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May 24, 2005

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Blame Japan

It seems churlish for China's Vice Premier to visit Japan urging an improvement in Sino-Japanese ties one day, only to stand up Japanese PM Koizumi the next.

But that is not today's topic. Instead I present Jake van der Kamp's lovely fisking of "know-it-all economist" Paul Krugman (sorry, Saru) on America's alleged addiction to Chinese dollar purchases. Read to the end, where Jake reveals the real buyer...
"In other words, the US has developed an addiction to Chinese dollar purchases and will suffer painful withdrawal symptoms when they come to an end."

Paul Krugman,
Know-it-all economist,
SCMP, May 21

Yes, these pundits from New York do not come to us one at a time. If we had barter trade - goods exports from China to the US against hot air exports at $1 per breath from the US to China - it would be the US that runs a big trade surplus with China, not the other way round.

Mr Krugman's point is the obvious one about how the balance of payments must balance. All those US dollars that China takes in from its big trade surplus must be invested somewhere outside of China. They are not invested in China because, if they were, China would not have a trade surplus.

And it is easy to see where that money is going, he argues. It is going into purchases of US government debt. Without this inflow to alleviate the pressure of a huge fiscal deficit, US interest rates would already be sharply up and they soon will be if China can no longer generate a big trade surplus.

Mr Krugman, do me a favour. Look at the second chart [below]. It shows that the big buyer of US government debt paper in recent years has been Japan, not China. Your own government's figures show that China's net purchases of Treasury bills, bonds and notes since that warmonger in the White House took office in 2001 amounts to less than 5 per cent of his blow-out in federal debt securities.

It was Japan that almost single-handedly took care of his growing fiscal deficit for more than two years until the end of last year.

But notice also that Japan has now grown tired of the game. It is buying no more. It wants out. If you now start to feel those painful withdrawal symptoms, Mr Krugman, look a little east of China for the reason.

I will merely add that recently we've seen a stronger US dollar and rising pricings of US Treasury bonds despite this decline in official offshore purchases. So will we soon hear pleas for Japan to allow the Yen to appreciate, for Japan to abandon it's unofficial currency peg (where the BoJ intervenes to prevent Yen strength)? Will protectionist measures be taken against Japan for such unfair currency manipulation? Oh, but I hear you say, Japan's economy isn't doing as well as China's. So what.

If American politicians want someone to blame, it's Japan. Don't hold your breath waiting for the change.

dollarchart.jpg

 posted by Simon on 05.24.05 at 10:11 AM in the




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