"Currency Reform for Fair Trade Act " Bill voted 348-79

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"Currency Reform for Fair Trade Act " Bill voted 348-79

Postby Kyrn » Fri Oct 01, 2010 1:13 am UTC

http://www.bloomberg.com/news/2010-09-2 ... ports.html
http://www.reuters.com/article/idUSN285 ... geNumber=1
http://thomas.loc.gov/cgi-bin/bdquery/z?d111:h.r.02378:

Spoiler:
China said a measure passed by the U.S. House of Representatives yesterday aimed at pushing up the value of the yuan will hurt the global economy if it becomes law.

The House of Representatives voted yesterday for a measure that would let domestic companies petition for duties on imports from China to compensate for the effect of a weak yuan. China said the legislation would do nothing to cut the U.S. trade deficit and only risk harming growth. The Senate won’t take up its version until after the November election, said Senator Charles Schumer, a New York Democrat.

“We firmly oppose the U.S. Congress approving such bills,” Foreign Ministry spokeswoman Jiang Yu told reporters today in Beijing. “We urge the U.S. congressmen to be clearly aware of the importance of China-U.S. trade and economic relations, resist protectionism so as to refrain from any damage to the interests of both peoples and people around the world.”

The 348-79 House vote highlights growing trade tensions between the world’s two biggest economies. The U.S. is enduring persistently high unemployment and a surge this year in the trade deficit with China, which rose 27 percent to $25.9 billion in July from a year ago.

House Ways and Means Committee Chairman Sander Levin yesterday said the bill “says very concretely is that we mean business” and will “send a message” to global leaders to make progress on currency values at a summit next month.

‘Serious Concerns’

President Barack Obama’s administration, which hasn’t taken a position on the bill, acknowledged the sentiment. The vote “clearly shows lawmakers have serious concerns about this issue,” Treasury Department spokeswoman Natalie Wyeth said in an e-mail. Democrats were joined by 99 of the 178 Republicans on the vote.

China’s central bank pledged in a statement yesterday it will expand flexibility of the yuan, which has gained 2 percent since a two-year dollar peg was scrapped on June 19.

U.S. Treasury Secretary Timothy F. Geithner has called the appreciation inadequate, and economists such as C. Fred Bergsten at the Peterson Institute for International Economics in Washington say the yuan is undervalued by as much as 25 percent.

The yuan weakened today for the first time in 13 days, dropping 0.1 percent to 6.6933 per dollar as of 10:00 a.m. in Shanghai. The central bank set the reference rate for daily trade weaker for the first time in three days.

‘Government’s Attitude’

“The fixing shows the Chinese government’s attitude towards the vote,” said Liu Li-gang, a Hong Kong-based economist at Australia & New Zealand Banking Group Ltd. “China wants to show it won’t yield to any foreign pressure. It will determine the policy based on its own economic fundamentals.”

The yuan had gained 1.5 percent in the 11 trading days before the vote. That rate of appreciation hasn’t satisfied China’s critics in the U.S.

Obama said yesterday at an event in Des Moines, Iowa, that he is “pushing China about their currency” because the Chinese are managing the yuan “in ways that make our goods more expensive to sell.”

Chinese Commerce Ministry spokesman Yao Jian said China doesn’t undervalue the yuan to gain a trade advantage and the bill won’t eliminate the U.S. gap. He said the legislation violates World Trade Organization rules and said the U.S. deficit was a result of changes in the global supply structure.

China’s Rebuttal

“China has a trade surplus with the U.S., but huge deficits with a number of Asian countries and regions,” Yao said. One-sided trade restrictions won’t solve the imbalance and the U.S. should instead lift restrictions on exports and work more actively with China, he said.

China this year has run up a $145 billion trade surplus with the U.S., more than the U.S. deficit with the next seven- largest trading partners combined. That gap, combined with the drop in American manufacturing employment, the lack of appreciation in the yuan and this year’s congressional elections have focused lawmakers’ attention on the commercial relationship.

The U.S. Chamber of Commerce, retailers, apparel importers and financial firms opposed the currency bill, and wrote lawmakers before the vote saying passage may lead to retaliation against businesses with investments in China or exporters of farm and manufactured goods.

‘Real Concerns’

“There are real concerns about how effective this will be and whether it will induce China to change its currency regime,” Representative Kevin Brady, a Texas Republican, said during debate on the bill. “This is no substitute for a comprehensive China policy, and that’s been sorely lacking from this administration.”

Backers of the measure say some companies will benefit, and the goal is to prod China to raise the value of the yuan and getObama to put more pressure on the Chinese to act.

Obama pressed China’s Premier Wen Jiabao in a two-hour meeting at the United Nations Sept. 23 to increase the yuan’s value. Wen said a day earlier that a 20 percent increase in the currency would cause severe job losses and trigger social instability in China.

The legislation is H.R. 2378.


Any bets if USA would do it? One can make ton of money on the stock markets if they guess right.. (or lose tons of money if they guess wrong, but w/e)
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Re: "Currency Reform for Fair Trade Act " Bill voted 348-79

Postby Diadem » Fri Oct 01, 2010 1:27 am UTC

348 vs 79?

Sjeesh, finally they got bipartisan support for something, and it has to be something idiotic.
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Re: "Currency Reform for Fair Trade Act " Bill voted 348-79

Postby jestingrabbit » Fri Oct 01, 2010 1:39 am UTC

The thing that will drive the RMB to appreciate is inflation inside china. These sort of measures are just a tax on local consumers.
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Re: "Currency Reform for Fair Trade Act " Bill voted 348-79

Postby badmartialarts » Fri Oct 01, 2010 1:42 am UTC

Hmm, did the ghosts of Hawley and Smoot just cackle maniacally?

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Re: "Currency Reform for Fair Trade Act " Bill voted 348-79

Postby Dark567 » Fri Oct 01, 2010 1:58 am UTC

Diadem wrote:348 vs 79?

