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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory

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To: mishedlo who wrote (52735)	2/5/2006 2:43:34 PM
From: russwinter	Read Replies (4) of 110194

I question the need to for country running huge trade surpluses with the US to maintain a reserve of $400-500 billion against a nation running 3/4 trillion trade deficits. It's much more than they really need, this isn't the 1997 Asia crisis environment, in fact quite the opposite. And for them it accept 5% return on agencies and 4.5% on Treasuries right now makes as little sense. My theory on why China and Japan do this is corruption. There is a exporter class in those countries, that gets to bring back overvalued USD and exchanges it with the central bank for Yen and RMB at artificially contrived rates. This transaction represents an egregious form of rent seeking behavior. Of course the other form of currency suppression is running too lax monetary regimes. I do feel China and Japan are too loose now relative to the US. But again, that's contrived and artifical designed to encourage rent seeking behavior. Examples or and defintion of rent seeking, substitute currency for good or service where I've bolded: Obtaining profit by influencing government officials to use the power of the state to create artificial shortages. Examples of rent-seeking include (1) obtaining an exclusive government franchise to produce a good or services, (2) obtaining protection from international competition in the form of a tariff, or quota, (3) obtaining an exemption from antitrust legislation, and (4) obtaining an artificially high, guaranteed (supported) price for a good or service. (Note: rent-seeking entails both legal and illegal means of influencing government officials. Legal means include bonafide political contributions and other forms of legitimate political support. Illegal means include bribes and extortion.) Rent-seeking opportunities are most pronounced in economies where the state plays a key role in directing and regulating the economy. In such rent-seeking societies, the source of wealth-creation is not investment designed to enhance productivity and create product and process innovation but instead investment designed to influence government officials - the key to success is not what you know but who you know and how well you are connected politically. Rent-seeking endeavors, then, consume (waste) resources (capital and human ingenuity) which could have been used to create new products and more efficient production processes.

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