China Lambastes Dollar “Carry Trade,” Diverting Attention from Its Currency Manipulation

What a difference seven years makes. No one had a problem with Japan having super low interest rates and stoking a global carry trade, nor with the US running overly loose monetary policy that led to a real estate bubble that spread its impact beyond our borders via the creation of toxic mortgage product sold far and wide.

But one difference this time is now the dollar, rather than the yen, looks like the best funding currency, and the dollar is a deeper market, so the scale of potential damage is much greater. Second is that a lot of countries are running loose money policies, but they are at least making some credible noises re tightening (whether they follow through is another matter, of course). The US, by contrast, has made clear that it is keeping things easy-peasey for the foreseeable future. And the US (starting with the Greenspan era) has signaled any hawkish moves well in advance, so the odds that the Fed will have a sudden change of heart are just about zero.

Now, to play devil’s advocate, one could argue that the loose money policy is warranted. There is tons of slack in the economy, unemployment is high and rising, capacity utilization stinks. Surely raising rates now would be the worst move possible, right?

The authorities are completely responsible for the messes on two different fronts that intersect to create monetary policy dilemma. Going below 2% for Fed funds was a huge error (well maybe you could justify 1% as a very short term expedient), but the Fed is now painted in a corner. But second, and the much bigger issue, is that (as everyone can see) all this cheap money is not going into the real economy. A few very high quality borrowers are getting good rates; everyone else finds credit scarce and costly. So spreads are higher than before, and even absolute rates are often higher expect in markets like mortgages where the Fed has intervened.

Now some readers will correctly say that overly loose lending is what created the problem, and we need to undo that, but they are conflating two issues. Tightening up on WHO gets credit and HOW MUCH they get is separate from pricing. If this was mere improved standards, you’d expect to see more discrimination within various types of borrowers. But instead, across entire swathes of borrowers, particularly consumers and small businesses, banks have simply turned off the spigot. This has little to do with a return to prudent practices. In fact, it illustrates a real cancer: that across consumers and many small business owners, old-fashioned multi-variable decision-making (which included some verification of income) has been replaced by heavily or entirely FICO based systems. Those systems failed utterly. But they were cheap to operate, banks have no intention of reverting to earlier, more costly approaches. So we have a credit assessment process that is broken, but no one wants to admit it.

So if all this loose money isn’t getting to the real economy, there should be no reason not to raise rates, right? Wrong. This little procedure is again, entirely about the banks, screw the real economy and everyone in it. First, low rates (and now a steep yield curve) are an ideal setting for banks to make money. Greenspan pulled the same trick in the wake of the S&L crisis, and it enabled banks to rebuild their very wobbly balance sheets comparatively quickly (I’m amazed at the revisionist history about the early 1990s banking woes, which also involved pretty serious damage from dud LBO loans, and left the US banking system seriously undercapitalized). This plus high spreads makes ofr a very attractive environment for any new business.

But the second reason for keeping rates low is explicitly to keep asset prices aloft. The bubble is an explicit goal of policy. Remember, early in the crisis, they was talk of the markets being irrationally depressed. Funny how it is only prices that are seen as inconveniently low, and not ones that are insanely high, that are criticized.

But to cite Richard Nixon parodists: Let us make one thing perfectly clear. These monetary shenanigans are in no small measure the result of the utter failure of nerve late last year and early this year, to take sick institutions and resolve them. In many cases might not have entailed the bogeyman of nationalization (as in protracted government ownership), but throwing out the old top management and board, and forced debt to equity conversions. Cleaning up the banks was never treated seriously as an option, when the track record clearly shows that that is the fastest, least-cost way to deal with a financial crisis.

Of course, the powers that be really only want bubble restoration in those asset classes to which banks and capital markets firms are heavily exposed. A bubble in gold goes them no good, and a bubble in other commodities is downright counterproductive. And that was the logic behind the Fed’s proliferating programs: to drive liquidity to the markets it deemed worthwhile. We can see how well that worked.

Now even though China is correct in accusing the US of stoking a global carry trade, they are not exactly free of blame either. China’s past and continued currency pegs helped enable US reckless borrowing.

And despite the many complaints of readers yesterday on a post on government deficits, let me point out one ugly fact. The main argument was “we need to cut our debt levels.” Guess what, sports fans. That will not, cannot happen across the economy unless we run trade (more accurately, current account) surpluses. Do you think this has a snowball’s chance in hell of happening if China keeps its currency pegged at favorable rates to the dollar? So China’s fulminating, even if narrowly correct, serves to distract attention from its own culpability in this mess.

And low dollar interest rates pose a particular problem for China. Its dollar purchases had been, and may still be, running at levels so high as to make it impossible to sterilize the purchases. The net effect is that they wind up importing our loose money policy to the degree that they cannot fully sterilize the dollar purchases they make to suppress the value of their currency. Some recent reports (admittedly anecdotal) suggest inflation in China is running at 15%, which is the upper limits of what the population will tolerate. So the Fed’s policy is of even more immediate interest to China.

Some snippets from the news. First the Financial Times, which highlights that there is more than a bit of the pot calling the kettle black here:

The US Federal Reserve is fuelling “speculative investments” and endangering global recovery through loose monetary policy, a senior Chinese official warned…

Liu Mingkang, China’s chief banking regulator, said that the combination of a weak dollar and low interest rates had encouraged a “huge carry trade” that was having a “massive impact on global asset prices”….

Before these latest comments, however, Beijing had generally been most critical of US fiscal policy, urging Washington to spend less.

But speaking at a conference in Beijing, Mr Liu said the Fed’s policy of maintaining low interest rates together with the weak dollar posed a threat to the global economic recovery.

“[It] is boosting speculative investment in stock and property markets and will pose new, real and insurmountable risks to the global recovery and particularly to the recovery in emerging markets,” said Mr Liu…

However, Mr Liu’s criticism of the Fed comes as China’s own monetary policy is attracting growing scrutiny at home and abroad. Critics say the massive expansion in bank loans this year could cause asset price bubbles and inflation.

Qin Xiao, chairman of China Merchants Bank, last month said China “urgently” needed to tighten monetary policy to avoid stock and property market bubbles.

On Monday, Dominique Strauss-Kahn, the head of the International Monetary Fund, said a stronger Chinese renminbi was part of the reforms that Beijing needed to implement in order to increase domestic consumption and help ease global imbalances.

The Wall Street Journal argues that higher rates in China may not curb speculation:

China hasn’t raised its benchmark interest rates since late 2007, although policy debate has been shifting in Beijing as the recovery in the domestic economy consolidates and as the People’s Bank of China tries to manage the flood of liquidity and credit underpinning the recovery.

A key concern about any Chinese rate hike is that it may prompt more speculative inflows into the recovering domestic economy. And because of the way the yuan pretty much tracks the U.S. dollar despite the local unit being referenced to a basket of currencies, increased capital flows into China adds further to the liquidity in the domestic money markets.

China continues to state that its own exchange rate policy reform will be done for its own needs and done in its own time.

And a separate Journal story:

Chinese leaders previously expressed nervousness that the U.S. may be ready to sacrifice China’s economic interests to haul itself out of the worst recession since World War II. China is the largest creditor to the U.S. It frets that huge U.S. budget deficits will weaken the dollar and slash the value of China’s massive foreign-currency holdings, which hit $2.273 trillion at the end of September, the latest figure available.

Beijing’s suspicions of U.S. intentions have been exacerbated by trade quarrels under the Obama administration.

These intensified in September, when U.S. decided to hit Chinese tire exporters with tariffs. The U.S. has since targeted Chinese steel pipes with tariffs, a decision that China denounced as “abusive protectionism.”

The U.S. is now moving ahead with investigations into the alleged “dumping,” or selling at below-market prices, of coated paper from China and Indonesia, and of certain phosphate salts from China. China has started its own investigation into imports of some U.S. cars.

