Response to: Wicksell Goes To China
Krugman continues to promote the fantasy that we can sell debt until the end of time without consequence. Fun! Let’s all just stop working and have Uncle Sam borrow money to pay our bills.
The idea that we are at the mercy of the Chinese — that terrible things would happen if they stopped buying our bonds — is very influential. Yet it’s just wrong.
Think of it this way: the argument that interest rates would soar if the Chinese bought fewer bonds is the same as the argument that interest rates would soar when the U.S. government sold more bonds — which, as you may recall, was the subject of fierce debate more than three years ago — and you know how that turned out.
Not quite. The argument that rates won’t soar because they haven’t yet is the same argument as saying, in 2006, that home prices can’t fall because they’ve been rising for years. The parallels between the bond and housing bubbles are alarming - but even more alarming is Krugman’s inability to see them (you’ll note the massive government intervention in both markets as a common factor).
It’s not just about China deciding to stop bond purchases. What if they SELL their existing holdings? That’s $1.16 trillion in bonds being dumped on the market to compete with new Treasury offerings. That won’t affect interest rates? That won’t cause “systemic risk?”
But also, consider what China does when it stops buying U.S. bonds. It buys “stuff.” While the Treasury ups their bond sales to fill the gap, the Chinese will be using their dollars in the marketplace - commodities, consumer goods, real estate, etc. That won’t affect inflation? Inflation won’t affect interest rates? Do basic economics stop applying because Krugman has some propaganda to push?
What China does by buying bonds is add to the excess savings — which makes our situation worse. (This is just another way of saying that the artificial trade surplus hurts our economy — just another way of stating the same thing). And we want them to do less of it; far from fearing that they will stop, we should welcome the prospect.
What China does is vendor-finance the U.S. consumer. Americans can buy iPads (made in China) because they have plenty of disposable income left over from not paying their share of the national debt - which, currently, amounts to $53,333 per capita ($16 trillion/300 million). I agree that it would benefit the United States, in the long run, for China to stop doing this - but it will involve a very painful loss in our standard of living that few are likely to welcome. Hell, we practically had riots over whether or not women should pay $15/month for their recreational sex (and we decided they shouldn’t).
China certainly has more power over us than we have over them. I believe they are just trying to figure out how to get out of their vast, complicated U.S. investments with as little pain as possible. They aren’t buying bonds anymore - they’re buying time. It’s the same way a lender may wait a few years to foreclose on a delinquent homeowner - they want to limit their losses (not lower property values through excessive regional foreclosure rates, not want to pay for maintenance, etc).
But, that day of reckoning is surely at hand. And the Chinese TELL us that!
A July 28, 2011, Xinhua News Agency (Xinhua) editorial stated: “With its debt approximating its annual economic output, it is time for Washington to revisit the time-tested common sense that one should live within one’s means.”
An August 3, 2011, a Xinhua editorial stated: “Should Washington continue turning a blind eye to its runaway debt addiction, its already tarnished credibility will lose more luster, which might eventually detonate the debt bomb and jeopardize the well-being of hundreds of millions of families within and beyond the U.S. borders.”
A Xinhua August 6, 2011, editorial said: “The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone. International supervision over the issue of U.S. dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country.”
A Xinhua editorial on August 8, 2011, stated: “The days when the debt-ridden Uncle Sam could leisurely squander unlimited overseas borrowing appeared to be numbered as its triple A-credit rating was slashed by Standard & Poor’s (S&P) for the first time on Friday. China, the largest creditor of the world’s sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China’s dollar assets.”
We certainly shouldn’t be afraid of China; China should be afraid of us. And, while we’re at it, WE should be afraid of us.
Just think logically, and this all makes sense. Don’t listen to the “experts.” They’re deluded and wacky.
For example, consider the analyses of the following brain trusts:
Standard & Poor’s
China credit rating: AA-
U.S.A. credit rating: AA+
Fitch
China credit rating: A+
U.S.A. credit rating: AAA
Moody’s
China credit rating: Aa3
U.S.A. credit rating: Aaa
source
So China, a nation currently lending the U.S. over a trillion dollars, has a lower credit rating than the U.S., which is $16 trillion dollars in debt. Have fun explaining that one! Makes for a great conversation starter!
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dwangelo posted this