Sjeesh, finally they got bipartisan support for something, and it has to be something idiotic.


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Re: "Currency Reform for Fair Trade Act " Bill voted 348-79

Postby Amora » Fri Oct 01, 2010 4:59 am UTC

Diadem wrote:348 vs 79?

Sjeesh, finally they got bipartisan support for something, and it has to be something idiotic.

It's Congress. Is it really that surprising?
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Re: "Currency Reform for Fair Trade Act " Bill voted 348-79

Postby netcrusher88 » Fri Oct 01, 2010 5:38 am UTC

I guess I'm not seeing how a bill to allow tariffs against countries manipulating their currency to fuck up markets is idiotic.

I don't believe the bill is solely about China, that might make it a bill of attainder. But China's the only sizable market force doing it.
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Re: "Currency Reform for Fair Trade Act " Bill voted 348-79

Postby Kyrn » Fri Oct 01, 2010 5:54 am UTC

netcrusher88 wrote:I guess I'm not seeing how a bill to allow tariffs against countries manipulating their currency to fuck up markets is idiotic.

I don't believe the bill is solely about China, that might make it a bill of attainder. But China's the only sizable market force doing it.

Several reasons:
1) China holds enough US treasury to manipulate prices by selling alone.
2) The US practically depends on Chinese trade and purchase of treasury bonds for it's current sustainability.
3) If you think costs will be pushed to China, you're wrong. Costs will more likely be pushed to consumers, causing a further increase in cost of living.
4) Highly likely to be shot down by WTO.
I'm sure there are other reasons as well.
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Re: "Currency Reform for Fair Trade Act " Bill voted 348-79

Postby sardia » Fri Oct 01, 2010 6:06 am UTC

Why is anyone surprised that the US Congress, which has been complaining forever, was going to pass this? We all saw the signs and threads we posted earlier. Whether it's a good idea, I'm not sure. However, Congress is mad, and the chinese make easy scapegoats. There's actually evidence they did keep their currency low. I doubt if it'll solve any problems for us though. I know that I the consumer will lose via higher prices for goods, and export companies gain better market access.

I don't see anything happening on the business front. Is everyone agreed on retaliatory tariffs and bans on trade goods? They might do what they did to Japan and imprison some americans on espionage charges. They just won that diplomatic row vs Japan combined with their rising power and their revisionist viewpoint. It could lead to a trade war or worse unless people calm down. I don't see the Americans wanting to escalate this beyond tariffs and trade bans, but I do see the Chinese getting really mad about a core issue of theirs.
1. In their mind, keeping their currency low is good for their economy. Economic growth keeps the Peasant/poor from rioting and cutting their heads off. They want to stay in power, so they'll put economic growth above all else.
2. There is a heady nationalistic movement in China that overreacts to any slight against China.

Opinions on my thought process?
Kyrn wrote:Several reasons:
1) China holds enough US treasury to manipulate prices by selling alone.
2) The US practically depends on Chinese trade and purchase of treasury bonds for it's current sustainability.
3) If you think costs will be pushed to China, you're wrong. Costs will more likely be pushed to consumers, causing a further increase in cost of living.
4) Highly likely to be shot down by WTO.
I'm sure there are other reasons as well.

This issue will head to the WTO anyway. The only reason it hasn't yet is because everyone wants access to a large healthy market who get mad and ban countries from trading with them if they complain, aka china.
China holding our treasuries is why the US has postponed the dispute, til now. In addition, you are ignoring two facts: the US is not a single Actor, and some US leaders are not rational.
Some people will note our treasury sales are going to China, and not care. Or they don't know the implications or don't know in general. All they know is some chinks are stealing american jobs illegitimately and to hell with the consequences/reality. And if you say you stood up to foreigners who were stealing your jobs? You just made yourself a great campaigning line.

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Re: "Currency Reform for Fair Trade Act " Bill voted 348-79

Postby Plasma Man » Fri Oct 01, 2010 10:59 am UTC

Coming soon, a bill to outlaw the tide coming in.
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Re: "Currency Reform for Fair Trade Act " Bill voted 348-79

Postby Silknor » Fri Oct 01, 2010 12:29 pm UTC

netcrusher88 wrote:I guess I'm not seeing how a bill to allow tariffs against countries manipulating their currency to fuck up markets is idiotic.

I don't believe the bill is solely about China, that might make it a bill of attainder. But China's the only sizable market force doing it.


A bill of attainder would be a bill saying X is guilty of a crime. Currency manipulation by another government is not a crime, nor would the normal process be a trial by a US judge which was circumvented by this bill.

Kyrn wrote:
netcrusher88 wrote:I guess I'm not seeing how a bill to allow tariffs against countries manipulating their currency to fuck up markets is idiotic.

I don't believe the bill is solely about China, that might make it a bill of attainder. But China's the only sizable market force doing it.

Several reasons:
1) China holds enough US treasury to manipulate prices by selling alone.
2) The US practically depends on Chinese trade and purchase of treasury bonds for it's current sustainability.
3) If you think costs will be pushed to China, you're wrong. Costs will more likely be pushed to consumers, causing a further increase in cost of living.
4) Highly likely to be shot down by WTO.
I'm sure there are other reasons as well.


Actually China is actively manipulating prices by buying US dollars. The Chinese deciding to sell would undercut their own policy goals.

http://www.piie.com/publications/testim ... rchID=1523 (Note: the 25 and 40 percent are slighly lower now, I couldn't find a working link to the more recent Senate testimony)

The Chinese renminbi is undervalued by about 25 percent on a trade-weighted average basis and by about 40 percent against the dollar.1 The Chinese authorities buy about $1 billion daily in the exchange markets to keep their currency from rising and thus to maintain an artificially strong competitive position. Several neighboring Asian countries of considerable economic significance—Hong Kong, Malaysia, Singapore and Taiwan—maintain currency undervaluations of roughly the same magnitude in order to avoid losing competitive position to China.

