Bond/Dollar Relationship Question

[pilgrimsoul]

I was wondering if someone could help me understand this issue a little better. With increasing talk of a possible revaluation of the yuan in the near future, would that affect the dollar in a positive or negative way? And what effect would a plunging or rising dollar have on government bonds? Thanks in advance for taking the time to explain this to me.

[adamd]

1. an attempt at an answer

Here's a simple answer, I can't really give a good analysis of the finer points of this...but it wouldn't be good on the value of the dollar or US bonds.

[applegrove]

4. China has been buying US bonds to keep their currency low and

the American one high (at great cost to themselves) so they can continue to get business (outsourced jobs & branch plants) at the same rate as before.

It is like the relationship between a pusher and a user.

If the Chinese are forced to revalue their currency, then their products will not be as cheap and less outsourcing would happen.

Countries always use 'devaluing' the dollar to stop imports and cause the type of recession that results in fewer imports and more domestic business.

The problem is that so many countries in the world would be willing to step in and take over part of the job of the Chinese that a lower US dollar would result in sourcing away from China but it could go to other nations.

In Germany, because they have joined the EU and use the Euro they cannot devalue their dollar to stop imports. So the unemployment rate in Germany is huge.

The fact is that with the help of the Chinese and the Japanese, the Bush government has been able to keep imports growing and Americans buying. Bush has put off the 2001 recession by war and tax cuts (which result in a glut of money into the stock market). This perpetual bull market is great for investors and people who may want to divest and get out of GM stock and into euros. The people who loose out are the unemployed and the Americans who bought expensive houses and the like.

Essentially, Americans have been selling off savings and their own wealth to keep the market going. When the bust hits... the unemployment may be less (or the outsourcing less to China). But millions of Americans will loose out for having over-extended themselves. And jobs will be risky and the job market not so hot. Till the boomers all retire and then the guest workers will be brought in so that wages do not rise too much.

So it is basically a big transfer of wealth to the rich from the middle class to keep the market going. And lowering the value of the dollar vis a vis China will allow for a correction (a more painful one than had Bush allowed it to occur when it was first needed). Americans need to learn to not buy so much. That the world is a much harder place to be wealthy in these days - if you are middle class.

And because the US government is in so much debt, it will be a very poor government and not able to meet all the needs of Americans that it does now. By bankrupting the government the Bush WH has succeeded in tying the hands of the Democratic President to come. There will be no money left.

America will become a debtor nation (well it has been for 30 years). It will struggle along. The middle class will struggle.

If the country faces a small amount of deflation (as Japan has faced & Europe a bit) then bonds are not worth so much. Your 3% bond when there is 2% deflation is like a 5% benefit. And nobody will be buying American bonds (hey - buy my bonds and loose 2% a year). As peak oil forces the cost of gas up by huge amounts, inflation may help combat the deflations. But interestingly enough.. the oil companies are own by the very rich (and some middle class) so the benefiters of this inflation (that helps the economy out of deflation but does not create jobs) will be the rich. Everyone else will be lowering their own wages to get work (even psychologists and doctors). It will not be as bad as your wages go down as the price of goods and food come way down. There will be suffering.

The corporations will be investing in the new democracies and dominating them and coercing the countries to not have socialized medicine or social programs or regulations. So the stock holders will do okay as long as they invest in multinationals and not local USA companies. The rich will also not have their wealth eaten away by inflation (because wage & cost of goods/food deflation added to oil inflation means that hyper-inflation will not occur.. and hyper-inflation is what eats away at rich people's money).

And if the price of oil is not enough to keep American out of high deflation, (low deflation is no big deal.. 2% deflation just means you are in a slow economy..but not a dead one) then there will be wars.

