I am a big fan of TPM Media and Josh Marshall. You will see a link to TPM in my blogroll; it is one of the 2-3 blogs I check absolutely every day. I admire Josh for his vision and what he has already accomplished, and am quite sure he will still do any number of great things in the future.
All that is a nice way of saying, Josh, whatever are you on about? In a really friendly way. Over the weekend Josh wrote:
Now we have Chinese Prime Minister Wen Jiabao publicly worrying about the safety of the almost $1 trillion of US Treasuries China owns. That they’d have some concern isn’t surprising. But having the head of government sound the warning bell is hardly the best approach to preserving confidence in US debt.…Certainly, it is worth noting that China’s export driven economy and massive build up of capital reserves were the fuel behind the US housing bubble. And China’s own continued growth is dependent at least for now and for some time into the future on a very receptive US market for its goods. We’re in a toxic but mutual embrace.
[Emphasis mine]
Now blogging requires a bold, fairly aggressive writing style. If one is super careful, one would never be able to crank out enough content to make a blog worthwhile, outside of certain exceptional people like Billmon (and even he, iirc, only posted once every couple of days). Even Digby, an excellent and prolific writer, has at least one co-blogger to help maintain a sufficient flow of content.
And Josh’s main point, that it is unusual and perhaps untoward to have the Prime Minister, the foreign Head of State, make such comments, is valid and definitely of concern. First of all, China should have been making these statements nine months ago, or even a year ago. Secondly, what specifically would spur such comments at this time? Obama is obviously trying to handle all the fires left by Bush. If you want to get a specific response or result, then at least make it possible for the other side to figure out what you are asking for. Who knows, maybe the comments were just for domestic consumption. Of course back in the day before Bush and Cheney screwed the pooch, China would not have been able to make big news with such comments. Ah, how things change… Let’s see what the ap article says:
Premier Wen Jiabao noted that Beijing is the biggest foreign creditor to the United States and called on Washington to see that its response to the global slowdown does not damage the value of Chinese holdings.“We have made a huge amount of loans to the United States. Of course we are concerned about the safety of our assets. To be honest, I’m a little bit worried,” Wen said at a news conference following the closing of China’s annual legislative session. “I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets.”Analysts estimate that nearly half of China’s $2 trillion in currency reserves are in U.S. Treasuries and notes issued by other government-affiliated agencies.
[Emphasis, again, mine]
When I first read this comment by Josh, I was just flabbergasted. The news about China’s stake in the US is not news to me, I was worried about that two years ago, not because I don’t like foreign nations buying US debt, even in substantial amounts, but because I could see how destructive Bush’s economic policies were going to be.
But what could Josh possibly mean? Now, after thinking about it for a bit, I do see (or at least think I see) what Josh is trying to say. But it is still an extremely tenuous connection, to the point that I am reminded of Palsgraf. (For those that do not know, the Palsgraf case is a classic example of how causation should be considered in order to apply tort liability. The chain of events leading to Palsgraf’s injuries was so bizarre and convoluted that Palsgraf was not able to win on the issue of causation.)
Now, I believe I can see the connection, but it is so obscure that I would like to try and clarify what I think is Josh’s meaning. Please note that I am not an economist, so I may be very off-base here:
1. China adopts export-driven economic growth model.
2. Once the exporting industry picks up steam, excessive inflows of capital begin to enter the country (including foreign investment that primarily sought to enter this export industry).
3. Inflation results because of a lack of outflows of capital (this is also partially aided by restrictions on outflows of capital by private parties, and restrictions on repatriating profits).
4. In order to stem inflation, and because once-scarce foreign reserves became abundant, Beijing began to buy foreign assets, primarily US T-Bills (this highlights the sea change in freedom to convert RMB in China. It used to be extremely difficult to change RMB into US Dollars in China, however today there are few restrictions).
5. At the same time that China was trying to stem inflation by buying foreign-denominated assets, the Bush Administration was selling as many bonds as they could to pay for their deficit spending (deficits don’t matter, remember?)
6. China, unlike more ‘developed’ countries, was not buying simply to change up their mix of investments; instead they were creating a whole portfolio, hence a great deal more buying took place.
7. Aside from a few lone voices in the woods, everybody thought this was a-ok. Remember, when Bush said that you are either with us or with the terrorists he wasn’t just warning (or threatening, if you will) his own citizens, he was threatening his own advisors. Paul O’Neill was fired for not toeing the line, and in retrospect he was right.
8. The US housing market collapses, and then the entire economy collapses as well. China criticizes capitalism.
2. Once the exporting industry picks up steam, excessive inflows of capital begin to enter the country (including foreign investment that primarily sought to enter this export industry).
3. Inflation results because of a lack of outflows of capital (this is also partially aided by restrictions on outflows of capital by private parties, and restrictions on repatriating profits).
4. In order to stem inflation, and because once-scarce foreign reserves became abundant, Beijing began to buy foreign assets, primarily US T-Bills (this highlights the sea change in freedom to convert RMB in China. It used to be extremely difficult to change RMB into US Dollars in China, however today there are few restrictions).
5. At the same time that China was trying to stem inflation by buying foreign-denominated assets, the Bush Administration was selling as many bonds as they could to pay for their deficit spending (deficits don’t matter, remember?)
6. China, unlike more ‘developed’ countries, was not buying simply to change up their mix of investments; instead they were creating a whole portfolio, hence a great deal more buying took place.
7. Aside from a few lone voices in the woods, everybody thought this was a-ok. Remember, when Bush said that you are either with us or with the terrorists he wasn’t just warning (or threatening, if you will) his own citizens, he was threatening his own advisors. Paul O’Neill was fired for not toeing the line, and in retrospect he was right.
8. The US housing market collapses, and then the entire economy collapses as well. China criticizes capitalism.
So, that is the only way I see that we can get from here to there. Otherwise, I am going to suggest the Josh was suffering from a serious lack of sleep when he wrote that. In any case, it gives me the chance to crank out a blog post of the topic, so it wasn’t a total loss.
I was also a bit surprise to see the Chinese Premier dissing the people who he’s lent money to – not something which is likely to inspire confidence, no?
” . . . surprised” Sorry my English no is good
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