This competitive undervaluation of the renminbi is a blatant form of protectionism. It subsidizes all Chinese exports by the amount of the misalignment, about 25–40 percent. It equates to a tariff of like magnitude on all Chinese imports, sharply discouraging purchases from other countries. It would thus be incorrect to characterize as "protectionist" a policy response to the Chinese actions by the United States or other countries; such actions should more properly be viewed as anti-protectionist.


2. If China decides to stop buying Treasuries, then the price of borrowing (interest) will rise until other countries choose to buy more. That isn't the same as not being able to fund the debt, and we get the benefit of reducing our trade deficit.

3. Passed on to consumers? That's the goal. To make Chinese imports more expensive and US exports less expensive, thus reducing the imbalance in trade. The practical effect is that US goods will be cheaper in China, while Chinese made goods will be more expensive here.

4. I'll let that same author respond:
China's exchange rate policy violates all relevant international norms. Article IV, Section 1 of the Articles of Agreement of the International Monetary Fund (IMF) commits member countries to "avoid manipulating exchange rates or the international monetary system in order to prevent effective balance-of-payment adjustment or to gain unfair competitive advantage over other member countries." Moreover, the principles and procedures for implementing the Fund's obligation (in Article IV, Section 3) "to exercise firm surveillance over the exchange rate policies of members" call for discussion with a country that practices "protracted large-scale intervention in one direction in exchange markets"—a succinct description of China's currency policy over the past seven years. Article XV(4) of the General Agreement on Tariffs and Trade (GATT), which is now an integral part of the World Trade Organization (WTO), similarly indicates that "Contracting parties shall not, by exchange action, frustrate the intent of the provisions of this Agreement."
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Re: "Currency Reform for Fair Trade Act " Bill voted 348-79

Postby BlackSails » Fri Oct 01, 2010 12:52 pm UTC

netcrusher88 wrote:I don't believe the bill is solely about China, that might make it a bill of attainder. But China's the only sizable market force doing it.


Bills of attainder single out US citizens, not foreign countries. We could have a bill that applies only to China and it would be perfectly fine.

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Re: "Currency Reform for Fair Trade Act " Bill voted 348-79

Postby sardia » Fri Oct 01, 2010 2:50 pm UTC

BlackSails wrote:
netcrusher88 wrote:I don't believe the bill is solely about China, that might make it a bill of attainder. But China's the only sizable market force doing it.


Bills of attainder single out US citizens, not foreign countries. We could have a bill that applies only to China and it would be perfectly fine.

The bill is worded that way because of a tradition/(requirement?) that bills be nonspecific. For example, you can't simply give 10 million dollars to the Chicago white sox and cub stadiums. However, you could fund any stadiums in a city with multiple teams in the same sport with crowds over 10,000 in the Midwest.

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Re: "Currency Reform for Fair Trade Act " Bill voted 348-79

Postby Vaniver » Fri Oct 01, 2010 3:13 pm UTC

netcrusher88 wrote:I guess I'm not seeing how a bill to allow tariffs against countries manipulating their currency to fuck up markets is idiotic.
The main reason one would be opposed to a bill like this is:

China is sending America free money. Congress wants to stop that.

Now, I agree the way China is doing it is highly disruptive to particular industries, and have sympathy for the Chinese citizens who are overtaxed and overpay for American imports. Everyone would be better off if China didn't game its currency.

But America as a whole is the prime beneficiary of this tactic, and so from that limited viewpoint it seems inequitable / unfair for the US Congress to sacrifice the position of America as a whole for the benefit of the American firms and people disrupted by this tactic.

Now, if the American government were strongly opposed to any unfairness in markets, I could see this as a practical positive because of moral effects- "I'm taking this small loss here to communicate how serious I am about something important." Unfortunately, our government is probably the worst in the world in absolute terms when it comes to gaming markets and protectionism.
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Re: "Currency Reform for Fair Trade Act " Bill voted 348-79

Postby Goplat » Sun Oct 03, 2010 2:19 am UTC

Vaniver wrote:
netcrusher88 wrote:I guess I'm not seeing how a bill to allow tariffs against countries manipulating their currency to fuck up markets is idiotic.
The main reason one would be opposed to a bill like this is:

China is sending America free money. Congress wants to stop that.
Suppose Mr. C offers you free money, but there's a catch: as you take the money, you will gradually lose more and more of your job skills until even that crazy bum who's always shouting at random passersby is more employable than you. And nothing prevents Mr. C from deciding to cut off the deal once that happens, leaving you to starve to death. Would you accept? Because that's what imbalanced trade essentially is.

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Re: "Currency Reform for Fair Trade Act " Bill voted 348-79

Postby Vaniver » Sun Oct 03, 2010 11:04 pm UTC

Goplat wrote:Suppose Mr. C offers you free money, but there's a catch: as you take the money, you will gradually lose more and more of your job skills until even that crazy bum who's always shouting at random passersby is more employable than you. And nothing prevents Mr. C from deciding to cut off the deal once that happens, leaving you to starve to death. Would you accept? Because that's what imbalanced trade essentially is.
So, you're saying I should be freaked out that I don't know how to farm, and my continued survival is entirely dependent on there being someone else with food to sell me?


The job skills you're talking about are not job skills I am worried about losing. They don't give China any power over us- if China decides to stop subsidizing their textile exports, they go from dirt cheap to cheap. If they try to artificially raise prices above cheap, then Americans will just buy from other nations. It's not like China is the only place desperate to work their way out of poverty.

