Asked about the balance of financial power between China and the United States, one of the Chinese government’s top monetary economists, Yu Yongding, replied that “I think it’s mainly in favor of the United States.”
He cited a saying attributed to Keynes: “If you owe your bank manager a thousand pounds, you are at his mercy. If you owe him a million pounds, he is at your mercy.”
The issue of what to do with the two countries with the greatest financial imbalances will continue. This is the recurring theme of Chimerica. The issue fall into both the real and financial side. The trade surplus of China has fallen with the decline in exports. China will just not be generated the same dollar cash flow for investing in the US Treasuries. Similarly, the trade deficit is falling in the US, so there is less of a current account deficit problem. In a sense, the real economy is starting to adjust. The issue is the dynamics on the financial side of the equation. Here the US is running huge government deficits. This is being offset by higher savings in the US, but the size of the deficits suggest that they will have to be monetized by the Fed which places pressure on the dollar. Of course, this pressure may not occur in the near-term given the size of the output gap, but it will have an impact for China because they are not able to adjust their Treasury holdings in the short-run.
China is stuck with a $2 trillion reserve position that has to be managed; consequently, they will try and make statements to steer US policy to a course that will be protective of bondholders.
The issue of what to do with the two countries with the greatest financial imbalances will continue. This is the recurring theme of Chimerica. The issue fall into both the real and financial side. The trade surplus of China has fallen with the decline in exports. China will just not be generated the same dollar cash flow for investing in the US Treasuries. Similarly, the trade deficit is falling in the US, so there is less of a current account deficit problem. In a sense, the real economy is starting to adjust. The issue is the dynamics on the financial side of the equation. Here the US is running huge government deficits. This is being offset by higher savings in the US, but the size of the deficits suggest that they will have to be monetized by the Fed which places pressure on the dollar. Of course, this pressure may not occur in the near-term given the size of the output gap, but it will have an impact for China because they are not able to adjust their Treasury holdings in the short-run.
China is stuck with a $2 trillion reserve position that has to be managed; consequently, they will try and make statements to steer US policy to a course that will be protective of bondholders.
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