Yves here. I have zero sympathy for the Chinese officialdom on this issue. The government bought Treasuries as a result of an explicit, concerted strategy to pursue mercantilist aims to help their manufacturers at the expense of ours. This was not an “investment”; this was a by-product of currency manipulation. Now the US bears a lot of blame for not taking that practice on a long time ago. But we need to quit indulging this crap. Buying foreign assets at a time when you are keeping your currency low by design is almost certain to produce foreign exchange losses. So the US is to blame for the inevitable result of Chinese currency manipulation? I don’t think so.

Update 4:00 AM: Paul Krugman has taken up the currency peg theme tonight:

Despite huge trade surpluses and the desire of many investors to buy into this fast-growing economy — forces that should have strengthened the renminbi, China’s currency — Chinese authorities have kept that currency persistently weak. They’ve done this mainly by trading renminbi for dollars, which they have accumulated in vast quantities.

And in recent months China has carried out what amounts to a beggar-thy-neighbor devaluation, keeping the yuan-dollar exchange rate fixed even as the dollar has fallen sharply against other major currencies. This has given Chinese exporters a growing competitive advantage over their rivals, especially producers in other developing countries.

What makes China’s currency policy especially problematic is the depressed state of the world economy. Cheap money and fiscal stimulus seem to have averted a second Great Depression. But policy makers haven’t been able to generate enough spending, public or private, to make progress against mass unemployment. And China’s weak-currency policy exacerbates the problem, in effect siphoning much-needed demand away from the rest of the world into the pockets of artificially competitive Chinese exporters.

But why do I say that this problem is about to get much worse? Because for the past year the true scale of the China problem has been masked by temporary factors. Looking forward, we can expect to see both China’s trade surplus and America’s trade deficit surge.

Yves here. “trade deficit surge” = “bigger US debts”. These two issues are inextricably linked. Back to Krugman:

That, at any rate, is the argument made in a new paper by Richard Baldwin and Daria Taglioni of the Graduate Institute, Geneva. As they note, trade imbalances, both China’s surplus and America’s deficit, have recently been much smaller than they were a few years ago. But, they argue, “these global imbalance improvements are mostly illusory — the transitory side effect of the greatest trade collapse the world has ever seen.”

Indeed, the 2008-9 plunge in world trade was one for the record books. What it mainly reflected was the fact that modern trade is dominated by sales of durable manufactured goods — and in the face of severe financial crisis and its attendant uncertainty, both consumers and corporations postponed purchases of anything that wasn’t needed immediately. How did this reduce the U.S. trade deficit? Imports of goods like automobiles collapsed; so did some U.S. exports; but because we came into the crisis importing much more than we exported, the net effect was a smaller trade gap.

But with the financial crisis abating, this process is going into reverse. Last week’s U.S. trade report showed a sharp increase in the trade deficit between August and September. And there will be many more reports along those lines.

So picture this: month after month of headlines juxtaposing soaring U.S. trade deficits and Chinese trade surpluses with the suffering of unemployed American workers. If I were the Chinese government, I’d be really worried about that prospect.

Unfortunately, the Chinese don’t seem to get it: rather than face up to the need to change their currency policy, they’ve taken to lecturing the United States, telling us to raise interest rates and curb fiscal deficits — that is, to make our unemployment problem even worse.

And I’m not sure the Obama administration gets it, either. The administration’s statements on Chinese currency policy seem pro forma, lacking any sense of urgency.

That needs to change. I don’t begrudge Mr. Obama the banquets and the photo ops; they’re part of his job. But behind the scenes he better be warning the Chinese that they’re playing a dangerous game.

Update 4:30 AM: Sheesh, Ambrose Evans-Pritchard is on the same page as Paul Krugman, namely that China’s policies are global economic menace number one:

By holding the yuan to 6.83 to the dollar to boost exports, Beijing is dumping its unemployment abroad – “stealing American jobs”, says Nobel laureate Paul Krugman. As long as China does it, other tigers must do it too.

Western capitalists are complicit, of course. They rent cheap workers and cheap plant in Guangdong, then lobby Capitol Hill to prevent Congress doing anything about it. This is labour arbitrage.

At some point, American workers will rebel. US unemployment is already 17.5pc under the broad “U6” gauge followed by Barack Obama. Realty Track said that 332,000 properties were foreclosed in October alone. More Americans have lost their homes this year than during the entire decade of the Great Depression. A backlog of 7m homes is awaiting likely seizure by lenders. If you are not paying attention to this political time-bomb, perhaps you should….

It is fashionable to talk of America as the supplicant. That misreads the strategic balance. Washington can bring China to its knees at any time by shutting markets. There is no symmetry here. Any move by Beijing to liquidate its holdings of US Treasuries could be neutralized – in extremis – by capital controls. Well-armed sovereign states can do whatever they want.

If provoked, the US has the economic depth to retreat into near autarky (with NAFTA) and retool its industries behind tariff walls – as Britain did in the 1930s under Imperial Preference. In such circumstances, China would collapse. Mao statues would be toppled by street riots.

I was going to write that I anticipate capital controls before this is over, but neglected to make that my coda, and now I see Evans-Pritchard has come to the same conclusion. It doesn’t have to be as draconian as what he suggests, but it is the inevitable end game if China refuses to relent.

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  1. dbt

    Yves, I assume you mean you have zero sympathy for the gov’t on this, because the government is hardly accountable to the Chinese themselves. Condemning the citizens of an autocracy seems uncharitable.

      1. Gary Anderson

        What makes you all think that a change would help the US consumer? My assumption is the US consumer is the only serious consumer in the world. Therefore, my view is that it is sour grapes to complain about the Chinese currency.

        If the Yuan appreciates, it will be more expensive for American consumers who are laboring under a massively high cost of living still, with gasoline and other commodities and products artificially high.

        If my assumption is correct, that the only consumer who matters is the US consumer, then it is necessary for the US to allow the dollar to rise. Interest rates must go up and the dollar must strengthen. We need to have less debt if we are going to be Japan.

        The author talks about Chinese mercantilism. But who is more of a mercantilist than Wall Street, Goldman Sachs, JPM, etc. They think the US can bail herself out with exports to China. I doubt it. The Chinese save massively and over 1/2 of GDP is saved.

        So, we need to quit this hot money carry trade which will make this asset bubble the world over all the more impossible for consumers everywhere.

        Cavuto and Schumer want one thing, for the Chinese to be up to their eyeballs in credit debt just like us! At least Chinese mercantilism produces things!

  2. Daniel de Paris

    “Yves here. I have zero sympathy for the Chinese officialdom on this issue.”

    +1. Good post as always.

    “Daniel here. I have zero sympathy for the Fed officialdom on these issues.” as well.

    Back on planet earth with Mises and other Austrian economists. I did not mean current Austrian banks… We are moving slowly toward a disaster. A working and perennial currency infrastructure is nearly as important as effective public infrastructure. Nobody does understand it. Sure it it plain invisible. Except when broken. Broken markets with excessive volatility, commodities used as pseudo-currency, massive mis-allocations of scare resources.

    Welcome to this brave new world. Yes the US-China couple is partly liable for the scenario. But most of us a stake in the party.

  3. gordon

    The first 11 or 12 paras. of this post could stand on their own as one of the best potted descriptions of the GFC and US policy responses to it that I have ever read. Congratulations, Yves Smith. Keep those paras. Appropriately presented and “topped and tailed”, they should be worth gold.

    Second, Krugman’s comment “[The Chinese Govt. have] done this [kept their currency weak] mainly by trading renminbi for dollars, which they have accumulated in vast quantities”. puzzles me. My understanding was that China had accumulated lots of dollars by running a big export surplus with the US, not by “trading renminbi for dollars”. Why would China sell yuan (which has only 4 letters, so I prefer that term) and buy dollars, except perhaps to buy oil? I thought that China accumulated dollars by selling goods to the US and just never repatriating all the resulting dollars – ie. never selling dollars for yuan. They parked them in Treasuries and “agencies” and some other low-risk securities. Occasionally some Chinese Govt. representative would turn up and buy some aeroplanes etc. with some of the dollars, but those shopping expeditions didn’t make much of a dent. Is this wrong? Are the Chinese really selling lots of yuan for dollars? Where?

