Posted on 07/31/2018 5:55:34 AM PDT by spacewarp
Just a strange question that's been rumbling around in my mind and I wanted to get some intelligent folks to discuss it, so I came to FreeRepublic, as always.
A few weeks ago, President Trump (and no, even as a third party guy, I don't get tired of saying that) enacted tarrifs on China.
In an act of sheer desperation, China reportedly devalued their currency by 45%.
Currently, we owe China $5.6 trillion.
Does this mean that we now owe them $3.36 trillion?
Does it mean that we would be able to borrow from the Fed and private sources $3.36 trillion and buy out the remainder of the Chinese debt?
Did Trump just end up forcing China into a desperate blunder that saves us $2.24 trillion on our national debt?
Or does it mean that borrowing will be much riskier because if they normalize their currency, anything we borrow during that time will be 45% higher later?
It’s above my pay grade.
Our debt is measured and payable in dollars.
Buy Venezuelan Bolivars NOW !!
With the caveat that I may well have no idea what I’m talking about — we still owe them the same dollar amount. Whatever their currency is valued at against the dollar, the amount will be higher in Chinese currency, same in USD.
So, our debt is now 2-3 trillion higher?
No. China holds the US debt in the form of US treasury notes. The devaluation of their currency is due primarily to the squandering of much capital building “ghost cities” and the enormous expansion and cost of an essentially very non productive military. Their trade surplus with the US and the accumulation of US treasury notes is a large block in their currency’s foundation. If tariffs diminish trade they accumulate fewer US treasury notes, their economy weakens, there is social and political discontent and their currency becomes worth less. China is very dependent on US trade. Ultimately Trump is playing the stronger hand.
“In an act of sheer desperation, China reportedly devalued their currency by 45%.”
You are mistaken.
I think our debt is the same as it is, and will increase as it would have anyway with compounding interest. Our debt is payable in USD, so however the chinese game their currency has no impact. Again, huge grain of salt, I may well be wrong.
Currently, we owe China $5.6 trillion.
Does this mean that we now owe them $3.36 trillion?
No, it means that - in Chinese currency - we owe China 45% more.
If you owe the bank a million $dollars the bank owns you. If you owe the bank a trillion $dollars you own the bank.
I think it is as simple as this:
If (before) we had an exchange rate of 100 to 100 (yen to dollar) then NOW we would have an exchange rate of 145 to 100.
So, 100 dollars buys many more yen. So if we pay them back in yen, then we do save nearly $2 Trillion.
(disclaimer: I may not know what the heck I am talking about)
If we put tariffs on Chinese goods that significantly decreases spending our money to buy Chinese goods, then there will be a significant drop in the increase in the Chinese money supply, which will cause a significant drop in the increase in Chinese aggregate demand, which will significantly slow down their overall economic growth. Maybe even a recession. This could be another win for Trump.
What part of "It's the same" are you having trouble with?
Over the past three months, the yuan has depreciated by around 7.7 per cent in value against the US dollar.
I say this as a math nerd software engineer who’s also an investor so I can retire early. Plus, right now I’ve got a lot in U.S. Treasuries (like China does) while stocks are so darned high (meaning stocks are more liable to go down than up).
Our debt to China is in U.S. dollars with specific interest rates that vary for each treasury note. Imagine China is a bank that’s got a lot of loans outstanding to many people at different interest rates, based on what was agreed for each loan. Now imagine it like a bank with multiple loans to one person (i.e. one person can have a mortgage, a home equity loan, a car loan, and a credit card all with one bank). That’s what it’s like when China or anybody else buys U.S. treasuries at different times and for different periods (i.e. a 10 year treasury and a 20 year treasury sold on the same day will have different rates).
Our U.S. Treasury owes China a certain amount at the maturity of each of those treasury notes, based on the interest rate we offered buyers when it was purchased. The notes aren’t physical paper notes anymore, but they’re as legally binding as a formal loan. So, the amount we owe China is fixed in U.S. dollars.
But China thinks in terms of both Chinese renmibi (their currency) and in U.S. dollars. Why do they care about U.S. dollars? Because the world operates largely on U.S. dollars. So in some ways when their currency is devalued it’s like their loan to us has gained value (if you look at it in terms of renmibies). But that’s only when looking at it through weird numbers that mean less today than they did a year ago.
Not quite sure. Somehow, the idea that if something is worth more or worth less then to repay the debt in that currency should somehow change. It’s a conceptual thing, I guess.
I think you are just transferring your debt, from the Chinese to the Federal Reserve.Still might be a good thing, but not really sure. The one benefit is we can always stiff the Chinese, but stiffing the Federal Reserve may not be possible. Not sure why that might be the case though. They are a private bank, so I guess we could. 8>)
“Currently, we owe China $5.6 trillion.
Does this mean that we now owe them $3.36 trillion?”
Not if the debt is in dollars. We would have to devalue to the dollar in order to shrink the debt that way.
The Treasury bonds that China holds are contracts based on the US dollar. There is no change to that, regardless of what their currency does. They cash their bonds in for dollars, like anyone else.
The Chinese currency is down about 7.5% since sanctions came out (not 45%).
It seems that the Chinese currency is dropping due to market forces, more than due to the Government policy. People making business decisions are betting against the yuan, and many are trying to sell their yuan-based assets, to get their money out of China, before things get worse. They have had serious problems with that (capital flight) in the last few years.
The Government is loosening credit in China (printing money), so part of the drop in their currency is driven by Government policy. They face a difficult trade-off between supporting their economy (threatened by tariffs), or supporting their currency.
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