Or don't believe everything you read in the New York Times (like you needed me to tell you that).

With apologies to Billmon.

Paul Krugman, I've two people and some facts for you to meet.

From J.K. Galbraith's The Affluent Society, Chapter 2 (The Concept of the Conventional Wisdom):

"We associate truth with convenience, with what most closely accords with self-interest and personal well-being or promise best to avoid awkward effort or unwelcome dislocation of life. We also find high acceptable what contributes most to self-esteem. [Economic and social behaviours] are complex, and to comprehend their character is mentally tiring. Therefore we adhere, as though to a raft, to those ideas which represent our understanding."

Via TPD and Saru, Paul Krugman expounding the conventional wisdom of China's dollar purchases:

Here’s how the U.S.-China economic relationship currently works:

Money is pouring into China, both because of its rapidly rising trade surplus and because of investments by Western and Japanese companies. Normally, this inflow of funds would be self-correcting: both China’s trade surplus and the foreign investment pouring in would push up the value of the yuan, China’s currency, making China’s exports less competitive and shrinking its trade surplus.

But the Chinese government, unwilling to let that happen, has kept the yuan down by shipping the incoming funds right back out again, buying huge quantities of dollar assets – about $200 billion worth in 2004, and possibly as much as $300 billion worth this year. This is economically perverse: China, a poor country where capital is still scarce by Western standards, is lending vast sums at low interest rates to the United States.

Yet the U.S. has become dependent on this perverse behavior. 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.

Low interest rates, in turn, have been crucial to America’s housing boom. And soaring house prices don’t just create construction jobs; they also support consumer spending because many homeowners have converted rising house values into cash by refinancing their mortgages.

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 [at this link]. 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.