Good morning Mr. Baker.

Lovely insight, but watch out. You've attacked the most prominent economist in America, and possibly the whole world (again!). Watch your back. ;)

It is overall a very good article. I am not sure Krugman is saying the China is 'surprised' as much as China wants help on getting out of their adventure with as little cost to them as possible. I am not sure that you and Krugman disagree on the China situation at all?

I had the same reaction as Dean on reading Krugman's column.

But it should also be realized that part of the equation was the supposed stability of US financial markets. The Chinese might have made different decisions if they had known how flimsy the markets were. In several respects the Chinese were in collusion with the plutocrats running the US system - now this partnership is not working so well for them.

And we had prevented them from doing it we might still have a manufacturing base. Perhaps even an auto industry.

The USA importing and distributing companies such as WalMart, Home Depot, NTB, and etc. pay the companies in foreign countries with US dollars to manufacture the things that these US businesses import, distribute, and then sell to the US consumers. Manufacturers such as GM, Ford, GE, Chrysler, GE, Westinghouse, and etc. manufacture vehicles, appliances, and equipment with imported parts that they paid the Companies in the foreign countries with US currency to manufacture the finished product that is then sold to US consumers.

Just print more money: Why should Americans have to work to make the things that we consume when we can just print more paper currency to pay people in foreign countries to manufacture the things that we import and then consume? (I thought that we were special and did not have to work!)

On a recent Saturday (14MAR09) Chinese Premier Wen Jerboa stated that "Of course we are concerned about the safety of our assets. To be honest, I'm a little bit worried." Wen said at a news conference Friday (13MAR09) after the closing of China's annual legislative session. "I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets." This message is unlikely to be misunderstood at the White House. The USA government is counting on Beijing to help pay for our TARP and economic stimulus packages by buying our U.S. bonds (at close to face value) with the currency that they earned from us by manufacturing the things that we imported and then consumed.

China already is the USA's biggest foreign creditor, with China owning estimated $1 trillion in U.S. government debt consisting of freshly printed US T-Bills, US bonds, and other US securities. If China wants Gold instead of printed-paper currency, a weaker dollar will result. If China wants to only pay pennies on the dollar for any of our future freshly printed paper T-Bills, Bonds, Securities, currencies, etc., this will cause great inflation in the USA, and/or also cause great reduction of the buying power of the US dollar. If the Foreigners will only pay 10 cents on the dollar, then the USA will have to print up ten times as much paper money, and the inflation could then be 1000%.

When and if foreign governments stop buying our freshly printed US paper T-Bills, US paper bonds, and other paper US securities at face value, and/or buy it at the foreign currency equivalent of a few pennies on the dollar, the government checks, social security checks, government payroll checks, and private paychecks will very soon not buy very much food or anything else that we consume. Your life savings might only sustain you for a couple of months. We are committing economic suicide.

The US Government no longer redeems US currency for gold from our gold reserves at Fort Knox. The dollars paid to foreign manufacturers were redeemed for Gold until 1972. Instead, these foreigners are allowed to exchange their US currency for title to any of our real estate, forests, industries, breweries, hotels, factories, casinos, financial institutions, businesses, and other assets located in the USA. Foreign entities will very soon own everything and then become the major sources of employment for US citizens. The USA population will soon become employees; possibility indentured servants; or maybe even beg to become slaves owned by the foreign countries and foreign individuals that will own everything of value in the USA in the near future. How else can US citizens feed their families? Our children and our grandchildren might also have to change to the religion (probably not Christian) of the business owner if they want a job. Some government sources estimate that the title to 25% of our property, businesses and other assets with recorded titles are now listed as foreign owned (http://www.economyincrisis.org/content/ownership). The foreigners know that the US currencies that they earn and hold will buy less and less each day that they do not spend them due to the falling value of the US dollar. This will cause inflation to the point that it will take a whole day's wages to buy one loaf of bread. We are selling of our children's legacy to foreign owners, and the US government calls it "Investing in America". Foreigners know that we are racing to sell title to everything in the USA in order to keep from working. This is sort-of like selling our body parts to keep from working!

Hi Dean,

I think Krugman's right on this one, since your interpretation begs the question, Then why make the we need a new currency speech?

China did not fully appreciate the fact that the Fed is the world's central bank.

We do this to all our partners, load them up with dollars, so they have a stake in our empire. We are the best bankers in history.

Gerald

Your doomsday scenario of hyperinflation because other nations stop buying our debt is unlikely. 1) We can buy our own debt. 2) Commodities are denominated in dollars and if prices soar in dollars everyone is toast. Countries use dollars to settle their international trade debts. 3) We are the only military superpower. Our navies patrol the world's trade lanes. Until someone can challenge us militarily, the empire will live on.

