Trade argument moved from the presidential poll thread

[Kidlicious]

Originally posted by KrazyHorse
Kid, come on over to the side that has logic. What makes the USD special? Why does it matter that exchanges quote the price of oil in USD and not EUR? I'm fascinated by your answer. Or are you willing to admit that any statement which contains "because oil is denominated in USD" is almost certainly false?

After WW2 the world economy was dominated by the US. Denominating oil in USD eliminates the most currency risk possible.

[KrazyHorse]

So? I can hedge against currency risk really easily. Not to mention that only 25% of oil is bought by the US. The other 75% have to deal with this anyway. This is a nuisance issue, not a fundamental issue. Bid ask spreads on major currency futures are ridiculously low.

[Kidlicious]

Originally posted by KrazyHorse
There is a propensity to hold USD as a reserve currency. If net world propensity to hold USD as a reserve currency drops then some of the little green pieces of papaer will come back to the US. If China sells them and somebody else decides to keep them then there will be no change as far as the US is concerned.

You're assuming that someone else will want to keep them for the same price. If the Chinese don't want dollars anymore, why would you think someone else does anymore than they do.

When the US needs to buy back its debt (which are in this case in the form of little green pieces of paper) that is when the US is hurt. If that never happens then the US is not hurt. Period. There is no way around it...

The dollar can fall in value, which will cause the price of oil to increase in the US, without the US buying back it's debt. It's the increase in the price of oil that will hurt the US.

[Aeson]

Actually the US can be hurt even if the green peices of paper don't come back. That is because the US way of life is largely dependent on foreign capital, and the US government and most of it's citizens are not fiscally responsible in any stretch of the imagination.

To illustrate...

China dumps all it's $ (which I will use for "green pieces of paper") on the market.

Since in this hypothetical, the $ are not repatriated, that means there is more supply of $ on the exchanges than demand (at the current price levels). Essentially there is a boatload of "demand" on any market, just not necessarily at the current valuation level. I may not be buying $ at 100% of it's market value right now, but I may have buy orders at 90%... or 80%... or 70%... and there's buy orders all the way down (or shortly will be once all those $ hit the market). "Selling" denotes bridging the spreads down, and so China would be driving down the value of $. What is it... ~$9 trillion to sell at ~mkt? Without intervention it would be one of the most spectacular waterfalls of all time.

This drives up the price the US Gov pays for new debt. Now a fiscally responsible nation would stop/cut back on borrowing at that point, but we are talking about the US government here. No, they would print more. Not to buy back the $ (in this hypothetical, since that is not an option), but to continue to increase outstanding $. (Which we do to the tune of ~$2bn per day...)

At this point we are caught in a very bad situation. We end up having to pay more to finance our new debts increasing the amount we are printing, increasing the amount we have to pay for new debt...

Of course China's economy goes *boom* too... as do most of the world's financial markets... which is why it won't happen... not to mention that the Fed would almost surely repatriate the $ by printing as KH has said... but such are the nature of hypotheticals.

(One other thing to note, such an event would be the blackest and swaniest of black swans. The likelihood of panic in all markets, rational or not, would be very high. The collateral damage could be tremendous.)

--------------------

I would say the hypothetical would be much worse for the US than if the $ were repatriated. Mainly because the Fed could defend the price targets while repatriating the $, and/or get it back for less than we sold it for (doubly so, since we'd be using our deflated currency to buy back our debt at firesale prices). Yes, the repatriation would be inflationary as well, but it wouldn't be as blatantly obvious to everyone what was going on as if the bid for US $ simply vanished under a sea of Chinese held $. Repatriating gives some time, some stability, and some profits. It would likely avoid the risk of an international panic selloff where everyone dumped their $, and may entice more foreign entities to continue to be confident that the US will back their debts.

Any way it happens it's going to hurt a lot though. We get a great deal from China... inflation free debt spending at ridiculously low interest rates... and at the very least, China dumping their $ en mass would signal the end to that deal.

[Kidlicious]

Originally posted by KrazyHorse
So? I can hedge against currency risk really easily. Not to mention that only 25% of oil is bought by the US. The other 75% have to deal with this anyway. This is a nuisance issue, not a fundamental issue. Bid ask spreads on major currency futures are ridiculously low.

Well it's tradition then.

