Who is in charge of regulating the US$?

[DanS]

The US Treasury is in charge of any government policy with regard to the US Dollar. The Federal Reserve is in charge of regulating interest rates.

Originally posted by DAVOUT
If you consider

the reserves in US$ will not be dumped (safety), but rather not increased anymore

His investment criteria point to further investment in US government bonds. The quote seems more like "I wish there were assets just like US government bonds, but that aren't US government bonds. In lieu of an alternative, we're going to do what we have been doing. The reasoning in deciding to purchase US government bonds in the first place was sound."

[Barnabas]

Originally posted by DaShi


But they didn't make the claim here. You did. Shouldn't you be able to back up your own statements? And you say that the US doesn't believe in free trade. Can you back up your claims?

A good an easy example is the USA demanding latin americans to open their markets in everything the USA is competitive, but the USA subsidizing everything latin america is competitive in like agriculture, and protectionism with the steelmakers.


I think I recall the USA not being very free trade loving and putting barriers when japan was murdering american car companies, that happened almost 2 decades ago so my memory may be wrong.

[DAVOUT]

Originally posted by DanS
The US Treasury is in charge of any government policy with regard to the US Dollar. The Federal Reserve is in charge of regulating interest rates.



His investment criteria point to further investment in US government bonds. The quote seems more like "I wish there were assets just like US government bonds, but that aren't US government bonds. In lieu of an alternative, we're going to do what we have been doing. The reasoning in deciding to purchase US government bonds in the first place was sound."

The rôle of the US treasury and of the Fed does not include the power to oblige China to act for the best intérest of the US. For instance, if China decided not to increase their reserves in US$, as stated, this could lead to difficulties if the trade deficit of 2006 was at the level of 2005, or even significantly less.
If I did not know how serious you try to be about those matters, I would say that your understanding of the Chinese quote ("the reserves in US$ will not be dumped (safety), but rather not increased anymore") is bordering wishful thinking.

[DanS]

The rôle of the US treasury and of the Fed does not include the power to oblige China to act for the best intérest of the US.

Some of the power has been handed off to the WTO and others by treaty, but the Administration and the Fed still have substantial powers to make policy. For instance, if the Chinese were to dump US government debt, the Administration could institute trade barriers against Chinese and/or other countries' goods.

Overall, these types of policies aren't in the US best interest, so the Administration has fallen out of practice in using these tools. But that doesn't mean that they couldn't do it, if they saw fit to do so to work out of a short-term crunch.

[DAVOUT]

Originally posted by DanS


Some of the power has been handed off to the WTO and others by treaty, but the Administration and the Fed still have substantial powers to make policy. For instance, if the Chinese were to dump US government debt, the Administration could institute trade barriers against Chinese and/or other countries' goods.

Overall, these types of policies aren't in the US best interest, so the Administration has fallen out of practice in using these tools. But that doesn't mean that they couldn't do it, if they saw fit to do so to work out of a short-term crunch.

What is interesting in the article relates to the fact that China can take actions and that the US can only react more or less efficiently as experienced by the Senate; the threat to raise a 27% trade barriers did not move significantly China, whereas the threat to only reduce the purchase of Treasury bonds could influence the interest rate policy, for a start.

[DanS]

Maybe I'm not understanding what you are saying, but the Administration has short-term effective control over most of the trade policy. The Senate is a side-show in the short term and is being used to threaten China with action (perhaps not so effectively).

[DaShi]

Originally posted by Brachy-Pride


A good an easy example is the USA demanding latin americans to open their markets in everything the USA is competitive, but the USA subsidizing everything latin america is competitive in like agriculture, and protectionism with the steelmakers.


I think I recall the USA not being very free trade loving and putting barriers when japan was murdering american car companies, that happened almost 2 decades ago so my memory may be wrong.

But what does that have to do with US/China trade relations? UR is claiming the the US is considering proposing unfair protectionist measures. However, China charges an absurd tariff on US imports, while the US tariff for Chinese imports in negligable.

That said, every country has some protectionist measures in certain industries. It's when they are deliberately harmful and exploitive to another country where they become a problem. Japan is still murdering US car companies, so much that Toyota has raised its prices to keep US companies competitive. Unfortunately, not every country is so charitable.

[DaShi]

Originally posted by DAVOUT


What is interesting in the article relates to the fact that China can take actions and that the US can only react more or less efficiently as experienced by the Senate; the threat to raise a 27% trade barriers did not move significantly China, whereas the threat to only reduce the purchase of Treasury bonds could influence the interest rate policy, for a start.

China is reluctant to act economically unless they are absolutely certain of the result. The economy is still fine enough that small hasty moves could have great unforseen consequences. They don't want to have the same problems as Japan and have been acting very smartly and cautiously in that respect.

