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Volatility isn't as important as low inflation and the ability of price discovery. I've heard the argument that the Yuan lacks volatility and hence it's stable
by akhatri_aus 10y ago
Volatility isn't as important as low inflation and the ability of price discovery. I've heard the argument that the Yuan lacks volatility and hence it's stable - on the contrary, it risks sudden massive shocks and they spill out to other countries in other manifestations to compensate for the fixed exchange (or somewhat pegged) rate.
Price discovery is extremely important, even if it comes with volatility. It would be comforting to know that China could reinvest its trade surplus back into the US, which it's not doing well since it's not incentivised to do so, solely investing in Treasury's. This is why we're in a recession, because this cash is a drag on consumption, and its stuck in Treasuries.
- seanmcdirmid 10y agoInvesting in treasuries IS investing in the US, just in a very safe low risk way. That is the value of the USD, at least, that you can always "save it" with the US gov (who is a dependable debtor of last resort). This is super good for the USD, and part of the reason interest rates are so low these days (all that extra Chinese money pushed down rates). With the Chinese stopping to use treasuries so much, one would guess that rates would pop up eventually.
- akhatri_aus 10y agoThis is true, though I'm sure you'll agree this isn't the best way to recycle a trade trade surplus?
- seanmcdirmid 10y agoIt depends. The money isn't really the government's...it needs to be somewhat liquid and ready to use elsewhere. Treasuries are fairly liquid (you can't redeem them early, but you can always trade them) and are not very risky (though these days they often have effective negative interest rates).