January 10, 2005
Why Oh Why Can't We Have A Better Press Corps? (Yet Another National Review Edition)
Kevin Drum calls for help on the Batphone:
The Washington Monthly: THE BEST OF ALL POSSIBLE WORLDS....Paging Brad DeLong. I need your help in analyzing John Tamny's piece in NRO today about the trade deficit:
Perhaps more importantly, it has to be remembered that we ultimately exchange products for products. Notwithstanding the media hand-wringing about the “kindness of strangers,” no one in the real world is able to import something without exporting something first. In short, trade balances are logically illusory in that we only receive goods and services to the extent that we give something in return.
Trade balances are logically illusory? We have now reached a point where NRO's financial writers aren't even trying. They have simply decided — by fiat — that no event that takes place during the presidency of George W. Bush can possibly be bad. Even Louis XIV would be envious of such courtiers.
Well, let's start by looking at who is actually buying what from whom. This year it looks like Americans will buy some $190 billion of goods and services from China. China's exporters will take $50 billion of the money they earn, and turn around and buy $50 billion worth of U.S. exports. What happens to the remaining $140 billion of foreign exchange? The Chinese government taxes China's citizens and buys up this $140 billion. What does it then do with it? It trades it back to the U.S. government for Treasury bonds.
Thus the first thing to note is that all of Tamny's appeals to acts of capitalism and market exchange between consenting adults are irrelevant. The big players here are the Chinese and American governments, which are not market actors but political actors. The Chinese government is buying up the $140 billion a year of foreign exchange not because it thinks that this is the way to become rich, but because if it did not do so the value of the renminbi would rise, China's products would become more expensive, China would export less, and there might be mass unemployment in Shanghai and elsewhere--something China's government fears greatly. the U.S. government sells Treasury bonds to the Chinese government for its $140 billion in foreign exchange because if it had to find other buyers it would have to sell them for less, leading to a spike in interest rates and perhaps to political pressure to do something about the deficit.
And I should stop there: Tamny pretends that the situation is a free-market equilibrium when it is not. Certainly neither Say nor Bastiat would ever claim that there is any presumption that a market in which various governments are taking up 3/4 of the volume in order to fix the price is working well. There's simply no point in reading any further.
Posted by DeLong at January 10, 2005 11:37 AM
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Tracked on January 11, 2005 09:39 AM
Who is the Chief Ontologist, and does she really belong on THIS website?
Posted by: northernLights at January 10, 2005 11:43 AM
Can I take this one step further? I'd like to say that money doesn't really exist, since bills and dollars and credit on credit cards is really just a representation of value, and value is not something tangible. Thus, money is just an illusion, as is the entire economy.
Seriously now, Brad, I know you've been asked this question before, but why is the National Review's economics commentary really that much worse than that of The Nation (or The American Prospect)? During the few months that I read The Nation regularly, I don't recall anything as pathetic and bizarre as the nonsense that comes from the likes of Kudlow and Luskin, et al. I still read TAP regularly, and in both that and The Nation, the only bad commentary comes from a few people when discussing outsourcing, and even there, they seem to be muddling the economic and social aspects.
Posted by: Brian at January 10, 2005 11:50 AM
Also, the Chinese government is using those American dollars to buy up oil contracts and other factories in Canada and South America in order to supplement their own economic growth - in effect using our own money to overtake us on the world stage. Is that irony?
Posted by: dstein at January 10, 2005 12:06 PM
Brad, why does the Chinese government have to tax its citizens in order for its central bank to end up with those extra $140 billion? Doesn't it suffice for it to require them to (or wait for them to) surrender dollars for renminbi, which the central bank then prints for them? Is the "tax" you mention the sterilization operation that follows (sale of renminbi-denominated bonds)?
[They don't seem to be printing money on that large a scale. But you're right--they're borrowing most of it (in renminbi) and taxing today to get only a little of it...]
Posted by: Jim M at January 10, 2005 12:39 PM
Recall Tammy wrote this to attack Stephen Roach. But what is Roach and a lot of other people saying? That current account deficits of this magnitude are not sustainable. So how does Tammy suggest otherwise? He doesn't. So the point of Tammy's rant was ????
