Something That's More Interesting Than Plagiarism

by hilzoy

Stephen Roach, the Chief Economist and Managing Director of Morgan Stanley, has just been in Beijing and Dubai (for reasons unrelated to e.g. the port deal). His Global Economic Forum posts are always worth reading, if you're into economics, but his two most recent posts are unusually good. This one is from Beijing, where Roach was participating in the China Development Forum, met with various interesting people like, oh, the Premier of the PR C, and then, by coincidence, met with some US Senators who were there to try to get concessions out of the Chinese. As Roach says in today's post:

"The editorialist in me says, if Washington -- or for that matter, beleaguered US manufacturers -- really wants China to give, then it needs to make that argument from a position of a macro strength and boost America’s national saving rate. Until, or unless, that happens, US-led China bashing is nothing short of political hypocrisy."

Today's post also talks about Dubai, and about certain common threads:

"From Beijing to Dubai, there is a growing undercurrent of economic anti-Americanism. The irony of it all is truly extraordinary: The US has the greatest external deficit in the history of the world, and is now sending increasingly negative signals to two of its most generous providers of foreign capital -- China and the Middle East. The United States has been extraordinarily lucky to finance its massive current account deficit on extremely attractive terms. If its lenders now start to push back, those terms could change quickly -- with adverse consequences for the dollar, real long-term US interest rates, and overly indebted American consumers. The slope is getting slipperier, and Washington could care less."

Our government, in its infinite wisdom, has made our economy extraordinarily dependent on foreign capital. Had it not done so, lecturing countries who lend us money about what they "must" do would merely be rude. As it is, it's also incredibly dumb. We have needlessly put ourselves in a position in which we depend on the goodwill of the People's Republic of China. In so doing we have sacrificed not just our right to lecture our lenders, but an enormous amount of our freedom of action. That was not, in my opinion, a very smart thing to do.

Comments

[morinao]

The title of this post clearly reflects the triumph of hope over experience. =)

[Gary Farber]

"...(for reasons unrelated to e.g. the port deal)...."

This is just a matter of style preference, but since it's driving me nuts (though not as nuts as Edward's [remember him?; he's a former blogger here] love affair with random use of ellipses used to drive me), your writing style is always lovely and beautiful and a joy to read; the one exception I involuntarily find is your tic for using "e.g." without first stating what you're giving an example of, and without needing to state that you're giving an example, since you could just say "for reasons unrelated to the recent port deal," for example.

Smooth use of "e.g.": "I love apples (e.g., Delicious, Granny Smith, and Winesap).

Unsmooth use of "e.g.": "I love e.g. apples."

Not an important point; feel free to disregard as an example of me being picky. It's possible that I'm e.g. being obnoxious, though that is not my intent. (But I know that I am sometimes obnoxious without possessing such intent, alas.)

[Steve]

It was the legendary Nick Danger of RedState who first advised me that our acquisition of massive foreign debt was a brilliant strategy, because it gave us all that valuable cash that can be used to buy guns and such, while the lending countries are left with nothing but pieces of paper.

I am not even kidding. That was his argument. I will find it if I can.

[Billmon]

Everything Roach says is true. But everything he says has also been consistently and perenially contradicted by the markets for going on ten years now. At the moment, there are absolutely no signs that the US is having any difficulty whatsoever financing its deficits on terms so generous as to be concessionary.

Will that change? Probably, and maybe quickly. But until then, Roach's frequent warnings of doom just over the horizon aren't particularly constructive. They make it painfully easy to dismiss him, and those who agree with his basic macro argument, as cranks.

Better to say: No country in the history of the world has been able to get away with what the USA is doing now for very long. A huge price may have to be paid for our recklessness -- and the longer we wait the bigger the price will be. But whether that day will come next month or next year -- or in the next decade -- is impossible to tell.

I suspect Roach would agree, but he needs to say it more clearly and more often.

[morinao]

Steve: How interesting. That dovetails neatly with the argument that the Social Security Trust Fund is actually bankrupt because it owns nothing but pieces of paper whose nominal value can be cancelled at will by the federal government.

[Steve]

Ah, here we go.

Here is why we take on debt: He who has the cash makes the rules. If we have the cash, we get to say how it's spent. Remember, money is power. It is a force you squirt at the world to make it change. We drive the change, when and where we want. What the foreigners get is a debt instrument. They are passive investors. Those are the best kind. This is especially important with respect to China. China is accumulating massive amounts of our debt. Good. Better that than they should have the cash, which they would probably spend on things that we would think are scary. Every dollar we can get them to loan us another dollar they don't have for building battleships. Bush understands this. Too many people don't.

A bonus insight from Nick Danger...

Our children are not going to have to pay it back. Institutions are not individuals. For our purposes, institutions are immortal. If some of their debt comes due, they simply roll it over. They can do this perpetually. IBM probably has debt on its books that's been there since the 1920's. It's been rolled over several times. No one cares.

[Steve]

Comment from streiff in the same thread, another one of my favorite RedStaters...

We could default on China loans as a reaction to them pestering Taiwan and it would not affect our ability to raise capital from anyone but the Chinese. And what are the Chinese going to do? Send a repo man?

Emphasis mine.

[Delicious Pundit]

1. Perhaps the "e.g." stands for "extra grappa," i.e., in order to finish the sentence, Hilzoy requires some additional fortification from her favorite spirit, viz., grappa. (N.B. -- "g" could also stand for "gin," or even "grape," referring to products thereof, such as Gewurztraminer et al.)

2. Billmon! Welcome back! We made the world extra crazy for you in your absence!

[hilzoy]

Hi Billmon! We have missed you. -- My only hope, at the moment, is to try to get more people -- the relatively small number who will read this, at any rate -- to see what a disaster we're letting ourselves in for, in the hopes that the more of us there are, the more likely it is that someone, somewhere, will get the guts to try to reverse it.

After all, there isn't much else I can do.

