Negative Interest Rates Implications - deflationary and inflationary

[dtan1e]

ok, against my better judgement to bother and so that someone will stop private msg me, also, for some reason i better phrase it "like explaining to a 5 yr old," here it is:

china needs to maintain its exchange at way low compare to US$ in order to remain competitive, why? major trading partner, what this means is china manufactures and exports and US buys a lot of their sh*t, so to maintain this status, their central bank intervenes regularly to buy US$ so as to keep the RMB low versus US$, so with the sh*t load of US$ they accumulate, what can they do? equities is limited outlet due to some US exchange regulatory and also to remain inconspicuous, so treasuries is the main avenue, as to the comment to purchase oil from middle east and all that jazz, there is the issue of inflation to contend with and china is a major user of commodities, not saying they haven't done so, which they did when they took over a no. of the major natural resources companies on various exchanges and if i remember correctly some attempts were blocked in the US, common sense tells u shouldn't buy 3T of oil!! so back to same predicament, where to dump the excess surplus of US$? u got it, treasuries, hope this helps, take it or leave it

 

[morganist]

Quote from dtan1e:

ok, against my better judgement to bother and so that someone will stop private msg me, also, for some reason i better phrase it "like explaining to a 5 yr old," here it is:

china needs to maintain its exchange at way low compare to US$ in order to remain competitive, why? major trading partner, what this means is china manufactures and exports and US buys a lot of their sh*t, so to maintain this status, their central bank intervenes regularly to buy US$ so as to keep the RMB low versus US$, so with the sh*t load of US$ they accumulate, what can they do? equities is limited outlet due to some US exchange regulatory and also to remain inconspicuous, so treasuries is the main avenue, as to the comment to purchase oil from middle east and all that jazz, there is the issue of inflation to contend with and china is a major user of commodities, not saying they haven't done so, which they did when they took over a no. of the major natural resources companies on various exchanges and if i remember correctly some attempts were blocked in the US, common sense tells u shouldn't buy 3T of oil!! so back to same predicament, where to dump the excess surplus of US$? u got it, treasuries, hope this helps, take it or leave it

I can see what you are saying. I would also appreciate it if you would read the post I put previously. The original point of this post was to explain the effect of a negative interest rate. I think I explain the risk element of that and how that negates the macroeconomic perspective.

On another note. I stated China will decrease its spending in America, which I still believe. I think that when the Chinese economy expands it will produce more service sector and this will increase consumer consumption. Saving will decline and demand will be more domestic. This has nothing to do with manufacturing and the need to sell goods overseas. The economy is changing and less dependant on US demand.

In addition to that although China is a major creditor it is not the only one. Japan also has huge investment in US debt so does the UK. I have linked an article. There is a good diagram you can interact with. I hope you see my point. Even if the Chinese have to buy debt the other creditors do not. They make up far more demand for US treasuries than China and thus in the whole scheme of things it is irrevelant.

I also think the problem is insolvency not liquidity. Regardless of whether the Chinese support the dollar or not it will not support the economy enough to make good on outstanding debt obligation let alone the commitments Obama is making. I notice your understanding is more what I thought Don'tmissthebus was arguing when I put Chimerica. You have also not taken another aspect into account. Most oil is bought in dollars, dollars have to bought to buy oil making the dollar artificially strong. This demand is going to have more impact on the dollar price and US to China demand than buying US Treasury bonds will. Regardless of the intervention of the Chinese if the dollar is no longer used to buy oil or if oil is reduced in price the impact on the Chinese economy is dangerous. However there is a compensating factor. If the oil is cheaper it means China can produce goods at a lower cost and thus compensates for the lost value in the US dollar or decrease in demand from the US, that can be taken from other consumers.

There are many aspects to economics and many views. I like your view and maybe you are right but I have put my view and back it with arguments. You can take it or leave it. In relation to your point I think it has some merit. I just think the factors I explained above outweigh it and the original point of this post in regards to negative interest rates is not viable due to the risk aspect of interest.

The link I stated it below.

http://www.guardian.co.uk/news/datablog/2011/jan/18/us-federal-deficit-china-america-debt

Here is a link. It has a view that China could stop buying US Treasuries.

http://www.moneynews.com/Economy/China-U-S-Treasurys-StephenRoach/2011/08/19/id/407995

 

[dtan1e]

Quote from morganist:


On another note. I stated China will decrease its spending in America, which I still believe. I think that when the Chinese economy expands it will produce more service sector and this will increase consumer consumption. Saving will decline and demand will be more domestic. This has nothing to do with manufacturing and the need to sell goods overseas. The economy is changing and less dependant on US demand.

In addition to that although China is a major creditor it is not the only one. Japan also has huge investment in US debt so does the UK. I have linked an article. There is a good diagram you can interact with. I hope you see my point. Even if the Chinese have to buy debt the other creditors do not. They make up far more demand for US treasuries than China and thus in the whole scheme of things it is irrevelant.

on the first part, they r already doing it, its old old news, everyone in Asia knows that for over 2 years already

2nd part, u seem to have bloomberg, try NW, btw, the question that u were asked by dontmiss... its been reported probably a "100" times, incidentally Japanese also does the same thing, one time that i know of they intervened less than 2 years ago, some economist u r, Japan has one of the largest bond swap portfolios which is why they also has a substantial treasury holding, ok, thats enough, if u making econ policies, God help us!!

 

[morganist]

Quote from dtan1e:

on the first part, they r already doing it, its old old news, everyone in Asia knows that for over 2 years already

2nd part, u seem to have bloomberg, try NW, btw, the question that u were asked by dontmiss... its been reported probably a "100" times, incidentally Japanese also does the same thing, one time that i know of they intervened less than 2 years ago, some economist u r, Japan has one of the largest bond swap portfolios which is why they also has a substantial treasury holding, ok, thats enough, if u making econ policies, God help us!!

