Here’s a letter that I sent few days ago to the New York Times:
Paul Krugman asserts that Beijing increases global unemployment by “siphoning much-needed demand away from the rest of the world into the pockets of artificially competitive Chinese exporters” (“World Out of Balance,” Nov. 16). This nefarious outcome allegedly results from the Chinese depressing the value of the renminbi “by trading renminbi for dollars, which they have accumulated in vast quantities.”
Not quite. The Chinese don’t hold lots of actual dollars; they hold lots of dollar-denominated securities. This distinction is significant, and should be a relief for Mr. Krugman given his current fetish for massive deficit spending. You see, when the Chinese buy dollar-denominated securities they return actual dollars to circulation. Because the largest seller of these securities is the U.S. government (which sells these securities to fund its massive deficit spending), many of the actual dollars that Mr. Krugman believes Uncle Sam must spend to save the economy come from the Chinese.
Would Mr. Krugman have the Chinese dramatically reduce their purchases of U.S. Treasuries? His column today suggests that the answer is “yes” – but his frequent calls for more deficit spending suggest that the answer is “no.” Awfully confusing.
Sincerely,
Donald J. Boudreaux
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I think Krugman is consistent but wrong. He has consistently told public audiences that the dollar should no longer be a reserve currency. He has consistently advocated some slightly reckless easing to weaken the dollar. He has indicated that domestic savings should be the source of deficit spending. Her has maintained the nihilist line about currency.
Krugman not being completely honest? Say it ain’t so Don!
And as usual, Kurgman left just enough wiggle room to cry out “Out of context” when someone calls him on his BS.
The government spends first (the potential buyers of treasuries have to get dollars before they can spend them on treasuries) and sells treasuries second.
Thus the government doesn’t need to sell any treasuries, in order to spend.
As far as the Chinese currency I agree with Don.
Keeping the yuan pegged to the dollar is identical to China using the dollar as their currency. If that makes them artificially competitive, why not accuse, let’s say, New Jersey of the same thing?