[liberaljaponicus]

Yesss! With the Japanese economy coming back, this is good news. ;^)

And while not plagiarism, the Danger/Streiff shtick has already been done

[Francis]

Billmon, you live! fwiw, i enjoyed your blog tremendously when you were posting on a regular basis. please consider stepping into the traces again.

as to RS having posters that don't understand the concept of deficits, well, recent events have pretty clearly established the depth of analysis to be found there.

[Gary Farber]

IJWTS that I am not related to Nick Danger, nor to Betty Jo Bialowsky, nor anyone named Audrey.

[Steve]

The RS diary I ridicule is actually pretty fascinating. Mr. Danger seems to have a master plan where the government will borrow massive amounts of money and use it to create a conservative fantasyland where everyone owns their own home, profitably operates an entrepeneurial small business, etc. At that point, having achieved success, the people will want small government and conservatism will finally have triumphed.

Occasionally apostates like Trevino wander by the diary to point out that using massive government spending as a force to reshape society is not, in fact, a conservative ideal. But Mr. Danger has an answer! It can work, you see, it's just that those evil Democrats never really wanted to do it when they were in charge because they need to keep voters in a cycle of dependency where they continually vote Democrat. Republicans, who actually want to help people, can easily use government spending to make everyone's life better in perpetuity.

And so forth. To me it sounds a lot like "we'll crank up the deficit spending until the Democrats all die of old age, at which point we can do as we please!" But what do I know.

This leads me to a more general electoral concern. Let us stipulate that elections are won through bread and circuses. Now, if you have one party who is willing to cut taxes to the bone, borrow trillions into perpetuity, and use the borrowed funds to give people all the entitlements they crave without actually charging them anything for it, what is one supposed to do to defeat such a party? Run as the party of responsibility, the party who will actually make you pay for those entitlements? Try to persuade millions of people concerning the long-term effects of acquiring too much foreign debt? Good luck with those things.

If one party decides that they truly do not care about long-term damage to the economy, and simply want to run as the Free Money Party for as long as they can hold power, I'm honestly not sure what the counter-strategy is supposed to be. On the other hand, mind you, I do like free money.

[John Thullen]

Steve:

The conservative base of the Republican Party has three enemies (more, but why include gay marriage): China, the Middle East (Islamofascists; even the burkaed women in Iran who read "Lolita"), and most of all the U.S. Government.

Danger's plan and Trevino's plan dovetail only in that Trevino wants to defund the U.S. Government AND bomb the others, while Danger wants to somehow bankrupt all of them and then bomb all three.

[Gary Farber]

"Mr. Danger seems to have a master plan where the government will borrow massive amounts of money and use it to create a conservative fantasyland where everyone owns their own home, profitably operates an entrepeneurial small business, etc."

Isn't this what used to be known as the Social Credit movement, back in the Thirties, when it was, you know, a leftist notion? C.H. Douglas? Alberta, Canada, actually adopted it briefly, though didn't really put it into practice.

[Gary Farber]

Maybe Danger's plan differs significantly from Social Credit; forgive me if I pass on reading Danger to find out; Social Credit is on my mind because of being recently reminded it was an enthusiasm of Robert Heinlein's once upon a time. Borrowing from other countries wasn't actually particularly part of Social Creditism, so far as I know, so maybe I'm thinking in overly broad strokes.

[liberaljaponicus]

To me it sounds a lot like "we'll crank up the deficit spending until the Democrats all die of old age, at which point we can do as we please!" But what do I know.

This strangely synchs with the notion that the electorate is getting more conservative through demographics. I can't remember the precise articles, but Stanley Kurtz here and Longman here are examples of that.

[Tim]

Will that change? Probably, and maybe quickly. But until then, Roach's frequent warnings of doom just over the horizon aren't particularly constructive. They make it painfully easy to dismiss him, and those who agree with his basic macro argument, as cranks.

On the other hand, no one is going to mess with the system unless they are threatened with impending Apocalypse. And and that, the Apocalypse would have to be next year.

[jane doe]

The general dangers are fairly well known and cause concern within large segments of the investment and business community. Among them and not mentioned are backlashes from foreign consumers and a reluctance of the best workers there to take jobs with US companies.

It has not seemd to penetrate mainstream consciousness though most decent business pages will have an occiassional article. Once again as with the details of varous important issues it doesn't reach the mainstream.

The rightists are arrogant about this just as they believe in the certainty of an economic miracle. Concern about potential weakness in the dollar and other issues are treated by Kudlow and others as subversion, an attempt by the liberal press to destroy America.

[Dan Harris]

Fortunately, (and I hope in this case as well), we can assume that nearly every time a U.S. politician speaks it is for consumption back home. Not that this negates what is being said about China, but it does certainly lessen it, particularly since the Chinese government does have a decent understanding of American politics. I expect a quickening moderation on the call for protectionism.

[Bernard Yomtov]

Steve,

I tend to stay away from RedState. Just speaking for myself, I would appreciate not reading their utterly idiotic ideas about international finance here.

Part of what Roach is saying is that currency crises happen quickly. You don't get a lot of time to head them off, so you need to not let the conditions develop in the first place.

[cw]

After all, there isn't much else I can do.

Aside from moving your assets overseas, along with a lot of other investors. Not even the President can withstand market forces for very long.

[noah]

The subtext of the post is ignorance.

It is often stated that China has financed the US deficit...as if we had gone hat in hand to borrow from them. When actually of course our government has sold bonds on the open market and China has elected to purchase them. You might say that we have them over a barrel.

The outcry over the Dubai ports deal was disgraceful. Foreign holders of dollar assets must be allowed to invest in this country or the whole international trading system will be put at risk.

[withak]

so, hilzoy, how would you react to a government that actually declared war before it sent soldiers to fight, which would require support from the people, which would allow that government to convince its people to buy war bonds (instead of selling treasury notes to China etc.)... sort of like World Wars I and II ... instead of paying for Iraq out of current operating expenses, which you correctly note are not financed by US citizens. Sorry, somehow I lost the hypothetical.

[hilzoy]

Noah: I don't think so. As I see it, we are selling our bonds on the open market. We have received very favorable terms, in part because of the willingness of various countries to buy our bonds. The Chinese, in particular, have bought tons. (So have the Japanese, but they are less likely to use this against us, which is why I didn't mention them.)