So getting the people out of the bond market is important for Bush. He says a long term bond will not be worth anything? Well it may be worth a great deal if the bond was bought at 3% and the deflation rate it 2%. In the short term, nobody will buy bonds when there is deflation. The SS changes and by indexing to 'a bundle of goods' instead of wages means that your SS could go down with deflation. If they are indexed to wages, as they are now, then because wages are very 'sticking' on the way down.. people will beat the market all the time. And it will cost the government more. Putting part of the SS money in the Stock Market keeps the government from owing on all those bonds. It also fluffs up the market (trillions into the stock market next year would put off the recession for another few years). And by making sure the money in the stock market is in small parcels (like individuals making the trades - the stocks bought would be vulnerable to bad decisions and whoever is selling their bad stocks is the winner. Who is selling their bad stocks? The rich!).

How to stop this? How could the middle class make sure they benefit here? By refusing to allow guest workers. So that some of the benefit of aging baby boomers retiring goes to good wages for Americans still working. And guest workers could be allowed in as immigrants to do the jobs the very employed Americans could not do. And then much more massive oil replacements would have to happen. Because the economy could not sustain both wages increasing and Oil increasing or there would be stagflation like there was in the 1970s. And people would loose jobs and once again the there would be a recession like there was in the 1980s. And the rich would loose money too.

And the rich loosing money is bad. Because they want to be rich. And if they just keep Americans at some high unemployment level.. with wages going down.. they will not be destroyed by the cost of oil. And they fully expect there to be massive labor migration (just like in the 19th Century where undesirable Scots and Irish moved out of England because they were shut out). They want perpetual markets for themselves. And that is why they want as many of the people in the markets. Even if there is about to be a recession as soon as the great SS trillion dollar bubble passes, they want Americans dependent on perpetual markets as much as they are. And they will use tribalism and localization of loyalties (by destroying federal government in the USA) to keep Americans from popping up their heads, looking around and saying: "hey, why not stop it with the perpetual markets, and go back to full employment part of the time... sometimes the rich do well, sometimes the workers do well".

Interesting to note that by replacing the making of all civil goods outside the USA, the factories are closed and the oil is used by the suburbanites, the military industry. So you have cut your oil dependence and handed the problem over to people in China who can replace oil with people work in factories.

Nobody can predict the future exactly. But you certainly can push it in one direction or the other. And plan for it.

World trade is good and important. Markets exist wherever one eats and lives off of more than the food you can grown on your own front lawn. It is the extend of the control that is the problem. Corporations will go for monopoly control wherever they can. And they try and take the monopoly of power away from he American people so they can have this new world go 'there way'. For sure they are not protecting the underclasses of Americans. They are only out for their own uber-elites and the dominance that such a system will give to the corporations and elites that fully participate.



IMHO

[adamd]

9. China is unique

Because they don't set the value of the yuan based on market forces, but on whatever Beijing decides the value should be.

[TreasonousBastard]

2. The yuan is pegged to the dollar, so..

if the dollar goes up or down the yuan goes with it.

The problem is that the dollar is going down so everyone's else's imports are getting more expensive. Not China's, though, and their's stay at relatively the same price.

If they revalue the yuan (probably won't happen soon) it shouldn't have any direct effect on the dollar.

Indirect effects? Too many variables there-- will it cause inflation (dollar down, or maybe up) with chinese stuff more expensive, will it reduce the trade deficit (dollar up) or make it worse (dollar down) ...

[mahatmakanejeeves]

3. Simple explanation; may help a little

I know there will be plenty of exceptions to this, but here goes.

Let's say you own a ten-year government bond that you bought some time ago. It pays 4-1/4% interest, and you paid $1000 for it. For one reason or another, interest rates go up. The government finds that it can't auction the newly issued ten-year bonds unless the bonds pay 4-1/2%. If I can buy, for $1000, a bond that pays 4-1/2%, then I'm not willing to take your 4-1/4% bond off your hands for $1000, am I? If you want to sell it to me, you'll have to drop your price to, say, $975. So, rising interest rates cause the price of existing bonds to drop.

