China's Economic Train Wreck?

[Copernicus]

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first of all, china doesnt subsidize our budget deficit but rather our trade deficit. What happens if they stop? THe US dollar loses value relative to the yuan.

Then imagine what happens, if their goods become twice exspensive to us and our goods become half as exspensive to them. So, we start exporting more they export less. How that affects the economy is somewhat a matter of debate but many people believe that it will improve for us. We will be able to buy less in the short term, but our production will go up.

Hopes this helps.

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As I said, I'm a layman but it seems to me that they buy a fortune's worth of our Treasury bills and that finances our deficit. If their economy slacks off then they don't have the same amount of money to buy our T-bills and the U.S. taxpayers have to take up the slack of either funding the deficit or doing w/o a lot of gumint spending that the citizen would have to cover out of his pocket therefore leaving less money to buy Chinese products, etc.

So that was what I was wondering.

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If whoever is in office at the time responds to the Chinese downturn by raising taxes the effects could be compounded. Republicans w/ Greenspan wouldnt make that mistake. Democrats with Bernanke, who knows.

[adios]

Sorry I haven't gotten back to you Cracka. I haven't been paying attention [img]/images/graemlins/smile.gif[/img].

It has to do with the quantity equation of money:

MV=Py

Where:
the quantity of money (M) times the velocity of circulation (V) equals the price level (P) times output (y).

I'm probably inviting a jihad from the ACers btw.

If M an y remain in balance and V holds relatively constant then P (inflation more or less) stays relatively low. If y (Chineese GDP) is increasing at a fast enough rate increases in M (the money supply more or less) can be accomodated.

[Copernicus]

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Sorry I haven't gotten back to you Cracka. I haven't been paying attention [img]/images/graemlins/smile.gif[/img].

It has to do with the quantity equation of money:

MV=Py

Where:
the quantity of money (M) times the velocity of circulation (V) equals the price level (P) times output (y).

I'm probably inviting a jihad from the ACers btw.

If M an y remain in balance and V holds relatively constant then P (inflation more or less) stays relatively low. If y (Chineese GDP) is increasing at a fast enough rate increases in M (the money supply more or less) can be accomodated.

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And just to finish the thought for Howard, if y nosedives, the Money supply cant shrink, and the Velocity remains drops (it doesnt need to move as fast with business contracting and banks not lending), the balance has to be found in P.... ie inflation.

[toor]

The money supply can shrink. Thats what the fed does.

Going back to Howards question. The government doesnt necessarily issue T-Bills in proportion to its debt (in fact it doesnt). China buying T-Bills is just there way of getting rid of their surplus of US dollars (at the same time increasing demand in USD and keeping the exchange rate low).

In fact the government often jsut tacks things on to debt without expecting current taxpayers to compensate for them. Thats the problem. Would the chinese not buying USD, make our debt larger? Not directly (AFAIK).

[adios]

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The money supply can shrink. Thats what the fed does.

Going back to Howards question. The government doesnt necessarily issue T-Bills in proportion to its debt (in fact it doesnt). China buying T-Bills is just there way of getting rid of their surplus of US dollars (at the same time increasing demand in USD and keeping the exchange rate low).

In fact the government often jsut tacks things on to debt without expecting current taxpayers to compensate for them. Thats the problem. Would the chinese not buying USD, make our debt larger? Not directly (AFAIK).

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You're right IMO that it's more of a balance of payments issue.

For Howard:

Balance of Payments


The U.S. current account deficit, due in large part to the trade deficit, results in a capital account surplus for the U.S. The U.S. $ leaving the country come back via the purchase of U.S. assets. At least some of the U.S. assets the Chineese choose to purchase (Congress had a few problems with the Chineese purchase of Chevron if you remember) are U.S. treasurys.

[Copernicus]

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The money supply can shrink. Thats what the fed does.

<font color="red"> Youre right...I should have said it cant easily shrink. Tinkering with M is extremely complex and has indirect results that arent easily controlled. That is why the Fed focus is more on interest rates than on M.

The three methods of controlling money supply in the US are to increase the Feds reserve requirements...not frequently done; by increasing interest rates, which dampens borrowing, leaving more in reserves...but slows the economy even further; and by issuing Treasuries (which shrinks money supply) or retiring Treasuries (which increases money supply).

In China the central bank is the Peoples Bank of China, which is modeled after the Fed, and functions in pretty much the same way. So to shrink their money supply they have to increase the Peoples Bank Reserve requirements, increase interest rate which exacerbates the debt problem its trying to solve, or sell US treasuries which, in large quantity again increases interest rates worldwide. </font>

Going back to Howards question. The government doesnt necessarily issue T-Bills in proportion to its debt (in fact it doesnt). China buying T-Bills is just there way of getting rid of their surplus of US dollars (at the same time increasing demand in USD and keeping the exchange rate low).

In fact the government often jsut tacks things on to debt without expecting current taxpayers to compensate for them. Thats the problem. Would the chinese not buying USD, make our debt larger? Not directly (AFAIK). <font color="red"> Im not sure what you mean by the first sentence about "tacking things on to debt without.....". It is correct that China buying or selling USD doesnt impact debt, though I dont know how thats relevant here. Debt is created by spending more than tax revenues. That spending needs to be paid for, and the main way to pay for it is to issue new Treasuries, which is the way its "tacked on to debt"</font>

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