The Chinese have alternatives. And they might decide to use them. If they did so, it would be very bad for us, since they are a large enough player that were they to stop buying our bonds, the price we'd have to pay for other people's money would rise a lot. I'm not sure how this constitutes us having them over a barrel.

withak: I would rather we hadn't gone into Iraq at all. If we had to, I would rather we paid up front. That said, why do you ask?

[noah]

Sure Hilzoy...The chinese could sell their bonds, but if they "dumped" their holdings, given the nature of markets they would lose their shirts. If they gradually reduced their holdings, it would tend to put pressure on bond prices downward (eg increase interest rates). If it had no effect on interest rates, why should we care who holds them. If interest rates did rise that would only affect future bond sales...the US only pays the interest rate printed on the bond.

Most of the loose talk about the issue is more like mercantilism than modern economic theory. That is to say ignorant rants.

[Bernard Yomtov]

It is often stated that China has financed the US deficit...as if we had gone hat in hand to borrow from them. When actually of course our government has sold bonds on the open market and China has elected to purchase them. You might say that we have them over a barrel.

When the US borrows money to cover its deficit it is quite accurate to say that those who lend the money are financing the deficit.

How exactly do we have China over a barrel?

[hilzoy]

Noah: they don't have to dump their bond holdings to cause us trouble. They only have to stop buying new ones. We badly need external sources of funding for our deficit, since our personal savings rate has -- well, I'm not sure if it's still actually negative, and don't feel like checking on such a nice afternoon, but it's nowhere near where it would have to be to begin to finance our deficit.

A rise in interest rates would affect future bond sales, including rollovers of existing debt.

[Bernard Yomtov]

If interest rates did rise that would only affect future bond sales...the US only pays the interest rate printed on the bond.

"If interest rates did rise?"

Of course interest rates would rise. And the government would pay the higher rate on the hundreds of billions it borrows every quarter. And rates throughout the economy would rise accordingly.

[noah]

Anyone with US dollars can purchase US government debt. The US is "borrowing" money from the market for US bonds...the identity of the bond purchaser is irrelevant.

The chinese allegedly have accumulated a large amount of US debt, ultimately if that debt were liquidated they end up with a huge pile of US dollars which are only worth anything in ordet to purchase US dollar denominated assets or US produced goods. That I submit is not a bad thing...they might want to buy a lot of stuff from us before they try to take over Taiwan for example.

[hilzoy]

Noah: the identity of the purchaser is irrelevant. The amount of demand for bonds is not irrelevant. If I decided not to buy government bonds, that wouldn't matter: I am an infinitesimal part of the market. But China is large enough that if it decided not to buy any future bonds, that would have a significant effect on interest rates.

That's the point of this: that China can significantly affect demand, and since supply and demand affect prices, it can affect them as well. (In this case, the price we pay to use other people's money, i.e. interest rates.)

[noah]

hilzoy, rising rates brings new potential purchasers into the market. Take me for example...I am no to interested in purchasing bonds at current interest rates.

The fact remains, the chinese sell a lot of goods in the US which are paid for with US dollars, if they don't buy bonds they must buy dollar denominated goods or sell dollars for some other currency or accumulate a lot of currency. If they sell dollars, they put pressure on the value of their bond holdings!!!

Its complicated and its facile BS for people to say that disaster looms for the US because the chinese have been foolish enough to sell us real goods in exchange for low interest debt.

[Bernard Yomtov]

rising rates brings new potential purchasers into the market.

Yes. At the higher rates.

[hilzoy]

Noah: right: taking on unsustainable levels of debt never constrains your conduct with respect to your creditors, and never causes disaster to loom.

And the chief economist for Morgan Stanley is obviously just facile.

If we were taking steps now to bring down our deficit, increase our savings rate, and so forth, we would be preparing for the inevitable. We aren't. Unfortunately, we will all get to see whether you;re right to be sanguine about the outcome.

[noah]

hilzoy, I believe the deficit did fall last year. We shall see if the Democrats get on board for a line item veto. Fact is most Dems want the government to spend more than Republicans profligate as they are.

I agree that we are facing fiscal disaster, but it has nothing (or very little...I do agree chinese actions could cause interest rates to rise)to do with whether the chinese hold our bonds.

[Gary Farber]

"Fact is most Dems want the government to spend more than Republicans profligate as they are."

Got a citation to prove that item of faith?

Is there some reason you don't capitalize "Chinese," by the way?

[withak]

I ask because if it is true that it would be a good thing for the US savings rate to increase, I think a bully pulpit could be used to get Americans to buy war bonds for a war they support, thus increasing the savings rate. And maybe even for a war they don't support, if they understood the consequences.

[noah]

Gary Farber:

There was a great deal of skepticism about Kerry's claims regarding reducing the deficit.

And no I can't provide a link. BUT the oft expressed dream of dems of providing universal health care won't be "free". In an attempt to outbid the Republicans, many Dems have proposed increased Defense spending. Dems have blocked votes thru filibuster for miniscule reductions in future spending for Medicaid. They constantly complain that Homeland Security is not prefect...perfection, if achievable, would require spending truly enormous sums...you can't hire people to guard stuff for nothing.

Chinese...sorry.

[hilzoy]

I agree. Though I would much rather (a) not have started the war, and (b) not have enacted the tax cuts.

[hilzoy]

Sorry; that last was directed to withak.

Noah: I have never complained that Bush's homeland security record is not perfect. I have complained that outside aviation it;s nearly nonexistent, but that's another matter.

[noah]

Current US debt to GDP ratio at about 70% is about where it was when Clinton took office and contrary to the fond memories of Dems it only dipped slight toward the end of Clinton's term. The fantasy that the US debt was on a path to elimination was just that...in a couple of years SS receipts will actually start decreasing...puttting pressure on the deficit.

[Bernard Yomtov]

Noah,

I think the problem is illustrated by an inconsistency in a couple of your comments. On the one hand, you say that the Chinese have been "foolish" - your word - to lend us lots of money at unreasonably low rates. On the other you argue that they would never sell their bonds, or quit buying them, because "they would lose their shirts." In other words, because it would be foolish.