And the American manufacturers who are competing with Chinese manufacturers have no moral superiority. They're actively suppressing competition from around the world, which hurts everyone but them.
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Re: "Currency Reform for Fair Trade Act " Bill voted 348-79

Postby Kyrn » Mon Oct 04, 2010 2:30 am UTC

Silknor wrote:Actually China is actively manipulating prices by buying US dollars. The Chinese deciding to sell would undercut their own policy goals.

http://www.piie.com/publications/testim ... rchID=1523 (Note: the 25 and 40 percent are slighly lower now, I couldn't find a working link to the more recent Senate testimony)

The Chinese renminbi is undervalued by about 25 percent on a trade-weighted average basis and by about 40 percent against the dollar.1 The Chinese authorities buy about $1 billion daily in the exchange markets to keep their currency from rising and thus to maintain an artificially strong competitive position. Several neighboring Asian countries of considerable economic significance—Hong Kong, Malaysia, Singapore and Taiwan—maintain currency undervaluations of roughly the same magnitude in order to avoid losing competitive position to China.

This competitive undervaluation of the renminbi is a blatant form of protectionism. It subsidizes all Chinese exports by the amount of the misalignment, about 25–40 percent. It equates to a tariff of like magnitude on all Chinese imports, sharply discouraging purchases from other countries. It would thus be incorrect to characterize as "protectionist" a policy response to the Chinese actions by the United States or other countries; such actions should more properly be viewed as anti-protectionist.

2 issues:
1) Hong Kong and Taiwan are technically part of China, so they can't exactly be used as examples. Singapore has precedence of a speculative attack on their currency in 1985, so their actions are at least justified to an extent.
2) Undervaluation is usually measured by comparing to US currency... which given current market sentiments, may actually be still overvalued instead.

Silknor wrote:2. If China decides to stop buying Treasuries, then the price of borrowing (interest) will rise until other countries choose to buy more. That isn't the same as not being able to fund the debt, and we get the benefit of reducing our trade deficit.

USA dollars don't come from nowhere. Either they are funded via treasury bonds, or you directly print more. I don't think I need to explain why directly printing more USA dollars is a bad idea, especially if assuming that China also stops buying USA treasuries at the same time.
EDIT: may have misunderstood. Regardless, the first effect of China stopping purchases of USA treasury bonds, will be a fall of value of USA dollar. The spike in interest rates needed to counteract said fall in value would have to be somewhat significant, and there is a greater possibility of USA going into further inflation. Especially if China goods also becomes more expensive, further contributing to said inflation.

Silknor wrote:3. Passed on to consumers? That's the goal. To make Chinese imports more expensive and US exports less expensive, thus reducing the imbalance in trade. The practical effect is that US goods will be cheaper in China, while Chinese made goods will be more expensive here.

I know it's the goal. However, it is probably a bad time to attempt to attain said goal when you are still suffering from about 10% unemployment. And just because US goods are cheaper in China, doesn't mean they would be bought regardless, given that cost of production in China would still likely be lower due to lower standards of living and convenience issues.

Silknor wrote:4. I'll let that same author respond:
China's exchange rate policy violates all relevant international norms. Article IV, Section 1 of the Articles of Agreement of the International Monetary Fund (IMF) commits member countries to "avoid manipulating exchange rates or the international monetary system in order to prevent effective balance-of-payment adjustment or to gain unfair competitive advantage over other member countries." Moreover, the principles and procedures for implementing the Fund's obligation (in Article IV, Section 3) "to exercise firm surveillance over the exchange rate policies of members" call for discussion with a country that practices "protracted large-scale intervention in one direction in exchange markets"—a succinct description of China's currency policy over the past seven years. Article XV(4) of the General Agreement on Tariffs and Trade (GATT), which is now an integral part of the World Trade Organization (WTO), similarly indicates that "Contracting parties shall not, by exchange action, frustrate the intent of the provisions of this Agreement."

China is currently revaluing their currency. It's apparently "not fast enough" for USA. Not to mention that China is still technically a developing country. Admittedly I'm looking for citations for a Wikipedia assertion that "Currency devaluation is recommended by the IMF to the governments of poor nations with struggling economies."
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Re: "Currency Reform for Fair Trade Act " Bill voted 348-79

Postby Silknor » Mon Oct 04, 2010 12:12 pm UTC

Hong Kong and Taiwan are technically part of China, so they can't exactly be used as examples.


Not only do they both have different laws than China, they also have different currencies. And Taiwan disagrees with you.

Undervaluation is usually measured by comparing to US currency... which given current market sentiments, may actually be still overvalued instead.


The Chinese renminbi is undervalued by about 25 percent on a trade-weighted average basis and by about 40 percent against the dollar.


I know it's the goal. However, it is probably a bad time to attempt to attain said goal when you are still suffering from about 10% unemployment. And just because US goods are cheaper in China, doesn't mean they would be bought regardless, given that cost of production in China would still likely be lower due to lower standards of living and convenience issues.


US goods are being bought in China. In large numbers. Just not as much as we buy Chinese goods. Making them cheaper there will boost how many are bought. It's not like the US products they're buying the the same things they produce for us.

Also, boosting exports and substituting domestically made goods for imported ones, tend to increase jobs in manufacturing. That's why it's being proposed now.

China is currently revaluing their currency. It's apparently "not fast enough" for USA. Not to mention that China is still technically a developing country. Admittedly I'm looking for citations for a Wikipedia assertion that "Currency devaluation is recommended by the IMF to the governments of poor nations with struggling economies."


Look for export-led growth. Currency devaluation promotes exports and reduces imports, which is the IMF recommendation.

Edit: Also, China is the second largest economy in the world. While it may be developing, it's not really the case that they need trade subsidies to survive.
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Re: "Currency Reform for Fair Trade Act " Bill voted 348-79

Postby sardia » Mon Oct 04, 2010 2:03 pm UTC

I'm not disagreeing with your post, but you should keep a couple things in mind. One, we will pay more for consuming goods because the cheapest producer has higher costs now. And two, "Edit: Also, China is the second largest economy in the world. While it may be developing, it's not really the case that they need trade subsidies to survive." Economical survival isn't the goal of china. China is lead by a oligarchy who wishes to stay in power, and they decided that constant economic growth is the only way to succeed without getting the leadership booted from power. There's also the lobbying effects on the communist party, but that doesn't sound as nice of an argument.