[KrazyHorse]

Aeson:

What you are stating is that the US will get hit if the Chinese stop accumulating US debt. This is true. My point is that there is no difference between the Chinese not accumulating FURTHER debt and the Chinese dumping their US debt and having somebody else pick it up.

[Kidlicious]

Originally posted by Aeson
Of course China's economy goes *boom* too... as do most of the world's financial markets... which is why it won't happen... not to mention that the Fed would almost surely repatriate the $ by printing as KH has said... but such are the nature of hypotheticals.

(One other thing to note, such an event would be the blackest and swaniest of black swans. The likelihood of panic in all markets, rational or not, would be very high. The collateral damage could be tremendous.)

I'm talking about a chain reaction here. The US economy is already in depression and Chinese imports have decrease so much that the Chinese can rely on them to prop up their own economy anymore. So they sell off their dollars to stimulate domestic demand.

[Aeson]

Originally posted by KrazyHorse
What you are stating is that the US will get hit if the Chinese stop accumulating US debt. This is true. My point is that there is no difference between the Chinese not accumulating FURTHER debt and the Chinese dumping their US debt and having somebody else pick it up.

I'm also saying that having someone else pick them up can hurt us, depending on the nature of the transaction. And given the shear magnitude of the increase of supply, the likelihood of the transactions being detrimental to our continuation of debt spending is rather high.

Essentially, if there's ~$9 trillion in $ being sold at firesale prices (which they quickly would be in such a situation), we're going to have a hell of a time raising new capital by selling $.

(You're correct that the Fed would, and should, print to buy back the $. Just in this hypothetical that isn't allowed.)

[KrazyHorse]

Essentially, if there's ~$9 trillion in $ being sold at firesale prices (which they quickly would be in such a situation), we're going to have a hell of a time raising new capital by selling $.

If the debt sale takes place at a different price than current prevailing prices then some of it will HAVE TO be repatriated. There's no way around that.

[Aeson]

Originally posted by Kidicious
I'm talking about a chain reaction here. The US economy is already in depression and Chinese imports have decrease so much that the Chinese can rely on them to prop up their own economy anymore. So they sell off their dollars to stimulate domestic demand.

It's still economic MAD. The value of the Chinese US debt holdings are in large part (as) valuable because the Chinese continue to hold them. If they try to dump a significant portion of their US debt they essentially take losses on what they sell, and undermine the rest of their holdings. If they hold them, they make a profit (small though the rate is) so long as the US Gov is still solvent.

If the US Gov isn't solvent, then China can't get **** for their US debt anyways.

I don't think there's any case where China dumping the US debt favors the Chinese. It can certainly hurt us, but it'll always hurt them too (and probably much much more... at least the US got their value out of the deal up-front).

At some point China will stop buying (as much... or as favorable to us) US debt. But dumping what they have would be a huge financial mistake IMO.

[Kidlicious]

Originally posted by Aeson
It's still economic MAD. The value of the Chinese US debt holdings are in large part (as) valuable because the Chinese continue to hold them. If they try to dump a significant portion of their US debt they essentially take losses on what they sell, and undermine the rest of their holdings. If they hold them, they make a profit (small though the rate is) so long as the US Gov is still solvent.

If the US Gov isn't solvent, then China can't get **** for their US debt anyways.

I don't think there's any case where China dumping the US debt favors the Chinese. It can certainly hurt us, but it'll always hurt them too (and probably much much more... at least the US got their value out of the deal up-front).

At some point China will stop buying (as much... or as favorable to us) US debt. But dumping what they have would be a huge financial mistake IMO.

I admit it's a black swan. But consider how important continued economic growth is in China. Nations like the US can have unemployment without danger of riots, because people aren't going to starve to death. China has to create something like 29 million jobs a year (I read that recently).

So I don't think they are just going to sit on their reserves with the risk of revolution existing in their country.

[Victor Galis]

Originally posted by KrazyHorse
Kid, come on over to the side that has logic. What makes the USD special? Why does it matter that exchanges quote the price of oil in USD and not EUR? I'm fascinated by your answer. Or are you willing to admit that any statement which contains "because oil is denominated in USD" is almost certainly false?

I could see some sort of answer based on psychology, transaction costs, or minor distortions due to currency fluctuations being valid. None of those would result in any sort of major correlation between nominal and real price that Kid seems to be assuming.