Unfortunately I cannot provide evidence for this assertion. But it was pretty widely talked about. I remember the Economist covering the government's attempts to deflate the dollar to more easily pay back its debts to foreign countries. The administration defended its actions as a way to increase exports and get the economy moving. It is disingenous to argue that recent government actions have been just massive incompetence and not a conscious attempt to benefit United States capitalists at the expense of others, both foreign and domestic. I could just read the Times or Post if I wanted this kind of beltway logic.

HTWW has its analytical hat on correctly with this one.

Reality is, China's decision to export while maintaining an undervalued rmb had a downside. In order to keep their currency undervalued, they needed to keep US$ in US$. That required buying massive amounts of US T-bonds at very low historic interest rates (it also allowed millions of us to buy homes at fantastic 30-year fixed mortgage rates).

Honestly, would YOU invest in a 10-year US Treasury Bond that is currently yielding 3.66%?

It certainly seems like a zero sum game to me, with the American side as the losing one. A slew of Chinese goods and financing for, among other things, the Iraq war, has given us a mammoth debt owned by China. It's good for them that "the U.S. appetite for Chinese goods has translated into increased prosperity for hundreds of millions of Chinese," but, frankly, it's only enabled poor American leadership to continue to be just that: poor.

You meant Inflate, no?

but they do betray a breathtaking misunderstanding of the quality of recent government in the United States if they think we could intentionally pull off that kind of massive grifter's scam on China

The ‘current government’ has done a pretty good job of hoodwinking the US into a war with Iraq. It did a pretty good job of hoodwinking American’s to re-elect Bush in 2004.

For all its complete incompetence at actually DOING its job, the current government is very good a fooling people into thinking that its doing its job.

I agree with the HTWW assessment, and think Rockstar8989's emphasis is well placed, too.

I'm surprised no one references the NYT's article, "Main Bank of China Is in Need of Capital" though. A big piece of the puzzle is now fitting right in.

Back in the boom from 04 to 06, there were times when I saw real estate being advertised with monthly payments of $1500 for $500k houses -- I knew this was unsustainable and couldn't figure out where the money was coming from to induce this mortgage frenzy. Now that S&P reports that the central China bank has invested something like $340 billion in Freddie and Fannie, I finally inderstand!

It's a supply/demand issue, if money like that is being poured into the mortgage buying market, mortgages will increase until that mortgage buying market is satisfied, independent of quality.

...Dan

Tim, I meant deflate the dollar with respect to other currencies. Perhaps the better terminology would be devalue. I imagine this leads to inflation of the price of goods imported into the country.

Why put the emphasis solely on China's actions? Sure they kept their currency artificially low and it was bound to rise in response to the huge trade deficit. But the US' choice to keep interest rates low while running a huge deficit played a role as well. So yes the Chinese bankers are morons, and now the US will pay them back with cheaper money.

I understand the North American currency is dead, but what a beautiful plan it was. Those holding worthless US dollars (China) would be forced to redeem them by a certain date, and we would set the terms. Firesale prices no doubt. It was a once in a lifetime chance to see what the dollar was really worth. It was a chance for Paulson and company to get that paper off the books, and orphan those treasury bonds. We would promise to pay the interest, (nothing much really), lock up the principle. After that the Fed could go ahead and set prime at real rates. It was like a lot of other backdoor deals Bush had in mind, like selling the port authority to Dubai, for military access to the south shore of Hormuz.

When the rumors were ripe that China would dump their bonds, Treasury printed several trillion real dollars, to pay the bearers in cash. It was a superb bluff, and evidently it worked. Printing cash is actually less inflationary than posting new credit, cash takes longer to work through the system. The Chinese have now issued domestic bonds, backed with their US treasury holdings, as I understand it.

The government in Bejing had their reasons for taking Treasuries, it really has nothing to do with free market principles, or the exchange would have stopped a long time ago. Margins at most Chinese factories are zilch. Who knows who it would have worked out in a free market, maybe a lot better. But Treasury is only the clearing house for the currency, they have nothing to do with the demand for goods, the trade agreements, and so forth. A wiser government would have seen the trouble coming and put the brakes on.

Did Andrew say that this entire boondoggle stablized the US economy?

Definately learned something there. Thanks. To clarify I meant that Chinese bankers were morons if they were actually working for their people. Being that they work for the interests of of the wealthy, they did their job well. Now the Chinese elites can point to the US as having duped the people when instead they all were part of a giant pyramid scheme. Anger is then directed outwards to an unseen enemy when those who stole their labor are up on the hill. But as Andrew says, millions of Chinese have increasing prosperity. Some are even able to eat meat now!

By far the biggest dupes are Americans. Witness the Treasurys' new plan to take over Freddie and Fannie, released after the markets closed on Friday, and to be finished before Asian markets open Monday morning. Treasury is probably going way beyond what the 689 page Congressional bill authorizes, but after gving Bush a blank check on Iraq you might think the Democratic Congress had learned something.

Specifically Congress authorized Treasury to buy shares in the GSES, however the Bush administrations plan for conservatorship will make those shares worthless, and the 25 or so billion Paulson said they might need will only be a drop in the bucket to what the real taxpayer obligation looks like.

I commented that Bernanke was frozen in the headlights, fearing anything the Fed did would be scrutinized by the next administration. Apparently there are limits on hubris, at least for those facing reelection, or confirmation. (One wonders if McCain would tap Paulson to insure some continuity?) Congress also lifted the debt ceiling, some Republicans complained about the bill when it was drafted in July. That should turn into a chorus of boos, but this is an election year.

Fannie and Freddie sit on a rather large mortgage portfolio, as you might guess, and those assets are highly desireable, and when the Bush people are finished they will be sold for pennies on the dollar, to private investors, and stripped of their GSE status no doubt. Privatize gains, Backstop losses.

For some analogy of how this works, check out the bankruptcy of Kmart, in which shareholders were denied any of Kmarts real estate holdings, which were sold and promptly scooped up by Eddie Lampert of Sears before anyone knew what happened. Similar MO this time probably, if you are a speculator pay close attention, you might get a chance to buy a few shares for yourself, or maybe not if they sell them under IPO guidelines, which is how that Sears holding deal worked I am pretty sure. (If you have ever tried to buy shares of an IPO you know how that works, the investment banks get first shot, at predetermined, firesale prices usually, and the chumps have to bid against each other in the market)