Chinese figure out a way to reduce their trade surplus so as not to have the problem of what to do with all their dollars, this would inevitably result in an increase in their purchases of dollar-denominated goods and services. Same goes for selling their dollar bonds--it means buying more of our exports, and that's not exactly a bad thing.
Even if we found a way to pay back the bond debt, the Chinese would still have to do something with the dollars we gave them, and ultimately the dollars would have to be spent on our goods and services.
Interesting side-note: dollars never really leave the US. Dollars received by those who export to us must be spent here on something we have: bonds, stocks, real estate, goods or services.
Bottom line: China can't exit its huge position in dollar debt without causing a major increase in the demand for US exports. And it's not in their interest to trash the US economy anyway, since that would lower the dollar and that would erode the value of their dollar-denominated reserves.
The budget looks like a remake of a once popular movie: Mad Max Spending Obama Beyond Thunder Debt.
ReplyDelete"Interesting side-note: dollars never really leave the US. Dollars received by those who export to us must be spent here on something we have: bonds, stocks, real estate, goods or services."
ReplyDeleteScott can you elaborate? I thought Chinese exporter receives the dollars, goes to Chinese CB exchanges dollars for yuan. Then Chinese CB buys US treasuries with those dollars. How come export dollars never leave the US? Btw you have a great blog! Thanks.
please answer the chartalists
ReplyDeleteburak: Your description of the process is accurate. When the central bank buys Treasuries the dollars earned by the exporter are effectively spent in the U.S. The dollars never leave the US for all intents and purposes. Most likely they are always held by a US bank, but they do of course change hands. First from the importer to the exporter, then from the exporter to the PBoC, then to Treasury.
ReplyDeleteScott,
ReplyDeleteI saw that in today's Rasmussen poll Obama is back down to -17 and overall approval down again. Do you see this as a good sign for the economy in general and the market specifically? I had actually expected a nice rally after Brown won in Mass but it seems like the market is going in the other direction. Could the market be saying that it really prefers less uncertainty about the composition of the Congress come November?
Bill: I too had expected a rally after Brown's election. But in retrospect at appears that the rally occurred in the weeks leading up to his victory. So what has caused the recent selloff? Earnings disappointments, jobs disappointments (e.g., the uptick in weekly claims), housing disappointments, PIIGS problems, fears of a dissolution of the Euro, fears of central bank tightenings, fears that stimulus plans were being threatened, etc. It was also disconcerting that Obama doesn't seem to have understood the message of the Brown election. As a shorthand for all this, the "carry trade" was challenged, with all risk assets declining and the dollar rising. There was a lot of fear behind this, as seen in the VIX rising and credit spreads rising. I think this all fits into the general category of a "correction" to what has been a pretty substantial rally.
ReplyDeleteScott,
ReplyDeleteDo you still think the improvements in key indicators over the last few months "on the margin" are enough to overcome the latest concerns you list?
Scott,
ReplyDeleteI would think that in the long run that Brown's win, Obama's refusal to accept/understand/acknowledge the consequences and Obama's continued fall in the Rasmussen polls will ultimately be good for the markets.
My hopes are that Obama continues his arrogant stance all the way through November, further alienating the democratic agenda from the voters.
While the market trend hasn't been good the last week or two, the political trend has certainly been good.
As always, thanks for taking your time to post your thoughts. I always enjoy reading your blog, learning new things daily.
Bill: I think Cabodog says it nicely. The economic fundamentals continue to improve, and although the political fundamentals were horrible a year ago they have gotten far less horrible over the past year and especially in recent weeks. On balance I see things moving in the right direction on almost all fronts.
ReplyDeleteAs you know Scott, I am critical of Obama, from the opposite direction and mostly for non-economic reasons. It is also my opinion that Obama is no more clueless than anyone else about what is happening with The Economy which includes Economists, who are possibly more clueless than anyone, primarily because they really believe they understand the basis for any economy.
ReplyDeleteAnyway, my point is that, as a resident of Massachusetts, I don't think the election of Scott Brown (as distressing as it is that he is occupying the seat so long held by Ted Kennedy) is as big a deal as everyone outside of Mass is making it; and I don't know what it is that Obama is supposed to "understand" about it. From the point of view generally held here, as I see it, one of the main issues is that we here are horrified that the Massachusetts Health Insurance Company Giveaway Program is being used as a National Model. Enough already with pouring vast sums of money into the coffers of one of the largest parasites on the body politic there is! What in the world makes anyone think it is better to shift large amounts of money into the Insurance sector profits than it is to have a single-payer with more money going into care?? Good Grief, it is completely illogical. Ideology rules again!
Doug: the message from the Mass. vote that Obama fails to understand is that the people don't want more government-managed healthcare, and they don't want more and more big government. I think you are saying the same thing. It was a vote against government healthcare, and it was a vote against him in particular.
ReplyDeleteInstead, Obama is trying to spin the vote as being all about voters upset by the past 10 years.