I would suppose that, being patient and deliberate, China’s CB managers would like to come near to finishing their conversion out of Agencies before they take on any other potential conversion, say from longer-dated Treasuries to short-dated ones ...That's a brilliant comment. I'd never looked at it that way. If he's right and the Chinese are slowly unwinding themselves from the Dollar, we're going to be in real trouble as Obama burns through mountains and mountains of money.
You task China’s leaders to put their money where their mouth has been recently - you just might get what you asked for when their conversion from Agencies gets sufficiently far along. Once they get into the short-dated Treasuries, it’s much easier to sprint from there to somewhere else that’s more desirable from a safety and/or return perspective. While short-dated Treasuries are certainly the safest and most liquid financial assets around, there might turn out to be other assets (not necessarily financial assets) that are even more desirable, going forward. Conversion from short-dated Treasuries into such other assets could be the planned 3rd leg of a 3-leg strategy. 1. Get out of Agencies and into short-dated Treasuries. 2. Get out of a significant measure of long-dated Treasuries and into short-dated ones. 3. Expend a large measure of short-dated Treasuries for other non-dollar assets.
All over time - not too suddenly. China’s leaders probably know they have a couple of years or so to get this all done to a sufficient degree so as to measurably decrease China’s exposure to the dollar.
Friday, May 15, 2009
The Comment of the Week
... comes from Brad Setser's blog. He's been posting about How China has been moving out of Agency bonds into short-term Treasuries because Agencies are not backed up by the US Government, but Treasuries are. They're getting out of all unsecured US Government debt. Brad argues that this is not necessarily an indication that they're planning to move away from the US Dollar like they've been threatening, but commenter WStroupe disagrees.
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2 comments:
On the bright side (at least from my perspective, others will almost certainly disagree), I think that regardless of what China does we are going to end up with a weaker dollar and a stronger Yuan, and at this point all China can do is try to slow the change to minimize the shock to their economy. Why is this the bright side? Because primary producers (mined products and agricultural products) benefit when the dollar weakens, because it makes it easier to export their products. And my job is intimately tied up with the mining industry, so I am keenly aware of this.
Most people want a strong dollar because it makes it cheaper to buy things from overseas, but if you are selling things overseas, it's a whole different story. I think the strong dollar policy that the US has been supporting all these years (because *consumers*, for which read, *voters*, like cheap goods), has been really wiping out primary production and heavy industry in the US for a long time. If we want to bring industry back to the US, that needs to change.
Thanks for the typically thoughtful comment, Tim.
Nouriel Roubini, in a WSJ editorial, suggested that the Chinese are moving towards an RMB-denominated debt. That is, we would borrow from them in their currency, thus protecting them from devaluaitons in the dollar. While that could be good in the short run for trade imbalances, it quickly becomes bad for us as we continue to rack up monstrous debts, debts that we can't simply print away.
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