    Third, back to those first golden paras. I think Yves Smith has articulated a major divide in US opinion here. It’s a divide between those who support the stimulus and cheap money as necessary to avoid a worse outcome, against those who think any such policy response is futile unless and until major institutions like the SEC and the Federal Reserve are extensively overhauled and some legal changes (like reintroducing Glass-Steagall) are made. As with many natural experiments like this one, there is a good chance that the results will be swamped by some extraneous third factor (another war? Chinese revaluation? a coup?). But maybe we shall see.

    Finally, if Chinese inflation is running at 15%, how much of this is due to the much-vaunted Chinese stimulus package?

    1. Yves Smith Post author


      You have cause and effect reversed. China implemented a currency peg. Doing that required it to buy dollars. The longer it held the peg at the same level, when market forces would have pushed the RMB higher, the more dollars it had to buy.

      The cheap RMB was and is a massive trade subsidy. Even with the RMB having been permitted to rise a bit, it is undervalued by at least 20%, some analysts say over 40%.

      I have heard from various importers of Chinese goods that the reject rates are high even now, after years of selling to the US. Think they’d be competitive here if their goods were 20% to 40% more pricey?

      1. gordon

        Thanks Yves Smith, but I’m still puzzled. You say: “The longer it held the peg at the same level, when market forces would have pushed the RMB higher, the more dollars it had to buy”. This implies that the Chinese dollar holdings are the result of Chinese selling (vast quantities of) Yuan to buy (vast quantities of) dollars. Is this really happening? It still seems more logical to regard these huge dollar holdings as just the outome of Chinese non-repatriation of their trade surplus. Every year, Americans buy Chinese goods with dollars, and the Chinese just park the money in dollars (eg. US Treasuries). They don’t sell the dollars to buy their domestic currency. If they did, the dollar would weaken (being sold) and the Yuan would strengthen (being bought) as predicted by conventional trade theory.

        Of course this is a weird way of doing trade. One might conventionally expect that the surplus would be either repatriated or used to finance US exports to China. Since the Chinese do neither of these things on any significant scale, their dollar mountain just grows and grows.

        1. Yves Smith Post author


          You still have the causality backwards!

          China ran a fixed peg against the dollar at the same level from 1994 to 2005. It did modest revaluation in 2005, which everyone (save the Chinese) deemed to be way too low, and moved to a managed float, which just means they let the currency price fluctuate a teeny bit on a daily basis. The price most assuredly is controlled.

          During this time period, China was accumulating a lot of foreign currency, mainly dollars, via direct investment. That alone should have pushed the RMB much higher. The Chinese kept that from happening by buying dollars (the peg has always been against US$). Keeping the dollar high against the RMB was a massive trade subsidy. The trade surpluses are the result of keeping the currency cheap. Had the currency been allowed to float, it would have risen to a level that would have put trade in balance, or at least substantially lowered the US trade deficit with China. Similarly, you would not have seen the massive shifting of US manufacturing capacity to China and other emerging markets. It would not have made any economic sense.

          1. john c. halasz


            What you’re missing is the sterilization of US$ surpluses. Without sterilization, which has been remarkably successful given the scale at which it has ocurred, exchanging export earned dollars for yuan would have stoked the domestic Chinese money supply, hence high inflation. Instead, the PBoC has bought those dollars with yuan bonds forced on CHinese banks, thereby keeping addition yuan base money out of circulation. Those dollars are then invested in U.S. T-bonds, amounting to a program of forced savings on the CHinese economy.

    2. DownSouth


      I dislike the conflation of “stimulus” with “cheap money” in your statement about “those who support the stimulus and cheap money as necessary to avoid a worse outcome.”

      When I think of “stimulus,” I think of it as the result of congressional action as in the stimulus package.

      On the other hand, when I think of “cheap money” I think of it as fiat–dictatorship–by the scientist kings at the Fed and the Treasury.

      Also, the intended beneficiary of “stimulus” is main street. The intended beneficiary of “cheap money” is Wall Street.

      So I believe it entirely possible to be in favor of “stimulus” but opposed to “cheap money,” as well as the converse.

      1. gordon

        Yes, there are sects and factions within the “reflate first” and “reform first” camps. I was painting with a broad brush, but I still think that those are the two broad categories whose competing claims are now being tested against reality.

  4. MarinusWA

    Something I do find peculiar is that when it comes to China is the ease at which authors predict riots there. Point in case above article from Ambrose Evans-Pritchard (toppling Mao statues in street riots).

    Yet when it comes to the USA this suddenly doesn’t seem to be an issue. Do authors like him really believe that despite the downward slide of the US economy the populace will remain calm and docile? Not to mention that it seems that goverment spending on things like law enforcement is dropping. More people who can’t make ends meet and less people to maintain order seems like a powder keg to me.

    I realize that there is a large culture difference here and the “If you’re poor it’s your own fault” mindset in the USA will place the riot treshold substantialy higher there. But to assume this treshold is absent in the USA is rather dangerous imho (I’m not saying that this is said in above article but I did see it in some other places).

    1. Yves Smith Post author


      The reason is the US, save for members of the working class at various points in history and students in the 1960s, simply does not have a history of violence against the authorities. It’s not part of our tradition. And now we have a total surveillance society, in which someone who has a criminal record of any sort becomes unemployable, as a further deterrent against demonstrations. China, by contrast, has a strong tradition of uprisings (there have been a lot in the Pearl RIver over factory closings. Seen any in Detroit?)

      1. MarinusWA

        I understand that there are several strong historical and cultural reasons making it very unlikely that there will be violent rioting in the streets of, say, New York.

        My point is more that very unlikely does not equal impossible. And yet that is what I keep seeing in blog posts and forum discussions. “Riots in our streets? Won’t happen”

        As I said, I find this a somewhat dangerous assumption to make. The fuse might be far harder to lit then in China but the powderkeg attached to it will explode just as well.

      2. carol

        Yves: ¨And now we have a total surveillance society, in which someone who has a criminal record of any sort becomes unemployable, as a further deterrent against demonstrations.¨

        But a photograph taken at a demonstration does not constitute a criminal record. Also, I assume that if one is mistakenly rounded-up and taken to a police station, then those same surveillance camera´s will show that one did not throw a stone, but was peacefully demonstrating, hence no criminal record either. (I hope my assumption is correct; otherwise the whole crisis situation is even worse)

        So while such a fear could explain the small number of protesters at the American Banksters Association last month (only 5000 according to, how well founded is that fear?

        1. Markel

          A Facebook post isn’t a criminal offense, either, but it can still stop you from getting a job. No company is going to employ a rabble-rouser. And people know it.

          Plus, riots and rebellions begin where people who know each other gather. Town meetings. Marketplaces. Union halls. Where, in the USA, do people gather? Do you imagine an uprising starting at the mall? An office park? A suburban cul de sac? Whole Foods?

          Perhaps some evangelical churches might start to get raucus, but don’t look to them to spawn an economic populist uprising. Though they might riot for a repeal of the estate tax.

          1. carol

            Markel: ¨No company is going to employ a rabble-rouser¨

            Off course not, but — aside from whether or not a peaceful demonstrator is a rabble-rouser — are you suggesting that HR departments have access to surveillance camera´s footage?

        2. DownSouth


          I’d say damned well founded.

          During the protests at the G-20 meeting in Pittsburgh, the police conducted an operation they called “Hammer and Anvil” where they trapped and herded protesters, as well as any innocent bystanders who happened to get caught in the trap, into a park and made mass arrests, including several journalists:

          Sure, as you say, the accused can fight the charges and probably win in count. But at what cost?

