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:
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.