Yes, they want to support the euro with their fx reserves to support their exports to that region, but there is no equivalent of US Treasury securities that they can hold.

It’s as if they could only buy US state municipal debt, and not Treasury secs, Fed deposits, and other direct obligations of the US govt with their dollars.

So the only way they can support exports to the euro zone is to take the credit risk of the available investments.

Now add to that their inflation problems.

The traditional export model is to suppress domestic demand with some type of tight fiscal policy, and then conduct fx purchases of the currency of the target export zone.

The euro zone does the tight fiscal but can’t do the fx buying, so the policy fails as the currency rises to the point net exports don’t increase.

China does the fx buying, but has also recently used state lending and deficit spending to increase domestic demand, which increases domestic prices/inflation, including labor, which works to weaken the currency and retard net exports.

So China fighting inflation and the euro zone fighting insolvency both look to keep aggregate demand down for 2011.

And I don’t see the deficit terrorists about to take their seats in the US Congress doing anything to increase aggregate demand either.

So all that and the Fed still failing to make much headway on either of its dual mandates, 30 year 0 coupon tsy’s at about 4.75% (and libor + as well) look like a pretty good place for a pension fund to get some duration and lay low, at least until there’s some visibility from the new US Congress.

China Frets About Spreading EU Debt Woes

By Langi Chiang

December 21 (Reuters) — China urged European authorities to back their tough talk with action on Tuesday by showing they can contain the euro zone’s simmering debt problems and pull the bloc out of its crisis soon.

China, which has invested an undisclosed portion of its $2.65 trillion reserves in the euro, said it backed steps taken by European authorities so far to tackle the region’s debt problems, but made clear it would like to see the measures having more effect.

“We are very concerned about whether the European debt crisis can be controlled,” Chinese Commerce Minister Chen Deming said at a trade dialogue between China and the European Union.

“We want to see if the EU is able to control sovereign debt risks and whether consensus can be translated into real action to enable Europe to emerge from the financial crisis soon and in a good shape,” he said.

Concerns that Europe’s debt problems will spread beyond euro zone’s periphery to engulf bigger economies such as Spain and Italy have weighed on global financial markets this year and taken a toll on the euro.

In part to protect its investments, China has repeatedly expressed its support for the single currency.

In October, Premier Wen Jiabao promised to buy Greek government bonds once Greece returned to debt markets, in a show of support for the country whose debt burden pushed the euro zone into a crisis and required an international bailout.

25 Responses

  1. China has been very vocal about their “support” of the Eurozone debt.

    I expect the spending vigilantes elected to Congress are going to shift the spending, not cut it. Expect it to be focused on southern states priorities, and we have had a significant amount of spending in the last 3 years already.

  2. Danw, Thanks for drawing attention to the Kucinich bill. My initial reaction after skimming thru is thus.

    He blames the Fed for lots of things that are not the Fed’s fault and which are just as much the fault of politicians (like Kucinich?). He wants money creation powers removed from the Fed and given to politicians. He wants the right of commercial banks to create money to be banned (I like that). He wants no government borrowing – presumably Warren would like that as Warren advocated that in a Huffington article.

    In short, MMTers could take this bill, make some alterations, and turn it into an MMTers’ paradise. I might have a go on my blog.

    1. Warren, do you know anybody who could get you a meeting with Kucinich? He’s wrong in many respects, but he;s a at least wrong in the right way, unlike the Ron Paul crazies…

      1. The Fed does need to be reformed maybe even, as Kucinich said, formally put into the Dept of Treasury. But leaving aside the monetary reasons his plan is too simplistic to work, its a politically unwise bill. A joint Administration / Congressional commission jointly exercising executive power, you don’t have to be Antonin Scalia to think that’s a pretty clear violation of Separation of Powers.

        I dunno, we could do worse just going back permanently to the pre-1951 arrangement between the Fed and Tsy when the Fed capped interest rates, during the 40’s, at 0.375% short term (one year and less, IIRC) and 2.5% long term.

        Tim Canova wrote a great article a couple months ago about how the Fed worked in those days (in the 1940s I mean, not a couple months ago 😮 ).

      2. the fed doesn’t create money the way he thinks.

        there is no operational problem with what the fed currently does.

        bank loans create bank liabilities. any loans create liabilities.

        100% reserve requirements would change nothing except maybe the cost of funds and returns on equity.

        the govt has to pay interest on reserves one way or another to support its rate targets.

        so even without govt ‘borrowing’ via the sale of tsy secs,
        if the fed funds target is above 0% the govt would somehow have to support that rate by somehow paying interest on the balances it creates by deficit spending

      3. Exactly. The people who concentrate on the supposed evils of the Fed miss the point. While the institutional structure of the Fed is certainly suboptimal (and would probably be better served by being folded into Treasury), there is nothing in it that prevents the adoption of the proper policies (Likfe for example, allowing Treasury overdrafts or ceasing the issue of Treasury securities). The people who focus on the institution are usually clueless about the actual operations, and at heart buy into the whole “Creature from Jekyll Island” story…

      1. I’m confused.

        I have read the material here. I admit to not understanding it all. I think I get the basic premises, particularly with regard to operational realities under a fiat system, etc.

        Perhaps Kucinich’s play is insincere. I kind of doubt it. He is probably one of the more sincere folks in an admitted den of insincerity. But you guys are trashing him out of hand.

        And, I have to say, you appear to be dismissing his attempt at reigning in the destructive forces of the financial industry with wave of the back of your hand. “Oh please, why waste our time with this drivel.” “The man clearly does not understand how things work.”

        Look guys. You may think that you have cornered the market on truth, but you are the only ones who think so. And even if MMT, and the solutions that it and Warren promote are solutions that could help the nation, the world, the middle class, etc., dismissing what appears to be at least somewhat genuine attempts at countering the power of the financial industry (and their apparent proxies at the Fed) deserves more than a dismissive “oh really” from MMT.

        Really off-putting stuff Warren.

      2. DanW, the Kucinich bill comes from American Monetary Institute. The differences between Steven Zarlenga/AMI and MMT have been discussed here and on other MMT blogs.

        Basically, what these folks are trying to achieve is a monetary authority that makes full use of the operational reality of a fiat system. The need is not to reform the monetary system, I virtually impossible task in the US given vested interests, but rather to remove the self-imposed blocks to the functioning of the existing system. That is much more doable politically and it accomplishes the result aimed at.

        With just a few tweaks like doing away with politically imposed restriction and redefining the role and structure of the Fed, formally consolidating the cb and with treasury functions within government, it is possible to achieve what the Kucinich bill aims at much more simply.

        Look at the bill and see what its goals are, and then look at how MMT would achieve those goals. To me, the MMT route is preferable.

      1. Thanks

        He’s a stubborn Austrian but at least he’s conversing. Not like the guy at “Daily Capitalist” Jeff
        Harding. That guy stands around with his fingers in his ears saying “LA LA LA LA LA, I cant hear you!!!”

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