Monday, May 18, 2009
Defending Western Debtors
Telegraph: Asia will author its own destruction if it triggers a crisis over US bonds
Ambrose Evans-Pritchard has penned a rather peculiar article in which he defends the "debt appetite of the Anglo-sphere and Club Med" and asserts that Japan and China dare not stop buying America's debt for fear of domestic economic consequences. Japan and China may both have their problems but the suggestion that "Asia cannot yet stand on its own two feet" without Westerners considerately consuming their exports looks a bit complacent. Lastly, this bit also caught my eye: "American can if necessary retreat into its vast home market and rebuild its industrial base, well-armed with 12 aircraft carrier battle groups." Yep, America is just going to rebuild itself. Just like that!
Posted by quiet guy @ 07:06 AM (956 views) Add Comment
27 Comments
- If you do not have an admin password leave the password field blank.
- If you would like to request a password allowing you to add comments and blog news articles without needing each one approved manually, send an e-mail to the webmaster.
- Your email address is required so we can verify that the comment is genuine. It will not be posted anywhere on the site, will be stored confidentially by us and never given out to any third party.
- Please note that any viewpoints published here as comments are user's views and not the views of HousePriceCrash.co.uk.
- Please adhere to the Guidelines
1. little professor said...
China is in a catch-22. They have lent the US so much money in the form of buying its treasury bonds. They know now that the US can not pay, yet they can not start selling their treasury bonds, or even stop buying them, because that would lead to an immediate collapse in the price of the bonds.
2. quiet guy said...
@little professor
Agreed, but it does not look possible to maintain the status quo. As the interest on America's debt rises as a proportion of GDP, America must default eventually.
Apologies to anybody who has seen this before: here is Peter Schiff's answer to the problem:
http://www.youtube.com/watch?gl=GB&v=sQ95njy0r0I (03:11)
3. This comment has been removed as it was found to be in breach of our Blog Policies.
4. happy mondays said...
Interesting watch there quite guy, i like peter schiffs humorous touch..It still sounds like we are all screwed, like Michael Martin or will he just get a big pay off...
5. uncle tom said...
I have never fully understood China's love affair with the Greenback, and their reluctance to promote their own currency.
My belief is that it stems from a combination of the vested interests that underpin the Beijing administration, coupled to a desire to get Uncle Sam over a barrel.
Ultimately this will prove a very expensive strategy for the Chinese - if they try to offload their dollar assets, the USD will implode in value. If they merely attempt to avoid acquiring more, the same thing will happen, but not so quickly.
Whatever they do, much of their dollar wealth will evaporate. Is it better for them to let the Yuan rise now - or later? I would argue that there is little to be gained from delay..
6. d'oh said...
If you owe China $2 billion dollars, it is your problem.
If you owe China $2 trillion dollars, it is China's problem.
7. matt_the_hat said...
The chinese strategy is simple: they need something that humans deem valuable, i.e. the US dollar, they mobilize their massive workforce gaining skills and knowledge (tangible assets) in the process to get the dollars, then they buy ever increasing stakes in assets they need in the future (raw materials), once the middle class is established (home grown consumption) they cut the US free and have a self sustaining system with the external inputs (raw materials) needed. The fact that Chinese people have been working for less money (i.e. sustaining western lifestyles) is irrelevant when you don't have a democracy. No one really cares about this paper (fiat) stuff, its about skilling a workforce and gaining control of natural resources and there is nothing a democratic government that is only guaranteed power for 4-5 years can do about it!
8. bellwether said...
Because most of us are at heart working class there is an identification with the producer nations. The tendancy to see producing/saving virtuous and consuming/spending as evil is however surely overly simplistic, they are just 2 sides of the currently very unbalanced coin. To get into balance the west needs to produce more and consume less and the east needs to produce less and rely on its own appetite. Rogers/Schiff tend to think that China will be able to get its act together in this regard better than the west but that seems to be just selfunderestimation.
The notion that China can win by redeeming their US bonds seems remote but many seem to feel that but this would surely just drive up the value of their own currencies and in doing so kill their industry and hand their competitvness to the west.
9. inbreda said...
6. d'oh said...
If you owe China $2 billion dollars, it is your problem.
If you owe China $2 trillion dollars, it is China's problem.
OK - so China have a problem. Question is - what are they likely to do about it? Roll over and drop their trousers? Personally I think this is the moment they have been waiting for - destroy the US without firing a shot. Just not sure how they're going to go about it.
10. bellwether said...
Matt the Chinese have made huge progress in the past 20 years but the vast element of their growth is the other side of the now imploding credit expansion. You seem to be suggesting that China as compared to US/WST will be ok becaue it has greater skill/expertise than the west and a greater hold on natural resources. That's an emotional perpsepctive (you referred to stinking slaves in an earlier post when rallying against GS) with no basis in fact.
11. bellwether said...
I'd add that as a collection of people who value prudence and who were too sensible to binge on the credit expansion we feel we missed out on the party. Inevitably we want to see the people who were at the party suffer the worst possible hang over. The envy is palpable but does not make for decent rational thought.
12. sold 2 rent 1 said...
IMHO The US and China have already done a secret deal to inflate their way out of this mess, and leave the slow moving eurozone trapped in a deflationary spiral and eventually to the collapse of the Euro.