          The fact that this has become standard operating procedure–not just in the US, but in other “democracies” such as Britain and Canada as well–was made by a former poster here on NC by the name of Anonymous Tim:

          The link Anonymous Tim provides is most informative:

          The most revealing part is the video “Police State II: The Takeover,” which is linked in three separate YouTube segments.

          How better to terrorize the populous than to send a message that the police can arrest you and accuse you on false charges, that they are accountable to no one as they operate with almost total impunity in this regard, and there’s not a damned thing you can do about it except spend a great deal of time and money to fight the charges?

          1. carol

            DownSouth, thanks for the links!
            Disturbing content.

            Reading the puppetgov article made me think o.a. of an article in today´s guardian (

            “I think that the more freely information flows, the stronger the society becomes, because then citizens of countries around the world can hold their own governments accountable,” Obama said.
            “These freedoms of expression, and worship, of access to information and political participation – we believe they are universal rights.¨

            Well, well, ¨hold one´s government accountable and freedom of expression¨, nicely spoken words, but in horrific contrast to the pratice as revealed in your links above.

          2. i on the ball patriot

            DownSouth … you are absolutely right. Cops are sell out scum bag tools and the scam ‘rule of law’ is an unfair waste of time where you will be further intimidated and harassed by the process.

            Better to stay in the court of public opinion where you have a voice and you do not have some ass wipe judge throwing out all of your evidence and limiting your case in pre trial discovery. The pretentious legal protocols and disarming jargon amount to a shake down system designed to profit the lawyer interpreters (just like finance).

            There is a big disconnect in the scamerican people where only those who have really tested their Free Speech rights, and other rights, on the supposedly free streets and in the court system are aware of the illusion of it all. Big money prevails. Those with scant resources get stripped of what little they do own.

            We are ALL, in some fashion, complicit in this big scamerican game that has allowed us to consume a greater than fair share of the world’s resources, but some among us are more complicit than others, and are therefore more instrumental than the rest of us in facilitating that exploitation. I would put cops, judges, and lawyers, high on that list for defending the scam ‘rule of law’ that has been bought and paid for by the ruling elite and so tilted the playing field that it has denied opportunity to the many who are then driven to crime. Cops, judges, and lawyers aid, abet, commit, and create more crime than they will ever protect you from.
            Detroit crime — which amounts to an uprising, a rebellion that is on the increase in scamerica — is testimony to that causative effect of oppressive law enforcement and the unfair opportunity created by bought and paid for self serving laws that favor the rich.

            Law enforcement — ALL — sucks! But you are not powerless. There there is a lot you can do. Shun, shame, and denigrate them for being the loser sell out pussies that they are. Don’t invite them to your homes. Treat them like the sell out parasites that they are. Click it and tell the cop to stick it!

            And HR departments (human resources — what a demeaning name) also have access to FICO scores. FICO scores count in job hiring and firing. Welcome to the scamerican debtor’s prison!

            Deception is the strongest political force on the planet.

          3. ndk

            Carol, I read Obama’s statements as a not-too-subtle-way of saying, “I’d also really appreciate it if you let my other dark masters Facebook, Google, et. al. store all the personal information for all your citizens. I know they’re doing a fantastic job accumulating data on mine. Thanks.”

    2. Kevin de Bruxelles

      I’m not sure if I understand your point. AEP did say in his article:

      At some point, American workers will rebel. US unemployment is already 17.5pc under the broad “U6” gauge followed by Barack Obama. Realty Track said that 332,000 properties were foreclosed in October alone. More Americans have lost their homes this year than during the entire decade of the Great Depression. A backlog of 7m homes is awaiting likely seizure by lenders. If you are not paying attention to this political time-bomb, perhaps you should.

      Being cynical I would question exactly where American workers are going to rebel to. Vote out incumbents? Wow that would leave a mark – not! But AEP certainly did bring up the possibility. It was very commentary from him.

      One this he missed was Obama’s total political omega-hood. Give a stirring speech – sure. Make a bold move – never. Yes the US has the tools to deal with the Chinese on trade. But does it have the political will? Not yet.

      1. MarinusWA

        I took that point about rebelling more in the legal sense, ie. through voting, writing your congresman etc, not actual rioting.
        Might be my misinterpretation though.

        Still I find it odd that he mentions riots in China in the case of an economic war while at the same time the USA carries on without a hitch. I’m not doubting that the USA can do the whole “circle the wagons” thing but the transition to that situation would be extremely messy. You can’t turn back decades of oversea labor and imports just like that, especially not with the deprecated state the US industrial sector seems to be in.

  5. gordon

    I just read the update. There would be an exquisite irony in Pres. Obama appointing Prof. Krugman (the tireless apostle of free trade) to head a US negotiating team going to Peking to threaten the Chinese with tariffs and capital controls!

  6. fresno dan

    Couldn’t agree more with the post.

    Its like life – you can live beyond your means for a while, but at some point th spigot goes dry.

    Substitute China for the old joke “When you own the bank 100K, you have a problem – when Brazil owes the bank 100B, the bank has a problem.”

  7. DJC

    The United States wastes trillions on fighting stupid wars in the Middle East and pretending to be the world’s supercop. Is it really necessary to station hundreds of thousands of troops in Japan and Germany, sixty years after World War II? The US fiscal deficit and financial system are out-of-control. In October alone, the US Deficit was $173 billion. Wall Street firms are still issuing AAA subprime junk securities but now with US Treasury insurance (ie. taxpayer backing for any losses). Maybe the US should get its own house in order before lecturing other sovereign nations on running their own internal monetary affairs.

  8. Haigh

    Does anyone know of a web site that is scoring congressman and senators by their favorable votes for the banking industry?

    It would be good to get a site like this up and running and making noise in preparation for the 2010 elections. Looking for a site that is committed to free market principles, the separation of bank and state.

  9. i on the ball patriot

    This china vs scamerica currency manipulation charade is in reality good cop bad cop manipulative deflective bullshit. Officialdom in both countries are gang raping psychopaths.

    Come on now, scamerica knew the china peg was low a long, long, long, time ago and didn’t do squat. Why? Because it was part of the scamerican gang leaders plan to manipulate china into providing the inflated cash (through treasury debt) and cheap trinkets as an integral part of the creation of the current global credit bubble and financial coup.

    The chinese gang did not buy “treasuries as a result of an explicit, concerted strategy to pursue mercantilist aims to help their manufacturers at the expense of ours.”

    The scamerican gang, with the collusion of sell out chinese ‘officialdom’, sent its manufacturers into china as a result of an explicit, concerted strategy to pursue imperialist aims to exploit and enslave the chinese populace through debt at the expense of its own domestic population, also through debt serfdom.

    This crisis is FAR from over despite the shill Krugman claims to the contrary. The bubbles will continue anywhere there is a speck of value to enslave and exploit.

    Deception is the strongest political force on the planet.

  10. Cindy6

    I guess China really is the hot button now that every commentator likes to talk about it. The only problem is that they usually don’t know anything about the country or the people there.

    The street riots usually is about back pay or other specific grievances, things that are usually taken care of in courts in nations with more reliable legal systems. Seldom is the anger targeting against the “evil dictatorial communist government”. The factories of the Pearl River delta are actually experiencing labor shortage right now as the migrants fired earlier this year don’t bother to come back anymore.

    On things economic, the policies of the commies are generally aligned with the interests of the Chinese people, which is why they are still in power, warts and all. I can’t say the same thing about the US government though. If we’re talking about broad-based civil unrest, I certainly would look to the US, or the UK as the more likely scenario. Though the US suffered from the Great Depression, Germany waged and suffered the consequences of a war. Perhaps this is what AEP has in mind?

    The RMB has been pegged since 1994! No one had any problem with that. In fact, it was deemed way OVERvalued during the Asian financial crisis. And guess just who advised Asian nations like S. Korea to stockpile on USD as reserve against calamities? Why is this now suddenly a problem? Could it be some spendthrift nation who’s been out-competed and instead of going through deflation, want their competitors to raise prices instead? Any why should others accommodate? After all, no one in this world could stop a US exporter from cutting their prices in dollar terms.

