China and Treasuries

Sometimes the comments are better than the post. Over at Seeking Alpha there is a slightly confused post on why the Chinese will continue to lend us money by buying Treasuries. The author confuses yuan appreciation and depreciation throughout the article, but the thumbnail version of his concept is this: the Chinese will continue to lend us money because to not do so would damage their existing investments and their currency. Also, there are no good alternatives.

In the comments, there are some real gems. Here are a few of my favorites.

So essentially what Tim Geithner, Barak Obama, Charles Schumer and most Democrats in Congress are saying when they accuse China of being a currency manipulator is stop buying our bonds. We want interest rates to climb thus leading the U.S. to a deeper recession and more unemployed.

I hadn't thought of this one. Obama and Co. want the Chinese to let the yuan appreciate against the dollar. The easiest way for them to do this is stop lending us money. If they did that, we'd get killed under a mountain of unsold debt. Here's another good one.

We all know China could just buy less. Then the interest rate would increase, then China buys at the higher rate. Then the rate decreases, China stops buying, the rate increases, China starts buying again. Essentially hold reserves until the US treasury rate gets higher then buy to reset. Talk about having full control over US cash needs.

What a great way to manipulate the market! If the Chinese feel they're not getting enough of a return, all they need to do is slow down their purchases and the interest rates we pay will go up! That is, until we start printing money to buy our own debt. Here's the best one of all.

China's biggest problem is that much of its investment is in a currency that going to depreciate rapidly, whether or not it pulls the plug. America is going to have an increasing need to borrow from China. China, however, should and is getting very worried about the the quality of the securities they hold.

The logical solution would be for China to stop purchasing Treasury Bonds, but to lend US in denominations other than the US dollar. The US Government would obviously be applaud at this prospect, but in reality they would have absolutely no choice. If they were obliged to repay a substantial proportion of its debts in a mixture of Euros, Yuan and Yen or even Oil and Gold, then the US would stop bleating about how low the Yuan is for a start and it would be much less likely to inflate away it other debts, This would in turn go a long way to protect China's existing investments that are denominated in dollars.

Imagine that. The Chinese decide that they don't mind lending us money, but they want to be repaid in something real instead of dollars which will soon be inflated away. That would put an end to the whole house of cards that is our borrow and spend economy. We would actually have to repay our debts with real goods. There are problems of scale with that solution, but the concept is interesting.