There were a fewcomments this week, focused especially on Chinese holdings. It shouldbe clear from my post that I am not concerned about the holdings norabout a possible run. China will gradually reduce its export surplus,but it is probable that other countries will continue to want toaccumulate more dollars and so will try to replace Chinese exports tothe US with their own. The Dollar will remain strong, there will beno run. So here are the questions grouped into main themes.
Q1 (Neil): Additionally is there a casefor having a positive domestic monetary policy and a zero monetarypolicy for foreign holdings?
A: I presume you mean interest rates?Warren Mosler has advocated permanent ZIRP (zero overnight interestrates) which is essentially Keynes’s euthanasia of the rentierclass. With Bill Mitchell he advocated elimination of treasuriesaltogether—which I also endorsed several times during the US debtlimits debate. So I guess my answer would be: zero for both!
Q2: (Neil) I’ve heard a couple of notesrecently that Abba Lerner argued for the burden “The only reallyserious burden associated with government debt is that part of thedebt owed to foreigners (as Abba Lerner argued.
A: I did write about that particulararticle in which Lerner tore apart the “debt burden” argument(you should read it) in my Understanding Modern Money book back in1998. Yes there can be a “real” burden if foreigners start buyingUS output—increasing our exports. Exports are a cost, imports abenefit. But that is if we are at continuous fullemployment—something we never have, of course.
Q3 (two commentators): If by ‘dumping’US Treasuries people mean selling them, would that be a problem? Thensomeone else would be buying … American or Foreign. So what ?
A: Agreed. As I said, this is likely tobe a very slow transformation as China and others realize exports area cost and begin to produce for domestic consumption; in which casethey won’t want dollars. And yes, I agree China has got more dollarreserves than it is likely to need to protect its exchange rate. ButI suppose dollars are like nukes—better safe than sorry, so youaccumulate more than you would ever need. But eventually they willdecide they’ve got enough.
Q4: (steve) A Chinese company makes asale through a distributor in the US. They receive dollars inpayment. They have to pay their workers (and themselves) inYuan. They exchange the dollars for Yuan at the central bank. Is this done at an exchange rate completely under the controlof the PBC? Are the Yuan simply created by the PBC? Sothe dollars are now owned directly by the government? And, theyexchange these reserves for Treasury securities. Must we offerthis exchange? Or, could we force them simply to hold thereserves (until if/when they decide to buy something).
A: China manages its exchange rate, soyes it determines the Yuan it will supply against dollars that itcredits to the bank accounts. The government only allows smallholdings of dollars by anyone else in China, so yes most of thedollars go to the government—official balances.