    The US is stealing the hard-earned savings of the Chinese people, and we aren’t even supposed to complain? Talk about hypocrisy.

    AEP is either whistling in the dark or simply silly with the suggestion of capital control. The problem with treasuries is not that China will sell its holdings, but that it bulks at purchasing anymore paper, especially if other creditor nations come to their senses as well. If you believe that the American people (yes, the people, not the government) are willing to make true, painful sacrifices in order to trim down their fiscal deficits, I’ve got a bridge to sell you. Capital control isn’t particularly conductive to attract fresh foreign capital, now is it?

    Or course, the argument is that w/o a certain dead beat consuming nation, the Chinese masses will be unemployed and will revolt. But since we’re never going to get our money back for things of value that we send over, perhaps we should just send the stuff to the peasants? We won’t get paid in either cases, but at least the benefits accrue to our own people. Just another form of fiscal stimulus if you ask me.

    1. ndk

      “Could it be some spendthrift nation who’s been out-competed and instead of going through deflation, want their competitors to raise prices instead?”

      That’s the gist of what I’ve been saying for months, but much more acute. Thanks.

      “Any why should others accommodate?”

      They shouldn’t, and as they’ve demonstrated again this week, they won’t.

    2. ndk

      Sorry to reply again, but your comment is so damn accurate that I was compelled to respond immediately. Now I’ve found more that I agree with.

      Capital controls are obviously a total non-starter. That would cripple the financially dependent U.S. economy like nothing else imaginable. It would be spectacular, and I find it hilarious that we’re even discussing it.

      The other is tariffs, which are more credible, but if the U.S. does this in sufficient size to start a trade war it just isolates itself, gets slapped by the WTO, and puts its own multinationals — whose elites control the country — in jeopardy.

      So long as China doesn’t cave to foreign pressures and continues to sanitize intervention effectively(which I think they can do; and if they fail, they only get more over-investment, and more deflationary pressure), I see a long, deserved deflation ahead for America.

      It’s Puritan and masochistic of me to say so, but I really hope China stays strong and doesn’t change its peg. This is America’s burden, not that of the Chinese people.

    3. jdmckay

      Throw in details of IMF abuse amongst Latin/So. American/ME economies for decades… policies which kept those economies on their knees much more forcefully than this “currency manipulation”…

      I think you’ve got it about right.

  11. Cullpepper


    And what are the odds this imbalance will be resolved equitably, with the best interests of the people (on both sides) represented?

    There’s a much easier way for politicians (on both sides).

    Commence saber rattling!

  12. craazyman

    Excellent post and terrific analysis.

    However, there will be no rebellion in the USA — other than through the ballot box and local politics. There is no center to the pain — it is widespread, fragmented, alone, self-doubting, self-recriminating and depressed. Misery, in this case, would like company but won’t be able to find it. There is no tribe, no mascot, no leader to run the Pessimist flag up the pole and rally the “losers”. This is not a value judgment on the humans themselves — in real life I am very empathetic and find it all to be a huge lottery — but they are the buggy whip brigade, and their only hope is in the next life, or, if they are lucky enough, in the favor of family and friends in this one.

    1. i on the ball patriot

      Despair not!

      He will carry the flag of optimism!

      Anti-Bullshit Man — Champion of the Forces of Freedom — is on his way!!!!

      He will blast away layer after layer of Aggregate Generational Corruption and create fairer chances for all in the lottery of life. Listen … listen carefully … that faint sound you hear in the distance is the combined vibrations of fear and the trembling of the wealthy ruling elite …

      In this generation they shall lose it all …

      Create the reality …

  13. DR

    “If provoked, the US has the economic depth to retreat into near autarky (with NAFTA) and retool its industries behind tariff walls”

    I would like to see the facts on this statement. Is the US equipped to product the chemical components of basic manufacturing? Much of US manufacturing uses components from China.

  14. SteveB

    Currently the economic measures of our economy are inconsistent; some show a turnaround, others hint at further decline. As unemployment continues to increase, and the economic measures show a more consistent decline, I would think it likely that the Democratic politicians will search for something dramatic to fix the problem. The commonly accepted story by all economic persuasions is that during the 1930s, the devaluation of the dollar relative to gold was a major stimulus.

    That specific act can’t be repeated again, but it is interesting to speculate on what type of similar dramatic action will be proposed by the Obama administration, probably a few months from now. Some of the choices seem to be currency barriers, stronger trade barriers, forcing Asian nations to use their stored dollars to buy goods instead of bonds, announcement of a weak dollar policy, etc. I would also expect a Camp David retreat followed by the resignation of the current crop of economic advisors.

  15. KidHorn

    One thing is clear to me, the US gov’t will never have a fiscal deficit under 1 trillion ever again. Our economy has become totally dependent on the gov’t raining money and with demographic trends, I don’t see any realistic way of this turning around. If the Chinese continue to peg, they’ll continue to accumulate US debt. It doesn’t really cost either side anything since the debt the US owes China is denominated in US currency. Basically the Chinese get on the job training and we get cheap (in both meanings) goods. Both sides are happy for now.

    As long as the unemployed continue to get benefits, there won’t be any riots. My hunch is benefits will eventually be extended forever. Basically, if you become unemployed, you go onto something a akin to being on social security. You won’t live like a king, but you’ll have lots of leisure time. It will turn the US into Russia circa 1975, but the politicians won’t care as they’ll live relatively well.

  16. Timbo

    Just as the US is determined to keep its consumers buying depsite their collectively crappy balance sheets, China is determined to keep the factories humming along, desite the lack of demand for their exports.

    The powers that be have taken this global trade to its inevitable terminal imbalance and we are really whistling past the graveyard as I see it.

    Equilibrium involves far more domestic production in the US and consumption in China, but neither are willing to go that route right now because its takes time and pain.

    As long as China takes devalued dollars in exchange for goods while the US deficit spends, both sides end up long term losers on the deal.

    What will end up breaking this imbalance in my view is technology. As manufacturing technology increases, the labor cost advantage that China enjoys will be increasingly diminished.

    The world evolves, and at some point it will no longer be optimal for Walmart to make its goods in China and ship them 5000 miles on a tanker.(Kind of seems silly even typing it) All this currency manipulation can delay this, but it cannot prevent it. And god forbid oil goes to $200 , that would accelerate it as well.

    Expect alot of tough talk, but until the price of Chinese goods rises in dollars, game is on.

    As the US govt subsidizes the buyer, so the Chinese subsidizes the seller. This futher distorts the situation making the eventual changes that much more difficult.

    Gotta run, Walmart is selling 30″ flat screens for 246 bucks! Wow, thats cheap. Hope my VISA is paid off.

    1. ndk

      What will end up breaking this imbalance in my view is technology. As manufacturing technology increases, the labor cost advantage that China enjoys will be increasingly diminished.

      This may be true in some future world, but even if it happened now, China still offers several things very attractive to capital: anticipations of valuation gains eventually(even if it never happens), strong local infrastructure, proximity to the world’s largest potential group of consumers…

  17. Mickey in Akron

    First, given that the globalists – Democrat and Republican alike – are firmly in charge, economic autarchy would require the repudiation of globalization? That does not seem likely as it would pit one group of American capitalists against another, with the overall larger message being that the ruling elites had failed. And that’s just the domestic side of the equation…

    Two, the immiseration thesis simply does not hold water in the United States. Otherwise, there would be an almost perpetual state of rebellion. Americans of all races are convinced that they are the freest people on the planet! After all, as one recent immigrant put it, it’s the only country where poor people are fat. 40 years after the 60s, the COUNTERREVOLUTION has triumphed. Inequality – social, political, and economic – is more pronounced and the populace is ideologically much more conservative, if not reactionary. Ask any American about the Whiskey Rebellion, Molly Maguires, the IWW, Sacco and Venzetti, Homestead. Ludlow, or Blair Mountain and the silence would be deafening. Labor history is a tabula rasa and antiunionism is also widespread, particularly among the “working class”. The LEFT is so discredited that liberalism is dismissed as an illness – if not downright treason! The parallels between this country and the Weimar Republic should be more than obvious. Atomized and leaderless, the population hyped up on steroidal nationalism is susceptible to manipulation. And you don’t need a weatherman to tell you which way that wind is blowin…
    In present day China even the “communist” elites dare not forget “the mandate of heaven”. In Western Europe, particularly France where there is a revolutinoary tradition, the middle-class “mob” will take to the streets. Elsewhere, class-consciousness is firmly rooted and governing elites have to factor it into their political calculus. The concept of a “general strike” – The Paris Commune of 1871, Bloody Sunday in Russia 1905, May 1968 in France, Tiananamen Square in China 1989 – has impressed this on these countries collective consciousness.

