The Last Thing We Need To Worry About?

Krugman claims the US private sector is financing the deficit, not China:

So who’s actually financing the US budget deficit? The US private sector. We don’t need Chinese bond purchases, and if anything we’re the ones with the power, since we don’t need their money and they have a lot to lose. In fact, we don’t want them to buy our bonds; better to have a weaker dollar (a point that the Japanese actually get.)

Lots of people keep getting this wrong, even after all these years. But really, truly, the last thing we need to worry about is whether the Chinese love our bonds.

He cites as evidence that the current account deficit as a percentage of GDP is way down since before 2008:

And that’s certainly a decrease — but that doesn’t mean that the US deficit isn’t being funded by foreign creditors. There is no doubt that foreigners are still buying a lot more debt than they were 10 or 20 years ago:

As someone called Paul Krugman noted back in 2005:

There’s no sign that anyone in the administration has faced up to an unpleasant reality: the U.S. economy has become dependent on low-interest loans from China and other foreign governments, and it’s likely to have major problems when those loans are no longer forthcoming….

Dollar purchases by China and other foreign governments have temporarily insulated the U.S. economy from the effects of huge budget deficits. This money flowing in from abroad has kept U.S. interest rates low despite the enormous government borrowing required to cover the budget deficit….

Here’s what I think will happen if and when China changes its currency policy, and those cheap loans are no longer available. U.S. interest rates will rise…. And we’ll suddenly wonder why anyone thought financing the budget deficit was easy.

A small-to-moderate dip in the level of treasury purchases by foreigners as a percentage of GDP doesn’t change the fundamentals.

The US economy is still dependent on the flow of goods, components and resources from creditor nations — flows that could temporarily (and disastrously) be shut down by acts of trade war, international crises, or natural disasters.

There are other economic issues that are more imminently worrying — like weak job growth, weak GDP growth, the housing depression, and excessive private deleveraging costs. Krugman rightly emphasises these problems. But Krugman is wrong to totally dismiss excessive dependency on foreign credit (and the trade flows and economic fragility that that implies) as a non-concern.

23 thoughts on “The Last Thing We Need To Worry About?

  1. Pingback: The Last Thing We Need To Worry About? « Silver For The People – The Blog

  2. In the a sense, Krugman is correct, the U.S. and China are in a co-dependent relationship where we buy their stuff and they buy our bonds [by necessity].

    Because of the mammoth nature of the trade balance between the two countries, there is no other market [other than U.S. debt] that could absorb tens of billions of dollars coming into Chinese hands every month.

    Therefore, if they want us to buy their crap, they have to buy our bonds. The sad thing is that this insanity only benefits expanding government and corporate bottom-lines.

    • Hint: they don’t need us to buy their crap, because they don’t need dollars. If they want dollar velocity they have a big enough monetary base there now to create fractional dollar-denominated monetary system 3 times US GDP.

      • One way or another, trade has to be balanced.

        The result of this dys-functional relationship is billions for the few and ever expanding government, EXACTLY what was ordered.

    • Krugman actually has it backwards. Yes, the 2 countries are co-dependent to a degree, but that never ends well. And it ALWAYS ends.

      The US government overspends, to do that they have to sell debt to someone. We USED to sell it more domestically when there was enough surplus capital, but the amounts got so big that the only way to keep interest rates from going up was to convince more parties to buy it. First it was Japan; to keep interest rates low we had to essentially transfer part of the private sector economy (read:jobs) to Japan. And we kept borrowing and had to go to a bigger country to sell debt to – at a cost of even more private sector economy.

      China could only absorb so much – and as we lop off more and more of the private sector economy buying Chinese goods gets harder and harder and we can’t buy as much from them as we used to. Sales go down and they can only buy so much debt – so we have to turn somewhere else. That’s the Fed, which is basically the government coercing the domestic private sector to buy debt. Certainly the private sector (ex banks) would prefer to invest with better returns than Treasuries – pension funds promising 8% returns aren’t going to get that from government debt long-term.

      The co-dependency began when the domestic private sector had no desire to absorb any more US debt. The only way the domestic private sector is going to buy enough debt to satisfy the overspending is if the US government stops its job-killing policies by lowering spending OR at gunpoint.

      So Krugman basically expects the domestic economy to invest in government employees rather than private sector enterprise. The private sector funds to buy debt has to come from somewhere – and those funds will be confiscated from private sector investment. The conscience of a National Socialist indeed.

  3. There’s something very important about The Distinction between the Natural Sciences and the Human Sciences…. This gentleman rhymes with Lockean principles of self-ownership of ideas about not being able to communicate from anything but a so called private property point of view…As a means of advancing civilisation, should we think of humans as in nature or on nature? Is it foolish to believe any human or group could ever truly conquer nature, the Universe? Should we try, anyway? For how else could space colonisation be thought about…. I have no idea..

  4. Krugman’s conclusion is correct, his reasons are completely wrong and near sighted.

    In the end we are selling the communists worthless paper and they are selling us cheaply made ropes. When the shit hits the fan we are going to default one way or another, some people may say we already are with low interest rates and money printing. The Chinese are certainly making this claim themselves.

    You can lend all the money out you want, if you are unable to collect its worthless. My point is debt on the international scale comes down to military might. If we want to print our way to worthless bonds we will, and the Chinese won’t be able to do anything about it unless they want WW3.

    So Krugman is correct we should not be worried about debt to China, it’s all just fairy tale bits on some computer. What we really need to worry about is the possibility of war under a currency collapse. Maybe I’m splitting hairs here?

    It’s definitely no coincident the great depression happened before WW2.

  5. Why does debt on the international scale come down to military might when it does not to nearly the same exact act in any way similar within the private sphere within ‘nation states’ themselves? Public debt produces war based on imposing costs on people who never voluntarily agreed to shoulder said debt or war. Public debt only results because of the scientifically silly idea of “public property” (conglomerates); if people realised nation-states should be privatised to preserve peace and improve commerce things would be much better off, in general

  6. Pingback: OL Weekend Reading | OVER LEVERED

  7. I agree with Krugman. The US Dollar is too high. A collapse of the Treasury Bond market and dollar collapse will make its exports more competitive. If it does nor arrest the dcline of its manufacturing sector it will lose all its engineering “know how”.

    As I have been calling, I see this sometime in December. After the Political uncertainty is over, and Geopolitical leaders can determine the appropriate plan.

      • I am predicting a Romney win, and I think the BRICs, especially China, will use the window of opportunity to put the new administration on the back foot. Hence December. China needs to keep inflation in check by buying commodities. It will move from a mercantilist policy to an inward focused nation building program.

        The USA will need to devalue to rebuild its industrial base. They (Romney camp) have been calling China a currency , manipulator and a Romney win will prompt China to float their Yuan, rapidly appreciating it. It is backed by a lot more than the USA.

        Even if Obama wins, China will know its Policy choices and act. Trade is falling off a cliff, and they have to placate their citizens with cheaper food and other goods. A strong dollar does that.

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