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June 26, 2005
Kristof on the Debt
There are few things more embarrassing to watch than non-economists lecture about the economy. Nick Kristof tries his luck this morning, and it's like an accident on the highway; no matter how much you try to avert your gaze, you can't help peeking at the carnage.
Another issue is that three-fourths of our new debt is now being purchased by foreigners, with China the biggest buyer of all. That gives China leverage over us, and it undermines our national security.
Sigh. Anybody remember when the Japanese were buying up America? Michael Crichton wrote a book about it, Rising Sun (which makes his current debunking of another Chicken Little "disaster", global warming, rather ironic).
The fact is that at the end of the day, the books have to be balanced. China has pegged its currency to the dollar, but by any measure, the yuan is now substantially undervalued. When one country exports more to another country than it imports, inevitably what happens is that the currency of the former rises to even things out. That's what happened in the late 1980s with the yen, which went from 220 to the dollar to 80 to the dollar in a few years.
Now think about that. Suppose you were a Japanese investor who plunked down $100 million to purchase an office building in the US back in 1988. In Japanese yen, that was Y22 billion. Assuming that the building remained stable in value, at the end of 1992, that investment was worth Y8 billion, a decline of about 60%.
The money lost in those investments represented the balancing of the books, and that's inevitably what the Chinese face with their investments here. And the irony is that they can't avoid it. When one country exports more to another than it imports, it inevitably affects the currency of both countries.
When China sells to the US, it gets dollars. But it doesn't want dollars, it wants yuan. So it sells the dollars to a money broker, who then turns around and buys yuan from American exporters for dollars. But when there is an imbalance between the two, pretty quickly the money broker realizes that he's got more demand for yuan than he does for dollars. So he adjusts the prices, charging more for yuan to balance things out.
By pegging their currency to the dollar, the Chinese have avoided this fate (for now). However, their only other option is to invest the dollars earned in the US, because the money brokers certainly won't exchange it at that artificially low rate. In effect the Chinese government has become the money broker, and they are quietly losing money on every transaction. Long term, they can't keep it up, especially as their economy continues to grow.
So don't worry about the Chinese buying up all our debt; we'll be paying them back with cheaper dollars.
He appears to be learning from Krugman. Check out this little sleight of hand:
More than two centuries of American government produced a cumulative national debt of $5.7 trillion when Mr. Bush was elected in 2000. And now that is expected to almost double by 2010, to $10.8 trillion.
On a percentage of GDP basis, the current deficits are far lower than the Reagan era deficits. And if you look at the US economy's performance, it pretty quickly becomes obvious that deficits presage good economic times, not bad ones. As the government gets closer to surplus, the economy starts to sour; see late 2000 for the most recent example.
Kristof closes with a cliched analysis of the debt:
President Bush has excoriated the "death tax," as he calls the estate tax. But his profligacy will leave every American child facing a "birth tax" of about $150,000.
Why is this so dumb? Because it completely ignores who actually pays taxes in America. Kristof's analysis would make sense if everybody in America were faced with an IOU for $150,000 and expected to make payments with interest at say, 5% per annum. But that's not what happens. Instead, the debt service gets paid, along with the other services the government provides, by the taxpayers. Which these days are mostly the wealthy; something like 50% of all adults don't pay federal income taxes at all. Effectively the sons and daughters of the wealthy are presented with the IOU, and the sons and daughters of the poor get a free ride.
Posted by pat at June 26, 2005 10:12 AM
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Comments
The "money broker" you mention sounds a lot like a "bookie" adjusting the line.
Posted by: THIRDWAVEDAVE at June 26, 2005 02:42 PM
Excellent analysis.
I remember all those news magazines specials on how it was impossible to live in Japan given the exchange rate in the late 80's/early 90's.
I will never forget the one example the show used...at the time, ten apples cost $55.
Did you see the Gertz column today?
Posted by: Aaron at June 26, 2005 03:37 PM
Same principle. They don't want to make any wagers themselves, they just want to live off the spread.
Posted by: Pat Curley at June 26, 2005 03:52 PM
Pat, check your e-mail, por favor :)
Posted by: kitty at June 26, 2005 07:48 PM