Why We Do Not Need China
Posted by Chris Martin at 11/22/2009 12:38 PM 
Categories: Economic Theory, The Crash of 2008
Tags: No market is an island
Categories: Economic Theory, The Crash of 2008
Tags: No market is an island
Commenting on an earlier post Mark L thinks that we should reduce the deficit and forgo fiscal stimulus in order to stop the Chinese from soaking up and holding dollars.
Actually we need do no such thing. We are in a liquidity trap because we want secure assets that we can tap in the event of emergencies. In a previous post Wonks Anonymous has argued that the government can and should offer such assets to the public. We need low denomination recovery bonds that offer returns a little better than the rate of inflation - that would probably be somewhere between 2% and 3% at this point. We need to make these available for IRA investors. Considering what the clowns on Wall Street have managed to do with his portfolio, Wonks Anonymous would probably sign up.
We should take our savings, which are now being held by banks and mutual funds as cash, and use them to finance public investment - remember the WPA. We cannot do much about the Chinese desire to hold our currency. We do not need to borrow from them.
This should help to take care of our trade deficit. On one side of the trade deficit we are buying more goods from China than we sell to them. How do we pay for this demand for goods? We pay for the trade deficit by supplying the Chinese with IOUs.
Stop supplying IOUs and the deficit goes away.
Actually we need do no such thing. We are in a liquidity trap because we want secure assets that we can tap in the event of emergencies. In a previous post Wonks Anonymous has argued that the government can and should offer such assets to the public. We need low denomination recovery bonds that offer returns a little better than the rate of inflation - that would probably be somewhere between 2% and 3% at this point. We need to make these available for IRA investors. Considering what the clowns on Wall Street have managed to do with his portfolio, Wonks Anonymous would probably sign up.
We should take our savings, which are now being held by banks and mutual funds as cash, and use them to finance public investment - remember the WPA. We cannot do much about the Chinese desire to hold our currency. We do not need to borrow from them.
This should help to take care of our trade deficit. On one side of the trade deficit we are buying more goods from China than we sell to them. How do we pay for this demand for goods? We pay for the trade deficit by supplying the Chinese with IOUs.
Stop supplying IOUs and the deficit goes away.
While I like your idea of encouraging domestic investment in government debt, it's not clear to me how your proposal will enable us to 'stop supplying the IOU's' to China. By pegging the Yuan to the dollar, the Chinese have setup the rules of the game such that they always win. If there's money in the US economy to be spent, it will be spent on goods from China because they are artificially a better value. Then the Chinese hold these dollars (IOU's), creating an artificial demand for dollar, further reducing export demand for US goods and maintaining this Mexican standoff we're in. I'm not against an employment stimulus package, but I think we'd be better off fixing the rules of the game in our favor by taxing imports from China and drawing first blood. The Chinese government has everything to lose and from I can see, we have everything to gain.
But even the Chinese should respond to the idea that the dollar is going to lose value internationally. A mild inflation would be a tax on China.
-WA
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