I exchanged IMs with Renee yesterday, in which she was describing the attitudes of virtually all of the students in her economic development class towards US debt with China. She wrote: “people are crazy paranoid about the chinese taking over the US with our dollars. . . . they are all asking, what happens when they call in our debt.” To which I responded: “They gave us stuff. We gave them paper. Pretty good deal.”
Lo and behold, what should I read in today’s WSJ, but an excellent oped by John Cochrane, from my alma mater, the Booth School at the University of Chicago, saying the same thing:
What’s the right policy toward China? They put a few trillion dollars worth of stuff [same word, even] on boats and sent it to us in exchange for U.S. government bonds. Those bonds lost a lot of value when the dollar fell relative to the euro and other currencies. Then they put more stuff on boats and took in ever more dubious debt in exchange. We’re in the process of devaluing again. The Chinese government’s accumulation of U.S. debt represents a tragic investment decision, not a currency-manipulation effort. The right policy is flowers and chocolates, or at least a polite thank-you note.
Yet Mr. Geithner thinks that the Chinese somehow hurt us. There is at work here a strange marriage of Keynesianism and mercantilism—the view that U.S. consumers supported the world economy by spending beyond our means, so that other people could have the pleasure of sending things in exchange for pieces of paper [again–same word choice].
Cochrane is also spot on in skewering the policy Goldilocks who claim to be able to discern what level of trade, investment, and saving is “just right”:
This is all as fuzzy as it seems. Markets and exchange rates are not always right. But it is a pipe dream that busybodies at the IMF can find “imbalances,” properly diagnose “overvalued” exchange rates, then “coordinate” structural, fiscal and exchange rate policies to “facilitate an orderly rebalancing of global demand,” especially using “medium-term targets” rather than concrete actions. The German economics minister, Rainer Brüderle, called this “planned economy thinking.” He was being generous. Planners have a clearer idea of what they are doing.
He also makes a point that I’ve belabored over the past two years, but which I’ve seldom seen in print:
So Mr. Geithner knows that trade surpluses in the end come down to saving and investment. And he knows that in the U.S. people are trying to save right now. Our government is undoing their efforts with massive fiscal deficits. Mr. Geithner recognizes that most of the trade “imbalance” comes down to a big fat fiscal imbalance centered in Washington, D.C.
Abso-effing-lutely. It drives me crazy (short trip, I know) to hear “analyses” of Keynesian-style stimulus policies that are predicated on the belief that Americans are programmed automatons, rather than deciding, active, acting, and reacting, agents. They want to restore their ravaged balance sheets, and do so by saving. They understand, perhaps not intellectually, quoting Ricardo, but certainly intuitively, that expanded government spending today is nothing but tomorrow’s tax bill. So they react to stimulus, and threats of more stimulus (and “threat” not “promise” is the right word), by making decisions that largely reverse government actions. Maybe not 100 percent, but substantially. Which means that the fact that stimulus has not stimulated shouldn’t be surprising to anybody who understands that American households are not inert blobs that can be manipulated at will by Washington mandarins. (I understand that excludes a good fraction of the 202 area code and vast swathes of the commentariat.)
No, talk of governments or the IMF correctly discerning “imbalances” and crafting appropriate policies in response is like Cochrane says: a pipedream (if not worse). The main thing that is unbalanced in the American economy right now is the administration’s economic policy, and those responsible for it. And Timmy! is at the top of the list.
One more thing about the Chinese and debt. The implicit presumption underlying the fear of Renee’s classmates is that the creditor has the power and calls the tune. But as far too many of Donald Trump’s bankers have found out to their dismay over the years, if you lend somebody enough, he has tremendous power over you.
With respect to China, we already have the stuff, thank you. We’ve promised to give you stuff in return in the future. Just what is the mechanism for enforcing that promise? This has been the conundrum in sovereign debt markets from time immemorial. Just look at how the Greeks can tie the Euros in knots. I’m not saying it will come to this, but insofar as debt is concerned, China is more vulnerable in many ways than the US. They have the Benjamins, yes, but (a) the amount of stuff the Benjamins can buy is outside of their control (and in the control of another Ben, ironically), and (b) there is always the risk that we tell them that their Benjamins are no longer exchangeable for stuff.