Results for “interest rates risk fed”

63 found

Using the threat of tariffs to pressure the Chinese to revalue their currency. 

Matt Yglesias considers the politics, don’t forget Dan Drezner either.  Brad DeLong offers the full economic analysis.  The bottom line is a bit difficult to parse from Brad’s lengthy post, but I’ll offer my summary. 

The Chinese (and other foreigners) are offering a massive subsidy to current levels of U.S. federal spending.  It happens to coincide with their desire to subsidize their exporters.  A low renminbi implies high Chinese exports, high dollar reserve accumulation in China, and relatively low interest rates in the U.S..  Forcing this picture to end overnight would run a significant risk of plummeting U.S. asset prices and a run on the dollar.  In the longer run the not-really-stable Chinese currency might end up whipsawed by international capital markets (Indonesia?  Thailand?  Argentina?).

I’ll make all the concessions here you want.  The current Chinese arrangement is screwy and harms the Chinese citizenry.  I don’t usually favor fixed exchange rates or export subsidies, implicit or explicit.  Somehow, sometime, someway, the Chinese should look toward another policy.  I’ll make those concessions until they are coming out of my ears.  But I still won’t favor dropping a lit match on an open field of gasoline, which is what this American pressure would amount to.  Nor does it matter whether or not you "trust the Chinese," whatever that might mean.  This is not the right way to deal with them, and yes it will remind them of the Opium Wars.

I am not a pessimist about our current economic course, but we can still wreck things if we choose.  And right now we may well make this gross mistake.

I have heard several accounts of why a low or falling dollar is bad:

1. U.S. citizens hold a relatively high percentage of dollar-denominated assets, so they are now poorer.

2. It looks bad when "the world’s strongest country" has a currency low in value.  Perhaps OPEC will start pricing oil in terms of Euros.

3. Markets dislike uncertainty per se.  People start wondering what a dollar is really worth and this causes them to hold off on other investments and purchases.  This hurts financial markets and the economy more generally.

4. The real problem concerns interest rate hikes.  The Fed won’t let the dollar fall too far, for some of the other reasons listed.  It will stop a dollar free-fall by raising interest rates, which is bad for the economy.

5. If the dollar is falling, people will expect it to fall more and unload dollar-denominated assets.  This one, however, is tricky.

If the dollar is expected to fall, we would expect nominal interest rates on dollar-denominated assets to rise (or the dollar must fall in value immediately).  A reasonable equilibrium will obtain and dollars will once again be an attractive asset to hold.

My take: #1 is correct, but not a major problem.  Imports are not a huge part of our economy, and often the exporter eats the currency loss, at least for a while.  I don’t put much stock in #2.  #3 and #4 are real.  #5 makes little sense to me, but I cannot rule out its role in today’s world.  How can it work?  Perhaps portfolio managers bear a special penalty from being thought stupid if they hold onto dollars while a falling dollar makes the headlines.  In this case a falling dollar would continually increase the real risk premia on dollar assets, even if traditional measures of risk do not much vary.

Keep in mind that the dollar did have a "soft landing" in the 1985-1989 period, so these are all possible costs, not necessary outcomes.

I cannot do links from this unusual Calcutta terminal, but read Brad DeLong’s recent posts on the dollar as well.

Seeking to tap into the billions of dollars that Mexicans working in the United States send home each year, a Mexican mortgage finance company is opening a New York branch on Thursday to offer loans to Mexicans who want to buy a house in their country.

Last year, Mexicans sent home $13.27 billion, more than the country earned from foreign tourism. The money lifts many families out of poverty and in some regions is the only source of income.

Many Mexicans working in the United States hope to save enough to buy a house in Mexico and return. But the money they send home is often consumed by daily needs.

Under the lending plan created by Hipotecaria Nacional, Mexico’s largest mortgage finance company, a Mexican working in the United States – legally or illegally – will be able to apply for a loan and pay the monthly installment in dollars through an American bank.

Relatives in Mexico must also sign the loan, which is issued in Mexico in pesos and backed by Mexico’s national mortgage bank, Sociedad Hipotecaria Federal.

And what do the stats look like?

…a worker would need to pay $400 a month for a 15-year mortgage at 15 percent interest on a house valued at about $36,000 with a 20 percent down payment. That interest rate, which would be quite high in the United States, is reasonable by Mexican standards, given higher base interest rates, inflation and the greater risk of default.

I’ll add that a house in rural Mexico costs only a few thousand dollars to buy or construct.

Nor are real estate-based capital movements restricted to mortgages proper:

…it has been Mexican companies that have come up with the most innovative ideas. Since 2001, Cemex, the cement giant, has allowed Mexicans to pay for bags of cement in the United States that relatives pick up in Mexico to build houses. The company, which has five offices in California and one in Chicago, even offers free engineering advice.

Here is the full story.