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Re: "Currency Reform for Fair Trade Act " Bill voted 348-79

Postby Dark567 » Mon Oct 04, 2010 2:23 pm UTC

sardia wrote: China is lead by a oligarchy someone who wishes to stay in power, and they decided that constant economic growth is the only way to succeed without getting the leadership booted from power.

Really isn't this true of every country? Generally, all governments are attempting to create constant economic growth so that they can avoid getting booted from power.
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Re: "Currency Reform for Fair Trade Act " Bill voted 348-79

Postby sardia » Mon Oct 04, 2010 4:13 pm UTC

Dark567 wrote:
sardia wrote: China is lead by a oligarchy someone who wishes to stay in power, and they decided that constant economic growth is the only way to succeed without getting the leadership booted from power.

Really isn't this true of every country? Generally, all governments are attempting to create constant economic growth so that they can avoid getting booted from power.

You are mistaken in the degree of lost power. If the Democrats are in charge during a recession, they'll lose the reelection. If the Communist party in China are in charge during a reelection, they'll be killed. I exaggerate, but there will be mass social unrest, and the Chinese leadership does fear a political revolution. The democrats aren't worried that there will not be a Constitution if they let GDP growth drop below 5%.

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Re: "Currency Reform for Fair Trade Act " Bill voted 348-79

Postby Dauric » Mon Oct 04, 2010 4:40 pm UTC

sardia wrote:
Dark567 wrote:
sardia wrote: China is lead by a oligarchy someone who wishes to stay in power, and they decided that constant economic growth is the only way to succeed without getting the leadership booted from power.

Really isn't this true of every country? Generally, all governments are attempting to create constant economic growth so that they can avoid getting booted from power.

You are mistaken in the degree of lost power. If the Democrats are in charge during a recession, they'll lose the reelection. If the Communist party in China are in charge during a reelection, they'll be killed. I exaggerate, but there will be mass social unrest, and the Chinese leadership does fear a political revolution. The democrats aren't worried that there will not be a Constitution if they let GDP growth drop below 5%.


It's what's generally known as "Rule of Law". The U.S. government is founded on a set of rules, the political parties and their constituent politicians get their legitimacy from operating within those laws, and even if they are booted from power it's not the end of the government as the people have known it. Unfortunately this kind of government is rare outside of North America and Europe.

In China and in most 3rd world countries it's the politicians that give legitimacy to the rules, and a "party" or even a single politician being ousted can result in a massive change in how a nation is governed. The rules are enforced -entirely- at the whim of those who enforce them* as opposed to the rules requiring enforcement, and this can include demanding payment to investigate crimes like theft or murder and/or a lack of any clear definition of "Due Process". A change in the people/parties that make up these kinds of governments can also mean a massive change in how business is conducted and how lives are lived for the "average individual on the street".

* Yes there's some discretionary power in most developed democracies as to enforcement of the rules, but the discretionary powers are generally outlined in the rules and they're the exception rather than the norm.
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Re: "Currency Reform for Fair Trade Act " Bill voted 348-79

Postby Silknor » Mon Oct 04, 2010 9:27 pm UTC

Sardia: I don't disagree with your second point. Rather I was saying that for purposes of international law and trade, considering China a country in need of special protection to grow its economy and feed its citizens makes little sense. Certainly the leadership wants to continue the growth at the most rapid rate possible.

One, we will pay more for consuming goods because the cheapest producer has higher costs now.

Yep. But that's part of the goal. To effect substitution from foreign made to domestically made goods, creating jobs in domestic manufacturing and related sectors.
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Re: "Currency Reform for Fair Trade Act " Bill voted 348-79

Postby waltwhitmanheadedbat » Mon Oct 04, 2010 10:43 pm UTC

I imagine the effects of this bill were coming one way or the other. If the yuan were allowed to float, it would have about the same impact as a protective tariff - making Chinese goods less competitive. Something like this might be such a boon to secondary industry in the United States that the net effect is positive.

kryn wrote: China holds enough US treasury to manipulate prices by selling alone.


I seriously doubt that China's holdings of US Treasury bonds are enough to seriously damage the US economy. When China sells, Americans and international investors buy. The bonds are backed by the full faith and credit of the US Federal Government, which is about as large of a guarantee you can expect to get on a security.

And China *has been* selling. There wouldn't be an impact on the yield on those bonds except to improve it, because the interest earned is a function of the face value. If I sell a bunch of $1000 face value treasury bonds for $900, the face value remains $1000, and the interest earned remains fixed as a percentage of face value. The yield goes higher, because if you're buying the bond at $900, you get paid as though you invested $1000.

This will make the bonds sold at a discount more attractive to buyers, so they won't be sold at a discount for very long at all. Private parties and even countries can try to push a market around through trading, but ultimately it will always fail.

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Re: "Currency Reform for Fair Trade Act " Bill voted 348-79

Postby Kyrn » Tue Oct 05, 2010 1:02 am UTC

waltwhitmanheadedbat wrote:I imagine the effects of this bill were coming one way or the other. If the yuan were allowed to float, it would have about the same impact as a protective tariff - making Chinese goods less competitive. Something like this might be such a boon to secondary industry in the United States that the net effect is positive.

Depending on your definition of float, China's currency is already floating. They do however invest in their own currency at the same time.

waltwhitmanheadedbat wrote:
kryn wrote: China holds enough US treasury to manipulate prices by selling alone.


I seriously doubt that China's holdings of US Treasury bonds are enough to seriously damage the US economy. When China sells, Americans and international investors buy. The bonds are backed by the full faith and credit of the US Federal Government, which is about as large of a guarantee you can expect to get on a security.

