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letterissue2 Letters Volume 2004 Issue 2 Business Cycle Trade Cycle China Yuan Yen Dollars Depression Recession less frequent less severe GDP Change 1930 2002 Letters to the Editor Volume 2004: Issue 2 March 29, 2004 John from Los Altos… Do you think that sales of American treasury holdings by Asian countries will influence the US economy? John, you've earned yourself a permanent spot in the Letters to the Editor… Scenario 1 Selling the US Treasuries, taking the receipts and buying Yen. Two transactions… 1st price of US Treasuries fall and yields will rise (inverse relationship between price and yield). 2nd cause the Yen to appreciate and the dollar to depreciate. To the extent that spending is sensitive to interest rates, it would have a negative effect on the economy. Also, since the dollar depreciates against the Yen, our net imports from Japan would decrease, having a positive affect on the economy. By the way, this is contrary to Japanese policy since the Second World War (the Chinese more recently). Scenario 2 After they liquidate (as noted above), they take the proceeds and buy equity positions in American companies or directly invest in plants (Toyota, Honda), etc. Chairman Greenspan recently noted that should the (Mainland) Chinese liquidate or more correctly, de–liquefy they might well move into equity positions in American banks. Keep your eyes on upcoming issues of the newsletter for further discussion on our growing indebtedness to Asia… Neil in Livonia… Why is it that I keep hearing that things are going so badly? Can you define recession and depression for me? I do apologize, but I have been so bombarded by the media that I am not really certain any more. Here are your definitions, plus a few more graphical representations to help it stick: Recession A period of general economic decline, specifically, a decline in GDP for two or more consecutive quarters. Depression A period during which business activity drops significantly. High unemployment rates and deflation often accompany a depression. A recession is formally defined in macroeconomics as a fall of a country's GDP (Gross Domestic Product) in two successive quarters. Combined with inflation this process is known as stagflation. A sustained recession is known as an economic depression. Click here to return to Main Page (Opinions expressed on this web page are those of a faculty member or employee and do not necessarily reflect the position of University of Detroit Mercy)