Currency Killers

S

ShoeshineBoy

I don't get it. How can so many countries deflate their currency to strenthen the dollar to kill our exports? I mean how do they get away with it? Here's a link that describes how Japan does it:

http://www.csmonitor.com/2003/1030/p09s02-coop.html

"In the short term, the US is paying an economic price for Japan's help: Japan's fat check looks like an unspoken quid pro quo that could worsen prospects for the ailing US manufacturing sector. It's no accident that at the same time Prime Minister Koizumi made his $5 billion pledge, Japan was buying dollars - depreciating the value of the yen. A strong dollar makes US exports more expensive abroad, depresses US sales, and increases joblessness."

Are we powerless for some reason to stop this? Why can't we start buying yen if they buy dollars. I don't understand the mechanics of this, but it doesn't make sense to me that a financial superpower like the U.S. just sits on its hands and let's other countries call the shots....
 
Umm, actually we don't want to stop it because when asia stops hoovering up our dollars we will be in serious trouble. Asian export powerhouses keep their currencies competitive by purchasing US government securities- the only holding vehicle massive enough to absorb their excess capital. In buying our dollars, asia (and other global investors) are literally financing America's massive debt.

As soon as they stop doing this, or if and when their purchase rate slows, you will see the US dollar go into freefall. We are headed for the mother of all catch 22's thanks to Greenspan's easy money policy: the fed tried doubling down to get us out of a hole and made the problem ten times worse.

If the dollar stabilizes our exporters stay weak in comparison to asia and protectionism rears its ugly head- but that's the positive scenario. If the dollar weakens too much and too soon, foreign investors and governments will quickly lose their taste for holding hundreds of billions in US debt. If Asia heads for the exits it will be like yelling fire in a crowded theatre.
 
Quote from ShoeshineBoy:

I don't get it. How can so many countries deflate their currency to strenthen the dollar to kill our exports? I mean how do they get away with it? Here's a link that describes how Japan does it:

http://www.csmonitor.com/2003/1030/p09s02-coop.html

"In the short term, the US is paying an economic price for Japan's help: Japan's fat check looks like an unspoken quid pro quo that could worsen prospects for the ailing US manufacturing sector. It's no accident that at the same time Prime Minister Koizumi made his $5 billion pledge, Japan was buying dollars - depreciating the value of the yen. A strong dollar makes US exports more expensive abroad, depresses US sales, and increases joblessness."

Are we powerless for some reason to stop this? Why can't we start buying yen if they buy dollars. I don't understand the mechanics of this, but it doesn't make sense to me that a financial superpower like the U.S. just sits on its hands and let's other countries call the shots....
More...

Be careful what you wish for.....
Japan and the rest of Asia are helping to finance the US deficit, and own a very large chunk of US Government debt. If Japan (and/or China) start selling the dollars that they've been buying then US interest rates and will go through the roof and markets will crash.
 
I figured I was looking at it wrong. That's what I get for reading mainstream news.

Jeez, I never thought of the potentially disastrous scenario. I guess the good news is that even through Japan's depression they kept up their same practices...

But are you saying that it is actually Asian corporations that are primarily buying our debt? I always had the impression that it was the central banks. And, if so, why would Asian corporations want our debt?
 
That's an eye opener! China, I know, has been in the news "artificially" holding it's currency to a fixed level. So they do this just like anyone else, by buying US debt??

If they're buying U.S. debt to hold their currency down, what right do we have to complain?

In other words, China now has our core manufacturing, owns our debt and could potentially send us into an economic tailspin? I only have one question, "Are we insane??"
 
Quote from ShoeshineBoy:


But are you saying that it is actually Asian corporations that are primarily buying our debt? I always had the impression that it was the central banks. And, if so, why would Asian corporations want our debt?
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primarily governments (central banks et. al) but also corporations, investors and smaller entities as well... the US dollar is popular as a reserve currency (a means with which to defend the home currency against evil speculators), a liquid place to park excess capital (US treasuries) and also as a means of trade between parties where neither's own currency is trusted (i.e. your currency is crap and so is mine so we'll deal in USD).
 
Don't get your touches in too much of a twist.

First, foreign central banks can't buy dollars for ever. And, they can't just unload all they've bought easily either because they have to put the money somewhere. But, where? The Euro? Maybe some of it, but nothing world wide compares with the safety of the U.S. Dollar and won't for a long long time.

Even the Euro, which is trying to make a move on the dollar with the help of the Germans, French and Russians in a move at wresting some world control from the U.S., has its problems. Many of which won't go away soon.

Second, consider how low our short term rates are now. They have no where to go but up. If the dollar isn't in the tank now with the lowest rates we've seen since the 50's it isn't going to go into a tailspin from here.

And, lastly, the world currency markets are way too big for any central bank to control. They can slow market moves and try to start moves but short of that, the market dictates where floating currencies go, not central bank buying and selling.

Wally
 
Quote from ShoeshineBoy:


In other words, China now has our core manufacturing, owns our debt and could potentially send us into an economic tailspin? I only have one question, "Are we insane??"
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no, just moving up the food chain- it's part of the natural order. as rich world countries move to the next level- high tech, high end 'platinum collar' services with a focus on thought and innovation- lower order processes such as manufacturing are taken over by the developing countries. China isn't evil because they are tired of being poor, and there's nothing wrong with them bringing their competitive advantage to the marketplace.

Rich world countries are stepping up to a higher level in concert with their competitive advantages whether they like it or not- there will be pain in shedding the lower order processes but not much point in resisting it. Protectionism is rooted in a desire to hold onto the past, which is not possible.

As for China holding massive amounts of our debt, they are doing us a favor- getting that deep in debt was our own dumb fault.
 
Quote from ShoeshineBoy:

I figured I was looking at it wrong. That's what I get for reading mainstream news.

Jeez, I never thought of the potentially disastrous scenario. I guess the good news is that even through Japan's depression they kept up their same practices...

But are you saying that it is actually Asian corporations that are primarily buying our debt? I always had the impression that it was the central banks. And, if so, why would Asian corporations want our debt?
More...

It is the central banks. Japan and China are the first and second largest buyers of US Treasuries. Recent figures show Japan owning around $450b of treasuries, China around $120b plus, the rest of Asian $166b.
Not to mention that foreign investors are also estimated to own around 20% of US securities.
 
Oh, and about China putting all their money in U.S. Treasuries. That is great! Wait a few years until they are forced to float their currency and we get to buy that debt back at 10 cents on the dollar!
 
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