"It chose to invest in dollars to prop up the dollar against the yuan. "

We are ignoring the political side of China owning huge dollar assets. China can gain major political advantages from the US by simply promising to dump those assets onto the market--and crushing our economy. (Using our T-bills against us would appeal to any Maoists in the leadership.)

So what if that makes the Chinese economy falter? The Chinese leadership faces no real threat from unhappy workers.

Remember, it is an authoritarian state; too often we talk about China as though it is a democracy. They won't mind repeating Tianamen Square if the peasants get rowdy.

Excellent analysis. It make sso much sense.

This issue is discussed extensively at Brad Setser's blog. The sense I get from reading him and his commenters is not the Chinese are "stupid", but that the exporting manufacturers and exporting regions are a sufficiently powerful constituency in the Chinese political system, that the Chinese did not want to hurt the export sector by following reserve and exchange rate policies that would allow the renmimbi to rise.

Well, I think that whether they were literally surprised by it is basically beside the point. Whether or not they more or less expected it, the situation is what it is. What Americans have to understand is that the gravy train is over -- we were able to buy all that cheap stuff from China because the Chinese were a) subsidizing the price and b) loaning us the money with which to buy. Now that game is played, and we'll have to consume less, for a long time.

There's a lot more to the story than just that but the bottom line is, no matter what the U.S. and the G20 and the Easter Bunny do, our standard of living is going to be lower. That has been inevitable for quite a while now, and some of us voices crying in the wilderness were saying so.

It may be more acting surprised than being surprised, but I view their pronouncements as largely for domestic consumption. They can collect credit when exports soar and shift blame when they falter. Not really different from any politicians.

Dean said:

"In effect, China was subsidizing the purchase of its exports by inflating the value of the dollar relative to the yuan."

In other words, they've been using PROTECTIONIST policies over the last decade. Why don't the "free traders" whine about these evil protectionists like the do against Americans that favor policies like "Buy American" in the US Stimulus bill?

China already has a huge labor cost advantage over U.S. What are average wages, 50 cents an hour or so? Why, in addition to that, do they need to prop up the yuan? This is unfair to businesses that produce their goods in the U.S.

if you have managed to accumulate two trillion dollars of of financial assets of any sort, i guarantee you that your demand is a big part of their value and if you stop buying and start selling you will end up losing money. this is not a function of USD, this is anything.

This highlights one of the most fundamental policy issues of the past 20 years. Namely, that China is subsidizing the transfer of technology from the United States to China.

I strongly agree with this:

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.

But this..

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.

I doubt that. The change from communism would have led to high growth with or without. And isn’t the purpose of growth to increase consumption?

"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.)"

If the path that China had followed had dramatically decreased its fossil fuel dependence (say by reducing car usage), one might reasonably argue that the development has been effective. The actual "development" that has occurred is more like cancer, since it involves increasing the fundamental dependence on exhaustible resources, thereby speeding the onset of collapse.

I'm not an economist. But I would not over-analyze China's decision to buy dollar reserve. They had trade surplus, the US was the most stable and powerful country financially, and in practically every other way, for that matter. Is it too hard a decision to put their savings in US bonds? Now everybody found how shaky and unfair our system can be (with regard to its deal to its debtors and the live-within-your-means middle class crowds in the US), is it surprising that for them to ask - is the system working? Don't we always say that absolute power will absolutely corrupt? In this case, did we give the Federal Reserve too much power? (Whose top decision makers routinely roam between the Wall street and government).

Actually, isn't that the exact question the hard working middle class who pay tax, save in 401K, save in 529, save in bank for rainy days, should ask? - "Where are the big chunk of our savings? How much will the whatever left be worth as the Feds revs up the printing machines?"

I'm quite surprised that some economists have not raised/studied those core questions. What happened to the economic system when it survives by printing money at will, changing accounting rules? Instead, we were studying if China is a ultra-sophisticated psycho with a grand scheme insisting on deliberately destroy its own wealth...

Maybe there is a reason why Krugman is a Nobel Laureate.

Gerald Spencer wrote, Instead, these foreigners are allowed to exchange their US currency for title to any of our real estate, forests, industries, breweries, hotels, factories, casinos, financial institutions, businesses, and other assets located in the USA.

Until we nationalize their a$$.

BWAHAHAHAHA!

I don’t think that the Chinese leaders are stupid about financial matters. They have bought little German debt and mountains of US debt. Now, German debt is surely safer over the long term, but buying German debt won’t do much for their exports.

The US China trade relationship is inherently unstable. It has benefited certain sectors in each country, but has major downsides. Take my advice. Learn from Krugman’s mistakes. He is a very smart man, but he has too many opinions which he releases rapidly in shotgun fashion. He’s relatively consistent and so none of his opinions are obviously contradictory. He has a political tin ear and would be impossible as head of any government agency. He doesn’t separate comments made by both American and Chinese leaders to placate domestic critics from real planning papers, treaties, laws, etc.

