Krugman on Deficit Spending and the Chinese

by Don Boudreaux on November 23, 2009

in Balance of Payments, Debt and Deficits, Stimulus, Trade

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.

Donald J. Boudreaux


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