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January 10, 2005


Yup, logically illusory if you don't count debt and you don't recognize paper money which can be held for later. Maybe Mr. Tamney is having a low blood sugar day?

I wonder if any economists out there have made an educated guess at how high US interest rates would need to be, given the current budget deficit, for bond markets to clear if the Chinese were to stop buying a few billion dollars a week of treasuries. Then again, what would be the point, as these concepts are illusory, like your credit card bills?

This ain't an economics blog, by which I mean I don't know if enough qualified macro and int'l guys hang out here to help with this very complicated stuff. I am trying to understand this stuff. So I will just ask a couple questions:

1)"China would export less, and there might be mass unemployment in Shanghai and elsewhere" Are you sure this is correct? Why couldn't China create jobs by stimulating domestic consumption? Why couldn't Japan do this during the preceding two decades? What reasons might they have not to do so?

2) What real effects did the dollar devaluations of the early seventies and mid-eighties have on the American economy, and the well-being or gains or losses in std of living of all or particular portions of the American people?

Setser 1

On the NRO column

Setser 2

On the recent rally in the dollar

DeLong has rightly been highly scornful of NR's economics writing for a long time. His criticisms have not generally been based on ideological disagreements, but on the sheer stupidity of the articles.

This column is actually more or less on the standard NR level of economic commentary.

While I think the NRO economic writing is not exactly sterling, I don't think it is fair to say this is the usual level of its commentary.

Sebastian, given the number of elementary boneheaded _mistakes_ that DeLong has pointed out (over, say, the last six months) in economic commentary published by NRO, one has to wonder.


That's a good column from a very good econ blogger. One of the more interesting parts:

Want a revealing statistic? Through the first three quarters of the year, the US "exported" more debt ($694 billion) than goods ($597 billion). We do export some services, so our debt exports did just top our combined goods and services exports ($850 billion). Roughly two thirds of our overall import bill ($1295 billion) was paid for by our exports of goods and services, and a third was paid for by our "exports" of IOUs.

Sebastian: I don't think it is fair to say this is the usual level of its commentary

It has been lately, as has been well documented by DeLong.


Please read some of DeLong's comments. I think you will have to agree that NR's economic commentary is abysmally bad.

I read DeLong at least twice a week, and have done so for almost two years. :)

I wonder how "strong" the NRO will feel if the Chinese start buying major US companies with those extra dollars (instead of treasuries).

In Sebastian's defense, forgetting about the existence of debt is a pretty amazing mistake, so his claim is completely consistent with the NR being abysmally bad (but not quite this bad) the rest of of the time.

1. What is the size of the PRC's GDP?

2. What EU country is the PRC's GDP comparable to?

3. Is it (PRC's GDP) sufficient to materially affect our economy now?

4. What level of growth must the PRC attain to materially affect our economy in the future (only applicable, if you answered in the negative to #3).

Timmy, how are those questions germane? AFAICT, the relevant issue is whether and how much the PRC can affect our economy through holding a substantial chunk of T-Bills and dollar currency reserves, which is something of a different question, no?

Let me just add that it would be more helpful for purposes of discussion if you would come right out and make your point, rather than relying on cryptic rhetorical questions. I'm not quite sure what argument you're making here; I took an implicit stab at it in my last comment, but that was only a guess.

How fast would China be growing if it wasn't throwing money into the ocean by financing our deficits? Would a faster growing China be a good thing?

"If we’re flooded with products, it’s because we can pay for them."

Why do we remain the consumption engine, the market for the world? What does Tamney's statement really mean? Does the rest of the world, or any part of it, have the political/military will and means to hold reserve currency status? What are the political/military/social costs of being the reserve nation(see Spain and Great Britain). Could we handle a depression better than others? Are we getting an extortion premium because the answer is yes?

Let me just add that it would be more helpful for purposes of discussion if you would come right out and make your point, rather than relying on cryptic rhetorical questions.

Hmmm, that point somehow sounds familiar. I wonder where I've heard it before?

I'm sure I don't know what you're talking about. :)

Two links for those interested in this
Eduoard Porter op-ed from NYTimes (and poke around the site, some nice translations of Japanese vernacular opinions on a range of subjects)

And here is the link mentioned in the article, Stephen Roach of Morgan Stanley (just so you good folks don't have to cut and paste)

Does the rest of the world, or any part of it, have the political/military will and means to hold reserve currency status?

