3 March 2007
Dear Sen. Clinton,
As my colleague Russ Roberts noted, a good economist could teach a semester-long seminar on the avalanche of errors,
half-truths, confusions, and question-begging assumptions roaring
through your recent letter to Treasury Sec. Paulson and Fed Chairman
Bernanke. My letter to you, alas, must be brief.
First a question. You note that $2.2 trillion worth of U.S. treasuries are
owned by "foreign nations." By "foreign nations" do you mean "foreign
governments"? Or does your figure include also treasuries held by
private foreign citizens? I suspect the former — although, for reasons given below, it doesn’t matter very much.
A more fundamental point is that you are
comically simplistic to assert that these foreign holdings of U.S.
treasuries mean that Americans "can too easily be held hostage to the
economic decisions being made in Beijing, Shanghai and Tokyo." The
worst thing these governments can do to the U.S. with their treasuries
holdings is to dump them, driving their price down. But precisely
because these holdings are large, these governments themselves would
suffer huge losses if, in an attempt to influence U.S. government
policy, they dumped their holdings. (If, on the other hand, foreign holders of U.S. government debt dumped these holdings for economic reasons — worried that the value of this debt will soon fall — then there’s every reason to suppose that the very same dumping of this debt would occur if every cent of the debt were held by Americans.)
In fact, foreign-government
holdings of U.S. debt arguably make these governments "hostage to the
economic decisions being made in Washington." The Fed, after all,
could monetize this debt, inflating away its value. Or Uncle Sam could
repudiate this debt, or unilaterally change its terms in ways unfavorable to holders. Or you and your colleagues could implement
economically disastrous policies that drive up long-term interest rates
and, hence, drive down the value of outstanding treasuries.
For you to ignore these reciprocities and realities is inexcusable.
Sincerely,
Donald J. Boudreaux
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{ 10 comments }
Don't hold your breath waiting for a response. Queen H. is surely smart enough to understand what you say, but as long as we mere mortals raise the issue without her acknowledgement, she doesn't have to worry about the issue gaining traction in the MSM.
I have to defer to Senator Clinton here given her spectacular success as a commodities trader. But she confuses me when she attributes a stock market selloff (concurrent with a bond market rally)to foreigners holding US debt.
Chinese ownership of U.S. Government assets that have non negotiable terms and no proxy voting rights (bonds — or, loans to the Federal Reserve Banking system) is a very bad thing. But, Chinese officials, from its Communist Party, giving large cash donations to her husband during his presidential re-election bid in 1995 for 'God knows what kind of foreign policy favors' is quite acceptable and even encouraged.
This kind of logic is about as consistent as paying a backhanded compliment to 'tax cuts for the wealthy' by boasting that you don't think that you deserve to keep all the large sums of money you earn during a year just a few short years after granting a prolific tax evader a presidential pardon. I find this stuff to be just a little too RICH…maybe I'm off the MARK, though
How ironic that, given your strongly held beliefs as to the folly of any government involvment in the economic sphere that you would now argue that foreign governments will be rational economic actors. They are not. They will act to further their political interests. That alone should be a reason to sound the alarms for you "free trade" types.
Oh, yes, but you have already argued how the trade subsidy resulting from the Yuan peg only really "hurts" the Chinese. (Because after all, they are working for free and you get to buy everything cheap while ignoring the absolute destruction of our manufacturing base and the loss of decent jobs for people other than intellectual educated types). Oh but wait! We can all just sell each other mortgages and houses instead of actually making things! (Whoops. That might not work out too well. See http://ml-implode.com/ )
You are absolutely correct in laying out the many stupid things that both US and foreign governments could do. Everything with you seems to be black or white. However, I doubt that any manipulation would be so drastic as a "dumping" or "inflating. Yes, we can do bad things to them, but they can also very much influence things on the margins. The point is that this is governemnt involvment in the market rather than allowing true market forces to work.
While I couldn't care less what comes out of Hillary Clinton's mouth, the fact is that as the housing collapse worsens, Bernanke will have "no choice" but to cut the Fed Funds Rate, driving the dollar down until the PBOC and other central banks have had enough and start exiting Treasuries, forcing the Fed to buy them to fund the fiscal gap, which in turn will send yields higher and thus interest rates, even as the economy tanks. Stagflation, in other words, any maybe even a hyperinflationary one.
What's a government to do? Widen the war in the Middle East, of course, and use the ensuing crisis to institute "reforms," including the creation of an EU-like North American Union — http://www.humanevents.com/article.php?id=14965 — complete with its own euro-like currency — http://www.worldnetdaily.com/news/article.asp?ARTICLE_ID=53350.
We live in interesting times.
Hillary has no economic background whatsoever, though she is a documented criminal with regard to cattle futures trading.
That was a laughable insinuation she made (see above), and she committed a fatal market error:
Were this situation (perceived as) economically unsustainable, we would have seen Treasury yields rally on Tuesday, with a massive selloff in bonds (bond yield and price are inversely related). We didn’t. In fact, the 10 year dropped 30 bps, signaling more people were buying, not selling, US Treasuries. This was referred to as “flight-to-quality,” where investors sold riskier investments like stocks, and bought safer instruments like bonds and gold (gold rallied as well).
The fact that she (and countless others, mostly on the left) cannot keep simple market economic principles straight is beyond disturbing.
Further, one of the major causes of the Chinese jitters was a rumored crackdown and imposition of capital gains taxes in Chinese markets. More government intervention, not less, caused this blip.
Isn’t it interesting that a Communist government doesn’t tax capital gains as much as we do?
Politicians are always playing to their audience.
"Politicians are always playing to their audience."
Politicians call that leadership.
I always wonder what converted the former Goldwater Girl to something so far from the Goldwater legacy.
I'm just curious, I'd like to as Mrs. Clinton the following…Who exactly isn't that can/should not be trusted?
Chinese people specifically?
Communists specifically?
Foreigners in general?