This will only buy these 2 counties time before the US has to go to war as its last available option.
So it is down to the US people to stop their own government from going to war again which aint gonna be easy but not impossible.
All this to happen in 2010.
13. easybetman said...
I suppose the typical - if you owe your bank £1000, that is your problem. If you owe your bank 100m, then it is the Bank's problem !
14. matt_the_hat said...
10. bellwether: I'm not suggesting that China has achieved its aims of skilled workforce and control of natural resource - all I am saying is that to achieve these goals it is prepared to fund western lifestyles for the moment - but don't for one moment think China plays by the same rules - its ultimate objective is for the Chinese citizen to have a better standard of living than anywhere else, so it will keep fueling the western debt junky just enough to keep the exports going so the transfer of knowledge/wealth from west to east is maintained but it won't let the US press the reset button (default/inflation), then once the frog is boiled and the west has no industry etc etc. the leach will be discarded - its a battle of media students vs engineering students
15. icarus said...
A E-P asks "what would have happened to the factories of Gangdong if the Fed had not taken emergency action", yet last week he reported (apparently approvingly, since the subject later claimed that his remarks were grossly misrepresented) with no editorial comment, that the TARP was subsidising speculators and throwing vast sums at the crisis with little benefit to US taxpayers.
16. icarus said...
should have said that the 'subject' was Mark Patterson of Matlin Patterson.
17. d'oh said...
9.inbreda - I was being facetious, but it is an important point. Whatever China and the US do about this imbalance will have interesting consequences. What I find puzzling is that the US would let themselves get into this position, unless they truly thought that default would be better for them than not selling all these bonds in the first place...unless of course it is just a case of "let someone after me deal with it..."
18. d'oh said...
9.inbreda - I was being facetious, but it is an important point. Whatever China and the US do about this imbalance will have interesting consequences. What I find puzzling is that the US would let themselves get into this position, unless they truly thought that default would be better for them than not selling all these bonds in the first place...unless of course it is just a case of "let someone after me deal with it..."
19. mander said...
If Asia's leaders give free rein to frustrations and crater the US bond market, they will ensure their own political destruction.
Not so scary. US can not print money to pay off their debt. The rest of the world had enough of green painted paper and therefore without a global support US will go the Argentina way.
We heard a lot of sub-prime, credit crunch and so on but the rest of the world is not buying up.
20. bellwether said...
Fair enough Matt but I don't think it will play out as neatly as that. As I have said before China have huge hurdles to overcome in terms of demographic, very large and ageing population, lack of democracy, and no real track record as yet in innovation, like it or not the US still leads when it comes to innovation in both technology and brand creation. A shift in power will come but not the one we expect and almost certainly not in our lifetime.
21. bellwether said...
Mander you are not reading both sides.
22. stillthinking said...
I think what Ambrose means is that there is nowhere for Chinese dollar holdings to go apart from US production, which would be boom time for the US. A dramatic fall in the value of the dollar is not such a threat. You might think oil would go up in dollar terms, but given that for the oil producers the US is a huge single customer, much more likely that the oil price would not fully revalue against the dollar at all. Their position in global trade is so large, in other words, they set the price, and the other countries operate relative to that. Consider that the US probably consumes 50% (at least) of oil production, where are the alternative buyers? Who outbids the US for oil? No other country consumes that much.
What I mean is that because of the sheer size of the US, commodity prices do not follow exchange rate valuations, they are likely to be very sticky in dollar terms. There are no alternative buyers so there is no bidding war as such. Probably in twenty years that is different but not now.
Hence the Chinese threat is meaningless, and if they want to maintain the value of their dollar holdings then perhaps they could buy stuff some american production. After all, the global problems are basically the paradox of thrift writ large.
Unfortunately for the UK we don't have sufficient scale and we don't dictate market prices, so import prices will adjust more in the UK.
23. bellwether said...
Stillthinking agreed on all that. As I've said before you post really good stuff on here. Ever get frustrated when people don't at least pick up on the threads of the argument?
24. stillthinking said...
Thank you bellwether. Against that of course China is building oil storage facilities which would enable the transition to higher oil consumption which is inevitable to appear today. Also a pretty significant consequence would be that non-dollar prices of commodities will cheapen. eg dollar halves against the Swedish Krona, but in dollar terms commodity prices don't double, so net effect is that commodities become cheaper in krona terms. Commodity pricing is non-linear for large movements.
In fact, from that, gold (being a commodity), will not serve as a safeguard against dollar devaluation.
For somebody as naturally brainy and talented (nobody likes a long list) as me, you would expect I get frustrated with others on a daily basis, but actually, no not really.
25. Cokesnortingtory said...
There's another excellent article by Ambrose at The Crunch Times:
http://www.thecrunchtimes.co.uk/
26. uncle tom said...
Stillthinking,
Although the USA is the world's largest consumer of oil, they actually consume less than a quarter of the total. As much of that consumption is essential rather than discretionary, a rise in oil prices in the US does not impact that heavily on global demand.
It follows that the US market on its own does not dictate the price.
27. stillthinking said...
UT, that is a good point indeed. But whether there is a lot of dollar stickiness or a little, the effect is there.