So you seem to be arguing that we can count on the Chinese to oscillate between foolish and rational behavior, as such behavior benefits the US.

I prefer to think that the Chinese government acts in accordance with its own self-interest, where its calculation of self-interest includes not just economic but also political factors - both domestic and international. Now, they do hold a lot of US Govt debt, in fact and not just "allegedly."

Their management of that debt will be guided by their self-interest as described. I don't think it's unwise to be concerned about that.

[noah]

In my opinion, we are mostly wasting money and resources on "Homeland Security". Take the Dubai ports deal kerfuffle...nobody ever explained how even an AQ cell could take advantage of controlling a few port terminals.

Suppose they had a nuclear weapon and had successfully forged bills of lading for a container containing it. What difference does it make who unloads it? They could just remotely detonate it in the harbor.

The fact that we have not been attacked has more to do with intelligence than jerks checking your bags at airports. I have seen it written that the hijackers actually did not use "boxcutters" to take over the planes...that the Feds are loath to admit that banned weapons got by security so they invented the boxcutter scenario since they weren't banned.

My opinion of course.

[noah]

Yemtov, I doubt we really disagree. I do think the Chinese would have been better off buying more US goods rather than accumulating US debt securities. I suspect they thought they were acting in their best interest. With 20/20 hindsight it could very well look foolish. We shall see.

On the other hand its bloody easy to see how various scenarios would work out if they attempted to sell off their investment.

[Frank]

noah- Welcome to Obsidian Wings.

I thought your initial post was interesting;

"The subtext of the post is ignorance.

It is often stated that China has financed the US deficit...as if we had gone hat in hand to borrow from them. When actually of course our government has sold bonds on the open market and China has elected to purchase them. You might say that we have them over a barrel.

The outcry over the Dubai ports deal was disgraceful. Foreign holders of dollar assets must be allowed to invest in this country or the whole international trading system will be put at risk."

I see these two statements as directly contradictory. No one else mentioned it so I will. First you try a version of the 'worthless IOU' talking point, that it is the Chinese who have to worry about weather we will honor our debts.

Next you say that it is dishonorable not to let the UAE buy anything in the US that they can afford. (Since that includes Presidents, Senators, Congressmen, and paid trolls like you, that means everything.)

Which is it? If "foreign holders of dollar assets" have to given whatever their little hearts desire then the Chinese have US over a barrel not vice versa.

[Gary Farber]

"(Since that includes Presidents, Senators, Congressmen, and paid trolls like you, that means everything.)"

I see little grounds for calling Noah a troll; "troll" does not mean "people we disagree with" or "people whose reasoning we don't respect." Trolling is a specific kind of behavior. And "paid trolls"?

[liberaljaponicus]

I think Noah has a point, but it is along the lines of 'if you go into debt, make sure that you go in deep so your creditors have a reason to keep you afloat' A massive selloff would hurt the Chinese, especially if put the dollar in a free fall. However, as a general rule, the Chinese have been quite astute, balancing appeals to nationalism with realpolitik. The Chinese students I have had have impressed me with their thoughtfulness, and this is a mid-range university, so I imagine that the sharpest ones have a lot on the ball. While I am not too enamoured of the coming conflict with China rhetoric, the Chinese powers that be are looking at this over a much longer time frame than the next election cycle. This is not to say that they have a handle on everything, nor is it to say that I agree with a lot of what they are doing. But there is some remarkable underestimation going on about this.

[Frank]

Gary- I knew you were going to step in. Please don't. Noah will either defend himself or he won't, but I'm not interested in what you have to say about this.

[hilzoy]

Frank: I'm with Gary. 'Paid trolls' is over the line, unless you have evidence that he is, in fact, paid to troll.

[Frank]

hilzoy- Curses, foiled again!

Well no I don't have any actual evidence, just my intuition.

Statements like this one: "The outcry over the Dubai ports deal was disgraceful. Foreign holders of dollar assets must be allowed to invest in this country or the whole international trading system will be put at risk."

seem really odd to me. I don't think I've ever heard a sentiment like that before in my 38 years on this earth. I remember the discussion about China buying Unocal recently pretty well. I was on the other side of that one because I felt that we should allow China to buy oil supplies within their sphere of influence, rather than try to keep them in a completely dependent state. That seemed the more diplomatic solution, because China's vital interests were at stake. I don't recal anyone at the time making any similar kind of argument to this.

So while I will apologise for my violation of OW posting rules, I don't see any way to change my opinion that someone would only make the obove claim if they were paid to do so.

[Gary Farber]

Statements like this one: "The outcry over the Dubai ports deal was disgraceful. Foreign holders of dollar assets must be allowed to invest in this country or the whole international trading system will be put at risk."

seem really odd to me.

I don't know why; seems like a perfectly common, if simple and simplistic, pro-free-trade opinion, that's a dime a dozen.

"So while I will apologise for my violation of OW posting rules, I don't see any way to change my opinion that someone would only make the obove claim if they were paid to do so."

Whereas that seems entirely bizarre to me.

Sorry that you don't want to hear from me, but feel free to ignore me; I don't, as it happens, post here, or not, to please you. Though I won't go out of my way to comment on things you say, either; notice I had nothing to say in this conversation up to now, until you made a rather bizarre accusation. (The odds that someone is paying Noah to make rather badly written, poorly put, statements of his opinion on some random blog seems fairly bizarre to me; do you think that the Chinese government has a blog-comment payoff program?; if so, I work cheap, and can write better than Noah can, I bet.)

[Gary Farber]

"...rather badly written...."

That was a little over-strong, actually, and I apologize to Noah; he has some careless tics, mostly, more than he's writing particularly badly; he's making his opinions fairly clear.

[hilzoy]

Frank: thanks.

[hilzoy]

And how much odder is it than the view that the President has the right, under the Constitution, to disregard laws he doesn't agree with? I think that it's a bit tricky, just now, to say "you wouldn't say that unless someone paid you, since you can't possibly believe it", given some of the things people seem to believe these days.

