I am having difficulty understanding this part of the article by Robert P. Murphy:
"To put it somewhat simplistically, when Greenspan flooded the world with more dollars, the dollar fell sharply against most major currencies. But in order for the Chinese to keep the renminbi (yuan) from appreciating against the dollar as well, they had to load up on dollar-denominated assets, such as US Treasuries. Thus, Greenspan's inflation in combination with the Chinese peg, on paper might have appeared as an irrational influx of Asian investment, which stubbornly refused to subside even as US indebtedness grew."
Would somebody explain to me how is it that the yuan ends up not appreciating against the US dollar if the Chinese buy tons of US Treasuries? I have trouble understanding the mechanisms here :o
Thanks!
"A man’s time is always scarce." - Murray N. Rothbard
Never mind Mises money clips! Where are the Mises wheelbarrows?
I believe this would provide the answer, althout I'm not %100 sure. Perhaps somebody else can approve. Sorry for the lenghy response
Loading up on dollar-denominated assets was, I believe, the method of which the Chinese used to actually peg the yuan to the dollar. In a floating system of currency, the free market determines the exchange rate. The natural tendency of the market would be to set the exchange rate so that imports equal exports. The market, if allowed to operate, would balance the trade between the two trading nations. There would be no trade deficit.
The Chinese, by buying Government securities, were able to interfere with the above process and prop up the dollar. By controlling the amount of US bonds purchases, they could maintain their desired exchange rate.
Here is an explanation of the process from Milton Friedman in "The Case for Free Trade" http://www.freerepublic.com/focus/f-news/1154295/posts
Milton Friedman:
Consider an extreme case. Suppose that, to begin with, 360 yen equal a dollar. At this exchange rate, the actual rate of exchange for many years, suppose that the Japanese can produce and sell everything for fewer dollars than we can in the United States--TV sets, automobiles, steel, and even soybeans, wheat, milk, and ice cream. If we had free international trade, we would try to buy all our goods from Japan. This would seem to be the extreme horror story of the kind depicted by the defenders of tariffs--we would be flooded with Japanese goods and could sell them nothing.
Before throwing up your hands in horror, carry the analysis one step further. How would we pay the Japanese? We would offer them dollar bills. What would they do with the dollar bills? We have assumed that at 360 yen to the dollar everything is cheaper in Japan, so there is nothing in the U.S. market that they would want to buy. If the Japanese exporters were willing to burn or bury the dollar bills, that would be wonderful for us. We would get all kinds of goods for green pieces of paper that we can produce in great abundance and very cheaply. We would have the most marvelous export industry conceivable.
Of course, the Japanese would not in fact sell us useful goods in order to get useless pieces of paper to bury or burn. Like us, they want to get something real in return for their work. If all goods were cheaper in Japan than in the United States at 360 yen to the dollar, the exporters would try to get rid of their dollars, would try to sell them for 360 yen to the dollar in order to buy the cheaper Japanese goods. But who would be willing to buy the dollars? What is true for the Japanese exporter is true for everyone in Japan. No one will be willing to give 360 yen in exchange for one dollar if 360 yen will buy more of everything in Japan than one dollar will buy in the United States. The exporters, on discovering that no one will buy their dollars at 360 yen, will offer to take fewer yen for a dollar. The price of the dollar in terms of the yen will go down--to 300 yen for a dollar or 250 yen or 200 yen. Put the other way around, it will take more and more dollars to buy a given number of Japanese yen. Japanese goods are priced in yen, so their price in dollars will go up. Conversely, U.S. goods are priced in dollars, so the more dollars the Japanese get for a given number of yen, the cheaper U.S. goods become to the Japanese in terms of yen.
The price of the dollar in terms of yen would fall, until, on the average, the dollar value of goods that the Japanese buy from the United States roughly equaled the dollar value of goods that the United States buys from Japan. At that price everybody who wanted to buy yen for dollars would find someone who was willing to sell him yen for dollars.
The actual situation is, of course, more complicated than this hypothetical example. Many nations, and not merely the United States and Japan, are engaged in trade, and the trade often takes roundabout directions. The Japanese may spend some of the dollars they earn in Brazil, the Brazilians in turn may spend those dollars in Germany, the Germans in the United States, and so on in endless complexity. However, the principle is the same. People, in whatever country, want dollars primarily to buy useful items, not to hoard, and there can be no balance of payments problem so long as the price of the dollar in terms of the yen or the deutsche mark or the franc is determined in a free market by voluntary transactions.