The other countries still out shadow the Chinese and Japan. In any event the demand that buying treasuries is only one aspect of the dollar value. The oil price is really the big factor.

In any event you just agreed with what I was saying. I said the Chinese will reduce investment in the US. You stated that in the above post. I never claimed anything else.

 

[dtan1e]

Quote from morganist:

The other countries still out shadow the Chinese and Japan. In any event the demand that buying treasuries is only one aspect of the dollar value. The oil price is really the big factor.

In any event you just agreed with what I was saying. I said the Chinese will reduce investment in the US. You stated that in the above post. I never claimed anything else.

pathetic !

 

[morganist]

Quote from dtan1e:

pathetic !

NO. I am not the only one saying this there are many other economists as the articles stated.

 

[trefoil]

Quote from morganist:

The other countries still out shadow the Chinese and Japan. In any event the demand that buying treasuries is only one aspect of the dollar value. The oil price is really the big factor.

In any event you just agreed with what I was saying. I said the Chinese will reduce investment in the US. You stated that in the above post. I never claimed anything else.

I'm having a little trouble following this, so just for my own curiosity, are you saying the Arabs and Nigeria and Venezuela are more important to the value of the dollar than is China and Japan (and Europe)?

 

[morganist]

Quote from trefoil:

I'm having a little trouble following this, so just for my own curiosity, are you saying the Arabs and Nigeria and Venezuela are more important to the value of the dollar than is China and Japan (and Europe)?

No. What I am saying is that there are other countries that have US debt that do not need the demand for their goods this creates like China and Japan do. Therefore even if China and Japan continue to buy US debt if the other countires do not it will not matter if the Chinese and Japanese do because the dollar value would have dropped sufficiently enough to cut the demand for Chinese/Japanese goods.

In short China and Japan cannot support the debt levels needed to maintain dollar value to sustain demand for their goods on their own. If the other countries stop buying debt, which they could, it would affect the US economy enough to affect the Chinese and Japanese economies. The other countries are also not dependent on US demand. They have no reason to continue buying it if they do not see getting repaid.

Look at the article I put up a couple of posts ago with the debt ownership. Yes China and Japan own a lot but there are a lot of other creditors. For example the UK owns 400 odd billion and there are five or ten others that own 200 odd billion. If the other countries pulled out of the market China and Japan would likely not be able to maintain investment let alone increase it.

 

[4PurposeLiving]

Quote from morganist:

In short China and Japan cannot support the debt levels needed to maintain dollar value to sustain demand for their goods on their own. If the other countries stop buying debt, which they could, it would affect the US economy enough to affect the Chinese and Japanese economies. The other countries are also not dependent on US demand. They have no reason to continue buying it if they do not see getting repaid.

Yea... this puts everyone in a very tough spot..

What do you think will happen? I'm curious what your take is?

 

[morganist]

Quote from 4PurposeLiving:

Yea... this puts everyone in a very tough spot..

What do you think will happen? I'm curious what your take is?

Actually it is a lot worse than that. The high level of debt changes the fundamental dynamics of finance and macroeconomics. Normally I would agree with the people who opposed me in this thread. However because of the following I am sceptical that the Chinese demand investment cycle will continue.

When interest rates are lowered more is lent out in theory. That is the general understanding in macroeconomics and has been for years. I understand that and always have. However when you have high levels of debt the risk changes. Risk is a determining factor of lending although not the supply of debt. The liquidity or availability of debt may increase but if it is not lent out the ability to increase consumption and demand is not there.

When people borrow money from a bank they bundle the debt up with other peoples and then sell it on as a credit derivative. When the credit crunch happened investors stopped buying such products. This meant banks could not sell the debt and had to hold onto more of it themselves. This meant two things the first the debt existing had to have a higher interest rate because of the new risk created through not being able to sell it on to someone else. The second is that less lending was allowed in the future or the lending was at a higher interest rate. It does not matter how low the interest rates are in the central bank, this just creates liquidity or supply of debt, if the risk is higher the lending rate is higher, this is an insolvency issue.

This is why there have been reports of high reserves and not enough lending, this is common in the UK. In addition to this the interest rate in banks do not have follow the interest rate set at the central bank or base rate in all scenarios. The interest rate can be whatever the bank wants it to be and is usually related to risk. Only tracker and variable loans have to follow the base rate and CAT standard mortgages (Charges, Agreement and Terms) are required to follow the base rate. They can only be two or less percent different from the base rate, so although they follow the base rate they are not exact to it. This means that in the UK only half of the loans have any direct relation to the base rate. The interest rate for the rest is whatever the bank sets.

In addition to that because there is so much debt when people that own existing debt receive a lower interest rate the consumption factor does not rise. The money they do not have to pay back due to lower interest is used to pay the principal down. In short the reduction in the interest rate just gives the borrower the opportunity to pay off existing debt. Therefore the lower interest rate is not likely to increase new debt or encourage consumption from the lower repayment of exisiting debt. The saved money is not being spent on goods.

Due to the debt levels the fundamental dynamics of banking and macroeconomics have changed. The understanding of debt expansion and consumer consumption have been overridden by the risk element of interest rates. This has been created through the higher uncertainty created through high gearing.

I am therefore sceptical that even if China buys US debt whether it will lead to an increase in consumption as a result of the lack of lending and reduction of consumer consumption that risk creates. Thus why would they buy a bad product to reach a target (increase demand in their goods) if it no longer does that? In short why buy US debt to increase demand for your goods if buying US debt no longer increases demand for your goods?

Do you see what I am saying now? The old principle concepts of macroeconomics have changed due to the fundamental dynamics of banking no longer working.