[Frank]

hilzoy- I think you need to pick a better example. :) We already know none of them believe that ("President has the right, under the Constitution, to disregard laws he doesn't agree with") Lots of them made the opposite argument personally when there was a Democratic president, and the rest will pretend to care about rule of law in the event there is another Democratic president.

Thats just ordinary partisanship for Republicans, its not at all the same thing as a (false) administration talking point that even Republicans widely rejected weeks ago.

Gary- Its not a free trade argument at all. Free trade is concerned with the movement of goods and services, not the purchase of large chunks of working capital. WTO rules have nothing to do with this, and there are plenty of other things the UAE's dollars could be used to buy.

[Frank]

hilzoy- You also continue to ignore the large condradiction between the two things noah pretends to believe.

[calmo]

Bernard has Noah (who cannot transcribe Bernard's last name properly), ballparked as "inconsistent".
Well who is'nt? And besides Noah accepts Bernard's post as therapy. ("Yemtov, I doubt we really disagree")
But Frank intuits (almost as good as reasons from evidence) that Noah is more than inconsistent in providing a subtext of ignorance: "directly contradictory"; parenthetically, "a paid troll".
(Did Frank overlook this case as a quasi-mention? [Was he hoping that Gary would draw that distinction between calling some one a paid troll and making a parenthetical remark to that effect?]And this after a warm welcome that some now have doubts as to the actual temperature.
But Frank recants, (too hastily as Gary argues convincingly: not good enough for real money, not yet a professional, a mere amateur honing his skills perhaps) and all ends well.
With Mr Roach safely forgotten till the next MS release.
But how well is it?
Has Noah been paid a more severe blow from Gary who has disparaged his trolling ability perhaps further than Frank's blow that it was mere ignorance?
In the event that Slarti is wearing his swimming googles at this moment, who decides these tender issues?

[Frank]

Howdy calmo don't see you around these parts very often.

[Steve]

The Noah/Nick Danger argument is, quite simply, an economic version of Mutual Assured Destruction. By letting the Chinese hold massive amounts of our debt securities, the argument goes, our survival becomes their survival. While in theory they could completely sabotage us, they would only hurt themselves because their IOUs would become worthless.

The reason why the economic version of MAD is not as reasonable as the nuclear version (did I just say that)? is that nuclear war is an all-or-nothing proposition. Either you nuke the other guy, in which case he nukes you back and everyone dies, or else you leave him alone. And by the same logic, of course the Chinese would never destroy our economy when we owe them trillions of dollars.

But in the real world, we don't see all-out economic warfare - what we see are relatively minor tweaks to a country's economic policy, based in part on how much they like their trading partners. To take a related example, following the scuttled UAE ports deal, the central bank of the UAE announced that they planned to convert 10% of their dollar holdings into Euros, whereas before the port deal the plan had been to convert only 5%. The effect was that the Euro benefitted at the expense of the dollar.

Similarly, China has the ability to tweak its economic policy in ways that would not be disastrous for us (nor for them), but would nevertheless create ripple effects in our economy. Perhaps China will decide to increase its domestic spending next year and lower the amount it lends to foreign borrowers. Perhaps they will choose to buy slightly less US securities next year and slightly more of some other country's securities. Or any of a dozen other possibilities.

Not only can any of these scenarios have a detrimental effect on our economy, but the mere presence of uncertainty hampers our capital markets. Any time our relationship with China is in the news, everyone on Wall Street has to hold their breath to see if there will be any fallout. That's bad for business on many levels.

It's a complicated world. There's so many things that can happen between us and other nations. The more economically dependent we are on other nations, the more our options are limited for dealing with those scenarios.

[calmo]

May I recommend Setser for commentary on China's role in our trade deficit picture which is currently about 6% GDP, (not the 70% mentioned above which might be an approximation of our total debt/GDP).
http://www.rgemonitor.com/blog/setser/
In addtion to a Mar 22 reference to Roach there are many articles/discussions in the archives. (Neophytes [like me] are tolerated.)
Greetings Frank, I am usually too facinated with the OW protocol to do anything but gawk.

[noah]

Let's see: while foolishly wasting my time by watching NCAA basketball when I could be a "paid troll", my posts have been trashed without really addressing the arguments.

Is it really that bizarre in this corner of the blogosphere to find someone making non-controversial arguments about international economics? Hilzoy's sarcastic comment: "Our government, in its infinite wisdom, has made our economy extraordinarily dependent on foreign capital" is basically a snarky conspiracy theory. Does she really think that our infinite wisdom had anything to do whether China decides to buy our bonds or buy our goods? Of course "our" government, as sovereign, could back out of trade agreements and prevent China from selling us goods in a variety of ways. Would that be wise?

Apologies to Yomtov. Apologies for unpolished posts. No apologies for making arguments unanswered except by appeals to authority, internal astonishment, and insults without evidence.

[noah]

70% is approximately US Debt/US GDP (not trade deficit/GDP) and can be confirmed by googling "US debt and GDP".

[noah]

The last time I posted much of anything at this site was when the Left was in a tizzy because it appeared that ANWR might be opened for exploration. The fatuous argument du jour was that we might end up selling the oil to China since it would be cheaper to ship the oil to them than to the lower 48. This was supposed to be a bad thing. Now the whining is about the trade deficit with China! Go figure.

[noah]

And BTW, I am not making Nick Danger's (never heard of him) argument whatever that might be. If it is fairly summarized by "By letting the Chinese hold massive amounts of our debt securities, the argument goes, our survival becomes their survival.", then I reject the question begging. We do not "let" the Chinese hold our debt. That mindset is what leads to Hilzoy's post.

