alt.politics.economics

On Aug 10, 9:53 pm, "Dan in Philly" wrote:
> "Davinchi" wrote in message ...
> > The Chinese government has begun a concerted campaign of economic threats
> > against the United States, hinting that it may liquidate its vast holding
> > of US treasuries.. It would also cause a spike in US bond yields,..
>
> Something similar happened about 10 years ago, except then Japan was the big
> dollar-holder. After some politicians made protectionist noises, .
> interest rates suddenly rose. Apparently the Japanese government/central
> bank decided to sell off some T-bonds and drive up interest rates
> temporarily. It worked; the . politicians quieted down.
>
> However, the article also says
>
> > such action could trigger a dollar crash
>
> Incorrect.
> Suppose China sells a bunch of bonds (presumably, American with cash are the
> buyers). Now China is holding the cash (ie dollars) and the Americans are
> holding the bonds.
>
> Now what?
>
> China could convert the dollars into yuan. But that would make the yuan
> appreciate; exactly what the . wants, and what China doesn't want (it
> would hurt their exports).
>
> China could simply sit on the cash. But then the Fed could buy bonds
> (creating new money), taking interest rates back down.
>
> Or China could invest in other assets, like stocks. But the Americans who
> sold the stocks are now holding the cash. What will they do with it?
> Probably buy bonds. So everything returns to normal, except for a slight
> change in asset ownership (China owns more stocks, Americans own more
> bonds).

In the above you are assuming that China has
only the United States to deal with. This is not the
case. It is true that if China dumped its dollars all
at once it would take a considerable loss; but
surely the wily Chinese can be more subtle than
that.

I think the speech, a couple of weeks ago, by the
Chinese fellow about dumping dollars, and its
rapid taking back, were something like a Mafioso
in a conflicted situation turning slightly so that the
people he's dealing with can see the gun under
his belt, and then turning back. It was a message
to Bush and company not to rock the boat too
much.

Probably, the United States is doing pretty much
what China (that is, the Chinese ruling class)
wants it to do. There is no need for conflict.