Dean Baker also minimizes the impact on the U.S. economy of China's threat to stop buying U.S. Treasury bonds (see below).
Although the Peterson Institute is using this threat to try to cut Social Security and Medicare, it is my understanding that with a large and growing U.S. deficit, there is a possibility of rising interest rates should the U.S. Treasury auctions fail.
Please explain why this isn't a problem..........? Thanks, Ann China's empty threatIf Wen Jiabao stops buying US debt, China's currency will rise which is what America has wanted all along <http://www.guardian.co.uk/commentisfree/cifamerica/2009/mar/30/us-economy-china-debt?commentpage=1>Comments (100)
* <http://www.guardian.co.uk/profile/deanbaker> Dean Baker <http://www.guardian.co.uk/profile/deanbaker> * Dean Baker * guardian.co.uk, Monday 30 March 2009 18.00 BST* <http://www.guardian.co.uk/commentisfree/cifamerica/2009/mar/30/#history-byline>Article history
When <http://www.guardian.co.uk/world/china>China's prime minister, Wen Jiabao, <http://www.iht.com/articles/2009/03/13/asia/china.php>expressed concern about the ability of the US government to repay its bonds, his comments prompted headlines everywhere. The newspapers were filled with gloomy warnings that China may no longer be willing to buy up US debt, which supposedly would have <http://online.wsj.com/article/SB123734170930865121.html>dire consequences for us all.
Unfortunately, too little thought was given to what these "dire consequences" might be, and who would end up suffering them. Suppose that China stops buying US government debt. That would mean that the dollar would plummet in value against the yuan. Chinese imports would suddenly become much more expensive for consumers in the <http://www.guardian.co.uk/world/usa>United States, making domestically produced items far more competitive.
The opposite would happen in China. Goods and services made in the United States would suddenly be much cheaper. As a result, we would expect to export much more to China, and see many more Chinese come to the United States as tourists or for business purposes. The reduction in imports from China and the increase in exports would substantially improve our balance of trade.
In other words, if Wen was threatening to stop buying dollar-denominated assets and therefore let the yuan rise against the dollar, he was threatening to do exactly what the US government has been demanding that China do. He will stop "<http://www.washingtonpost.com/wp-dyn/content/article/2009/01/22/AR2009012203796.html>manipulating" China's currency meaning he will stop deliberately intervening in the market to keep the yuan's value from rising.
There is an alternative interpretation of Wen's threat. Perhaps he will stop buying long-term government bonds, but continue to buy short-term debt. This will have some impact on raising long-term interest rates in the United States, but it hardly provides a basis for panic.
The reason that Wen's threat should not be serious cause for concern is that if we want to keep long-term interest rates low, we already have a mechanism: it's called the Federal Reserve Board. Just last week Federal Reserve chairman Ben Bernanke <http://www.iht.com/articles/2009/03/18/business/fed.php>announced that he was going to buy up more than $1tn in long-term government or agency (Fannie Mae and Freddie Mac) bonds over the next several months. This purchase far exceeds any possible purchases of long bonds by the Chinese. If Wen pulls out of the market, Bernanke can simply increase his purchases to offset the lost demand.
Does this policy risk inflation? Actually, the Chinese purchase of Treasury bills and the Fed's buying up the long-term bonds would have the same impact on inflation. It really doesn't matter whether the Chinese government or the Fed is buying bonds to hold down the long-term interest rate the impact on the inflation rate will be the same. Of course in a period where there are <http://www.forbes.com/2009/03/20/deflaton-bullard-fed-markets-bonds-deficit.html>serious concerns about deflation, a modest increase in the inflation rate would be a good thing.
There is one other irony about Wen's threat that is worth noting. In 2004, Alan Greenspan began to raise short-term interest rates. He expressed surprise that long-term interest rates stayed constant or even fell slightly. He described this as a "<http://www.nysun.com/opinion/greenspans-conundrum-fed-back-on-the-beam/15873/>conundrum".