[calmo]

Hilzoy's sarcastic comment: "Our government, in its infinite wisdom, has made our economy extraordinarily dependent on foreign capital" is basically a snarky conspiracy theory.
You are making Frank look right noah.
"in its infinite wisdom" is not Hilzoyan sarcasm. A figure of speech maybe, a stylistic artifact, but not her brand of sarcasm.
I intuit this (like Frank) [It goes like this: we all know what she thinks of the government (not so much) and how she deploys her sarcasm (it's not going to be dashed off in a platitude like "in its infinite wisdom"): with all the craft that we expect from a professional writer.]
Of course I could go back to other threads and pick out examples of what I consider to be good examples of Hilzoyan sarcasm but my intuition tells me that might be overkill.

It is an interesting issue, (not especially a conspiracy theory), that Setser (much more so than Roach) is devoted to: following foreign US reserves and the key purchasers.
He's good (readable and approachable, read and approached by many others) and recognized (addressed Senate committees). And a real human being, like us ok?

[noah]

Sorry Calmo, your thesis is definitively disproven by the fact that the quote is from Hilzoy's post.

[noah]

And her use of the verb "made" implies of course that someone in the government screwed up and failed to force the Chinese to order their finances to our liking.

[Frank]

noah- I agree with calmo that you may be reading too much into hilzoy's figure of speech. I didn't exactly intend to insult you. (tho maybe you are responding to Gary there) I was hoping for an explanation of why your argument seems to contradict itself. Evidently that was too much to hope for, though I wish Gary hadn't clouded the waters.

The Bush administration chose to take America from record budget surpluses to record deficits as far into the future as anyone can project. These budget deficits inevitably lead in turn to record breaking trade deficits. It's entirely true that someone outside the US had to buy those bonds. So I'm not sure what kind of point you are trying to make here? Let me know. Also if you could explain why you think we have China over a barrel, but simply mustn't prevent Dubai from being able to buy our ports I'd appreciate it, thanks.

[noah]

You don't really deserve a response Frank but I will give it a shot. But I start out with pointing out that your comment re budget deficits leading inexorably to trade deficits is complete nonsense (eg Japan...chronic budget deficits, chronic trade surpluses, and chronic weak economy). Also like Hilzoy, you use words like "chose" to describe the Bush admin. policies as if they chose to inherit a weak economy, chose that our country suffer a terrorist attack, and chose for the stock market bubble to collapse.

I don't see the contradiction between observing that China may have foolishly accumulated large amounts of US debt securities and lamenting the hysterical opposition to the Dubai ports deal. It all goes back to the fundamental point that we export dollars and restrictions on their eventual theoretical repatriation distorts markets.

[Frank]

noah- 1. The Bush administration chose to talk the economy down, chose to ignore warnings about upcoming terrorist attacks, and instituted much less tech friendly economic policies, but even if they hadn't the Bush tax cuts would have taken us into deficit.

2. The Japanese don't have a negative savings rate.

What could be foolish about China's purchase of dollar denominated securities if restricting "eventual theoretical repatriation distorts markets" wow that was quite a turn of phrase.

And "hysterical" too. I'm now going to have to classify you as not worth responding to now. But I am begining to understand why you are so hysterical now. Desperate, in your last throes even. ttfn

[liberaljaponicus]

noah,
could you spell this out a bit more

But I start out with pointing out that your comment re budget deficits leading inexorably to trade deficits is complete nonsense (eg Japan...chronic budget deficits, chronic trade surpluses, and chronic weak economy).

I'm going a bit of mind reading, but you seem to argue that because Japan couldn't supplant the US, obviously China can't. I don't know, but my impression is that China and japan are like two players putting on a green covered with dew. The one furthest away putts first and the second player can easily read the green. Regardless of what this administration 'chose', I feel that the US is now in a position where it can only pretend to control events rather than actually do so.

[noah]

Truly pathetic response Frank. Trot out your favorite word "chose" as in "chose to talk down the economy"...apply it to an accurate description of the weakening economy toward the end of Clinton's term. But this rhetoric is perfectly acceptable no doubt when employed by Kerry to "talk down" the economy by describing it as the worst since Hoover. Of course he was wrong and fact is there is a paucity of evidence that the economy can be moved much in either direction by talk.

You present a theorem re the relationship between fiscal deficits and trade deficits, when disproved by couterexample, you complain about "national savings rate"...you apparently do not realize the relationship between trade deficits and national savings!!!

[noah]

Liberaljaponicum, thank you for at least not openly insulting me.

I don't think "we" have control of our destiny necessarily. I am an unreconstructed capitalist and there does not seem to be very many of those in these precincts. Hilzoy, implicitly assumes that the government could make the trade deficit problem, if it is one, go away by the correct government policies. I pointed out to Frank that Japan has a trade surplus, a weak economy, and chronic budget deficits but that has not led to nirvana...maybe if they could get rid of the budget deficits!! I suspect it is the contours of their government policies that is the problem, but I don't pretend to be an expert on their economy or much of an expert on anything.

I object to Hilzoy's illusion of control. We can make the best of our situation by correct policies but we do not control the actions of other players.

[hilzoy]

Noah: "Hilzoy's sarcastic comment: "Our government, in its infinite wisdom, has made our economy extraordinarily dependent on foreign capital" is basically a snarky conspiracy theory. Does she really think that our infinite wisdom had anything to do whether China decides to buy our bonds or buy our goods?"

It's not a conspiracy theory. First, note that I said "foreign capital", not "China". So I did not say that we had in any way selected who was going to be buying our bonds and goods.

Second, and more fundamentally, what I said requires (I think) only the assumption that our government has control over the extent of its own deficit, and some control (via fiscal policy) over the economy more generally. By choosing some policies over others, it can largely determine the size of its own deficit, and can have a substantial impact on the economy. Are either of these two claims controversial?

Given our abysmal rate of savings in this country, any deficit our government decides to run will be financed largely through foreign capital. Our government chose to run a very large deficit, which requires very large amounts of capital to finance it, capital that will (see above) be largely foreign.

The government could, of course, have taken steps to increase personal savings, but it has not, as far as I can see.

What I'm saying is: of course we don't control the decision by any particular government to buy bonds etc. On the other hand, we have a lot of control over how many bonds we need for someone to buy. Under the circumstances -- circumstances our government has not done much of anything to try to change -- the people who have savings available to invest in our bonds will be largely foreign. How is this a conspiracy theory?