Chinese leaders must support their export industries. It will take 20 years and political tranquility to nurture a broader Chinese middle class and more internal consumption. We Americans have shot ourselves in the foot. We have outsourced too much manufacturing and are now flooded with food and drugs of poor quality coming from China which aren’t honestly labeled and will never be properly inspected. What about generic drugs made with 90% Chinese ingredients? Shouldn’t manufacturers have to disclose that fact? The insurance crooks just want the cheapest generics they can find; they don’t want any discussions of quality and purity. If our government continues to support the financial sector first and foremost, we’ll never restore American manufacturing to a sane level and will remain dependent on poor quality Chinese imports. I don’t think however that we’ll become slaves to Chinese firms as Mr. Spencer seems to.

Your column is interesting and generally well written. You would be smart to critique Krugman’s and Summers’ views once a month, not every two days. Analyze NPR & PBS once a month, they are shoddy, the big newspapers once a month, TV entertainment shows & their economic message monthly, etc. Learn from Simon Johnson, the comprehensive and slow moving guy can have a big impact.

Somehow people have made the move from China being the largest holder of US Treasuries to China being the only effective player. For example I saw some e-mail on CNN talking about China holding 'trillions in US debt'. Well no the figure for all dollar denominated assets is around $1.2 trillion (though Brad Setser suggests that more is held in offshore banks). The Treasury publishes the data here: MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES. Until last September China was not even the single largest holder of such debt, that was Japan, but has stepped up purshases while others held back and now holds $739 billion in Treasuries out of a total foreign pool of $3.072 or 24% of such debt. Now that is up significantly from the 20% level they had been consistently maintaining which may explain some of the nervousness. But still they only hold 11,5% of all debt held by the public and 6.9% of total debt.

I don't want to unnecessarily want to minimize the problem but too many people see $11 trillion in debt and imagine that most of it is in the hands of the Chinese.

That 20% figure stayed remarkably constant over the last couple of years and I wouldn't be surprised if China was trying to get back down to that target suggesting that they have $125 billion in excess Treasuries right now and so have a motive for slowing down new purchases. But the idea that they would simply dump their portfolio always seemed far fetched. While a bit of rebalancing their portfolio makes perfect sense.

"Obviously, alternative paths were possible, whether they would have been better for China is an open question."

And a huge question is whether they would have been politically feasible.

Political feasibility is also a hugely important issue for us. So I wonder why there isn't more discussion on, and thought and research on, one of the most crucial political tactics today, parliamentary maneuvers in the senate, specifically what can avoid the filibuster, or how measures can be structured to avoid the filibuster.

I'm not a Professional Registered Parliamentarian, but I have researched this quite a bit. A surprising array of measures may be possible to pass with only 50 votes (plus Vice President Biden breaking a tie). For example, it appears to me that for another round of stimulus all of the government spending could be put in a reconciliation bill, with tax increases so that it’s revenue neutral. Such a bill, from what I've read, it appears cannot be filibustered. Then, a separate bill of tax cuts can be put forward. This will, in fact, take 60 votes, but it will be very hard for the Republicans to vote against it, and only one or two would be needed.

If Obama is willing to fight, there are parliamentary tactics he can use to force through many strong measures with only 50 votes.

For more on this see:

http://www.mcclatchydc.com/251/story/64192.html

This is a game that has played by US and China. US should have come out ahead by using those borrowing money to reinvent ourselves like invested in our education, clean energy, etc…. during the Bush administration but instead the government went wild in spending on wars and tax cut and provide cheap credits for the consumers to spend their heads out.

Game is not end yet. US needs to come out of this recession before China does then we come out a head. How the government spend $3.5 trillions budget is important to the country's long-term growth. One thing is we have to do is reinvent ourselves. Don't expect any quick fix to this mess that has accumulated in 10 years under the president who was clueless about anything and everything and who did not care about the well being of the country. Yes, Bush is one of the worse presidents but Americans are the one who voted for him. China is wiser; they are using the surplus to invest in natural resource around the globe and to develop within itself.

Ah yes, the classic Blazing Saddles gambit: Nobody move, or the [sheriff] gets it!

Nobody move, or the Chinese will sell all their dollars!

To whom?

Nobody move, or they'll step down off that ever-growing tiger they've been riding. And the greatest vendor-financing fraud of all time will come to an end.

One thing which must be kept in mind is that Plutocrats and Republicans oppose government spending and therefore large deficits (though deficits are OK if they come through tax cuts). A great deal of what is in the media about China is scare tactics - we will have to beg the Chinese to support the deficit, they may dump their investments and wreck the US economy, etc. Most of this is just factually wrong, and at any rate largely irrelevant to real international trade issues. It would be good to see Krugman push back against this propaganda, as Dean does.