There was actually nothing mysterious about the situation at all. As Greenspan was acting to raise short-term interest rates, the Chinese and other foreign central banks were intervening directly in the long-term market, buying up long-term bonds in order to keep long-term interests down. Did Greenspan fail to recognise the impact of the Chinese intervention in the same way that he managed to <http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/question-for-economic-experts:-can-you-say-housing-bubble/>miss an $8tn housing bubble?
In short, Wen has nothing with which to threaten the United States. He is proposing to do something that Congress and the Bush and Obama administrations have all urged him to do: stop propping up the value of the dollar against the yuan.
This will lead to an adjustment process involving some pain on both sides. In China's case, the reduction in exports to the United States will require increasing the size of its domestic market, or at least finding alternative destinations for its exports. In the case of the United States, we will have to pay more for our imports, which will mean some increase in the rate of inflation and, in the short term, a modest decline in our standard of living.
But we always knew that China would not subsidise its exports to the United States forever. It would have been better for us if they had stopped a decade ago, before we developed a huge trade imbalance and developed a housing bubble-led growth path. Still, better late than never. Wen has made a promise, not a threat and we should encourage him to follow through on it.
At 06:50 PM 4/3/2009, you wrote:
Dean Baker took exception to the idea that the Chinese bought US bonds by mistake: http://www.prospect.org/csnc/blogs/beat_the_press April 03, 2009 Krugman is Wrong, the Chinese are not Fools This is one of those rare cases where I have to disagree with Paul Krugman. His column today implies that China is somehow surprised that it is in a situation where it stands to face large losses on its dollar holdings. This is implausible on its face. Did China not notice when the dollar fell from being worth 1.2 euros in 2002 to just a bit more than 0.6 euros last year? Did it not occur to China that they might place better bets on other currencies than a rapidly declining dollar? The "China just discovered view" implies that China thought the dollar was a good place to invest its money and is now surprised to find that this is not true. The alternative perspective is that China understood all along that it was going to get whacked on its dollar investments. It chose to invest in dollars to prop up the dollar against the yuan. This made Chinese exports very cheap for people in the United Sates, thereby leading to the boom in U.S. imports from China. In effect, China was subsidizing the purchase of its exports by inflating the value of the dollar relative to the yuan. Given its extraordinary growth over the last decade, this was clearly an effective development path and it may justify any subsequent loss on its dollar holdings. (Obviously, alternative paths were possible, whether they would have been better for China is an open question.) Anyhow, the reason why the distinction between the China surprise versus strategy view is important is that the bad guys are already using the China threat as an argument to cut Social Security and Medicare. The argument goes that if we don't get our budget in order (i.e. cut Social Security and Medicare) then the Chinese will pull the plug on us. The Peter Peterson crew have already been vigorously pushing this line. As I have argued elsewhere, we have nothing to fear if China stops investing in the U.S., but it is also important to point out that they are not suddenly surprised (shocked, shocked) by the fact that they are going to take a hit on their dollar investments. This was the deal that they consciously entered, eyes wide open. On Fri, Apr 3, 2009 at 6:14 PM, MICHAEL YATES <[email protected]> wrote: > In Paul Krugman's New York Times column today, he says, "China acquired its > $2 trillion stash-- > turning the People's Republic into the T-Bills Republic--the same way > Britain acquired > its empire: in a fit of absence of mind." I found the part I put in bold > mind-boggling. > Maybe that is the way the nobility and the merchants took possession of > peasant land > in Britan proper too. > > Michael Yates > > > _______________________________________________ > pen-l mailing list > [email protected] > https://lists.csuchico.edu/mailman/listinfo/pen-l > > -- Robert Naiman Just Foreign Policy www.justforeignpolicy.org [email protected] "It's 11 AM in Washington. Do you know where your foreign policy is?" _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
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