[noah]

Hilzoy, how would the government increase the personal savings rate? Just asking.

Sounds sort of like a conspiracy theory to me when you imply ("made us extraordinarily dependent on foreign capital") that the government given the totality of circumstances could have chosen a quite different path (but fail to provide a discription of that path). You say that the government "chose" to run huge deficits but avoidance of deficits would have required raising taxes during a recession or drastically cutting spending. When Bush cut taxes, government tax receipts started increasing within a quarter and are now higher than they have ever been in history. The deficit problem is related more to GWOT spending than anything else in my opinion...but Kerry, for example, never claimed that he was going to reduce such spending.

You guys seem to have a reflexive need to blame Bush for everything. Or is it Rove?

[hilzoy]

Noah: the tax cuts were pretty badly designed to stimulate the economy. We could have done a lot more for a lot less. We could also have made them temporary, so that they'd last only as long as the recession.

Tax receipts generally go up over time, thanks to inflation, population growth, and growth in the economy. The question is, by how much? In this case, by considerably less than the administration forecast, and not at all when you control for inflation and population growth.

[liberaljaponicus]

noah,
I'm really bad at this economics stuff, but it sound like you are saying that the Bush admin couldn't help run the deficits that it has and, at any rate, deficits are good. My naive understanding is that it was better when 'we' (this gets a bit tricky because I live in Japan and my pension and the house I have will be in yen rather than dollars, hence my snarky comment at the beginning) didn't have the debt burden because now we are paying interest rather than devoting that money to things like national health.

Now, I'm one of those fuzzy liberals who thinks that if we had actually set up a working democracy in Afghanistan rather than going off into Iraq, it might have made a difference, so I feel the admin's mistaken invocations of the threat from Iraq resulted in us dropping money down a bottomless pit, so I would have been much happier with the US at the same current deficit situation, but spending it on establishing democracy in Afghanistan and all of the casualties (both US and Iraqi) not occurring, so you could say that I am being hypocritical here, but since you are saying (I think) that the admin couldn't have chosen its financial course and anyway, the deficits are good, we shouldn't blame Bush. But wouldn't having only a deficit and avoiding 2300+ US casualties and how ever many Iraqi casualties be a good thing?

Sorry to pile on, as I see in preview that hilzoy has also commented, but if you seem to be presuming a lot of information, so if you could be more explicit about what you are saying, I would appreciate it. Thanx.

[noah]

Hilzoy, not wanting to prolong this discussion if facts don't matter. Fact is that tax receipts starting increasing (instead of declining as they had been) almost immediately after the tax cuts were enacted...I am asserting cause and effect here (Ive seen the chart...sorry can't find it at present). Whether the tax cuts were optimal...beats me...sounds an argument for policy wonks. Would allowing the tax cuts expire harm future economic growth...maybe so and then your kids will have less oportunity in the future. Maybe that is why we have elections?

But I am really interested in how you would propose to increase the national savings rate. As you know that has been a "problem" for decades.

[noah]

Liberaljaponicum, I think deficits do matter. But I also think that the common liberal complaint that Bush took a surplus producing economy and wrecked it is a lot of baloney...external factors played a huge role.

Yep, we would possibly be better off if Saddam were still in power but my response is would the world be? "Finish the job in Afghanistan"...we have done about as much as we are going to achieve there...suggest reading "Imperial Grunts"...it has an excellent chapter about the time the author spent with the special forces there. OBL is probably hiding in Pakistan...large unit tactics in the region where he probably hiding don't make much sense and are prohibited by the Pakistanis anyway.

I really didn't understand your comments about what I was saying upthread. I have no idea about who will supplant who in the future.

[liberaljaponicus]

But I am really interested in how you would propose to increase the national savings rate. As you know that has been a "problem" for decades.

I don't understand the quotes around "problem", but I assume that you don't think it is, though on preview, I see that you think deficits are important, so I'm not sure who else is to blame for running up large deficits.

Assuming that you don't think savings to be problem, I'd argue that a country with a poor national rate of savings leads to a lower standard of living because sufficient reserves are not set aside for both short term (house, education, etc) and long term (retirement, setting up children) goals. In addition, given the absence of a national health care plan and a national pension, US citizens are in greater danger than their european or japanese counterparts. This also affects the presence of jobs in the long term, because companies (cough*Wal-Mart*cough) force states to pick up the bill for health care, thus creating wealth for a smaller slice of the population, which leads to inequities which is not a good thing (note that China has made it the top priority to deal with rural/urban disparities)

Also, the lack of household savings has been cited as a reason why the dividend tax cut and the change in IRAs was touted and passed by this administration, so are you arguing that this is not, in fact, a problem, so claiming that it is being done for increasing personal savings is simply demagoging?

As for my comments upthread, it makes a big difference to me whether the US or China will be the dominant power in the world. There was someone here who, when it was suggested that China was a threat, always responded "what is the GDP of China?" Looking 20 years down the road and thinking about current economic trends, are you sure that my daughters should be concentrating on English, or would it be better if I aimed to take a sabbatical in China? I know, piddly stuff, but that's what I think about.

As I said, economics is not my thing, so if you could present some sort of data, I'll happily plow thru it, remembering that I am at the 099 level for this stuff.

[Frank]

lj- I got my degree in Econ. noah is not a good person to ask. noah should be taking Intro to Macroeconomics.

[noah]

Lj, Didn't say it isn't a problem...I just don't "know" that it is a problem. Japan as I am sure you are aware has a very high personal savings rate (why?...some say it is cultural). For me its not a problem I have been a saver all my life.

I was just interested in what Hilzoy (and you) think is the solution. Now Bush proposed allocating part of SS taxes to private accounts...nonstarter with most liberals. Would some other forced savings program on top of SS taxes be acceptable? Inquiring minds want to know.

In spite of Japan high personal savings rate, I understand from what I read that the economy has not been so rosy there for the past decade or so. Do you have any thoughts as to why that is?

[noah]

Frank are you as delightful in person as you are here? Hysterical ninny...why don't you respond to my arguments instead of descending into the snark patch?