However, that doesn't mean that they aren't concerned by the US tariff. They did invite US senators who strongly support the tariff to China in an attempt to dissuade them from voting for it. It will certainly be on Hu's "Things to Talk about List" during his visit, but no one expects much from that visit other than some showing off on both sides. I'm sure that the Chinese newspapers are running daily articles on US protectionism since this bill was proposed in the US.

[Tingkai]

Originally posted by Colon™
And how do you think the Chinese central bank is able to set the exchange rate? It were to just dictate a rate the black market would be simply uncontrollable. Hence it buys billions and billions of US currency every month. Why else do you think China has arrived to the point it has official reserves worth $850 billion?

As Davout said the foreign reserves are a result of the trade surplus.

As for the rest, you're still making the mistake of assuming the market determines the peg rate. It does not.

Because of the trade surplus, the Chinese government can dictate the price of the RMB. Or put another way, more people want to buy RMB then there are people who want to sell RMB for U.S. (EDIT: The end result is the Chinese government must print more RMB)

If there was a long term trade deficit, then the peg could not be maintained because too many people would be trying to sell off RMB. That's not the case now.

As for black market, it doesn't work because demand for RMB exceeds supply. If there was excess supply, or excess demand for U.S. dollars, then there would be a black market.

Do the math yourself and you'll see what I mean.

[Tingkai]

Originally posted by DanS
For instance, if the Chinese were to dump US government debt, the Administration could institute trade barriers against Chinese and/or other countries' goods.

Such a move by the U.S. would be considered illegal under WTO rules. Governments are free to own, or sell, foreign currency holdings.

[DanS]

Hasn't stopped this or any other Administration in the past, I think you will be forced to admit.

In any event, nobody is in charge of regulating the value of the US Dollar. The price is set by the market. That should be the takeaway point from this discussion.

[DAVOUT]

Originally posted by DanS
Hasn't stopped this or any other Administration in the past, I think you will be forced to admit.

In any event, nobody is in charge of regulating the value of the US Dollar. The price is set by the market. That should be the takeaway point from this discussion.

Adopting your point of view, I would say that the Chinese Administration has serious capacities to influence the US$ market, and that will be the case as long as the US trade deficit with China will exist.

[DaShi]

Originally posted by Tingkai


As Davout said the foreign reserves are a result of the trade surplus.

As for the rest, you're still making the mistake of assuming the market determines the peg rate. It does not.

Because of the trade surplus, the Chinese government can dictate the price of the RMB. Or put another way, more people want to buy RMB then there are people who want to sell RMB for U.S. (EDIT: The end result is the Chinese government must print more RMB)

If there was a long term trade deficit, then the peg could not be maintained because too many people would be trying to sell off RMB. That's not the case now.

As for black market, it doesn't work because demand for RMB exceeds supply. If there was excess supply, or excess demand for U.S. dollars, then there would be a black market.

Do the math yourself and you'll see what I mean.

Do you know how hard it is to exchange RMB for USD in China? Getting paid in RMB is terrible. Sometimes I felt that I couldn't give the stuff away. Black market exchange is very common. Just wait outside a bank near closing hours. Fortunately, I had some friends who could help me, but they also could only exchange so much. The rest I just spent on gifts and such, since it's even harder to exchange RMB for USD in the US.

[Sikander]

Originally posted by Tingkai
Aye-yeah.

The RMB is peg within a narrow band to the U.S. dollar. If the Chinese central bank dumps U.S. dollars it has no effect on the RMB-$ peg because the value of the RMB relative to the greenback is artificially maintained.

If China dumps U.S. dollars, then the values of the U.S. dollar and the RMB fall relative to other currencies, all else being the same.

The cost of Chinese goods in the U.S. would remain the same because the peg remains unchanged. The cost of goods from other countries increases in the U.S. because the U.S. dollar has become weaker. As a result, the U.S. would buy more, not less, from China because Chinese goods have become relatively less expensive compared to the now more expensive goods from other countries.

Meanwhile, the cost of Chinese and American exports to other parts of the world becomes cheaper because the dollars and the RMB have fallen in value. So dumping U.S. dollars makes Chinese goods more competitive on the international market, not less.

Simple, really.

Also simple is the fact that China will be paying more for the huge quantities of raw materials and energy that keep their economy moving because their currency will be falling as the value of their foreign reserve falls and as the value of their exports to the U.S. fall.

[DAVOUT]

Originally posted by Sikander


Also simple is the fact that China will be paying more for the huge quantities of raw materials and energy that keep their economy moving because their currency will be falling as the value of their foreign reserve falls and as the value of their exports to the U.S. fall.

True, but this will not deteriorate the competitivity of Chinese products compared to imported products of other origins, if they just incorporate into the price the increase of raw products and energy imported in China.