Posted by: pgl at January 10, 2005 12:50 PM
Let's assume that the nut-job in question means that we export financial obligations in return for the goods and services we import. (If he doesn't, he should.) Then there is a substantial distinction that must be willfully ignored in order to say that what we import and what we export are equivalent. Our exports entail the surrender of valuables in the future. We are swapping current consumption for future wealth. China is doing just the opposite, foregoing current consumption in return for future wealth. One must ask whether it is worth trading away our capacity to consume in the future in order to consumer even more right now, given that our level of current consumption is already the highest in the world. Can't we save a bit for a rainy day? Can't China, with its vast poverty (there still is vast poverty, despite all that growth) have a bit more to eat and invest right now?
Posted by: kharris at January 10, 2005 12:55 PM
"One must ask whether it is worth trading away our capacity to consume in the future in order to consumer even more right now, "
You simply don't understand NRO's outlook. Their economic philosophy, in keeping with Bush's, is clearly "live for today and let tomorrow take care of itself." You probably thought they were conservative.
Posted by: Bernard Yomtov at January 10, 2005 01:09 PM
Well, in 50 years I'm sure this will be a signature writting in the National Review's 100th Anniversary.
Posted by: Rob at January 10, 2005 01:16 PM
How many Treasury bonds must the Chinese government hold for it to have, if not a veto over, at least major role in setting US monetary policy? The scenario in which China takes a bath on its dollar holding seems to assume that this would surprise them; and then everything stops, and like a defeated speculator or bankrupt day trader China becomes irrelevant. Surely starting a speculative attack that harms itself is not a sensible financial plan for China, but then why should we assume that matters (especially in an discussion aimed to explain seemingly irrational accumulations of risky currencies)?
Posted by: David at January 10, 2005 01:20 PM
re: what China's leadership is thinking by hoarding dollars
The Chinese calculation of currency-peg/strong dollar/strong RMB and corresponding policy of ever larger sterilization [ackages is about 7 or 10. The Chinese would absolutely love to have played the Euro off against the dollar to hedge, but 4 years ago who could have predicted the sudden 'drunken sailor' budgets of Shrub and the inevitable slide in dollar value. The Chinese economy does not have a huge current account surplus with European trade partners so they could not replicate the washing machine entirely but they could still hedge.
A 'currency attack' is talked about among certain Chinese strategic/military thinkers - see "Unrestricted Warfare" on google. But the boomerang effects at this point would make the blowback prohibitively expensive.
At this point, the Chinese leadership would be thrilled to get out off the downward spiral of the dollar flush. But they can't. The snowball keeps getting bigger, and even the one-party dictatorship realizes that a serious correction and revaluation of the dollar will piss off tens of millions of Chinese.
Posted by: Skipwalkdc at January 10, 2005 01:38 PM
"Supply is (implicit) demand."
That's all the NRO article is saying.
[No it isn't. The NRO is saying that there's nothing weird about a market in which two big governments are the major players and are manipulating prices. That's wrong. And you're too smart to spend your time pretending they're saying something they aren't.]
And it's correct. But it's amusing to see people argue that U.S. Treasury Bonds aren't real assets. Especially those who think the untradeable "special" bonds held by the SS trust fund are.
Posted by: Patrick R. Sullivan at January 10, 2005 01:42 PM
One of the clearest and most humane voices in economics will survive. Reading his books gives you an idea of what economics could have been, and might yet become. (An obit is here.)
I am proud to say he read and appreciated some of my own work. A relative caught a citation of me in one of his articles for the New York Review of Books, in my family roughly analogous to being nominated for an Oscar.
I can't think of anyone else like him, so if you're young and prepared to read tons, the field is open to promulgate the next worldy philosophy. DeLong might make the grade if he decided to go native.
Max B. Sawicky
Posted by: anne at January 10, 2005 01:49 PM
"One must ask whether it is worth trading away our capacity to consume in the future in order to consumer even more right now, given that our level of current consumption is already the highest in the world."
Agreed, but there is little prospect of soon changing our consumption pattern. The lack of investment income in future will be a significant problem.
Posted by: anne at January 10, 2005 02:15 PM
Why shoot the messenger?
You consistently blame the mass mediumb for saying things that violate Econ 101. But the problem is much deeper: There are economists out there saying things that make economically literate folks cringe.
Arnold Kling@Econlog (an economist, not a reporter!) agrees that trade deficits are an illusion that we shouldn't worry our pretty little heads about. It's not just AK - a fellow named Don Bordreaux is on the same kooky page.
Check it out:
Posted by: Deb Frisch at January 10, 2005 02:27 PM
I think a person really could make an argument that we are providing a service to the Chinese would the 140 billion deficit a year.