    Blaming China for our ills is tantamount to blaming the capitalist who invested there when, in fact, after all it was you and me. Walmart’s business model has nothing to do with it… Remember that the next time you go shopping.

  18. Demented Chimp

    Who cares, forget the $ carry trade, fornicate, drink and be merry because in the everyone dies.

    Lets face it we are all dopamine junkies be it bankers or hippies. Just different flavours for the addicted delusional heirachical chimps that we are. Get it anyway you can, and enslave the rest, because it makes you feel good, damn good.

    Oh DNA what a curse you leave us with. Sharing a planet with 6bn insane and dangerous monkeys the majority of whom would enjoy fucking you over anyway they can. Home sweet home.

    1. Skippy

      The end scene from that wacky teen cult movie *Heathers* “Now that your dead, what are you going to do with the rest of your life”.

      Skippy…ahh..its all about

  19. Stelios Theoharidis

    Although I may be giving Obama’s economic advisors way too much credit here. I’m curious given rising default rates in Commercial Mortgage Backed Securities, as well as alternative classes of residential loans, Alt-A, Option-Arm and their after effects on prime loans; as well as increasing default rates in companies (the Private Equity article also linked today). Doesn’t this sound like a situation where the interest rates leave the powers that be between the many-headed monster Scylla (increased default rates) and the whirlpool Charybdis (dollar carry trade). Sorry for the mythology references, but this is a narrow path to navigate.

    Anyone want to tell me which one is worse or whether this makes sense at all? Increased default rates or dollar carry trade?

  20. DownSouth

    I thought this article from the NY Times was rather enlightening:

    In a July meeting, Chinese officials asked their American counterparts detailed questions about the health care legislation making its way through Congress. The president’s budget director, Peter R. Orszag, answered most of their questions. But the Chinese were not particularly interested in the public option or universal care for all Americans.

    “They wanted to know, in painstaking detail, how the health care plan would affect the deficit,” one participant in the conversation recalled. Chinese officials expect that they will help finance whatever Congress and the White House settle on, mostly through buying Treasury debt, and like any banker, they wanted evidence that the United States had a plan to pay them back.

    But Cindy6 in her comment above is the one who gets it right. Echoing what Evans-Pritchard said—“ Well-armed sovereign states can do whatever they want.”—she asserts that “we’re never going to get our money back for things of value that we send over.”

    Anyone with even a cursory knowledge of history of course knows this to be true. Without one of those “big sticks” that Teddy Roosevelt immortalized, you’re pretty much dead in the water. Debt, as even the most pedestrian of mobsters knows, is meaningless unless you have a couple of goons at your disposal to break some legs.

  21. HrWest

    There may be more violence in “the streets” in China than in the U.S. However, the targets for political class violence are far more numerous here. Does Blankfein or Dimon or former officials likeRubin, Greenspan and Paulson have mulitple bodyguards and would they be truly effective if a dedicated group formed a la Mafia? Remember the Cosa Nostra got Special Judge Falcone in Sicily and he had like 5 bodyguards, armored Mercedes, etc. Just like terrorism has many different facets so would rioting/violence based on economic hardship.

  22. mxq

    at the risk of turning this into a partisan debate, gallup recently mentioned “Republicans Edge Ahead of Democrats in 2010 Vote” – totally off the top of my head, but i don’t ever recall repubs outpolling the dems in a generic poll. The reason i bring this up is b/c China and big labor are at odds and the President is supposed to be mediating. Apparently big labor isn’t happy (?).

    1. DownSouth

      Ross Douthat has a piece in the NY Times in regards to this issue today.

      “Most of the prior Republican registered-voter leads,” Gallup notes, “occurred in 1994 and 2002.” Both were ugly years for liberalism.

      I usually don’t care for Douthat, because he’s way to partisan (Republican) for my tastes. But it’s hard to argue with anything he has to say in today’s column. It’s shaping up to be a bloodbath for Democrats in 2010.

      If Obama were to have set out to deliberately destroy the Democratic Party, I don’t think he could have done a better job.

      Perhaps the wisest thing Krugman said in his column was “And I’m not sure the Obama administration gets it.”

  23. MyLessThanPrimeBeef

    If China can peg her currency at favorable rates to the dolalr, why can’t America, peacefully and without resorting to big-stick well-armed violence, peg her dollr at some other US-friendly rates to the RMB?

    I know we can’t out-manfuacture them, but com’on, at least we can still out-peg them. Don’t forget, we had more Olympic medals in Beijing, didn’t we?

    This is for Demented Chimp. Hopefully we soon hear the news that there are other beings in the universe, now that we have found out there is water on the Moon. My dream is to find out that these very intelligent and wise ET’s know enough to not foolishly elevate memebers of their own kind and worship them as their version of gods, as we Homo Not-So-Sapiens Not-So-Sapiens not so sapienly (I made the word up) do idolatrizing (this one is there in the dictionary) internet bloggers, dismal and not-so-disaml scientists, beauty queens, rock musicians and politicians.

    1. ndk

      If China can peg her currency at favorable rates to the dolalr, why can’t America, peacefully and without resorting to big-stick well-armed violence, peg her dollr at some other US-friendly rates to the RMB?

      Most of your comment strikes me as a little bizarre, but I’d like to respond to this. America would be offering, say, 5 RMB for $1 USD, while China would offer them 6.82.

      Now, if there were a lot of people with RMB who were scrambling to get into dollars, that might be effective. But people want to get from USD to RMB, both because of the bilateral trade deficit and ol’ infallible hot money. It also neglects the fact that we kinda don’t have any RMB anyway. This policy would be utterly futile.

      If someone wants to peg their currency below the mark you’d like, there’s really not much you can do.

  24. zeke

    Ah, isn’t it great to have somebody to blame. Those //// Chinese!! Those foreigners!!! Now I can sit back and not do a thing, have a beer and thank this column and countless others for somebody to blame.

    Like countless others who let their lives get out of control, I learned decades ago blaming is an utter waste of time even though it is the favorite American pass time. Only when we stand up, like responsible adults, and stop hiding behind economic jargon will we solve the issue. Of course we’re getting hit in the international arena. What’s new?? We’ve been doing it for decades ie messing in every country we could. It’s called turn about is fair play. When you play nasty, get nasty back. And our getting out maneuvered is just beginning.

    More than a decade ago, I read several books predicting exactly what is happening now so it’s no surprise to me. Has been interesting to watch as it came!!

    1. MC

      I think the US trade imbalance issue could be easily solved if Americans consume less and within their means. After all, it is a fact Americans generally over consume. Why is there need to use other tools like violence and military might as some commentators like AEP have suggested?

  25. Matt Stiles

    My semi-serious proposition is for the US to selectively default on CUSIPs owned by the Chinese. Whatever retaliation the Chinese feel appropriate would not likely match the havoc that would create in China.

    I’m a pro free trade libertarian myself. But much of the trade occurring between the US and China is not “free” but rather mandated indirectly by both governments (China via exchange controls, US via wage controls).

    In my mind, reneging on these obligations would be perfectly legal and justifiable. However, one then must ask if the same should be done for Japanese, Arab and other foreign owned CUSIPs. It becomes a bit of a rabbit hole.

