Sunday, September 09, 2012

Suppose China decided to _____...  

Fill in the blank. An enormous number of people with a tenuous grasp of macroeconomics and less understanding of foreign policy are lobbing out bizarre scenarios that in truth simply arise from blatant xenophobic "Yellow Peril" panic.

One of my favorites is: CHINA"S GOING TO CALL IN OUR LOANS!!! (I use all caps because that seems to be the standard format).

And, um, how would they do that, zactly? Let's check in with someone who actually studies these things.
No.  No, no, no, no, no, and no. 
To elaborate a bit further:  
First, it wouldn't be enough for China to stop buying Treasuries -- as Joe Weisenthal showed with some fun charts a few weeks ago, China has pared back its Treasury purchases intermittently over the past few years -- with zero appreciable effect on U.S. interest rates. (see non-panda-hugger Paul Krugman on this point as well).  No, for China to have the effect that Friedman envisions, they would also have to actively dump most of their holdings of U.S. debt as well.
So what if they do?  Well, second, while Romney's stated China policies border on the destructive, the "labeling" move is bone-headed rather than truly calamitous. China wouldn't dump its debt unless things got really bad between the two countries.  Not even Stephen Roach thinks this would be the initial Chinese response -- and I think Roach is being way too gloomy about Sino-American relations under Romney. 
The reason China won't respond with the nuclear option of dumping all its U.S. debt holdings is that -- to repeat a theme -- this move would hurt China way more than it would hurt the United States.  The far more likely response by China would be to retaliate with trade measures.  This would not be good, as China is now the third largest export market for the United States.  Beijing can hurt a Romney administration by reducing its American imports far more adroitly than trying to trigger another financial crisis. 
Now, for the record, I don't think Romney should label China as a currency manipulator on day one, and I think Friedman makes some trenchant observations on Romney's consequences-free foreign policy statements later in his column.  But this Niall Ferguson-lite version of Sino-American relations is bad international relations theory and really bad economics -- and yet Very Serious People keep trotting it out.  
I really, really wish this would disappear from public discourse.  But it won't.  So, most likely, my desk is gonna get dented a few more times before Election Day. [More]
Thinking about it, this is very similar to the worry that Arabs were buying up all the good property in the US back during the 80's (?) or some such time. I never could figure out why that was a big deal. It's not like they could take a skyscraper back home. 

What I keep coming back to how hard it is to comprehend the glut of wealth in the world. It has to be somewhere, and if not in relatively high-quality sovereign debt it would be "bubblizing" other assets even more than currently is the case.

While I agree we need to address our fiscal policy and move toward a sustainable debt level, the current simplistic view of debt as anathema or a weakness to be exploited by China is unhelpful and inaccurate. We need to fear the effects of enormous and concentrated wealth more.

1 comment:

Bill Harshaw said...

The Arabs were buying up debt in the 1970's. The Arabs had money from nationalizing their oil (see the movie Rollover where the impending crisis is whether they will rollover their investments in US debt.

The Japanese were buying up real estate (maybe Rockefeller Center?), including ag land, hence the Agricultural Foreign Investment Disclosure Act of 1978, which is still on the books.