You may have been distracted by events related to New Year’s Day and negotiations over the “fiscal cliff” to notice that the United States reached its authorized debt ceiling of $16.394 trillion on New Year’s Eve. Rich Barbieri and Jeanne Sahadi reported on the CNN Money website Monday morning:
It’s official: U.S. debt reached its legal borrowing limit Monday, giving Congress about two months before it must raise the debt ceiling or risk causing the government to default on its bills and financial obligations.
“I can confirm we will reach the statutory debt limit today, Dec. 31,” a Treasury Department official said Monday.
As for increasing the nation’s debt ceiling yet again, U.S. President Barack Obama doesn’t want debate from Congress on the subject. From Reuters this morning:
President Barack Obama vowed on Tuesday to avoid a repeat of last year’s divisive fight with Congress over an extension of the nation’s borrowing authority.
“While I will negotiate over many things, I will not have another debate with this Congress about whether or not they should pay the bills they have already racked up,” Obama said in remarks in the White House.
“I will not have another debate.” Hmm. Back on December 5, Zachary Goldfarb wrote on the Post Politics blog on the Washington Post website:
As part of the fiscal cliff negotiations, Obama has proposed effectively ending the need for Congress to periodically raise the debt limit, which Republicans have rejected.
I wonder if this proposal won’t be pushed again in the near future?
By Christopher E. Hill, Editor
Survival And Prosperity (http://www.survivalandprosperity.com)
Barbieri, Rich and Sahadi, Jeanne. “It’s official: U.S. hits debt ceiling.” CNN Money. 31 Dec. 2012. (http://money.cnn.com/2012/12/31/news/economy/debt-ceiling/) 2 Jan. 2013.
“Obama Debt Ceiling Statement: Limit Increase Not Up For Debate After Fiscal Cliff Showdown.” Reuters. 2 Jan. 2013. (http://www.huffingtonpost.com/2013/01/02/obama-debt-ceiling-fiscal-cliff_n_2394164.html). 2 Jan. 2013.
Goldfarb, Zachary A. “Obama on debt ceiling fight: ‘I will not play that game.’” Post Politics. 5 Dec. 2012. (http://www.washingtonpost.com/blogs/post-politics/wp/2012/12/05/obama-on-debt-ceiling-i-will-not-play-that-game/). 2 Jan. 2013.
Media outlets are reporting that the People’s Republic of China is diversifying away from the U.S. dollar. Bob Davis and Tom Orlik wrote on the Wall Street Journal website today:
China still remains a strong buyer of U.S. debt. China’s holdings of U.S. securities rose 7% to $1.73 trillion as of June 30, an increase of $115 billion from 12 months earlier, Treasury data show.
But the percentage of dollar holdings in China’s foreign-exchange reserves fell to a decade low of 54% in the year that ended June 30, from 65% in 2010.
In 2006 that percentage was a record 74%, according to David Pierson on the Los Angeles Times website today. Davis and Orlik added:
The purchase of U.S. securities amounted to just 15% of the increase in China’s foreign-exchange reserves in the 12 months ended June 30, down from 45% in 2010 and an average of 63% over the past five years, according to calculations based on information published by the U.S. Treasury and the Chinese government.
Should the PRC start to cut back on purchases of U.S. securities, interest rates in the United States could rise. Pierson noted that federal data shows China was actually a net seller of Treasuries in the second half of last year.
David, Bob and Orlik, Tom. “Beijing Diversifies Away From U.S. Dollar.” Wall Street Journal. 2 Mar. 2012. (http://online.wsj.com/article/SB10001424052970203753704577254794068655760.html). 2 Mar. 2012.
Pierson, David. “China hedging its bets on U.S. government debt, data show.” Los Angeles Times. 3 Mar. 2012. (http://www.latimes.com/business/la-fi-china-us-debt-20120303,0,1286478.story). 2 Mar. 2012.
China is warning the United States that it’s risking a trade war. The U.S. Senate voted 79-17 last night to open a week of debate on the Currency Exchange Rate Oversight Reform Act of 2011, to put pressure on China to allow its currency, the renminbi or yuan, to appreciate. U.S. lawmakers claim an undervalued Chinese currency has cost America jobs and has created a massive trade imbalance between the two nations. Reuters’ David Stanway and Aileen Wang wrote this morning:
An angry China warned Washington on Tuesday that passage of a bill aimed at forcing Beijing to let its currency rise could lead to a trade war between the world’s top two economies.
China’s central bank and the ministries of commerce and foreign affairs accused Washington of “politicising” currency issues and putting the global economy at risk after U.S. senators voted on Monday to start a week of debate on the bill.
The response suggested China sees a greater risk from the proposed bill than it has in the past when U.S. lawmakers attempted to put forward similar legislation to speed up the pace of appreciation in the yuan, or renminbi.
Beijing made similar remarks last year after the House of Representatives passed a currency bill that later failed to make any further progress in Congress.
