Worst Case Scenario
Posted by Chris Martin at 3/15/2010 10:05 AM 
Categories: Globalism, The World's Only Superpower
Tags: Please don't throw me in the briar patch
Categories: Globalism, The World's Only Superpower
Tags: Please don't throw me in the briar patch
Moody's downgrades US and German sovereign debt. The Chinese start selling dollars and Euros and bring down the value of both currencies. While we can buy less Cheap Chinese Crap our ability to purchase domestic goods and services remains intact. We all buy more domestic output, employment increases and our trade deficit declines.
Meanwhile the Chinese are stuck with piles of devalued dollars. They have to get rid of them by buying stuff from us.
What about the deficit? Plenty of domestic savings here folks. All the government needs to do is to appeal to our patriotism and greed by offering two or three percent real return on small denomination recovery bonds. Better return than a bank and a whole lot safer.
Besides, Wonks Anonymous wants to see Lady GaGa do a "buy bonds" pitch.
Meanwhile the Chinese are stuck with piles of devalued dollars. They have to get rid of them by buying stuff from us.
What about the deficit? Plenty of domestic savings here folks. All the government needs to do is to appeal to our patriotism and greed by offering two or three percent real return on small denomination recovery bonds. Better return than a bank and a whole lot safer.
Besides, Wonks Anonymous wants to see Lady GaGa do a "buy bonds" pitch.
While I agree that an orderly decline in the $$-Yuan exchange rate would be a good thing, I am not so sure about a sudden one. Remember the J-curve. When a country's currency depreciates, the first thing that happens is an increase in its trade deficit, since the price of what it imports goes up, but the elasticity of demand is very low in the short run. (What else are people who need to buy Chinese-made underwear at Walmart going to do, but suck up the higher prices).
Oh, and you missed the part about how the immediate effect of such an announcement would be a spike in the spot prices of crude oil, soybeans, and every other exchange-traded commodity, as a decrease in the yuan-denominated price of a commodity subject to arbitrage implies and increase in the dollar price of the same.
The J curve point is taken. As far as I can tell there are no open commodity markets that trade in Yuan. If ther were the pressure of arbitrage would add to the problem faced by the Chinese Government when it tries to maintain an artificially low Yuan.
If we forced the Chinese to raise the dollar value of the Yuan but they kept the Euro price of the yuan stable there might be some issues.
WA
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