Does the US? If you read the Porter link above, you will read that:

reports indicate that Warren Buffet, the world's most savvy investor and its richest man, has already pulled his fortune out of American-dollar investments.

Mr. Buffet began betting against the dollar in 2003, and has made quite a bit of money doing so. According to Forbes, part of the reason is the fear that, "the electorate of the U.S. may be strongly tempted to get out of hock by inflating away the country's dollar debts". In other words, he is beginning to doubt the political will of the US to maintain reserve currency status.

The real problems would begin if the world's central banks came to share those doubts.

Timmy: I don't know why you couldn't have looked this up on your own, but since you asked: it depends on whether you use nominal GDP or purchasing power parity calculations. Personally, I prefer PPP, and so (I note) does the CIA Factbook entry for China. If you go be PPP< you'll find that China's GDP is the second largest in the world, after ours. It is over half as large as ours. It is almost three times as large as the largest European country (Germany), and thus not really comparable to any of them. Using nominal GDP, on the other hand, China's GDP ranks seventh in the world, and is roughly as large as Italy's, slightly behind the UK and France, and considerably smaller than Germany's.

I have no idea what you mean by the question whether China's GDP is large enough to affect ours. I suppose that if we dropped the entire GDP of even a small impoverished country -- say, the $58 million worth of (mostly) copra and fish produced by Kiribati -- directly onto the New York Stock exchange, it would have a large and damaging effect on the US economy. Absent more specifics about what you imagine being done with the GDP of the People's Republic, I'm not sure how to answer your question. It is pretty clear to me, though, that if, for instance, China were to unload its dollar denominated assets, or even stop buying more, it would have a large and very bad effect on our economy, regardless of the size of its GDP.

"If you go be PPP<" -- should be: "If you go by PPP", without the bracket thingy.

Oh, I'm just know that we will all regret this this, but:

Timmy, what in the world does a comparison of China to the EU have to do with this discussion?

We're talking about trade and current account balances. So, one potentially relevant question is, "Who has become one of the largest purchasers of U.S. Treasury notes?" Or to simplify for those following along at home, to whom does our government owe a whole pile of money to?



Oh, OK, I'll put the numbers out here for you (courtesy of the Treasury Department):



Japan 715.2
Mainland China 174.6
United Kingdom 140.9
Caribbean Banking Centers 85.2
Korea 65.6
Taiwan 57.5
Germany 52.1
Switzerland 50.6
Hong Kong 49.9
OPEC 46.9
Mexico 35.2
Canada 34.2
Luxembourg 27.3
Singapore 26.3
Ireland 18.6
Turkey 15.9
Brazil 15.0
Thailand 14.7
Italy 14.6
Belgium 14.3
India 13.7
Israel 11.5
Sweden 11.0
Spain 9.3
Netherlands 8.8
France 7.8
Australia 6.7
All Other 131.9
Grand Totals 1855.3

So, we have China overtaking our long-time financial partner, the UK. In fact, the Asian Pacific Rim (Japan China, Korea, Taiwan, Hong Kong and Singapore, Thailand) accounts for %60 of the foreign holders of US Treasury debt. OPEC and the money launderers (excuse me, "Caribbean Banking Centers") hold another 7%, and brown-skinned folks to the south of us and elsewhere (the Americas south of the Rio Grande, south Asia, Asia Minor, and Africa) account for another 4%. Canada accounts for another 2%. Toss in Israel, Australia, etc. and 3/4 of our obligations are outside of Western Europe. And nearly 1/3 of those that are, are held in the UK and Ireland.

The EU is not particularly relevant to this discussion but, hey, thanks for playing.

"Japan 715.2
Mainland China 174.6..."

I thought I read that China was much closer to 300, much bought thru secondary channels. And China has been buying a lot of mortgage securities.


This goes into it a little bit. Seems hard to determine exactly.

Economics...not one of my strong suits. Ditto for NRO. Not defending them, but Tamny isn't an NRO regular. Or at least they don't list him as an author.

Also, isn't the yuan tied to the dollar? What happens to currency tied to the dollar, if the dollar begins to slide?

Also, isn't the yuan tied to the dollar?


What happens to currency tied to the dollar, if the dollar begins to slide?

