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matt605
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Former US Treasury Secretary says dump T-Bills.

Larry Summers, former US Treasury Secretary and now former President of Harvard University, is urging everyone to diversity out of US Treasury bills. They don't return a good enough return on their money. Maybe what Summers is really saying is that the USA is just too big to fail. If a run on T-bills will collapse the USA economy, then world leaders musn't allow it to happen. The cost of failure to them would be too high.

Advice to Invest Less in U.S. Bonds
Foreigners Can Do Better, Summers Says

By Paul Blustein
Washington Post Staff Writer
Thursday, June 22, 2006; D01

A former U.S. Treasury secretary is advising some of the world's biggest holders of U.S. Treasury bonds that they ought to find much better ways to invest their money.

Lawrence H. Summers, who headed the Treasury in the last 18 months of the Clinton administration, has argued in recent speeches that developing countries in Asia, Eastern Europe, Latin America and Africa should put much of their excess funds into stocks. Too often, he contends, the central banks of those countries invest their hoards of foreign securities -- now totaling several trillion dollars -- in safe but low-yielding U.S. Treasurys.

The return "will be zero" on those Treasurys after inflation and currency changes are factored in, Summers said in a lecture last week at the Center for Global Development, a Washington think tank. Meanwhile, he said, the developing countries are passing up much more lucrative investments -- "this, in societies where hundreds of millions of people are still desperately poor." In another speech, this one in Bombay a few weeks ago, he said, "It is striking to estimate the cost to developing countries" of their Treasury-heavy portfolios.

Given Summers's previous job as the official with chief responsibility for financing the U.S. government, there is an obvious paradox in his suggesting that any central bank disinvest in U.S. securities. In a telephone interview yesterday, he said he saw no incongruity in his position, because he is not urging wholesale dumping. He said central banks around the world must keep "large volumes" of their money in super-safe assets such as Treasury bills. And "any diversification" into riskier investments such as stocks "is not likely to be rapid, in ways that would affect" the Treasury's ability to borrow at affordable interest rates, he said.

Summers, who announced in February that he will step down as president of Harvard University, is known for his impolitic remarks -- a famous example being his suggestion that "intrinsic aptitude" could explain why fewer women than men have excelled in science and math. So his argument against Treasurys might seem to be just another case of his penchant for flippancy.

But Summers has developed an elaborate rationale for his proposal, and he still commands attention in policymaking circles. The World Bank, where Summers once was chief economist, has shown considerable interest in the idea.

Summers's proposal is based on fundamental shifts in the global financial system that arose well after he left office -- in particular, an immense buildup in the reserves of foreign exchange held by developing countries' central banks. Those reserves have grown as the United States, with its burgeoning trade deficit, imports goods from abroad.

The dollars Americans spend on foreign products eventually end up in the hands of central banks overseas, and the central banks invest the proceeds largely in U.S. government securities. They do so in part because they want to protect themselves against financial crises of the sort that struck Thailand, Indonesia, South Korea, Russia, Brazil and Argentina a few years ago.

For a developing country, accumulating a big war chest of dollars can help discourage speculators from trying to drive down the value of its currency.

But the upshot, in Summers's view, is "the central, global financial irony of our times": Countries that need capital to finance rapid development are shipping more money to the United States than is flowing in the opposite direction -- and it is their official policies to do so.

Suppose, he said in his lecture, "you were on Mars, and you had not seen planet Earth, but you had studied economics, and someone said there are these substantial number of countries that are growing at 4, 5, 6, 8, 10 percent a year that are relatively poor, and there are these other countries that are rich, aging, growing at 2 percent a year, 3 percent a year, 4 percent a year perhaps, with slowly growing populations."

Although such a Martian economist would assume otherwise, "the flow of capital is actually very substantially from poor countries to rich countries, and in particular it is from poor countries to the world's richest and most powerful nations -- on a scale never before contemplated or seen."

Moreover, Summers said, the chief explanation is not "capital flight," in which wealthy foreigners in unstable countries park their savings in the safe haven of a U.S. bank account. Rather, it is the collective decisions of central bankers as dollars roll into their reserves from the export of goods to the U.S. market.

