"Tensions are rising over Chinese economic policy, and rightly so: China’s policy of keeping its currency, the renminbi, undervalued has become a significant drag on global economic recovery. Something must be done…
And it’s a policy that seriously damages the rest of the world. Most of the world’s large economies are stuck in a liquidity trap — deeply depressed, but unable to generate a recovery by cutting interest rates because the relevant rates are already near zero. China, by engineering an unwarranted trade surplus, is in effect imposing an anti-stimulus on these economies, which they can’t offset…
What you have to ask is, What would happen if China tried to sell a large share of its U.S. assets? Would interest rates soar? Short-term U.S. interest rates wouldn’t change: they’re being kept near zero by the Fed, which won’t raise rates until the unemployment rate comes down. Long-term rates might rise slightly, but they’re mainly determined by market expectations of future short-term rates. Also, the Fed could offset any interest-rate impact of a Chinese pullback by expanding its own purchases of long-term bonds…
It’s true that if China dumped its U.S. assets the value of the dollar would fall against other major currencies, such as the euro. But that would be a good thing for the United States, since it would make our goods more competitive and reduce our trade deficit. On the other hand, it would be a bad thing for China, which would suffer large losses on its dollar holdings. In short, right now America has China over a barrel, not the other way around."
Krugman is one of the worst political hacks/trolls known to man but is he right here? I know that Keynes once said that if you borrow ten thousand dollars from a bank, they own you, but if you borrow ten billion, you own them (or something like that.) Thoughts?
Paul Krugman proposes a radical plan to combat global warming. He ask that the government sell bonds to the people. (This will increase the interest rate, he understand, but asks to hear him through.) He pleads the government then pass a bill to match the sum of money collected.
Asked what he was planning to do with the money, he responded: ‘Over a six month period, the money supply will be injected directly into the atmosphere. This will significantly lower global temperatures. It will also lower the market interest rate like never before, getting entirely around the excess reserves that banks have been holding.’
As usual Krugman’s prescriptions are worse, much worse in this case than the disease. And his prescriptions come from this mix of facts taken out of context, left wing populism and a belief that having a government employee card imparts super intuition to the holders.
On the Chinese Currency Being Over Valued: NO, Krugman is completely wrong. The US Fed is devaluing the dollar. So the Chinese are buying dollars in an effort to keep the current exchange rate.
As for the USA having China over a barrel: Absolutely. The Chinese hold gazallions of dollars in US Government Bonds. If the USA defaults these then the Chinese are left holding worthless paper which is much worse than their holdings of paper that is becoming increasingly worthless.
So China must keep buying these bonds to keep its current relationship with the USA stable AND to keep the US GOVERNMENT FROM DEFAULTING, THINK GREECE.
As for prescriptions: The best solution is to allow competing currencies in the USA by getting rid of legal tender and any taxes on the sale of commodities and capital assets. Then the Chinese will have the option of purchasing these instead of USA Dollars. The USA would be forced to either dissolve the Fed or at least constrain it. The USA would be better off and interest rates will tend toward the real market rates. Is any of this going to happen: NOT A CHANCE but it is nice to dream.
Now an easier solution:
And also the USA should let the Chinese buy anything they wish in terms of assets in the USA. Then the Chinese would send this capital to the citizenry who could use it to invest in productive capacity thus pulling the USA out of recession.
I think that the history of Chinese foreign investment in south Asia and elsewhere poses a serious problem to that particular prescription. Chinese investments in Vietnam and Thailand in particular, as well as in oil refineries in Saudi Arabia and Turkey, have been characterized by large scale initial capital investment, true - but the assets are not widely available to domestic buyers, and the Chinese concerns abroad overwhelmingly utilize primarily exported Chinese labor.
If the U.S. were to simply allow direct investment by Chinese companies in the domestic market, there is little reason to believe that a similar process would not play out on our own home soil.
Also - competing currencies? Really? That move alone would preclude any such investment by China in the U.S., and could conceivably damage China’s own credit rating, which is tied to the value of those very same Treasury securities, based on the dollar, that you propose abolishing by fiat.
Krugman is simply paying his tribute to the latest political fad: “China is the source of all evils”. He also played on America’s overinflated and frankly scary political narcissism: “we are SO smart we have China in our pocket right now”.
He forgot to mention that while China is perfectly able to survive any political/financial trick the US will pull on her the US won’t survive their own suicidal politics. The present Chinese leadership knows perfectly well relationships with the US are deteriorating very quickly and are taking measures: they have started investing abroad, especially in countries not easily pressured by Uncle Sam, and have reversed their bonds-buying trend. In the meanwhile I am sure they are also studying how to slowly get rid of increasingly worthless dollars and euros. Slowly and cautiously, as all things are done in China, but when Washington DC will start to take notice it will be already too late. The scenario is being set for the Resources Wars.
Anyway Krugman displays an incredible roughness and lack of political tact: China, by buying mountains of bonds, has helped the US government spread democracy and giving people socialized healthcare. And don’t forget the mountain of municipal bonds China bought, thus allowing US cities to go on bizarre spending sprees and thus stimulate the economy. But, hey, those Chinese are just yellow skinned democracy haters, it’s their duty to help us all live the American Dream!
This isn’t a game of economics. It’s the game of geopolitics. Defaulting would be very, very bad for the US. It is not indestructible. Sure, China is left “holding the bag” on what it owns on USD. But what happens to the roles of the US and China geopolitically?
Maybe China is willing to take a hit to see the US crumble?
Is your definition of an economist merely someone who has a PHD in the subject (and please don’t bring up the prize Krugman one as supposed evidence of it…)?
Again, what relevance has it whether I am a capitalist or not how far I will be going in accepting his own definition? And I care not for how standard it is.
