Asia Needs Deal to Prevent Panic Selling of U.S. Debt, Yu Says

Asia Needs Deal to Prevent Panic Selling of U.S. Debt, Yu Says
By Kevin Hamlin
Sept. 25 (Bloomberg) -- Japan, China and other holders of U.S. government debt must quickly reach an agreement to prevent panic sales leading to a global financial collapse, said Yu Yongding, a former adviser to the Chinese central bank.
``We are in the same boat, we must cooperate,'' Yu said in an interview in Beijing on Sept. 23. ``If there's no selling in a panicked way, then China willingly can continue to provide our financial support by continuing to hold U.S. assets.''
An agreement is needed so that no nation rushes to sell, ``causing a collapse,'' Yu said. Japan is the biggest owner of U.S. Treasury bills, holding $593 billion, and China is second with $519 billion. Asian countries together hold half of the $2.67 trillion total held by foreign nations.
China, Japan, South Korea and others should meet soon to seal a deal, said Yu, a former academic member of the central bank's monetary policy committee. The talks should involve finance ministers, central bank governors and even national leaders, he said.
``Whether some kind of agreement between them to continue to hold Treasury bills is viable, I'm not sure,'' said James McCormack, head of sovereign ratings at Fitch Ratings Ltd in Hong Kong. ``It would be unusual. If it became apparent that sovereigns in Asia were selling Treasuries the market would take that quite badly, it's something to be avoided.''
The global credit crisis, triggered by a housing slump in the U.S., has saddled financial companies with more than $520 billion in writedowns and losses, collapsing Bear Stearns Cos. and Lehman Brothers Holdings Inc. in the process. Insurer American International Group Inc. and mortgage giants Fannie Mae and Freddie Mac also were rescued by the government.
`Grave Threats'
U.S. Treasury Secretary Henry Paulson is urging Congress to pass a $700 billion plan to remove devalued assets from the banking system. Federal Reserve Chairman Ben S. Bernanke said Sept. 24 that the U.S. is facing ``grave threats'' to its financial stability.
China's huge holdings of U.S. debt means it must bear a large proportion of the ``burden of sorting things out'' in the U.S., Yu said. China is not in a hurry to dump its U.S. holdings and communication between the two nations every ``couple of days'' is keeping Chinese leaders informed and helping to avoid a potential panic, he added.
``China is very worried about the safety of its assets,'' he said. ``If you want China to keep calm, you must ensure China that its assets are safe.''
Currency Manipulator
Yu said China is helping the U.S. ``in a very big way'' and added that it should get something in return. The U.S. should avoid labeling it an unfair trader and a currency manipulator and not politicize other issues, he said.
``It is not fair that we are doing this in good faith and are prepared to bear serious consequences and you are still labeling China this and that, accusing China of this and that,'' he said. ``China knows what to do. We don't need your intervention.''
The U.S. financial crisis had taught China a lesson and that was: ``Why are we piling up these IOUs if they may default?'' China's economic expansion strategy, which emphasizes export growth that has led to trade surpluses and the accumulation of $1.81 trillion in foreign-exchange reserves, is the main problem, said Yu.
``Our export-growth strategy has run its natural course,'' he said. ``We should change course.''
China should stop intervening in the foreign currency markets and thus allow rapid appreciation of the yuan, he said. While this would cause pain for exporters, China could ease the transition by using its strong fiscal position to aid those who lose their jobs. It also should stimulate domestic demand to offset lower income from overseas sales.
Without yuan appreciation, China will continue to accumulate foreign reserves, which means further accumulating ``IOUs from the U.S.,'' said Yu. ``This is paper and it may default and it will not increase China's national welfare.''
If China doesn't allow the yuan to appreciate and continues to promote export-led growth it will lead to confrontation with the U.S. and Europe, Yu said.
To contact the reporters on this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net Last Updated: September 25, 2008 01:45 EDT

September 21 update on investment horizons

this update follows one of the most turbulent weeks in the history of wall street.
Lehman failed on monday, aig given bridge loan wednesday, talk of a systemic
bailout plan by the government with first cost appoximations put at 700 billion.
the market plunged and credit markets all but seized at the start of the week, but
by the end of the week with increasing rumours of a resolution trust II approach,
stocks soared 700 points in last 2 days.

hopeful guidance.
Again i want to move to positions which require less investment of time and nervousness.continue discipline and safety. hedge against weakening dollar. oil might rise, take modest positions in foreign currency and gold.

short term plays - dhi, gld and merkx (play against dollar), iyf (the financial
index) play for bailout.

sold dhi (bought 13.4 - sold 14.5)sell iyf with another 6% rise (currently 76)keep gld position to 94 (currently 84)
long-term purchase - bought 35000 bond of Goldman

the market went to 10600 but i did not yet increase my position in vti. i believe
market will retest the 10600 mark and i will then purchase vti.

beginning to invest the money from the sale of father and mother's home.

for the trust purchased on long-term savings preservation type trust promising 1% above 3 month trailing cpi.will buy one short-term cd.

joint account.
keep cash in etrade savings account anticipating a drop in the vti and perhaps in the price of an interesting bond. tempted to buy a caterpillar bond but the price may go lower. perhaps its better to wait out this process in a 4% cd, but the savings account does pay 3.3%

so how much is my home worth?

we buy chinese goods and pay in dollars. in turn the chinese are unable or unwilling to consume a like amount of american goods. the resulting surplus on the chinese side is absorbed by the issuance of debt in the form of us treasury bonds commanding a very low rate of interest. in effect and in practice, the us pays its debts by printing more paper dollars. this is the tax imposed on the world by the currency (currently the dollar, prior to world war I, the British pound) which is accepted globally as the sovereign means of payment.

the repatriated dollars lacking sufficient domestic productive outlets is invested in fixed assets: homes, commodities and stock issues or seeks investment opportunities in foreign markets. the prices of assets (e.g. our homes) and commodities (e.g. oil) are pushed higher and higher by the easy liquidity provided by foreign purchases of our debt and the recourse to more and more subtle means of leverage by wall street finance.

evidently a problem here lies in the world-wide glut of dollar instruments in relation to their potential productive investment. the excess dollars are spent to speculative purpose on asset bubbles.

finally, the unproductive speculative use of the dollar in raising asset prices (in the current crisis, home prices) foments a bubble which pops when the leverage behind it can no longer prop it up. in a neo-liberal economic regime like that of the us, finally, wages are inadequate as the base to keep supporting and building the house of cards.

what's the holistic way out of these specualtive bubbles? ultimately the rest of the world, the chinese first of all, needs to increase domestic wages and consumption and prop up less of its export production by buying worthless us treasuries. in turn, the us has to rebalance its consumption patterns with a more equitable distribution of wealth and produce more of what the world needs.

among the many unanswerable questions: can the world sustain more consumption from asian countries? the price of raw materials can be expected to restrain western consumption standards in asia and then also reduce those standards in the west itself.

so how much is my house worth? well, the government by nationalising the housing market debt wants to prevent you from knowing its current value. this is considered to be in your best interests. in effect the government will prevent the pricing of unfunctioning mortgage securities and hold the debt until it judges the market is more favorable to judging the true value of homes. in the treasury's opinion, the proverbial bottom will then have been reached. sounds like a plan to me. the chinese lent us the dollars we used to drive up the housing market. now they are asked to continue to buy us treasuries after the speculative use of the previous lent dollars has gone bust. obviously, the chinese need to work off the pile of dollars in their possession without causing its collapse.