And China *has been* selling. There wouldn't be an impact on the yield on those bonds except to improve it, because the interest earned is a function of the face value. If I sell a bunch of $1000 face value treasury bonds for $900, the face value remains $1000, and the interest earned remains fixed as a percentage of face value. The yield goes higher, because if you're buying the bond at $900, you get paid as though you invested $1000.

This will make the bonds sold at a discount more attractive to buyers, so they won't be sold at a discount for very long at all. Private parties and even countries can try to push a market around through trading, but ultimately it will always fail.


1) You don't need that much bonds (in that you don't need a majority) to affect the market. China is for all intents and purposes a major shareholder and contributor to the current value of treasury bonds. You can't immediately assume that other investors will buy from China, because they are ALREADY buying them currently, hence the whole concern of a bond bubble. On an additional note, just because China's US Treasury Bond reserves are falling does not mean they are selling; they may simply be cashing in on the bonds they already have, so differences between values then and now may not be entirely reflective of the amount sold.
2) The monetary numerical numbers are backed by the Federal Government, but the actual value (as compared to commodity prices or other currency) is not. It is technically impossible for a government to ensure a stable currency (i.e. prevention of significant inflation or deflation) without some form of currency manipulation, be it by not being floated, or by active buying/selling. USA is not in a position to buy back treasury bonds, without issuing even more bonds to compensate, due to the lack of surpluses. And with the additional matter that this is technically against the very bill being discussed.
3) On the note of selling there's a significant difference between diversification, and outright dumping. Diversification is understandable and is not considered as a lack of faith. Complete dumping is, and is the issue here.
4) Pushing the market always fail? How about Black Wednesday? Or even more recent, the bankruptcy of Iceland? Countries are not immune, they're just hard to push. But pushable they are, and China currently has the biggest muscles of all.

Silknor wrote:US goods are being bought in China. In large numbers. Just not as much as we buy Chinese goods. Making them cheaper there will boost how many are bought. It's not like the US products they're buying the the same things they produce for us.

Also, boosting exports and substituting domestically made goods for imported ones, tend to increase jobs in manufacturing. That's why it's being proposed now.

Just for a reference, how much of the goods are that which would actually increase in numerical purchase? Also how much of that are actually from manufacturing? In addition, you also have to consider the possibility of a China boycott of USA goods, and/or a similar retaliatory tariff on USA goods, negating the benefits.

Silknor wrote:
China is currently revaluing their currency. It's apparently "not fast enough" for USA. Not to mention that China is still technically a developing country. Admittedly I'm looking for citations for a Wikipedia assertion that "Currency devaluation is recommended by the IMF to the governments of poor nations with struggling economies."


Look for export-led growth. Currency devaluation promotes exports and reduces imports, which is the IMF recommendation.

Edit: Also, China is the second largest economy in the world. While it may be developing, it's not really the case that they need trade subsidies to survive.

China wasn't the second largest economy however. As mentioned, they are currently revaluing their currency. Hence they are following the recommendations, just that again, it isn't fast enough for USA.
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Re: "Currency Reform for Fair Trade Act " Bill voted 348-79

Postby Silknor » Tue Oct 05, 2010 2:18 am UTC

Just for a reference, how much of the goods are that which would actually increase in numerical purchase? Also how much of that are actually from manufacturing? In addition, you also have to consider the possibility of a China boycott of USA goods, and/or a similar retaliatory tariff on USA goods, negating the benefits.


The competitive undervaluation of the Chinese renminbi and several neighboring Asian countries has a very substantial impact on the United States. As noted, an appreciation of 25 to 40 percent is needed to cut China's global surplus even to 3 to 4 percent of its GDP. This realignment would produce a reduction of $100 billion to $150 billion in the annual US current account deficit.5

Every $1 billion of exports supports about 6,000 to 8,000 (mainly high-paying manufacturing) jobs in the US economy. Hence such a trade correction would generate an additional 600,000 to 1,200,000 US jobs. Correction of the Chinese/Asian currency misalignment is by far the most important component of the President's new National Export Initiative. As its budget cost is zero, it is also by far the most cost-effective step that can be taken to reduce the unemployment rate in the United States.


Same source: http://www.piie.com/publications/testim ... rchID=1523 (And same caveat, the numbers should be scaled down somewhat since the RMB has appreciated vis a vis the dollar since the report was published)

It's hard to say what Chinese reaction would be, and what WTO/US/EU reaction to Chinese reaction would be, and what Chinese counterreaction would be etc.

China wasn't the second largest economy however. As mentioned, they are currently revaluing their currency. Hence they are following the recommendations, just that again, it isn't fast enough for USA.


Sorry, this is unclear. Letting the currency appreciate is bad for export led growth.
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Re: "Currency Reform for Fair Trade Act " Bill voted 348-79

Postby Kyrn » Tue Oct 05, 2010 2:30 am UTC

Silknor wrote:
China wasn't the second largest economy however. As mentioned, they are currently revaluing their currency. Hence they are following the recommendations, just that again, it isn't fast enough for USA.


Sorry, this is unclear. Letting the currency appreciate is bad for export led growth.

I don't think there's any disagreement with this, just that there's a general opinion that (1) China's growth/low currency value is negatively affecting other countries, more so than the general benefit of a low cost provider (if it was otherwise, there wouldn't be any complaints), (2) China can handle some appreciation of their currency and still have good growth, while significantly re-balancing the economy to increase growth elsewhere, and (3) China's economy is sufficiently advanced to be played in the global markets "fairly".
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Re: "Currency Reform for Fair Trade Act " Bill voted 348-79

Postby Silknor » Tue Oct 05, 2010 12:03 pm UTC

Agreed, with 2 caveats.

First, some interests groups would be complaining regardless of currency valuation, manufacturing groups and manufacturing unions don't care why American jobs are going overseas, only about the result.

Second, the big established economies cheat too. See for example corn subsidies or the steel tariffs Bush imposed in the run up to the 2004 elections.
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Re: "Currency Reform for Fair Trade Act " Bill voted 348-79

Postby Kyrn » Tue Oct 05, 2010 11:59 pm UTC

Silknor wrote:Agreed, with 2 caveats.

