Currency Question (Dec 10, ’07)

There could be a backdoor to fixing the currency problem. Namely, the way Asians and other neomercantilists fix their exchange rate to ours is by holding our securities. Moreover, ‘zero risk’ US gov’t bonds are a favorite investment vehicle among rentier states and other command economies. Foreigners make their currencies cheaper by holding our money, which acts like a counterbalance. The logic is that, if the demand for dollars increases relative to another currency, the dollar gets stronger vis-a-vis that self-same currency. The foreigners don’t manipulate our currencies in a vacuum. By allowing them to hold our securities, we are complicit in this currency fixing regime.

Asiatic countries do not allow foreigners to hold more than a very small percentage (if any) of their government bonds. If they did allow it, that would defeat the purpose of their [sterilization] efforts. If we want to affect change regarding the current currency situation, it would be wise for us to impose restrictions on the amount of government bonds we sell to foreigners. I would say specifically Asians, but they would find away around such words – e.g., third party brokerage. Perhaps we could put the bonds we sell to foreigners in specific tranches and designate them as such. A gradual and measured approach to restrictions of this kind could perhaps put the US and China on a relatively equal currency regime in ten years.

The alternative of starting a trade war by levying taxes on imports (tariffs) would be disastrous and should not be contemplated. That being said, we should also not restrict foreign purchases of nongovernmental (private sector) securities because that would be overly restrictive and it would hurt business (like Sarbanes Oxley).

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