Rising interest rates also have the effect of attracting foreign investors. Say that someone in France was not, in the past, interested in buying a US bond that paid 4-1/4%, but the recent yield of 4-1/2% is enough to coax him to buy one now. To buy the bond, he has to convert his Euros to dollars. This leads to a second effect of rising interest rates: they cause the value of the dollar to increase. The French investor now wants to sell Euros and replace them with the dollars he needs to purchase the US bond.

There are many footnotes and exceptions to what I said, so please don't flame me too vigorously.

[many a good man]

5. The long term effect would be good

because it is more in line with the true market value. It would begin to encourage discipline and responsibility in the markets. Its effects, however, would ripple across the intl economic system...

;-) "revaluing" to something approaching market conditions means the value of the renmimbi will soar up to 25%.

:( Chinese goods will become more expensive. This leads to inflation in the US

:( Since consumer spending is such a large pctg of the American economy, higher prices will choke growth

:* The Fed will be forced to raise interest rates in order to sell more bonds to finance our mushrooming deficits

x( Rising mortgage rates will put a halt to the real estate bubble. Prices will gradually retreat in step with each rate hike.

;( Climbing interest rates will slow demand and hit hard the record number of families carrying debt loads.

:) Manufacturing in the US will be greatly relieved by the revaluing, leading to strong employment gains in this sector

:) China turns it attention to Europe. China starts draining more mfg jobs from EU than US

:-( China's growth cuts in half while it readjusts to changing conditions;

;( Billions in Chinese reserves evaporate because they are in the form of US dollars lining their central bank's vaults from floor to ceiling

:P Billions of dollars in US foreign debt evaporates

:D Mkts react positively to the first faint gesture of responsibility coming out of Washington; the dollar strengthens on intl mkts.

;-) Stagnation in European and Asian markets makes the US still look like a good deal.

America maintains her preeminence but the world is at a stand still. Something big is going to happen, but no one knows what. I'm betting a huge golden chariot comes out of the heavens and hauls Pope Benedict around the sky over all the world...

[German-Lefty]

7. Not sure I follow all of that

:* The Fed will be forced to raise interest rates in order to sell more bonds to finance our mushrooming deficits
How was that linked to yuan? Are are you just saying because of the slowdown in retail sales, tax revenue will be less? Or are you saying because China won't buy dollars to keep it's currency down anymore, the deficits will require higher rates?

:) China turns it attention to Europe. China starts draining more mfg jobs from EU than US
Not sure I follow this. They are hitting EU jobs right now. The Euro is high against the dollar and the Yuan is low against it. So the Yuan is really low against the Euro.

If anything it will help our exports (Germany's #1 in the world in exports) compete in the US, EU, and elsewhere.

;-) Stagnation in European and Asian markets makes the US still look like a good deal.
Again, I'm not so sure.

[many a good man]

8. Bitter medicine; better mgmt needed

:* Absolutely right. China is a big consumer of our foreign debt so rates must rise to attract more buyers. Its a badly needed dose of medicine that will be bitter to the patient in the short term, but better in the long run. We're living in an enormous credit bubble and we don't want it to pop. It will strengthen the dollar moderately on world mkts.

:) You're right, I need to rethink this one. Prices of Chinese goods will rise against the Euro. It will help European mfg as much as here so let's call this one a draw.

;-)The world markets leap with joy at the faintest noises of responsiblity coming from Washington. There's always more opportunity to make money in the US mkt than in the slow and steady European mkt. With China putting on the brakes, investors will keep propping up the US equity mkts. Until we reach the point of no return. We've gotten ourselves into a terrible pickle, and we won't get out of it by following bad fiscal and monetary policy with worse...

[Massacure]

6. Chinese imports will get more expensive.

Companies that moved to China will get screwed over, and those that stayed here will benefit.

The dollar will probably sink, but a weak dollar makes it easy to pay off the national debt though.

If the government manages to pay back the debt we are fine, otherwise interest will rise.

I guess the only wildcard is what is going to happen with China in terms of resources. They cannot get raw materials fast enough. Hopefully it will force them to eneact some conservation and pollution controls and help reinforce the middle class there.