Krugman: China has an unloaded water pistol pointed at our heads

[Kurt_and_Hunter]

Two things it is vital to take away from this piece:

1) The American economy is not going deeper into debt. The Federal Government is going deeper into debt because the entire rest of the country is NOT going deeper into debt. Borrowing in the American economy is DOWN. Let the chart sink in and notice that it goes below zero. (Borrowing below zero is paying off existing debt and I think is counted as part of 'the savings rate') Net American borrowing went from 2500 billion in 2007 to 1000 billion in 2009... a staggering drop. And because people are not borrowing much to build things and such there is MORE American investment capital out there looking for safe places to park money... like US Treasuries. Our burgeoning federal debt is LESS financed by foreign nations than it was three years ago.

2) Dire concerns about China holding so much of our debt or not buying more of our debt are, no matter how widely held, baseless xenophobic wing-nuttery.

March 15, 2010, 9:00 am
China’s Water Pistol

"China is the biggest buyer of Treasury bonds at a time when the United States has record budget deficits and needs China to keep buying those bonds to finance American debt."

...it’s considered obligatory to say this in any article about US-China relations. As it happens, however, while it’s part of what everyone knows, it’s also completely false. Why don’t people get this? Part of the answer is that it’s really hard for non-economists — and many economists, too! — to wrap their minds around the Alice-through-the-looking-glass nature of economics when you’re in a liquidity trap. Even if they’ve heard of the paradox of thrift, they don’t get the extent to which we’re living in a world where more savings — including savings supplied to your economy from outside — are a bad thing.

Also, and I think harder to forgive, is the way many commentators seem oblivious to how we got here. Yes, we have large budget deficits — but those deficits have arisen mainly as the flip side of a collapse in private spending and borrowing. Here’s what net borrowing by the US private and public sectors looks like in the Fed’s flow of funds report:



The US private sector has gone from being a huge net borrower to being a net lender; meanwhile, government borrowing has surged, but not enough to offset the private plunge. As a nation, our dependence on foreign loans is way down; the surging deficit is, in effect, being domestically financed.

The bottom line in all this is that we don’t need the Chinese to keep interest rates down. If they decide to pull back, what they’re basically doing is selling dollars and buying other currencies — and that’s actually an expansionary policy for the United States, just as selling shekels and buying other currencies was an expansionary policy for Israel (it doesn’t matter who does it!).

http://krugman.blogs.nytimes.com/2010/03/15/chinas-water-pistol/

[SanchoPanza]

1. Add "calling in our debt" to baseless xenophobic wing-nuttery as well.

I realize that most people don't own or are familiar with how Treasury Bills work, but the notion that someone who holds any kind of T-Bill can suddenly ask for the remaining principal and interest in full is laughably absurd. It's simply not possible because they're not structured that way. Every T-Bill that China (or anyone else owns) has a specific payment schedule and maturity date at which point the remaining principal and interest is paid. Since the 14th amendment mandates that this interest payment schedule be upheld (Congress has to, by law, pay interest on public debt before any other spending priorities), the Treasury isn't going to be hit by some massive bill from China. Or anyone else. Ever.

[Kurt_and_Hunter]

2. Very true... some commentators don't seem to get the whole bond thing

"What if China demanded early repayment!"

Then we would all have a good laugh. The schedule of repayment is printed right on the bond. (Sad that the Chinese read English better than Lou Dobbs.)

And the prize example of how confused these folks are is that say it is dangerous that China holds too much of our debt and ALSO complain that China may stop buying more of our debt.

The two anxieties are kind of opposite.

Like the Woody Allen thing from Annie Hall: "The food is terrible here. And such small portions!"

[Hansel]

6. It is pretty funny how they try to sell this crap isn't it?

I think that's why they have names such as 10 year treasury note. Because they can't redeem them for 10 years.

Even if they could call in the debt, beyond that, if the US goes down it takes China down with it.

[roguevalley]

8. I have heard that Japan owns more of our debt than China and

Britain owns more of our stuff than we do. :)

[Uncle Joe]

3. I have one quibble with Krugman's analysis

Indirectly we do need China to keep our interest rates down, should China pull back and starts selling dollars for other currencies, I would imagine the dollar will depreciate, which in turn will lead to great inflationary pressure, followed by a hike in interest rates to curtail possible hyper inflation.

Thanks for the thread, Kurt_and_Hunter.

[Kurt_and_Hunter]

4. In a world with more borrowing that would be more of a problem

His comments are offered in the context of a global environment with very low demand for credit. If credit demand were very high there would probably (?) be more sensitivity.

And China doesn't actually hold that much of our debt. A little under a trillion. So even the worst potential effects are not large. (Think of China's holdings as comparable in scale to the stimulus package, which was 100% debt-financed. Our stimulus package put as much US paper on the market as China could manage if she dumped everything. The stimulus package probably weakened the dollar some and raised rates some but not to any great degree.)

[Uncle Joe]

5. I wonder about

the psychological implications, it's one thing to spend more money by your own choice, it's another to have your leading creditor start pulling up the draw bridge.

It seems like a catch 22, in order to spark our economy we need exports to pick up, as just depending on the financial casino aspect and domestic consumption is dysfunctional along with being dangerous but if exports pick up; it follows there would be more global demand for credit.

To be honest I haven't paid much attention to the inflation rate since the stimulus package was enacted, but food and fuel certainly don't seem cheaper and this taking place without the economy doing well, the point being it seems like our economic choices are greatly limited, so we need to make the best of them.

[grantcart]

7. Yup, this is the 'trump' card that the US possesses.

Another way to think of all of those US dollars is to call them "promissory notes to buy something in the US in the future".

Now they can sell off those dollars but ultimately the end holder of the bill will have to either buy assets or buy products in the US if they want to exchange those dollars for something.

As it is a major asset in their portfolio it also means that it is in their interest to keep it valuable.