--- "John K. Taber" <jktaber@tacni.net> wrote:
Here is the NY Times article. Could somebody help me out with the
statement
that foreigners buying US Treasuries returns money to American consumers
to
continue buying foreign goods. I just don't understand the claim. Is it
accurate, and if so how does this mechanism work? 

John K. Taber

http://www.nytimes.com/2004/09/18/business/18trade.html

My naive banker's understanding is that:
1) If foreigners were not buying US treasuries, then US citizens would have to buy them, which would leave them with less money to spend. And if they didn't buy them, then they would have to pay higher taxes to support government spending, or spending would have to be cut.
2) Much more importantly, US treasuries are priced in $ (obviously). This means that Chinese buyers of US treasuries have to use their Renmimbi to buy US $. Therefore there is increased demand for dollars and the price of the $ rises - i.e., the dollar can be used to buy relatively more stuff in that is priced in other currencies.  And the Americans who have sold dollars are left with a pile of Renmimbi.  These renmimbi are used to buy Chinese goods that are imported cheaply to the US. And for the next few decades the US taxpayers will pay interest in $ to the Chinese holders of the treasuries.

I thought the article was right not to be catastrophist about this relationship.  When things fall away from equilibrium they might crash back to equilibrium, they might slowly unwind, or they might continue indefinitely. Any firer conclusion is crystal ball gazing.  

An interesting aspect of the US-China relationship that I came across doing research for my bank is the extent to which the Chinese rely on US expertise.  Sometimes this is through joint ventures, where US businesses get licensing fees for intellectual property - money for old rope if you ask me. They've already spent money to develop a process, and now they'll charge some one else for actually doing something with it.  But it goes much deeper. Consultants like McKinsey are busy writing Chinese building regulations, industrial regulations etc. This is also likely to bring benefit to US companies that are already complying with these regulations. It's an interesting aspect of the Empire.

--James