But the reserves that have piled up, Summers said, are "far in excess of what is necessary" to defend against a crisis -- probably more than $2 trillion too much, he estimated, based on the most commonly used guidelines. Moreover, "no one could suppose that these are going to be high-return investments," because the interest rates on U.S. Treasurys are about 2 percent after inflation, and for developing countries even that paltry yield would be wiped out if -- as many analysts expect -- the dollar declines against other currencies.

The phenomenon is occurring not only in countries such as China that are well known for amassing vast quantities of Treasurys, but also in many poor countries that, while holding much smaller amounts than China, still hold sums that are sizable relative to their gross domestic products. Algeria, for example, has about $50 billion in what Summers calls "excess reserves," which is about half of its GDP. A few countries, such as Singapore, have already begun using their reserves much more creatively, Summers noted.

Summers acknowledged several problems with his proposal, such as the danger that central bankers would start gambling with their reserves by putting them into even more risky investments than stocks.

But he pointed out that at an annual return of 5 percent -- a conservative estimate for the long-run yield on a sensible stock portfolio -- the $2 trillion in excess reserves could produce average annual yields of about $100 billion. That is more than all the rich countries in the world spend on foreign aid to poorer countries each year.

Therein lies potential, he said, for realizing economists' fondest wish: "an almost free lunch."

© 2006 The Washington Post Company

2006-6-23 04:14 AM

tongluren (tongluren)
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Entry Fee

Well, returns are important, but keeping the U.S. consumer market afloat is also important.  It means keeping the Chinese workers employed.

Longer term, the "habit" of the credit junkie - owing the world almost 9 trillion dollars, cannot be sustained.  The world is running out of patience to lend.  So indeed it is in China's national interest to develop a stronger domestic market.

Kill two birds with one stone - print another 6.5 trillion in RMB, and GIVE 5,000 RMB to each man, woman and child in China.  The resulting shock will drive the RMB lower and continue to favor exports. The resulting increase in domestic consumption will soak up the huge domestic excess capacity (which has and will hold down inflation).  If coupled with a program to encourage entreprenurial development, the effects can be permanent - China can enjoy a full decade of mid double digit growth with little inflation.

2006-6-23 04:45 AM

matt605
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That's sort of like what America has done.

With its social security and medicare program, the USA has shifted the bias in economic activity toward living longer and healthier. When social security was first founded, only a few people lived to age 65. Now 65 is young, and that's when social security and medicare begin. So the government keeps printing monthly checks and keeps paying the doctor bills for people to sustain a quality life.

When the government skews the economy through production subsidies, it subsidizes old age consumer goods and health care.

2006-6-23 05:52 AM

roger604
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China will remain dependent on buying T-bills for as long as domestic consumption is held back.

What we need is a massive campaign to promote Chinese brandnames for Chinese consumers. People in China must be proud of the fruits of Chinese industriousness and innovation.

We need an LG, we need a Samsung, we need a Sony, we need a GM and we need a Ford

Buy those high-quality Chinese brandnames and show the world how much money you have!

2006-6-23 06:34 AM

greendragon
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Reply #2 tongluren's post

Sounds like quite dangerious advice. Print money and just give it to the citizens...and so they spend the money and happy ever after.

What if the citizens decide to safe the money...and banks stuck with MORE LOANS to give out to the HARDLY PROFITABLE INDUSTRIAL? It sounds like a gamble, why not print the money, and let the local governments spend it on local infrastructure upgrading? The money eventually will reach the citizens but they first have to work for it.

Getting them to spend is another matter.

First you need to make the citizen feel secure to spend instead of saving. This would mean
(1) Worker's insurance against disability.
(2) A Worker's savings pension scheme.
(3) Ease to obtain credit card lines.

It is obvious that China bank loan is skewered to heavily to CORPORATE INVESTMENTS. It should be, i think 25% industrial, 10% personal credit, 15% on hire purchase vehicles, 20% property mortgage and rest in trade financing or bank reserves. (or something like that percentage)

The NPL is highest among industrials, so with more credit spread out.....it should increase consumption while keeping NPL financing the Industrial controllable.

Green DRagon

2006-6-23 11:13 AM

greendragon
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Reply #4 roger604's post

China is still a poor country. The cars from Chery etc. leave much to be desired. I have seen the cars in the Alado showrooms in Malaya. I have had first hand look as the car agency wanted to appoint me as one of their suppliers.

