May 26, 2005
China's dollar policy and a dose of reality
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."Just setting the stage. Conventional wisdom is often created by experts who can make "facts" fit prejudices. It becomes widely accepted because in this age of specialisation who has the time, the wherewithal and the patience to do the research to challenge a theory that seemingly fits the facts. Especially if it has the imprimatur of the New York Times to boot.
Here’s how the U.S.-China economic relationship currently works:Now Mr Kurgman, meet Jake van der Kamp and the facts. I will repost from my Blame Japan entry:
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.I report. You decide. posted by Simon on 05.26.05 at 02:56 PM in the
TrackBack URL for this entry:
Send a manual trackback ping to this post.
Krugman won the Clark Medal, so you’ve got to assume he’s a competent economist even if you don’t like his politics. I’ve heard him mention the Bank of Japan several times, but that column you quote was written just recently, now that Japan has stopped buying.
In 2004 China’s reserves increased by more than Japan’s. The way the Chinese buy is not transparent, so the US figures don’t tell you the whole story. They buy through intermediaries in London, and they buy debt already held outside the States.
They have a huge current account surplus. If they aren’t buying dollars, what are they buying?
My problem is Krugman's allowed politics to get in the way of the facts. The ways the Chenese buy are as transparent as the Japanese - all of these holdings are closely tracked by the Federal Reserve because all Central banks hold accounts with the Fed to hold their Treasury and Agency securities.
It's not that I doubt Chena has played some role - it's that Japan has played an even larger one, yet is not the target of any protectionist pressures. As I said, the Yen is tightly capped as well, just not officially.
BTW - Japan hasn't stopped buying. They've scaled back their purchases, but they've not stopped. If the Yen starts strengthening again, watch their purchases skyrocket.posted by: Simon on 05.30.05 at 10:18 AM [permalink]
Great post. I hadn't seen the data for Treasuries presented in that way before. And you're right about the Japanese playing a huge role in keeping the dollar up and interest rates down. But I think we should make a distinction between dollar purchase and treasury purchases. One big differentiation between Japan and China is that the Japanese exchange rate is (ostensibly) floating. The BOJ has not intervened in the FX market since March of last year, which would probably explain the drop in their purchases of treasuries, as indicated in the graph you posted (b/c of less dollars to buy them with). If there is upward pressure on the RMB, then China has to purchase dollars to hold the peg. They may not dump those dollars into Treasuries, but they are sure buying like crazy. I don't have any data on hand, but if you can get a look at Chinese holdings of FX, you will quickly see what I'm talking about. What effect that might have on U.S. interest rates is something I'm not qualified to answer.posted by: Saru on 06.11.05 at 04:23 AM [permalink]