  26. craazyman

    Dear My good American Friend,

    We are entering period of waxing moon. Careful action. Good friends step like cat in night. The rat is cunning but fooled by trash can. But the cat must be QUICK! Be like cat, fat stupid Americans, or you will end up like rat. Let us step down street together, like two cats. Send me LeBron James jersey and I will keep friendly peace and be good friend.

    -Mr. Hung So Lo, MS. Eng., Governor, PhD
    Quichang Province
    People’s Republic of China

  27. KK Cheung

    Gordon’s question on Yuan/USD peg really hit the nail on the spot.

    The world currency market is really a USD market. US FED supplies the dollar. Big institutions like HSBC and Citibank are the big dealers. And central banks merely plug the gap when hot money flows in and out of the demestic money supply.

    The Yuan/USD peg is not what people think it is. There is no Yuan market globally. For example, when China trade with Korea, the transaction is paid in USD, settled in New York.

    It is a misconception to think there is Yuan and USD in the global currency market, and China is buying and selling the USD/Yuan to manipulate the currency.

    The peg merely means China manage the exchange rate when USD hot money flows in and out of China’s domestic currency market. (And not really a market in the ordinary sense, at least not yet)

    1. Yves Smith Post author

      I am glad to see the Ministry of Truth claim that China’s large FX surpluses have nothing to do with its currency peg.

  28. KK Cheung

    Do you know when I buy a toyota in the USA, how the USD end up to become yen in Toyota’s account back in Japan?

  29. KK Cheung

    Currency peg and large foreign reserve has no meaningful correlation.

    Unless oil producing nation begins to accept Yuan/Yen/won/NTD/etc, these idustrialized countries running on oil must keep a large FX reserve in whatever currency that can buy oil with.

    Each financial crisis in the past, such as the asian financial crisis in 1997 or the one we just witnessed in 2008, there were shortages of USD for international trade. International trade practically froze.

    That’s why Asian countries are talking to resource producing countries of alternative settlement currencies in case of a repeat of 2008. Hey, guess what, maybe we can trade in seashells, beads, or even rubber bands.

    1. Yves Smith Post author


      You can try distorting what I say all you want to, it does not change the fact that China’s trade large and sustained trade surpluses (and therefore a large measure of its FX reserves) are the direct result of its currency manipulation. Pegging a currency at an artificially low rate for a sustained period will most certainly result in the accumulation of FX reserves.

      1. kk cheung

        World bank and IMF practically dictated that world trade and world debt must be denominated in US dollar. This is essentially the Bretton Wood Agreement.

        China must carry out its trade, not only with USA, but other countries as well, in US dollar ONLY!!!!!! China has no other choice. Same with Japan, Korea, Taiwan, India, you name it.

        You did not grasp the importance in my previous message: China conducts trade with countries such Korea denominated in US dollar.

        USA must furnish the world with US dollar via current account deficit. No US current account deficit, no US dollar for world trade. That is why there was a shortage of US dollar when US current account deficit shrank in 2008.

        Pegging or not pegging to US dollar is only a side issue. Yen appreciated from 360 to 90, and yet the trade balance never budged. Because USA must furnish Japan with US dollar for it to buy oil with, thru current account deicit.

        Don’t think of world trade today in te clasical mercantilist framework. We operate in a pure fiat currency regime. Money in itself has no value.

        1. Yves Smith Post author

          Your depiction of Japan is counterfactual.

          When the yen appreciated as the result of the Plaza Accord in 1985, Japanese exports, including those to the US, fell dramatically. However, Japanese imports from the US did not change much because Japan had a number of structural barriers (for instance, pharmaceuticals in Japan then could be sold only via majority owned Japanese companies; the Japanese had restrictions on beef imports that verged on the absurd, with officials arguing that Japanese could only eat Japanese beef because their colons were different) and Japanese consumers strongly preferred Japanese goods in many categories.

          In fact, the BoJ was so concerned about the sharp fall in Japanese exports that it stoked asset prices in the hopes that the wealth effect would stimulate domestic consumption. We know how that movie ended.

          When the yen rose from 115-110 to 90, it most assuredly HAS had an impact on trade; Japan has gone from surplus to a deficit!

          I suggest you quit making things up.

          1. kk cheung

            The headline says “carry trade”. Then I assume the topic “carries” a global implication. Or are you merely talking about the bilateral trade between USA and China?

            When I say china must maintain a large USD reserve because global trade requires US dollar, as most trading nations do today. Somehow you narrow the focus down to bilateral trade between China and USA.

            When I say Japanese trade surplus doesn’t budge, meaning Japan must maintain a huge USD reserve, no matter who Japan trades with. Then you narrow the focus down to year-on-year trading account fluctuation between USA and Japan only. If so, the bilateral trade would only have affected the two countries only, not world wide. Then why was Plaza accord a monumental event impacting the world????

            The world has turned upside down ever since (or even earlier in 1971): from money serving the real economy to real economy serving money now.

            World trade pattern has been changing, and the change is accelerating.

            After Plaza Accord, Japan’s domestic economy shifted towards financial services. Its production was offloaded to other countries, Taiwan and Thailand being the most prominent. And domestically, its manufacturing shifted from consumer grade products to emphasis on capital equipment, such as machine tooling.

            Apart from oil producing countries, Japan and Germany were practically the only two countries enjoying hefty trade surpluses with China. Up to 2007 at least. And interestingly, Japan/China trade is still denominated in US dollar. Japan and German export to China grew, even though their currencies rose.

            Do you really think a pair of shoes leaving china now at $2, and then rising to $4, will dent the trade volume that is selling at $50 at Wal-mart?

            If one thinks along the classical mercantilist line, one will never understand why on earth US dollar rose in 2008.

            I repeat: US must furnish the world with US dollar through current account deficit, or else world trade implodes. If world trade implodes, that would force the world to seek another intrument of trade (ie another reserve currency.)

          2. Yves Smith Post author

            You made erroneous statements about the appreciation of the yen in USD terms and its impact on trade balances. That put it in bilateral trade terms. The reason for the Plaza accord, although it was a coordinated intervention, was specifically to drive down the yen versus the dollar, which it did too well.

            So you brought up this emphasis, not I, then you try to shift the terms of the discussion to different issues to distract attention from your having presented incorrect information earlier.

            Your argument is fallacious. There is already a tremendous amount of US currency in foreign hands. There is no need for continued US deficits to lubricate trade. The US moved to a small surplus in the early 1990s. Did trade collapse then?

            Most respected trade economists are saying 1) we need an end of global imbalances, meaning big US deficits and big Chinese surpluses, they are a major cause of financial instability and 2) the US is going to remain the reserve currency for the foreseeable future. No one would make these arguments if your logic was valid.

  30. AC

    As KK Cheung noted:
    “Currency peg and large foreign reserve has no meaningful correlation.”

    Yves, could please reference any monetary/currency/economists who have argued that the huge dollar accumulation is the result of yuan peg to the dollar.

    1. Yves Smith Post author

      There is no such thing as “currency economists.” There are some Wall Street analysts who might write about currencies on a short-term forecasting basis, and they might happen to have some economic training in their background, but there is no academic speciality of “currency economists” and monetary economists in the US, which is where the vast majority of academic education in economics takes place (a vastly disproprtionate number of the graduate programs are here), pretty much ignores FX in rate setting (per the Taylor Rule).

      The type of economists that think about currencies at least to a degree are trade economists. Krugman is a trade economist and I already linked to him above. I am perplexed that you are questioning this argument; it is a pretty uncontroversial view. See here for one of numerous examples (

      A pegged exchange rate regime has been pivotal to China’s export-led development strategy. However, its huge trade surpluses and massive build up of international reserves have been matched by large deficits for major trading partners, creating acute policy concerns abroad, especially in the United States. This paper provides a straightforward conceptual framework for interpreting the effect of China’s exchange rate policy on its own trade balance and that of trading partners in the context of discrepant economic growth rates. It shows how pegging the exchange rate when output is outstripping expenditure induces China’s trade surpluses and counterpart deficits for its trading partners. An important corollary is that given its heavily regulated capital account, China’s persistently large surpluses imply a significantly undervalued yuan, which should gradually become more flexible.