Depends. Hong Kong tied its currency to the dollar in the mid-70s, I believe, because the government wanted a way to artificially devalue the currency without causing a public uproar. [That's the story I heard, at least, for why the HKD remained tied to the USD from 1987, the year I moved there, onwards.] Cheaper HKD meant lower amounts paid in wages -- irrelevant to the big-business bigshots and multinationals, who diversified their currency portfolio, but huge to their factory workers -- hence lower production costs on goods, hence a) greater access and penetration of markets and b) greater profit potential once the markets were entered. My assumption is that China is doing much the same thing: deliberately devaluing the currency to make its goods cheaper and thus undercut the other Asian economies' -- all (?) of whose currencies have been appreciating -- export potential.

I think there may be other (political) advantages of pinning the yuan to the dollar -- it prevents the kind of arbitrage that tanked SE Asia, for example -- but I don't know enough about international currency markets to say for sure.

OK Sebastian. You got me. This is even worse than usual.

Thesis: the more technologically advanced the exports, the more egalitarian and liberal the society.

One end of the scale:export raw materials & resources, import finished products = aristocracy of rentiers and landowners. Examples:antebellum South, Saudi Arabia. Unskilled or cheap labor & capital being kinds of raw materials. Currently, t-shirts and televisions have been commoditizied.

Other end of scale: import raw materials(commodities), export high value-added product = liberal democracy. Need highly educated populace who demand meritocracy and gov't services. Examples:Hollywood, Silicon Valley.

Just saying there can be structural political domestic implications to monetary and trade policy. Economists are wildly biased toward equilibrium and will have difficulty understanding policy aimed at disequilibrium and structural change.

Bob McManus,

I'm not sure of the answer to all your questions, but I believe part of the problem in Japan has been the strong propensity of the Japanese to save. Thus "stimulus" doesn't actually stimulate very much.

Whether that applies to China I don't know. There may also be the issue that it would take a lot of stimulus to raise Chinese consumer demand to the level of demand for Chinese goods in the US.

Also, isn't the yuan tied to the dollar? What happens to currency tied to the dollar, if the dollar begins to slide?

It slides also, as long as the tie is maintained. It's important to bear in mind that these ties are not simply accomplished by decree. They require intervention in the markets. If the Chinese want their currency to move with the dollar they have to take steps to keep them in line - like buying treasuries. Otherwise, in the current environment, it would rise.

At times it becomes impossible for a country to maintain such a tie, which brings us back to George Soros and the pound sterling. But that's another thread.

Otherwise, in the current environment, it would rise.

Excuse my ignorance, but what exactly would rise? If the exchange rate is tied to the dollar, what is there to rise?

Slart: when governments allow exchange rates to float, they allow supply and demand to set the price of their currency. When they peg their currency to another, however, they introduce the possibility that the price set by supply and demand will diverge from the price they have stipulated. And when these two get out of whack, odd things can happen.

If the exchange rate is tied to the dollar but does not reflect real economic differences, the prices will rise to reflect the economic differences.

Excuse my ignorance, but what exactly would rise? If the exchange rate is tied to the dollar, what is there to rise?


Currencies are not simply tied to one another by fiat. It's not as if the Chinese government simply announces that the yuan is tied to the dollar and that's that. There is still a currency market out in the world where traders can buy and sell yuan and dollars.

Now suppose the yuan is attractive, maybe because there are good investment opportunities in China, or because Chinese goods are cheap. Then traders will seek to buy yuan, and will drive the price up. If China wants to maintain a fixed price for yuan in terms of dollars, it has to increase the supply, which it does by buying treasuries.

In the current environment, the yuan is apparently underpriced relative to the dollar. In a currency market without government intervention it would not maintain its peg but would rise relative to the dollar. So the Chinese government intervenes to prevent this.

The thing to bear in mind, repeating myself, is that "tied to the dollar" or not, there is nothing to prevent you and I from trading dollars for yuan at whatever rate we agree to. So China intervenes in the market to make it unattractive to do so at any but the official rate, since at any other rate one of us will refuse to trade.

which it does by buying treasuries.

Ok, I'm closer to understanding, but...whose treasuries?

whose treasuries?

Ours. I was a little careless there. Sorry. The Chinese central bank acquires the dollars from Chinese exporters at the official rate and uses them to buy US Treasury securities.

Ah. That's what I'd thought you meant; other choices didn't really make much sense, but my intuition around this sort of thing is pretty much untrained.

So, this is what is meant by debt? The fact that we've effectively borrowed money from them at treasury rates?

So, this is what is meant by debt? The fact that we've effectively borrowed money from them at treasury rates?

Yes, as far as the debt held by the central bank is concerned. Chinese individuals or businesses may also hold other US securities, corporate bonds, stocks, etc. (unless there are some currency laws in China I don't know about).

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