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Interest rates are determined as the inverse of the bond rate. I have no idea how accurate this is, but here's my thinking... So: 1 selling bonds (treasuries

Interest rates are determined as the inverse of the bond rate. I have no idea how accurate this is, but here's my thinking... So: 1 selling bonds (treasuries) will lower the price of the bond (supply/demand). 2 This will increase the effective interest rate - (face value - price paid)/face value / years for simple straight line rate. 3 The higher interest rate will cause more money to flow towards that currency (USD) 4 That will result in the USD appreciating against all other currencies 5 China then uses the proceeds to buy Renminbi, driving it up against the USD 6 That USD->Renminbi sale might result in a drop in USD because there will be more USD around? 7 If enough bonds are sold, this might have the same effect as a Fed increase? 8 An increase in the value of the USD will keep manufacturing jobs from coming back to the US 9 Oil prices will drop in USD (?) 10 China might have a UK vs Sorros moment [1] [1] https://en.wikipedia.org/wiki/Black_Wednesday https://en.wikipedia.org/wiki/Black_Wednesday

misja111 11y ago
Point 1 is correct, the selling of bonds by China will have the effect that their prices will drop. That's the law of supply and demand in action. Point 2 will probably also happen; but only up to a limited amount, because: Point 3, and the others, won't happen. There will not flow more money towards the USD. What happens now is the opposite; China is selling USD's. Again because of the law of supply and demand, this will lead to a drop of the USD rate. If the drop will be too much for the FED's taste they will increase the interest rate (point 2), but only so much that the depreciation will stop.
- RaSoJo 11y ago
  >There will not flow more money towards the USD. What happens now is the opposite; I guess it is an event in the chain. jpollock asks the question in point 6 "That USD->Renminbi sale might result in a drop in USD because there will be more USD around?"
RaSoJo 11y ago
Thanks for this. I look forward to more answers on the questions you highlighted in this thread. One additional question I have now is, what about the impending Fed Rate Hike? As in your point 7 - if the China Govt. action is equivalent to a rate hike, then will the Fed's own hike get pushed further into 2016?
jazzyk 11y ago
Excellent list. Two additional impact points (see my other post somewhere above in this topic) - the stock market may drop - negative impact on government debt ($19T and counting)
lmm 11y ago
1. True 2. True 3. A little, perhaps - demand is somewhat elastic (although treasuries are weird). But the economy is damped rather than chaotically oscillating; the amount of money flowing into USD that way will be less than the amount that China's pulled out. You may be missing the point that treasuries are pretty much equivalent to USD; China isn't selling the treasuries for USD, they're selling them for RMB. The effect on treasuries and USD will be pretty much the same. 4. Again, less than the amount it depreciates. 5. They might continue, or they might not. 6. Yes 7. Yes 8. There's not going to be an increase, there's going to be a decrease. 9. Likewise, oil prices will rise 10. Maybe. The thing is, Sorros was right; fundamentally, UK manufacturing was less competitive than German, and the price needed to adjust to reflect that. This move is, at least partly, China brassily saying that their companies are still up to snuff, and will outcompete those in the US (something that a lot of people are a lot less confident in than they were a week ago, if you go by Shanghai stock exchange prices). Are you sure they're bluffing? The other part is that Sorros had more money than the British government. A modern-day equivalent would have to put their hands on more money than China's total US treasury holdings - $1.2 trillion. Bridgewater, the largest hedge fund firm, has $78 billion. They could probably lever that up a bit, but betting the whole firm at 14:1 ?

misja111 11y ago

Point 1 is correct, the selling of bonds by China will have the effect that their prices will drop. That's the law of supply and demand in action. Point 2 will probably also happen; but only up to a limited amount, because: Point 3, and the others, won't happen. There will not flow more money towards the USD. What happens now is the opposite; China is selling USD's. Again because of the law of supply and demand, this will lead to a drop of the USD rate. If the drop will be too much for the FED's taste they will increase the interest rate (point 2), but only so much that the depreciation will stop.

RaSoJo 11y ago
>There will not flow more money towards the USD. What happens now is the opposite; I guess it is an event in the chain. jpollock asks the question in point 6 "That USD->Renminbi sale might result in a drop in USD because there will be more USD around?"

RaSoJo 11y ago

Thanks for this. I look forward to more answers on the questions you highlighted in this thread. One additional question I have now is, what about the impending Fed Rate Hike? As in your point 7 - if the China Govt. action is equivalent to a rate hike, then will the Fed's own hike get pushed further into 2016?

jazzyk 11y ago

Excellent list. Two additional impact points (see my other post somewhere above in this topic) - the stock market may drop - negative impact on government debt ($19T and counting)

lmm 11y ago

1. True 2. True 3. A little, perhaps - demand is somewhat elastic (although treasuries are weird). But the economy is damped rather than chaotically oscillating; the amount of money flowing into USD that way will be less than the amount that China's pulled out. You may be missing the point that treasuries are pretty much equivalent to USD; China isn't selling the treasuries for USD, they're selling them for RMB. The effect on treasuries and USD will be pretty much the same. 4. Again, less than the amount it depreciates. 5. They might continue, or they might not. 6. Yes 7. Yes 8. There's not going to be an increase, there's going to be a decrease. 9. Likewise, oil prices will rise 10. Maybe. The thing is, Sorros was right; fundamentally, UK manufacturing was less competitive than German, and the price needed to adjust to reflect that. This move is, at least partly, China brassily saying that their companies are still up to snuff, and will outcompete those in the US (something that a lot of people are a lot less confident in than they were a week ago, if you go by Shanghai stock exchange prices). Are you sure they're bluffing? The other part is that Sorros had more money than the British government. A modern-day equivalent would have to put their hands on more money than China's total US treasury holdings - $1.2 trillion. Bridgewater, the largest hedge fund firm, has $78 billion. They could probably lever that up a bit, but betting the whole firm at 14:1 ?