Hey Dean - great work as always..... but you are one of the few who could step back and see the bigger picture...
it's actually a brilliant strategy..and it's not just about the trade surplus....
how does the possible losses on dollar holdings compare to the value of acquiring all of the US technology for the past 10 years or so (and tech transfer is actually speeding up right now in the downturn)...so you create a climate where trading partner will rush to grow your capabilities in production, engineering, movement of machinery, intellectual property, worker training and detail know-how... helping out with treasuries is small cost to pay even in domestic displacement of farmers etc is small cost.. give them credit for trying to improve conditions for their country.. only sad part is that there is no similar effort here.

Not only will the Chinese buy up US assets at a cheap price, but will also use their holdings to increase their immigration to America. That's what virtually every middle class parent there really wants for their kids, to send them to America, Canada, or Australia to live. Once they've fixed up their mistake selling Shanghai concessions 150 yrs ago, they'll fix up their Zheng He folly.

Why is that people can't imagine that China 1) knew all along this was going to happen, 2) it was cheaper to buy all industrial manufacturing on the planet this way than to start a war to destroy enemy capacity, 3) the cost is nothing for the country that gave us Sun Tzu and who said war is fought on many fronts including economic.

Why do American presume the Chinese have "been turned" to our way and they will value money exactly the same way we myopically do?

Most of this analysis is pretty superficial. Mr Wen was responding to a question in Chinese to a domestic audience, not threatening the US. After some small losses in Blackrock and Lehman, some Chinese are rightfully concerned about the stewardship of their money, and the more recent financial crisis has not increased transparency of what happens to money flows. There is a certain amount of reactive nationalism in China.

But when being worried about the risk, there are many other points than the safety of US Treasuries. (And even that is divided into interest rate risk--currently short-term Treasuries are at zero-return--and the risk of long-term inflation from increasing money supply and velocity.)

Likely a major concern for China is the safety of investment in GSEs such as Fannie Mae, or in such too-big-to-fail firms such as AIG, and whether or not bondholders would be wiped out or not completely bailed out. You can see that Bernanke and Geithner were very careful to honor contracts for foreign banks when unwinding the CDS at AIG. We don't know how much the Chinese have invested in funds other than Treasuries, but surely they would like to have more income and also some respect with equity.

There are some other concerns not mentioned. One is the aftermath of the Asian currency crisis in which nation after nation was attacked by shorts. China learned to amass more than enough foreign currency reserves to prevent this from recurring. Another is that China has more trade with the EU than the US, and has been shifting foreign currency reserves there. Also, Japan buys nearly as many Treasuries as China, and nobody seems to bash Japan. Finally, there are quite a few obstacles to full convertibility of the yuan, such as the recent privatization of the banks, the transition of the Hong Kong dollar and "one nation, two systems," the need to keep the export sector functioning while spending money domestically on infrastructure stimulus and consumption while preventing large outflows of investment.

All these concerns make the situation complicated, but China seems to handle it well. The Chinese value stability and harmony, and a basket of currencies seems a reasonable solution, but will take a long time.

Meanwhile, expect China to buy many fewer Treasuries, not because it is really worried about safety, but because it will not get so much money in trade, and has better uses for the dollars.
Certainly nobody said or would say the Chinese would try to get out of the dollar for political reasons if that did not make economic sense.

China has sneakily been building up it's manufacturing capacity? By February of this year, 20 million chinese workers have been laid off:

http://www.google.com/search?hl=en&q=laid+off+chinese+20+million&btnG=Search&aq=f&oq=

Whether by design or accident, they will not profit from their actions.

Gee, the Chinese could always step up purchase of products made in the USA, as in "free trade". I know, I'm a heretic.

One person's excess savings is another person's mercantilist financing. Whatever name we call it, the effect has been to destroy the fixed income savings in the US, forcing people and institutions (pensions) into riskier and ultimately fraudulent securities in the quest for yield. Other money was forced into housing, stock markets, and commodities, cutting a "hurricane alley" of rising and crashing bubbles.

The unbalanced trade is wreaking havoc on all who have played. Rationality is sorely missing from the equation. So yeah, China. Stop laundering your profits in the US.

Dan: Exactly correct about "unbalanced trade". Nothing can stay out of balance forever. It's entirely irrational to believe it can continue forever. "Free trade" insanity is founded on the "fallacy of composition".

The more out of balance, the greater the turmoil when the correction comes ... and it's already begun ... we're really going to be in for it. See the devastation in "Jobs & 'Trade' Data Update Mar09" on my site.

دردشة

thanks

thanks
ahj

thanks