We still need to rely on foreign brands to set the standards while continuously upgrading local capability or else in joint venture efforts.

and Mr. Summer could be right,

if foreign government invest the Forex in stocks, it could even increase American Exports as the "invested money" need to be "spend".

Green Dragon

2006-6-23 11:19 AM

greendragon
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"voodoo economics" in difficult times.

ha ha ha

USA wants to keep on spending.
China wants to keep American Engine of Import.

so, the Voodoo economics.
I guess, China just need time.....
and USA will take the "bitter pill" to secure it financial security eventually..

Green Dragon

2006-6-23 11:23 AM

tongluren (tongluren)
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Reply #6 Greendragon's Post

The program can be fine tuned. For example, instead of money that can be saved, it can be vouchers that have expiration dates, that have to be spent on certain items, or even certain vendors (that are deemed worthy of support).  For example, if the idea is that learning English is valuable, 1,000 of the RMB could be redeemable for English lessons, redeemable within a year (that is oversimplifying it, but you get the idea).

An exception to consumption could be that they can invest in certain securities - imagaine what it can do to the stock market.

Another exception could be that it can be coupled with a program to encourage entrepreneurship - you can pool the money or coupon if you are starting a business, and the banks may through in a matching loan.  Watch 10,000,000 new enterprises sprout overnite.  Competition will kill many of them, but the experience would be invaluable, and the surviving ones can form a solid platform for the next phase of China's growth.

5,000 RMB is a good round number.  It is not big enough to allow the folks to buy big items (like a car).  It is big enough to be exciting and cause imagination to go on high gear.

[ Last edited by tongluren at 2006-6-23 11:34 AM ]

2006-6-23 11:29 AM

greendragon
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Reply #9 tongluren's post

Voodoo economics again! Mr. Tong

Experience in business comes from years and years of experiments, failure, struggle and learning!!!!
Just dumping money..is like Uganda...under "what's that dictator's name- Idi Amin----complete mess"

sorry to use a simple example...

I have been seeing a new generation of "Chinese immigration" to Malaya from "Liaoning".....and they are doing all kind of copying...
Except for the pretty lasses, their capability to do a good facial, a good reflexology is severely lacking......yes young and willing.....yet no SIFU!

Even Singapore Spa took in experienced masseurs from Kuala lumpur who learned it from Hong Kong masters......ha ha....who learned in from Shanghai masters!!!

I might be wrong....but it is my own personal opinion. Please do not get offended by it!

Green Dragon

2006-6-23 11:45 AM

#10

tongluren (tongluren)
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Maybe, Maybe Not

Whether it is voodoo economics would depend on the amount of planning and the expertise in execution of the plan.  5,000 RMB really is not that much, and the risk taken per person is diminimus.  It is not the kind of dough that can conveniently be lost offshore, so it will end up in China's economy anyway.  It is a way of equalizing things, and giving everyone a chance.

If it is coupled with an educational program on entrepreneurship - examples could be given of rural businesses that can be started with the minimal startup capital.  Or structures can be set up for cooperatives and for folks to pool their money - say up to 100 shares, thus totally 500,000 RMB, for a more substantial business, with standardized services (company formation, accounting, etc.) already set up and provided at reasonable costs.  A lot of these new startup will fail.  But that is just the nature of an open market.  But the ones that survive - you can't buy the kind of training with money or school studies.  So China ends up with a new class of grassroots entreprerneurs.

Not bad for the exercise of just printing up a bunch of bills.  Actually they don't even have to be bills.  It is much better to just issue a credit of 5,000 MB to each, using the smart chip ID cards that each and every Chinese citizen carries.  That way the flow of the funds can be tracked, and corruption (e.g. village official forcing everyone to turn over the  new cash to them, etc.) can be minimized.

2006-6-23 03:33 PM

#11

greendragon
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Reply #11 tongluren's post

Rmb5,000 is almost one year pay for a lot of Chinese citizens!

Hey, we have good example in Singapore,
Recently they gave money to its citizen to "buy" votes...i think it was around Rmb10,000 each?
Let's see how their citizen spend that money?

Green Dragon

Note: ha ha i see where you are going...issuing DEBIT or CREDIT cards to more citizens
ha ha that's a lot of work, and the triads are going to have a "fabulous time" "conning" the state......

maybe you are also one of those "pro command economy" freaks..ha ha ha
and you also want to decide on how the "people spend" their money.......

2006-6-23 08:56 PM

#12

tongluren (tongluren)
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All Governments Influence Spending

It is elementary economics that all governments influence spending.  Sin taxes such as high excise taxes on cigarettes and liquor discourage excessive consumption in those less desirable areas.  Tax credits encourage business formation.  We are not talking about issuing scripts for everything.  That has proven not to work.  It is merely using modern technology to make the system of influencing spending more efficient.

Issuing credit cards need not be costly or time consuming.  It is already done.  Each and every smart card ID already is a credit card., a debit card, an access control and tracking device, etc.  All that's needed is to put in the back end, and voila, a part of the system becomes cashless and eminently trackable.  Just the additional fiscal income from making it harder to cheat on taxes would pay for the system 100 times over.  If it is cashless, all funds are always subject to the purview and taxation powers of the state.  Anyone who "cons" the government would leave a trail a mile wide, and the beauty is that they cannot hide - their loot would largely still be in the system.

But back to the topic at hand.  The focus here is WHAT could serve as an alternative to American T Bills.  The argument is that China should boost domestic consumption. The question is how.  If you don't like outright consumption, how about using the same 5,000 RMB per person to build a medical care delivery system?  Print the same amount of money (which should show up as national debt). Instead of just using it pay insurance, add an entreprenurial element, and give each person a spending account instead, and also allow them to form coops for making profits.  It all takes tweaking and there are risks involved of course, but the possibilities are very encouraging.  Since most of that money would be spent domestically (except perhaps the small percentage, say 3-5% that would be spent on imported drugs), the recycled effects in the economy would be huge.  It would also develop further medical expertise that can either b e exported, or new domestic industries (e.g. elective surgeries, convalescent and long term care, etc.) that can serve imported patients with good profits.

The cost?  The nation would have a bigger national debt.  But compared to Japan or America, the numbers are still glowing.  Also, the higher debt ratio would likely lower the RMB and take off the pressure to revaluate.  Several birds with one stone.

2006-6-24 12:32 AM

#13

greendragon
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Reply #13 tongluren's post

yeah...how are you going to "link up" 20 million enterprises in China!
how is the small businessman with his pull cart store going to install a credit card/debit card.

how you going to defend the "electric data system" from being corrupted by "foreign sabatours" or even "local chinese triads".....
It's voodoo.....way too advance for the present state of affairs in China....
Just wait 25 years when i predict China farmers will be working on 40 hectare farms (average) and 75% of our citizens lives in Cities with a wide range of services...

then we talk again..
probably i might be old and senile...and don't have energy to talk to you...

ha ha ha

Green Dragon

2006-6-24 10:49 AM

#14

tongluren (tongluren)
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Opportunity, Not Obstacle

" yeah...how are you going to "link up" 20 million enterprises in China!
how is the small businessman with his pull cart store going to install a credit card/debit card."

Hey, that is a HUGE opportunity, not an obstacle!!  Imagine what that would do to the China credit card machine industry.  Also, the smart ID card is already in the pocket of every citizen.  I

" how you going to defend the "electric data system" from being corrupted by "foreign sabatours" or even "local chinese triads".....
It's voodoo.....way too advance for the present state of affairs in China.... "

Legislation plus techonology will prevent 99% of the problems.  If it is a "closed" system, and the "money" cannot leave the system (or go overseas), everything remains traceable.  Crooks may be able to get the "money" temporarily, but if the proper legislation is in place, the act alone of improperly trying to rip off the system would be a criminal act, subjecting the perpetrator to process and prosecution - and the beauty is that they cannot take the money with them.  All is electronic, and what the government giveth, the government can just as easily taketh back.

" Just wait 25 years when i predict China farmers will be working on 40 hectare farms (average) and 75% of our citizens lives in Cities with a wide range of services..."

You are way too pessimistic.  Sitting on hands is now how New China got to where she is, nor the way to march into the new century.  Farming is definitely not the way to go.  Full development of the service sector, and further expansion of manufacturing, is how China will be the undisputed No. 1 in the world.

2006-6-25 02:18 AM

#15

roger604
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I'll make it short and sweet

China needs cutting edge technology for military and for economy

That means stopping smart Chinese people from permanently leaving China

The brain drain is the biggest danger

Chinese must be more proud of modern China and not glorify western culture!

Chinese must know that living in a western society is not "raising their status"..... it is lowering their status because now they are at the bottom of a racist western imperialistic order.

Stay in China and be a proud part of the Chinese nation and Chinese economy! Do not sell out yourself and your children to the "white masters".

2006-6-27 10:34 AM

#16

greendragon
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Reply #15 tongluren's post

ha ha ha

now we are having fun...
nice to know that you probably realize that you do not have full control.....
well, smart cards, credit card to dispense money could be a good way for a central control government..
maybe you can add a simple language with few tones so that people obey and understand what you said....
and maybe standardized the food we have, they way it is being cooked in the standard few methods which makes tracing by the government easy...
and we can have some "complaint king" politicians telling how "unhappy" they are and how the citizen should follow "his way of living" or "his gods"...

ha ha ha

Just another day....
Sorry, Mr. Tong..you do not have full control.......
You are just "swimming (or floating) in a fast flowing river"....
If you had....it would have been done long time ago..
and not now, with foreign investment, knowhow, Taiwan, Hong Kong, Overseas chinese, Amerikan, British, European influence...

Not so easy....
Never was.....

Even for the Amerikans....

Green Dragon
Third Force

2006-6-27 12:27 PM

#17

greendragon
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Reply #16 roger604's post

like i said...why don't you simplify our language further...
make it easy to understand....
and loud...

ha ha ha

yes, keep everybody in China...
in fact, drum into them a set of rules...your rules...

and guess what would happen to China in about 100 years down the line...

probably become a new beggar nation!!!!

ha ha ha

Green Dragon
Third Force

2006-6-28 10:41 AM

#18

tongluren (tongluren)
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It is a Fine Balance

Some control is always necessary. That's why countries have laws. Too much control is stifling, that's true. But how much is enough, is always a balancing act.

Traceable money and elination of cash transactions has been the dream of many governments. The benefits are many. The rise in efficiency alone means hundreds in billions in savings.

2006-6-30 03:56 PM

#19

greendragon
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Reply #19 tongluren's post

The fallacy on the PRO-CONTROL people!

Instead of "Floating on the fast flowing river" as advised by our great SOLDIER, Mr. Mao...
Mr. Tong insist on WESTERN style control and tyranny!

Try this little experiment, Mr. Tong....
Take a gal friend to a dinner somewhere you are familiar and nice in Beijing...
Buy her a meal, which has something not so tasty on it....

Bet you find that, she'll pass that bit to your plate...

ha ha ha

and Governments are like that....
If you allow Governments to be TOO LARGE...
a CLIQUE will form, a CORRUPT CLIQUE.........

and they will start passing the BAD PIECE on that plate to you....
In Malaya...the RIAU GOVERNMENT has been trying hard to AVOID that practise..
but in actual effect, the corner 50% of the central bank controlled banks, 80% of the automotive manufacture business, 60% of the government funded education business, 95% of the petroleum industry......

and gave away the worse to the Chinese, Indian, Natives, and Patani people.

In Singapore, the Government took 60% of the economy, paid its people of the Hai San gang the highest civil servant salaries in the world!!!!! and left the people only to TAP for work and taxes. The Singapore government does not work, the STRONG ARM you to pay 2 to 3x the average cost of utilities, monopolized the real estate business, take away all your savings in compulsory CPF savings, prevents you from spending so that they corner the FOREX $ that you work hard to get and give you the "free" local units.

Is that what Mr. Mao wanted??????
I doubt it......
If you look at the "manipulation" of Mr. Mao....
he created "autonomous" districts, so that people of all colour have "local decision making"....yes Mr. Mao is the RAINBOW EMPEROR!!!!!
he created "self sufficient" military units -so that the "people's armed forces" does not feed on the sweat of the people...but a unit dedicated to protect the intergrity of the Chinese nation.
he wanted to create a simple language to "GAP" between the uneducated rural poor and the wealthy city rich. But i guess, if he did it "our way"...he would build more cities and make the farmer rich by more land/production which would keep the supply of assembly labour salaries high...!!!!

which would make city folks richer!

Green Dragon
Third Force

2006-7-1 01:35 PM

#20

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