First, some interests groups would be complaining regardless of currency valuation, manufacturing groups and manufacturing unions don't care why American jobs are going overseas, only about the result.

Second, the big established economies cheat too. See for example corn subsidies or the steel tariffs Bush imposed in the run up to the 2004 elections.

Not going to disagree with that. Not to mention that some might view the constant printing of treasury bonds for the sole purpose of financing an evergrowing debt as a form of cheating/manipulation too.
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Re: "Currency Reform for Fair Trade Act " Bill voted 348-79

Postby waltwhitmanheadedbat » Wed Oct 06, 2010 6:31 am UTC

Kyrn wrote:
waltwhitmanheadedbat wrote:I imagine the effects of this bill were coming one way or the other. If the yuan were allowed to float, it would have about the same impact as a protective tariff - making Chinese goods less competitive. Something like this might be such a boon to secondary industry in the United States that the net effect is positive.

Depending on your definition of float, China's currency is already floating. They do however invest in their own currency at the same time.

waltwhitmanheadedbat wrote:
kryn wrote: China holds enough US treasury to manipulate prices by selling alone.


I seriously doubt that China's holdings of US Treasury bonds are enough to seriously damage the US economy. When China sells, Americans and international investors buy. The bonds are backed by the full faith and credit of the US Federal Government, which is about as large of a guarantee you can expect to get on a security.

And China *has been* selling. There wouldn't be an impact on the yield on those bonds except to improve it, because the interest earned is a function of the face value. If I sell a bunch of $1000 face value treasury bonds for $900, the face value remains $1000, and the interest earned remains fixed as a percentage of face value. The yield goes higher, because if you're buying the bond at $900, you get paid as though you invested $1000.

This will make the bonds sold at a discount more attractive to buyers, so they won't be sold at a discount for very long at all. Private parties and even countries can try to push a market around through trading, but ultimately it will always fail.


1) You don't need that much bonds (in that you don't need a majority) to affect the market. China is for all intents and purposes a major shareholder and contributor to the current value of treasury bonds. You can't immediately assume that other investors will buy from China, because they are ALREADY buying them currently, hence the whole concern of a bond bubble. On an additional note, just because China's US Treasury Bond reserves are falling does not mean they are selling; they may simply be cashing in on the bonds they already have, so differences between values then and now may not be entirely reflective of the amount sold.


They can only 'cash in' on bonds so fast. The one that writes the bond is in the position of power, given that you cannot simply go to the government and say, "here is your treasury bond, now pay up." The value of treasury bonds largely lies in the face value - you'll be getting a fixed bond coupon amount relative to the face value of the security. This makes these bonds very desirable when trading at a discount.

Further, the Fed and Treasury have pockets deep enough to absorb China's holdings. The Federal Reserve bought 1.25T of mortgage-backed securities in 2009, and in the event that China wanted to sell their entire treasury holdings, what doesn't get self-corrected by the market can get picked up by the Fed, should the situation turn dire enough. This also addresses your second point sir.

Kyrn wrote:3) On the note of selling there's a significant difference between diversification, and outright dumping. Diversification is understandable and is not considered as a lack of faith. Complete dumping is, and is the issue here.
4) Pushing the market always fail? How about Black Wednesday? Or even more recent, the bankruptcy of Iceland? Countries are not immune, they're just hard to push. But pushable they are, and China currently has the biggest muscles of all.


The Sterling crash is an excellent example of the market getting it's way, actually. A group of funds pushed the value of a currency from it's artificially high (you might say 'manipulated') position to a more fair value. Market conditions - the pound being overvalued - allowed a move like this mad short-selling to work, because more often than not, it goes the other way. Example: Silver Thursday.

With regard to the Icelandic financial crisis, I don't know enough about the topic to be able to respond thoughtfully, and I won't do quick research and pretend that I have it all thought out. I can tell you that the size of Iceland's external debt pales in comparison to the amount of debt traded on the US Treasury market, the largest and most liquid debt market in the world, but that's far from a thoughtful analysis of the situation.

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Re: "Currency Reform for Fair Trade Act " Bill voted 348-79

Postby sardia » Wed Oct 06, 2010 5:37 pm UTC

Anybody notice that a bunch of other countries are joining in? There could be a currency war that needs to be averted.
http://www.nytimes.com/2010/10/07/busin ... mf.html?hp

This is a bit more serious than a spat between america and China. Worst case scenario reads The great Depression, ver. 2.

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Re: "Currency Reform for Fair Trade Act " Bill voted 348-79

Postby Kyrn » Thu Oct 07, 2010 12:06 am UTC

waltwhitmanheadedbat wrote:
Kyrn wrote:1) You don't need that much bonds (in that you don't need a majority) to affect the market. China is for all intents and purposes a major shareholder and contributor to the current value of treasury bonds. You can't immediately assume that other investors will buy from China, because they are ALREADY buying them currently, hence the whole concern of a bond bubble. On an additional note, just because China's US Treasury Bond reserves are falling does not mean they are selling; they may simply be cashing in on the bonds they already have, so differences between values then and now may not be entirely reflective of the amount sold.


They can only 'cash in' on bonds so fast. The one that writes the bond is in the position of power, given that you cannot simply go to the government and say, "here is your treasury bond, now pay up." The value of treasury bonds largely lies in the face value - you'll be getting a fixed bond coupon amount relative to the face value of the security. This makes these bonds very desirable when trading at a discount.

Further, the Fed and Treasury have pockets deep enough to absorb China's holdings. The Federal Reserve bought 1.25T of mortgage-backed securities in 2009, and in the event that China wanted to sell their entire treasury holdings, what doesn't get self-corrected by the market can get picked up by the Fed, should the situation turn dire enough. This also addresses your second point sir.