While a strong case can be made that the Chinese currency is indeed undervalued, a number of analysts believe the Democratic-led legislation was being introduced to divert blame for the floundering economy away from Washington D.C., and to increase the odds lawmakers from the Rust Belt and other areas where manufacturing is depressed will get re-elected in 2012. And certain scholars point out that a revaluation of the Chinese currency won’t do much to help the U.S. bring back jobs or address its trade deficit and the trade imbalance. From the University of Pennsylvania’s China Knowledge@Wharton website back on March 31, 2010:
China has pegged its currency to the U.S. dollar since 1994. After 2002, its trade surplus burgeoned, causing a huge global current account surplus. Meanwhile, as China’s major trading partner, the United States suffered from a growing current account deficit. Many U.S. legislators attributed their nation’s deficit to the Chinese government’s currency manipulation to keep the renminbi artificially low. Ever since, a reminbi revaluation has been the center of the trade dispute between China and the United States.
Today, “legislators are trying to make constituents believe that the joblessness [in the U.S.] is caused by the trade deficit, and the trade deficit is the result of China manipulating its currency,” says Charles Freeman of the Center for Strategic and International Studies, a Washington, D.C.-based public policy research institute, and a former assistant U.S. trade representative for China affairs. “However, I see no correlation between joblessness and the trade deficit, as well as the trade deficit and the undervalued renminbi.”
He also says it is unlikely that increasing the value of the renminbi vis-à-vis the dollar will reduce the trade imbalance between the two countries. “If you look at the average cost of consumer goods in China and the equivalent wholesale costs of manufacturing goods here in the United States, you would see that the margin between the two is too high,” he notes. “The labor costs are so high in the United States that it would be difficult for the U.S. to regain competitiveness solely through forcing the renminbi to appreciate by another 20%.” In fact, he doubts whether any increase in the value of renminbi will move the production back to the U.S. If Chinese exports to the U.S. were to become more expensive, “the United States would shift its demand to other third party developing countries, such as Mexico,” he says.
(Editor’s note: Italics added for emphasis)
Not only would forcing China to revalue its currency might not help on those fronts, but it could actually mean higher prices for U.S. consumers. From the article:
Echoing Freeman’s view is a new article titled, “The RMB: Myths and Tougher-to-Deal-With Realities,” by Pieter Bottelier, a senior adjunct professor of China studies at Johns Hopkins University’s School of Advanced International Studies, and Uri Dadush, director of the international economics program at the Carnegie Endowment for International Peace, a Washington, D.C., think tank. According to Bottelier and Dadush, the immediate effect of a renminbi appreciation would be an increase in prices for U.S. consumers. “A 25% revaluation of the renminbi, which some economists have said is needed, would — if not offset by a reduction in China’s prices — add $75 billion to the U.S. import bill, since the United States imports three times as much from China as it exports there,” they wrote. That rise in costs will most likely be passed on to the consumer. As they see it, a revaluation of the renminbi on its own would do little to redress global imbalances, and could initially lead to a wider U.S.-China trade deficit.
(Editor’s note: Italics added for emphasis)
Something else that needs to be considered is China’s massive holdings of U.S. debt. From Reuters’ Emily Flitter back on September 22:
China’s vast Treasury holdings, which totaled $1.174 trillion in July according to Treasury data, have been a major source of anxiety among policymakers and some Wall Street analysts who thought they gave China too much power over the United States, politically and economically.
China has been known to evoke the specter of massive Treasury selling in political disputes. It could do so again as the currency manipulation issue heats up…
If China were to dump Treasuries, that would not bode well for the greenback. And once again, you’re talking about higher costs for U.S. consumers as many consumer goods are imported. A weaker dollar equals higher prices for imported goods.
From what I’ve read this morning, analysts at Goldman Sachs and elsewhere don’t think this legislation will be passed into law. But if there’s one thing I’ve learned from observing and actually working in Congress, it’s that Washington D.C. can be quite unpredictable. Especially these days when their backs are up against the wall.
Stanway, David and Wang, Aileen. “WRAPUP 2-China warns of trade war if U.S. bill passes.” Reuters. 4 Oct. 2011. (http://www.reuters.com/article/2011/10/04/usa-china-idUSL3E7L40IA20111004). 4 Oct. 2011.
“An RMB Revaluation: Could It Reduce Global Trade Imbalances?” China Knowledge@Wharton. 31 Mar. 2010. (http://www.knowledgeatwharton.com.cn/index.cfm?fa=viewArticle&articleID=2200&languageid=1). 4 Oct. 2011.
Flitter, Emily. “Time for China to sell U.S. debt?” Reuters. 22 Sep. 2011. (http://www.reuters.com/article/2011/09/22/us-markets-bonds-outlook-idUSTRE78K6KS20110922). 4 Oct. 2011.
Christopher E. Hill, Editor
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