      As China’s trade surplus grew explosively from 2006 onward, this view has become more widely accepted.

  31. MC

    One major reason for the big trade imbalance between China and US is that there aren’t many products or services that China would need from US. China obviously would not want to buy toys, clothings, shoes, tyres and the like which it exports to US from US. What China want to buy from US is the high tech stuff but for obvious reason the American are not selling. If there is less restriction by the American, I am sure the imbalance could be balanced in a short time.

    1. Yves Smith Post author

      You are framing this far too narrowly. The US sent a lot of its manufacturing overseas, starting in a serious way in the 1990s, due to a significant degree to the strong dollar policy, a desire to please Wall Street, and a huge bias against manufacturing (are any smart people encouraged to be engineers or manage manufacturing operations?) I know people (and these are top executives who were NOT in manufacturing, hence had no personal ego in this) who have said their company outsourced manufacturing overseas, the economics did not justify it, but Wall Street wanted to hear it so they sent it abroad.

      I have even seen analyses that show that the loss of much of our shoe industry was unnecessarly, much of it could have remained here (but Interco, the biggest shoe manufacturer by far, was liquidated in bankruptcy for reasons that had to do with deal market stupidity. The company was viable, but was losing money because the buyers had loaded a ton of debt on it).

      We don’t need to sell to China. We have a very large domestic market. We could reduce our trade deficits considerably if we supplied more of our demand at home. But that will take time.

  32. kk cheung

    >> The US moved to a small surplus in the early 1990s. Did trade collapse then?

    When one talks about currency carry trade, one talks in global perspective. And must keep in mind US dollar is the world reserve currency in trade, and more importantly in world debt.

    So let’s keep this in proper scope.

    US surplus was down in the 1990’s, coinciding with a decade of bad deflation worldwide. Only USA escaped the consequence.

    USA and the west has abandoned manufacturing and shifted straight to the lucrative business of finance. If you have seen the profits generated from underwriting financial instruments, you don’t want to grow beef and sell it to the Japanese any more.

    As I said before, shoes leaves china at $2-$4 a pair. And Walmart sell them for $50. Who keeps the $40? This is the US “productivity” miracle the british magazine “economists” was alluding to. The “productivity” benchmark is all in $$ numbers only.

    And I don’t think USA can detach from world trade and get back to autarky any more. World trade is simply too lucrative for USA.

    >> Most respected trade economists are saying…

    No respected economist could foresee the 2007/2008 collapse. Neither could they explain why afterwards.

    1. Yves Smith Post author


      You make up facts, and I am losing patience.

      There was most assuredly not worldwide deflation was in 1991, when the US had its brief surplus. A falling rate of inflation is not deflation. Agricultural prices fell, but ex Japan, the rest of the world experienced inflation.

      You completely omit the shipping and coordination costs involved with overseas manufacture, which is considerable, as well as the very high reject rate on Chinese shipments, which I am told by my attorney, who does a lot of licensing with Chinese manufacturers, is typically 50%. The costs on the US end alone of dealing with that alone more than doubles the price. With software, which involves no shipping or inventory carrying costs while goods are in transit, even when labor costs abroad are only 20% of those in the US, the expected savings are only 15-20%, meaning coordination, extra oversight, and greater errors introduce NEW costs of 60-65%. Much of that is eliminated with local, just in time manufacturing. And as other readers have pointed, if oil prices rise, China’s cost advantages will be undercut. Many international firms started rethinking and restructuring their supply chains after the 2008 oil price spike.

      You assume Americans need $50 shoes. Those $50 shoes happen not to last very long. People used to buy fewer, higher quality goods and keep them longer. Americans are already belt tightening and are much more concerned about real value for money, and that is not necessarily the lowest purchase price.

      1. Ismail

        There were recent reports in the German press that more and more German companies (primarily SME’s) are returning production from Eastern Europe and China to Germany both due to quality problems there and the quickly increasing labour costs in those countries.

  33. Ismail

    It is inevitable however that the Chinese will sustain losses in the hundreds of billions of dollars as the Yuan must rise. The United States could force this to happen if the Fed would buy up treasury bonds and then delete them, ie one government agency would buy the debt of another government agency. In this situation the dollar would surely lose a lot in value as this would stoke inflation. China would then have to consider moving to a freely moving exchange rate and that would automatically lead to a Yuan appreciation, just as the D-Mark had done when Bretton Woods was finished in 1973.

  34. jdmckay

    From your Evans-Pritchard snippet…

    Western capitalists are complicit, of course. They rent cheap workers and cheap plant in Guangdong, then lobby Capitol Hill to prevent Congress doing anything about it. This is labour arbitrage.

    Well finally some talking head gets around to crux of the matter. And Pritchard vastly understates the complexity, saturation levels, and immorality of this practice which, when looked at studiously, is revealed as more insidious by each added detail.

    People have short (if that) memories… europeans would say Americans are most extreme in this deficiency. Just 3 decades ago China had millions dieing of starvation annually. Nobody was getting educated there. Infrastructure was near nonexistent, transportation was medieval.

    Rather then help them build, we instead exploited their hungry and very cheap labor force. We did this at the expense of maintaining our own, comitting to enviro/labor standards etc. etc. It’s really that simple.

    The cheap labor thingie has a different term on Wall Street: increased productivity. Or in other words, kind’a like cutting back on feed for your cattle, and doing it again, and again… the lamenting just when the point is reached where you’re feeding ’em nothing at all, the herd goes and dies!!!

    At some point, American workers will rebel. US unemployment is already 17.5pc under the broad “U6″ gauge followed by Barack Obama. Realty Track said that 332,000 properties were foreclosed in October alone.

    Well, they may rebell, but that’s not going to put more income in their pockets. The manufacturing wage enjoyed for generations here is gone… it’s just over. China (and many others now) are delivering high quality goods world wide. By our own capitalistic rules, it’s over. Blue collar workers here (especially manufacturing) are not going to enjoy wages/standard of living near what prior generations did.

    More Americans have lost their homes this year than during the entire decade of the Great Depression. A backlog of 7m homes is awaiting likely seizure by lenders. If you are not paying attention to this political time-bomb, perhaps you should….

    What’s his point? That all these foreclosed, former homeowners who are out of work or earning hugely reduced incomes… that if these folks scream loud enough they get their homes back? What about US savings/retirement (etc.) swallowed up in those junk mortgage bonds… we just wipe that clean and, and… uh, move those losses where? The Treasury’s already bulging w/’em, so exactly where is the capital to make us comfy going to come from?

    The anger this guy seems to be predicting, while connecting it to this (subject of this article) event, is (IMO) absurd. This set of circumstances (lost homes, vastly overbuild housing, financial collapse etc.) is result of a long process of deception: (mostly)Wall street selling what they pitched as high value financial products that were junk. We, as a nation, lied about strenght of an economy build on backs of 3rd world labor.

    Just look at wages and conditions for HIB hi-tech workers here now (+/- 40% of industry avg in ’05), w/Micro$soft and other clamoring for more visas.

    The nation’s wealth is decreasing, not increasing.

    It is fashionable to talk of America as the supplicant. That misreads the strategic balance. Washington can bring China to its knees at any time by shutting markets. There is no symmetry here. Any move by Beijing to liquidate its holdings of US Treasuries could be neutralized – in extremis – by capital controls. Well-armed sovereign states can do whatever they want.

    If provoked, the US has the economic depth to retreat into near autarky (with NAFTA) and retool its industries behind tariff walls – as Britain did in the 1930s under Imperial Preference. In such circumstances, China would collapse.

    geezus… the man sounds like he’s on acid. Last gasp of hubris.

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