Just for reference, I'm not referring to actually asking the treasury to pay up, I'm referring to the natural expiration and cashing in of bonds. after their term.

Also, you know what was the side effect of USA buying back all those securities? They drove themselves further in debt, and the valuation of US currency fell. notice an issue here? And I'm not worried about self-correction. I'm worried that self-correction should technically rightly lead to a further loss of US dollar value; it's my opinion that US dollars are significantly overpriced based on the sheer belief that the US dollar/government cannot fail.

waltwhitmanheadedbat wrote:
Kyrn wrote:3) On the note of selling there's a significant difference between diversification, and outright dumping. Diversification is understandable and is not considered as a lack of faith. Complete dumping is, and is the issue here.
4) Pushing the market always fail? How about Black Wednesday? Or even more recent, the bankruptcy of Iceland? Countries are not immune, they're just hard to push. But pushable they are, and China currently has the biggest muscles of all.


The Sterling crash is an excellent example of the market getting it's way, actually. A group of funds pushed the value of a currency from it's artificially high (you might say 'manipulated') position to a more fair value. Market conditions - the pound being overvalued - allowed a move like this mad short-selling to work, because more often than not, it goes the other way. Example: Silver Thursday.

With regard to the Icelandic financial crisis, I don't know enough about the topic to be able to respond thoughtfully, and I won't do quick research and pretend that I have it all thought out. I can tell you that the size of Iceland's external debt pales in comparison to the amount of debt traded on the US Treasury market, the largest and most liquid debt market in the world, but that's far from a thoughtful analysis of the situation.

The point is that the market does not work for the government. It can very well work against the US. Let's take an example: IF the US currency were to be no longer the world standard, the currency may very well plummet in value, a standard market correction when false beliefs about true valuation is corrected. This is identical to the housing mortgage crisis, where a false belief about the true valuation of the mortgage securities are corrected.

In short, the market corrects itself, but what is "correct" may not be what you think it is. Given that, market correction is unreliable.
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Re: "Currency Reform for Fair Trade Act " Bill voted 348-79

Postby waltwhitmanheadedbat » Thu Oct 07, 2010 5:47 am UTC

Kyrn wrote:
waltwhitmanheadedbat wrote:
Kyrn wrote:1) You don't need that much bonds (in that you don't need a majority) to affect the market. China is for all intents and purposes a major shareholder and contributor to the current value of treasury bonds. You can't immediately assume that other investors will buy from China, because they are ALREADY buying them currently, hence the whole concern of a bond bubble. On an additional note, just because China's US Treasury Bond reserves are falling does not mean they are selling; they may simply be cashing in on the bonds they already have, so differences between values then and now may not be entirely reflective of the amount sold.


They can only 'cash in' on bonds so fast. The one that writes the bond is in the position of power, given that you cannot simply go to the government and say, "here is your treasury bond, now pay up." The value of treasury bonds largely lies in the face value - you'll be getting a fixed bond coupon amount relative to the face value of the security. This makes these bonds very desirable when trading at a discount.

Further, the Fed and Treasury have pockets deep enough to absorb China's holdings. The Federal Reserve bought 1.25T of mortgage-backed securities in 2009, and in the event that China wanted to sell their entire treasury holdings, what doesn't get self-corrected by the market can get picked up by the Fed, should the situation turn dire enough. This also addresses your second point sir.

Just for reference, I'm not referring to actually asking the treasury to pay up, I'm referring to the natural expiration and cashing in of bonds. after their term.


Good to know and glad to hear it.

Kyrn wrote:Also, you know what was the side effect of USA buying back all those securities? They drove themselves further in debt, and the valuation of US currency fell. notice an issue here? And I'm not worried about self-correction. I'm worried that self-correction should technically rightly lead to a further loss of US dollar value; it's my opinion that US dollars are significantly overpriced based on the sheer belief that the US dollar/government cannot fail.


I'm long EUR/USD in my paper account right now, so I am with you there about the US dollar being significantly overvalued. It appears the only disagreement I have with you is over what the magnitude of the impact would be; suffice it to say that I don't expect it to be very large, and I do believe that investor confidence in treasury securities, at least domestically, would be strong enough to absorb at least part of those securities. We may end up with a W-shaped recession afterall if I'm wrong, but even in that case I don't believe the dollar would decline enough to damage the credit of the US government or seriously devalue the currency.

Kyrn wrote:
waltwhitmanheadedbat wrote:
Kyrn wrote:3) On the note of selling there's a significant difference between diversification, and outright dumping. Diversification is understandable and is not considered as a lack of faith. Complete dumping is, and is the issue here.
4) Pushing the market always fail? How about Black Wednesday? Or even more recent, the bankruptcy of Iceland? Countries are not immune, they're just hard to push. But pushable they are, and China currently has the biggest muscles of all.


The Sterling crash is an excellent example of the market getting it's way, actually. A group of funds pushed the value of a currency from it's artificially high (you might say 'manipulated') position to a more fair value. Market conditions - the pound being overvalued - allowed a move like this mad short-selling to work, because more often than not, it goes the other way. Example: Silver Thursday.

With regard to the Icelandic financial crisis, I don't know enough about the topic to be able to respond thoughtfully, and I won't do quick research and pretend that I have it all thought out. I can tell you that the size of Iceland's external debt pales in comparison to the amount of debt traded on the US Treasury market, the largest and most liquid debt market in the world, but that's far from a thoughtful analysis of the situation.

The point is that the market does not work for the government. It can very well work against the US. Let's take an example: IF the US currency were to be no longer the world standard, the currency may very well plummet in value, a standard market correction when false beliefs about true valuation is corrected. This is identical to the housing mortgage crisis, where a false belief about the true valuation of the mortgage securities are corrected.

In short, the market corrects itself, but what is "correct" may not be what you think it is. Given that, market correction is unreliable.


Agree. I don't think we disagree on any substantial points then, other than my assertion that the impact would probably not be enormous.


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