Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
China and Japan are both worried about the current upcoming fight over the U.S. debt limit. According to the Independent:
If the United States doesn't, what would happen?
Japan is also concerned. It is threatening to slow or stop its purchases of U.S. Securities. Financial Times reports:
Over the last year, Japan has bought dollars and invested them in U.S. bonds in order to lower the exchange rate of the yen versus the dollar by about 25% (from 1.28¢ per yen on October 8, 2012 to 1.02¢ per yen on October 8, 2013). They wanted Japanese automobile and electronics companies to earn huge profits in their competition with American car companies and electronics companies. These Japanese companies will likely invest some of their increased profits in new products, which should enable them to gain market share in their competition with American companies.
If Japan and China stop buying dollars with their currencies to keep their currencies at an artificially low value, they may have to let their currencies rise in foreign exchange markets. They might even have to take down their trade barriers and let their people buy American products with the dollars that their exporters are earning from selling to the United States.
The falling dollar, relative to the yuan and yen, would make American products more competitive with Chinese and Japanese products in U.S. and world markets. The boom in U.S. net exports and business investment would likely bring the United States out of its current trade-deficit caused economic stagnation. The long-term U.S. interest rate would rise to a level that would encourage households to save and discourage the U.S. government from running massive budget deficits. We can't have that!
Journal of Economic Literature:
Atlantic Economic Journal: