Pledge to China's Leaders: You Will Lose Money on Government Bonds
The battle over China's role as an investor in U.S. government bonds is taking ever more bizarre turns. According to the New York Times, China's Prime Minister, Wen Jiabao, warned the United States about running large deficits and inflation, saying that protecting the value of the dollar is a matter of "national credibility" for the United States.
The NYT then quotes Mr. Wen as saying: "any fluctuation in the value of the U.S. currency is a big concern for us. ... I hope the United States will take concrete steps to reassure investors. It is not only in the interests of the investors, but also the United States itself."
Mr. Wen is apparently badly mistaken about the assets he is buying. Not only is there a serious risk that the value of the dollar denominated assets (like government bonds) that he is buying will fall, it is an absolute certainty. Anyone with any understanding of the U.S. economy can assure Mr. Wen that he will lose money on his investment in the U.S. economy; the dollar will fall in value. If he is concerned about this prospect, then he absolutely should take China's money elsewhere, and let the dollar fall against the yuan now.













