The gun to their head is of their own making since it is the Chinese that refuse to let go of the currency peg. Interestingly enough higher rates should lead to continued purchase of dollar denominated assets such as bonds. At least the Chinese will get a better return for holding a gun to their own head.
Travis
> ECONOMY: CHINA’S CURRENCY POLICY LEADING TO HOUSING BUBBLE IN U.S. JAMES
> BERMAN, president of JBGLOBAL: “China must buy our bonds to peg its
> currency in order to possess enough dollar-denominated assets to serve as
> a backstop to the Yuan. This gun to their head shanghais them into buying
> treasury bonds without regard to our deficits or low yields —- the type of
> thing a normal investor would care about. The artificial buying of our
> bonds without regard to price causes our yields to be lower than they
> would be in a truly rational market, which in turn keeps mortgage rates
> artificially. These low rates fuel our housing bubble in the U.S.”
> (3/21/05)
>
>
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