China's Hefty Stimulus Package - Bad for the Dollar?

China recently announced a stimulus package for its economy, promising 586 billion. This is a rather enormous stimulus package relative to the size of China's economy; John Browne says it would be analogous to a stimulus package of 3 trillion U.S. dollars by the U.S. government. For the U.S. dollar, this is not a particularly ominous sign.

This major expenditure on the part of the Chinese government will leave fewer funds available to purchase Treasury bonds -- just at the time when the U.S. government is issuing more and more debt. Even potentially worse for the U.S. dollar would be if China decided to sell its holdings of U.S. treasuries to finance its stimulus package.

Either way, the result is falling demand for U.S. Treasuries while market supply is increasing -- which will naturally lead to the coming bear market in bonds that we recently discussed on SeekingAlpha. As a result, China's stimulus package is a bearish sign for the U.S. dollar and for U.S. treasuries.

Comments

[Dean M:]

Aren't you the guy who was touting commodities as a long term holding just as they were beginning to collapse? Based on your track record I will stay in the dollar at least for a while yet...

2008 Nov 14 09:33 AM

[Dean M:]

Just to expand on my previous comment. You could make an equally bullish case for the greenback going forward:

-Recent turmoil proves it is still the worlds reserve currency
-It probably overshot to the downside in the recent multi year decline.
-US was first in, probably will be first out of global recession.
-China stimulus should have a positive impact on global economy.
-Check the chart on UUP if you question whether the bulls are still in control.

I don't question your arguments as well but you are consistently biased in your analysis. You sound like sour grapes because the trade went against you. Better to be a realist than a bull or bear, I will be the first to jump ship if the dollar actually does trend down.

2008 Nov 14 10:02 AM

[huangthomas:]

Possible weakness in US$ depends more on the trade imbalance between two countries and not on the Chinese national budget. There never be a budget item to purchase US treasuries in Chinese national budget.

2008 Nov 14 11:21 AM

[doubleguns:]

What happens when all of the recent short term bonds 1-6 month bonds expire. As i understand it everyone ran to the US dollar (treasuries) when the crisis hit in Sept. The bond yields fell through the floor.

As I see it and correct me if I am wrong.

Foreigners (and americans with foreign investments)had to
1. sell thier foreign assets
2. purchase dollars with foreign currency.
3. purchase US treasuries/US assets

This put GREAT demand for dollars strengthening dollars

When this reverses and everyone rushes back to foreign assets what is going to happen to the dollar? Crash?

!. Sell US assets to get dollars
2. Purchase foriegn currency with $. (Many $ now on the market)
3. Purchase foreign assets.

With many $ on the market the exchange rate should fall weakening $.

Do i have this right or am I am I missing something?

I dont think this will happen until the recession gets closer to ending but if this happens it would happen before the end of the recession since no one wants to wait till the dollar collapses to sell. First one to run back to foreign assets gets best exchange rate on dollar and cheapest foreign assets. I dont think the door is wide enough for everyone to fit through it once this starts.

2008 Nov 14 12:39 PM

[Allah:]

If foreign currencies are so great that people can't wait to get into them fast enough then why did they abandon them in the first place? In 6 months we will still be in recession and commodity based currencies will still be weak, and Europe ? forget about it. I'm sure eventually the dollar will weaken as a result of all this stimulus but we're not the only ones running the printing presses overtime.

"When this reverses and everyone rushes back to foreign assets what is going to happen to the dollar? Crash? "

2008 Nov 14 01:02 PM

[huangthomas:]

The reasoning is sound. The question is when? I believe everyone is right as long as the current financial turmoil is still on, the US$ will remain strong.

2008 Nov 14 02:21 PM

[Allah:]

The question is always 'when'. Based on this blogger's articles, I get the impression he thinks we should be trying to catch falling knives right now.

2008 Nov 14 02:39 PM

[doubleguns:]

sting, US treasuries is where the foreign currency headed but they had to get dollars to do that. They did not want to stay in foreign assets or our stocks for that matter that were and still are dropping. US teasuries at 1 month are getting .05% right now. NO THAT is not five percent that is point zero five percent. It beats loosing 20% however. They have very cheap stocks right now too but who knows when it is going to quit going down. AT some point it will stop going down and when people think we are at the bottom they will rush back to thiere markets. That is how I see it but will they keep buying new short term bonds each month and if so for how long is THE ULTIMATE QUESTION. Everyone wants someone to tell them when this dance is going to end. I think maybe DOW 4500. Hows that for a WAG.

2008 Nov 14 04:13 PM

[Allah:]

Nice use of caps lock, that really bolsters your arguments.

2008 Nov 15 12:12 AM

[Allah:]

BTW, I hope we do get a weak dollar when all the dust settles from the current mess. American manufacturing will be more competitive and it will help jobs. And consumer balance sheets will improve if we're not wating so much money on Chinese crap. Unfortunately I don't think we'll be so lucky as to see it drop that much any time soon. My guess is that we will come to equilibrium somewhere between current levels and recent lows. Emerging economies have an interest in propping up our currency to support their manufacturing sector.

2008 Nov 15 12:20 AM

[jepittman:]

At some point the dollar will likely weaken again. However these trends can continue for considerable periods of time. The US has been a good place to invest for a long time. Our markets are deep and liquid. Capital is free to come and go in hugh size without causing significant volatility. Our institutions are strong and our political system is safe from tyranny (despite what some democrats would have you believe). The point is we are a nation of laws not men and we have a long track record of political and economic stability. Also we are unchallengeable militarily.

On the negative side we carry too much debt which one day will become a bigger problem. We run a chronic trade deficit and have a low national savings rate. Our public and private sectors are seemingly unable to stay within even the most generous of budgets.

At some point in the future it is likely our creditors will at last have too much of our obligations and will demand higher and higher interest rates in compensation. When this becomes apparant is not entirely knowable but many say it is very soon. Many of these same people have been saying it for more than a few years. I suppose if you forcast something long enough you will eventually be right.

2008 Nov 15 02:36 PM

[tragicomix:]

China does not have to sell Fx reserves to finance its expenditure. It will either monetize the additional debt or borrow from the banks. Inflation is down to 4% and may drop to 1 or 2% in a year. Further, overall debt to GDP ratio is quite low. It parks its trade surpluse and capital surplus in US Treasuries. To the extent that its trade surplus may become smaller and capital flows from overseas Chinese reduces, China will have less funds to park in USD. It is a different matter whether the stimulus will yield the desired result: most probably only partially.

2008 Nov 15 05:07 PM