Nouriel Roubini reports of a looming $300 billion dollar loss if China accumulates US$ reserves at the same pace until 2007 and the US$ drops 30% in value.
As we have been saying for a while a 20% appreciation of the Chinese currency today would lead to a loss for China of about $100 billion (on total reserves of $640 billion now) or a capital loss that is equal to about 7% of the current GDP of China. If China maintains its peg for another three years (until the end of 2007) and accumulates reserves at the same rate as 2004, its reserves will grow to over $1,200 billion and then, a 30% appreciation will lead to a loss of $300 billion or 20% of it current GDP (or 16% of its expected GDP in 2007). These losses are really staggering!
I agree those losses are staggering.
However they are based upon two assumptions that may or may not happen:
1) The rate of accumulation continues at the current pace.
2) The drop from here on the US$ would be 30% vs. the RMB.
Let’s assume for a second that both of those happen.
Nouriel goes to great length to prove that the losses are real and not just paper losses. I agree. Such currency losses would be real. No argument from me on that point. However are there not some offsetting gains?
Do China and Japan get NOTHING in return for supporting the US$?
I think that is the real question and that’s were it gets far more complex.
How many people did Japan and China keep employed by supporting the US$? How many factories have moved from the US, Europe, and even Mexico to China because of China’s peg to the US$ and their support of US treasuries?
Suppose China’s plan all along was to keep the RMB pegged to the US$ and keep buying treasuries until every possible manufacturing job from everywhere heads to China. Exactly what is wrong with that plan? Is it not working? Is the transfer of massive amounts of manufacturing and technology from US and Europe to China worth nothing?
I am sure it is worth something, if not now then down the road. Is it worth $300 billion, $100 billion, or perhaps $1 trillion? I do not know how to put a value on it so I will not attempt to make myself look silly by doing so. I will suggest there is REAL value in that for China, perhaps even more than the $300 Billion China might lose on currencies. A point of comparison: The US just spent $300 billion in Iraq and as best as I can tell got nothing for it. Is $300 billion too great a price to pay for the transfer of mammoth amounts of manufacturing and technology?
Furthermore, I still keep asking and no one has answered me yet: Just what is China and Japan supposed to do with all the dollars they receive? If Japan and China sell US dollars, then who is the buyer? At what price? Can a slow wean off US$ possibly work? Isn’t the global liquidity bubble too far along for such an approach to work?
The moment China and Japan start selling US$ the entire jig is up. In the meantime they have exports and jobs and factory gains to show for it. I fail to see why that is such a bad deal for China OVER THE LONG HAUL. Short term it is inflationary for China perhaps but has it accelerated China’s long term strategic goal of permanently becoming the world’s premier manufacturing power?
The Fiat Question:
In a world of fiat currencies does it really matter if Japan prints YEN or China prints RMB and both lose on it, as long as the US is printing more on a relative basis? Who is the REAL loser here?
No doubt this unstable situation is going to blow sky and probably sooner than, perhaps over oil, perhaps over panic out of the US$, perhaps by US consumer exhaustion, or perhaps over a Trade War Retaliation, but I fail to see how persuading China to dump US$ is going to do anything but immediately plunge the world into a US$ panic sell crisis.
Let me ask again
1) How does China and Japan unload their vast supply of US$ and treasuries, to who and at what price?
2) Is China and Japan getting ANYTHING in return for their support of US treasuries and if so, how does one put a value on it?
3) Even though the currency losses are real, in a fiat world of currency madness, why should China and Japan be overly concerned about it now? The currency loss may be a REAL LOSS, but its only PAPER MONEY isn’t it? Isn’t the fact that it is only “PAPER MONEY” a huge part of the entire problem in the first place?
I remain convinced that a huge world-wide recession is inevitable, but I have to wonder: what advantage does anyone have to start one now?
I have still more questions: Why does EVERYONE and I mean EVERYONE assume the US$ would plunge if China floated the RMB? If the US$ did in fact plunge for how long would it stay there? What would happen to China’s balance of trade if the US$ plunged 30%? Would there be a world wide recession? How about a world wide depression? Isn’t that possible?
What if China’s property bubble is bigger than the US property bubble? What would a global property bust do to China’s banks and the RMB? Are Chinese banks solvent right now? Is it possible that China is using their current account balance surplus to fund insolvent Chinese banks? If so, is their US$ policy all that bad? Might it not in fact be perfect?
Mish has one final question:
Is there a way out of this mess? I sure do not see one (other than one huge worldwide recession) and I am pretty sure that no one else has one either. The global “crisis of excess liquidity” will resolve itself when the US consumer finally throws in the towel. At that point it will be game, set, match, regardless of what China or Japan or anyone else does or does not do with floating currencies or divesting out of US$. After the tipping point, I think it just might be hard to say what the US$ does vs. the RMB or anything else. In the meantime, if the point is to get this mess started before it gets worse, then trade wars or dumping US$ or treasuries will sure bring it on in a hurry.
In the grand scheme of everything, is $300 billion a really big deal? Personally I think this mess comes to a head long before we reach that point, and certainly far sooner than 2007.