December 11, 2003

Alan Greenspan Is Polite

Alan Greenspan says that--no matter what fellow Republicans Don Evans and Karl Rove say--U.S. unemployment is not manufactured by China's exchange rate policy: US unlikely to get lift from yuan float-Greenspan: "A rise in the value of the renminbi would be unlikely to have much, if any effect on aggregate employment in the United States, but a misaligned Chinese currency, if that is indeed the case, could have adverse effects on the global financial market and, hence, indirectly on U.S. output and jobs," Greenspan said in remarks prepared for the World Affairs Council of Greater Dallas...

Nevertheless, the judicious and polite Greenspan warns China that its central bank cannot keep buying dollar-denominated assets forever without risking substantial domestic inflation.

Posted by DeLong at December 11, 2003 10:50 AM | TrackBack


Japan has been buying dollar denominated assets forever with no inflation. Why should there be a limit for China?

Posted by: anne on December 11, 2003 11:25 AM


China and Japan are quite different. If Japan had been growing at China's pace, had China's thin financial markets, lack of consumer access to international goods markets and had not suffered deflation for a considerable period, Japan might need to worry about stacking up reserves, too.

Speaking of Greenspan, the October 28 FOMC minutes are out and they caused a bit of a stir. Imbalanced labor market and no inflation for roughly another 2 years - that's what they thought in late October. The FOMC statement this week suggests some change in outlook, but not much. Bakho? Are you out there? Why aren't you trading Fed funds?

Posted by: K Harris on December 11, 2003 12:07 PM


K Harris

Sorry, I do not find an inflation risk in China accumulating dollars. The Chinese have ample access to international markets as far as I understand. What am I missing? Japan was accumulating dollars during the 1980s, before the economic weakening. Perhaps you are arguing that the accumulation of dollars by Japan in the 1980s contributed to asset inflation in Japan. Now, that is interesting. There was never general inflation in Japan during the 1980s, but asset prices bubbled. Is the danger in China an asset bubble?

Posted by: anne on December 11, 2003 12:26 PM


Bubbles are in the eye of the beholder, before they burst. Inflation is a measurable phenomenon. So I don't want to pin any analysis on the notion of a bubble. I think that a central bank piling up reserves, in exchange for domestic bank balances, represents a pretty obvious case of monetary expansion, unless the whole thing is sterilized. Japan sterilized. I'm not sure China does.

Beyond that, China, according to press reports, is suffering from rising food prices. That in conjuntion with a rising wage disparity, is making it tough for the less well off. While rising prices in one category of goods in not, by definition, inflation, I would think that mounting a generalized pattern of higher prices on top of already rising food prices could be disasterous for low wage Chinese. So I don't like the look of a central bank piling up assets.

That offers a reason for Chinese policy makers to be very careful, but doesn't answer the issue of mechanism. Neither does your disagreement with the points I raise. I think what you are missing is the vast structural differences between China and Japan, including those factors I listed. You don't seem to agree, but haven't told me why.

In the end, assessments of policy risks are about risks. A well off Japan (as you have often noted) can probably absorb an economic shock of just about any stripe better than a not so well off China.

Posted by: K Harris on December 11, 2003 01:03 PM


Nicely argued. China will need to change currency value in time, perhaps more quickly than I supposed. Watch how the current attempt to slow asset price increases in China works. Asset prices in Japan were simply too high by 1980. Notice how much of the rise took place after the Plaza Accord of September 1985. The Yen climbed, dollar fell, assets prices in Japan "soared."

Posted by: anne on December 11, 2003 01:52 PM


I like AG's statement about weakness in domestic investment as the cause of unemployment.

Investment, at least in mfg is being funneled overseas as part of restructuring. The Bush tax cuts and low interest rates encourage this trend. What would cause investment in the US to increase??

The Feds could invest directly in the states instead of giving tax cuts to their wealthy sugar daddies. I wonder why they have not thought of that???

Posted by: bakho on December 11, 2003 02:10 PM


"Alan Greenspan says that--no matter what fellow Republicans Don Evans and Karl Rove say..."

Is Alan Greenspan a registered Republican? Do you really know this, or just assume it?

Posted by: Mark Bahner on December 11, 2003 04:10 PM


"The Feds could invest directly in the states instead of giving tax cuts to their wealthy sugar daddies. I wonder why they have not thought of that???"

The Constitution forbids it. But I don't expect that matters much to the Feds or you.

Posted by: Mark Bahner on December 11, 2003 04:27 PM


Actually, it doesn't, Mark. The states have been getting block grants form the Federal govt at least since Nixon. If you were referring to the Federal Reserve, yes, they are forbidden. But not by the Constitution.

Posted by: Chuck Nolan on December 11, 2003 04:55 PM


And what would happen if China and Japan stopped buying dollars. Hmmmm?

Posted by: Ian Welsh on December 11, 2003 06:29 PM


China is neutralizing foreign currency inflows by sucking-up RMB-denominated assets down in Shanghai. But this has very little to do with either the exchange rate or Chinese purchases of US Treasury Bonds.

Posted by: trevelyan on December 11, 2003 08:40 PM


Arrgg.... accidental post!

The second part of that statement was going to point out that with an average NPL rate of about 30% in state-owned banks, there is a massive hole just waiting to suck down much of the high-powered money flowing into the system. So Greenspan may be overoptomistic (overpessimistic?) here.

Posted by: trevelyan on December 11, 2003 08:48 PM


Pardon a possibly stupid question by an economic novice, but why should China's buying dollar-denominated assets lead to inflation?

As I understand it, the process is this: China exports to the U.S., and gets paid in dollars, but instead of converting these dollars to yuan, it buys dollar-denominated securities with them (which pay interest in dollars, and so on). Is this supposed to cause inflation because China's banks are holding all these reserves in dollars instead of yuan, thereby leaving more yuan in circulation (as some comments above seem to suggest)? But surely China has other ways of controlling the supply of yuan.

Of course, China's holding large stores of dollars also keeps the price of the dollar high relative to the yuan (which I gather is why they're doing it). But I wouldn't think that Chinese imports from the U.S. are a large enough share of the Chinese economy as a whole for this to be a significant cause of inflation.

Posted by: Adam on December 12, 2003 07:40 AM


"Actually, it doesn't, Mark. The states have been getting block grants form the Federal govt at least since Nixon."

As if Nixon cared about the Constitution! :-/ Why not try actually ***reading*** the Constitution?

Notice how Article I, Section 8 specifically says, "...the general welfare of the ***United States***..."? There is no mention of paying off debts of individual states in Article I, Section 8.

And the Tenth Amendment specifically prohibits the United States (i.e., the federal government) from having powers not enumerated by the Constitution.

Posted by: Mark Bahner on December 12, 2003 08:10 AM


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