[noah]

Lj, IRA's etc did produce increased savings among some sectors and no I don't think it was demogoguery. But without rehashing the whole SS debate, there is a definite problem out there for anyone rational enough to see it. So it appears that a lot of folks are not saving enough.

[hilzoy]

Noah: please read the posting rules. They prohibit incivility. "Hysterical ninny" counts as uncivil in my book.

[noah]

Hilzoy...read upthread where I have been referred to as a "paid troll" I believe by Frank. He also called me hysterical after he declined to respond to my arguments in a rational way.

His last post cites himself as authority on economics but he won't defend his arguments when challenged.

[hilzoy]

Noah: read upthread where I said the same thing about that remark that I said to you.

[noah]

As I recall back during the "ANWR" crisis, the pattern was the same here. Liberals would pronounce the truth. When challenged would resort to ridicule or appeals to authority or, rarely, with reasoned defense of their positions. But you have posting rules.

[noah]

Thanks, Hilzoy, didn't see that.

[Gary Farber]

"Liberals would pronounce the truth."

No, actually, individuals would give their opinions. Whomever they are, they don't speak for "liberals" in general, any more than you speak for whomever it is you might be grouped amongst. Thinking that you're responding to some sort of group is reductionist and incorrect.

[noah]

Gary, of course you are correct. IIRC tho, it was pretty much a "group think in" where the herd of right thinking individuals attacked anyone who did not share their view. Typical across the spectrum. I guess I should not have even mentioned it.

[Gary Farber]

"...where the herd of right thinking individuals attacked anyone who did not share their view."

Restated without the adjectives, you're asserting that people disagree with the people they disagree with; sometimes several people disagree with one person.

Quite so. I, myself, find that, from time to time, people disagree with me. It's quite shocking, really.

[Steve]

It's amazing to me how the faith-based espousers of the "tax cuts increase revenues" theory simply ignore all the evidence they don't like and proclaim themselves the winners.

Revenues fell after Reagan's tax cuts? No problem. Revenues fell after Bush's 2001 tax cuts? No problem. Revenues went up after Bush's 2003 tax cuts? See, you Bush-hating moonbats, what more proof could you want!

In any event, the actual facts concerning the 2003 tax cuts are quite different. Inflation-adjusted receipts for 2004 were pretty much flat. Inflation-adjusted receipts for 2005 went up, primarily due to a one-time adjustment to corporate depreciation which was revenue-neutral over the long term. Every dime of revenues from this adjustment is a dime less we'll be collecting from those taxpayers in 2006-2010.

The reason I denigrated this theory as "faith-based" is because it is truly remarkable how little supporting evidence its proponents require before they will declare it to be settled fact. If you believe in God, you will see Him in every butterfly. Similarly, if you believe in this economic theory, all it takes is one good quarter to confirm your belief forevermore.

I have read so many disingenuous comments from Noah in the last several hours ("we don't 'choose' to accumulate foreign debt," "government has no power to increase the national savings rate," etc.) that I really can't believe his goal is anything other than obfuscation. Hilzoy's common-sense understanding of the issues involved here is really quite accurate.

[Gary Farber]

So, bottom line: is the Schumer-Graham bill a bad idea or a good idea?

[liberaljaponicus]

In spite of Japan high personal savings rate, I understand from what I read that the economy has not been so rosy there for the past decade or so. Do you have any thoughts as to why that is?

Well, I would recommend that you read Wolferen's _The Enigma of Japanese Power_. For countries as well as people, your greatest strength is also your greatest weakness and the ability to incrementally plan without actually having longer term goals (Wolferen's image is of a large ship isn't piloted) allowed Japan to make remarkable strides recovering after WWII, but did not serve it very well in understanding that a bubble was building. When that bubble collapsed, though, it did not lead to the massive dislocations that it might have in the US precisely because of the wide ranging welfare system and the savings habits of Japanese. There's a lot more to say, but I will just leave it there for the moment

[noah]

Steve,

Current tax receipts are 6% higher in inflation adjusted terms than their peak in 2001 when they began falling due to the recession.

The deficit is falling, not rising.

Hilzoy lambasted the admin for failing to boost the personal savings rate. But various observers have been lamenting our low personal savings rate for decades. Despite repeated urging by me, Hilzoy declined to offer her thoughts on a policy that would increase personal savings! Apparently she believes in magic wands!

Magical thinking is not a policy description.

Where is the obfuscation?

[noah]

I also might add the only bright star in the EU is Ireland which is very similar to the US in terms of total tax burden. The EU bureaucrats are pissed so now they want "tax harmonization" in order to put Ireland on the same path as the rest of the basket-case economies in the EU. Of course, this is something that liberals in the US do not wish to discuss since basically they would have us adopt EU policies!

[noah]

Fantasy honest conversation with Hilzoy:

Hilzoy: Well noah, I'm glad we have this oportunity to speak off the record. The strictures of academic discourse ordinarily restrict me from speculating on the intentions of 'others' so OW is liberating in the sense that I am free to ascribe motive, ability, and therefore the responsibility of my political opponents.

Me: I would never have guessed.

Hilzoy: I hate Bush. There you have it.

Me: I would have never guessed.

Hilzoy: It is a fundamental theorem of international economics that the level of personal savings can cure all ills of current account balances, therefore for the purposes of "Bush bashing" I will posit that the failure of the Bush administration to appropriately adjust the level of personal savings to be a diabolical desire to trash the US economy. I admit that this is dishonest but Glenn Greenwald gave me permission to lie.

Me: Hilzoy, thank you for your candor. God bless the USA.

[hilzoy]

Alternate fantasy conversation:

hilzoy: Actually, I am not particularly interested in continuing this argument. Also, I have a job, at which I have been working.

noah: Oh. I'm sorry for the incivility, then.

hilzoy: good. Otherwise, I'd have to ban you for not following the posting rules. After all, this is not the first time you have violated them.

noah: Oh. Sorry

[noah]

LOL...not incivility. Just have wondered for days why you refuse to back up your arguments.

To much to ask of a philosophy doc?