Why then all the furor about the "weakness" of the dollar? Why the repeated foreign exchange crises? The proximate reason is because foreign exchange rates have not been determined in a free market. Government central banks have intervened on a grand scale in order to influence the price of their currencies. In the process they have lost vast sums of their citizens' money (for the United States, close to two billion dollars from 1973 to early 1979). Even more important, they have prevented this important set of prices from performing its proper function. They have not been able to prevent the basic underlying economic forces from ultimately having their effect on exchange rates but have been able to maintain artificial exchange rates for substantial intervals. The effect has been to prevent gradual adjustment to the underlying forces. Small disturbances have accumulated into large ones, and ultimately there has been a major foreign exchange "crisis."
Interesting. Your reply does clarify things for me. Thank you!
Why does China adopt this policy? Is China's monetary policy influenced by people who profit from exporting Chinese goods to the US in exchange for dollars?
There are many different takes on this issue. I personally think that most of them are bogus and based on stupid economic fallacies such as exports good, imports bad... basically, all the things you will hear on TV.
I personally think that the reason is one that the Chinese share with us and the rest of the world: STUPIDITY!
This is like asking, why do we have a Fed? Why did we get off the Gold standard, why do we have unions, why do we have Taxes, ... should I continue?
In other words, why do we not have free markets? The Chinese are no better then us. It's funny to hear all the pundits and politicians theorize about such nonsense. In my opinion, there is no reason other then the anti-capitalistic mentality (stupidity).
Hello,
I have a question from same article "Greenspan's Bogus Defense" by Robert P. Murphy (http://mises.org/story/3394).
Firstly, could you explain me first chart in more details why mortgage rates from 2002 didn't fall (disconnect from FED funds rate) and didn't rise from 2004?
Moreover, what is the main idea of second chart, what explains difference between the federal-funds and mortgage rates? Could you explain me this in more details?
Thank you in advance
Regards,
http://www.eurokonsultantai.lt/
Mantas:Firstly, could you explain me first chart in more details why mortgage rates from 2002 didn't fall (disconnect from FED funds rate) and didn't rise from 2004?
The market didn't belive that the interest rates would stay low for very long (because the trigger was a one-time event, the 911, and because they were almost zero and had only one way to go from there, up again). The 30 year interest rate should reflect expected interest rates averages during future decades. It wasn't impressed by the temporary hikes in 1974 and 1989 either, according to the graph.
It shows that the 30 year interest rate fluctuates around the short-term interest rate (plus a constant premium of about 2½%). As is expected. If in 1977 you gave a loan for 30 years, and have continuosly financed it with short term borrowing until expiration in 2007, then you've made on average about 2½% profit per year. That's the premium for the risk you've taken during all those years. Some of the years have been a loss for you, others a profit. The one you lent to, paid you that premium in order for you to carry that risk for him.
Greenspan claimed that it was something new that the 30 years interest rate didn't react to the short term interest rate. That is obviously not true. The market isn't that easy to fool. Greenspan's steep interest cuts after 2000 were not taken serious by the long-term interest rates market. And the market got it right, since Greenspan's playing around with the interest rate soon zig-zaged it back to the pre-2000 level.
It's not fascism when the government does it.
“We must spend now as an investment for the future.” - President Obama
Thank you very much
Didn't read much, and this may be a bogus theory on Greenspan, but I kind of think he secretly tried to work against the Fed's efforts until Clinton came in. Here's a few reasons why:
Friends with ayn rand
said he supports the free market (he's not known to lie like Bernanke)
He was preceded and succeeded by the complete economy-crashers Volcker and Bernanke. [Those names sound kind of demonic to me, although I feel kind of dumb b/c I'm likely the only one that thinks that]
Reagan's economic skills weren't desirable, although he schooled Bush41, and they were better than Clintonomics/Obamanomics (I just thought of that, and if I'm the first then it's probably stupid; if someone else thought of it, I think it's cool, but anyway) who started having Greenspan print, then clinton somehow worried about debt accumulated by Reagan, which doesn't hurt as much as printing. The way I see it, among others, is if china inflates their own currency, and they agreed to, then they shouldn't be paid back--whoever wakes up first should win. Someone here taught me that in earlier thread, and I wanted to thank them. I forgot who it was. Another question, if it's ok. Does Obama definitely seem to want to pay back debt, or has he said one thing and then another about debt? I haven't been paying enough attention.
I don't know why someone would want to place econ sanctions/protectionism against china, yet pay them back their debt. Not paying back the debt would hurt china's economy and help the U.S.'s if it's even possible at this point; sanctions would just lead to more trouble.
What about this:
Greenspan has been an objectivist all the time! He's just done a Fransisco d'Anconia and programmed a total crash of the state regulated financial system...