This argument might be better made by a trial attorney than I...plenty of UC Profs around here aren't there? How about using the intellectual sort of "but for" argument.
"But-for" the US as consumers, would the Chinese government (and people) be worst off forgoing the present level of US-Chinese trade OR doing business with the US under terms that had them throwing the entire store of treasuries into an incinerator?
The "service" that US consumers do for the Chinese economy is likely worth far more than 140 billion.
By providing an external market that is profit motivated and not susceptible to internal political distribution issues, US consumers effectively create much closer to a meritocracy there than could hope to occur under their countries political system (and perhaps culturally reinforced by their thousands of year totalitarian history).
There are still pronounced amounts of payoffs and grease money necessary for companies to produce goods there and gain the necessary materials and infrastructure to do so. My understanding is that may divisions of the military control choke points in the production scheme.
However, we have an "all boats sailing in the same direction" situation where those seeking graft know that there won't be anything to rake off of if they rake too hard.
Petra is as an older economic example, (that one more directly toll orientated).
Malaysia, India, Taiwan, and the Philippines are still fairly low cost producers, and there are also control of supply chain issues that might keep some high value objects produced elsewhere where the cost of production is a tiny portion of a price of a product, where intellectual property elements of the product create the margins.
The question if the system is working from the Chinese position would be would they be better off without us?
Now there is an issue in that the treasury bills are not being thrown into an incinerator. Will that cause political ramifications?
Unless the Euro and the Dollar reverse course, for all practical purposes, European holders have had over a third of their accrued surplus burned in the last few years.
With the Japanese it might only be 20% or so.
And we should also remember that the other countries have some "inflation" themselves in their own currencies, even if very low.
A 1% or 2% half life still reduces the burden of a debt, and when you have a few on top of each other that’s a subtle yet persistent incinerator.
Actually, I figure the best way to quantify the relative value of a dollar in national debt relative to the economy might be M3 which stood at 9.369 trillion in November, 6.465 trillion in Nov 1999 and 4.369 billion in Nov 1994. That is compounding at a bit over 8% with the rate slightly higher in the last five than the first five despite the very low interest rates the last five years. http://www.federalreserve.gov/releases/H6/hist/h6hist1.txt
The GDP, as defined by the government (including governmental expenditures) looks like its going at closer to a 3% rate. The last 5 years w
Maybe there is 1% population growth. The economic growth due to population growth can't be seen as an offset to the value of money but it can be seen as extra security for a countries debt. Economic growth per person is probably a whole percentage less
Call me a monetarist, an idiot, or an amateur, but if money supply is growing at over 8%, and true growth factors of per person is growing at just over 2%, there is a real monetary dilution of around 6% a year.
At a dilution of dollars of economy per person compared to total money supply per person you'd have been losing 4% of purchase power a year few percent a year in 2% treasuries (much worse the last few years) and barely breaking even a few percentages on yield on 10 year government bonds.
The face value of all this debt foreign banks are holding is bound to drop if the governments were to tire of the situation.
I'd think that if there weren't government players involved, or if some truly inflation neutral risk neutral alternative were available, the value of the ten year and long paper could drop over 30%.
We've been having a devaluation of around 6%. (not "inflation" which to sell this sham the Government conveniently thinks that a dollar shouldn't buy more to be neutral when things can be produced more easily due to innovation).
On a 10 trillion dollar GNP and a M-3 gross about of 9.4 trillion, the a 600 trade account shortfall in dollars isn't really consuming dangerously more of our resources.
Right now that amount is just preventing a lot of domestic inflation that would be occurring without such surpluses.
The part which is scary is the notion that the dollars owed are accruing. If the total amount owed to foreign parties is 2 trillion out of 10 trillion now and goes to 10 trillion out of 20 trillion in nine years (if M-3 continues its rate), there is a non neutral issue. 5 trillion out of 20 might not be much a difference though.
The population growth, and the per capita GDP growth, and the Increase in number of dollars per person basically make give additional protection.
While going ever deeper into in may strike us as un-prudent as the lender who is accruing money that is not receiving close to adequate return on it, we should also ask ourselves the same questions the Chinese might.
Just as from a "but for" argument china as a country might be better off losing money on a giant accrued surplus for internal reasons, the artificially low money we're borrowing is keeping our economy relatively robust and allowing for all sorts of investments that might not otherwise be made.
That is a terrible situation for investors, but not a terrible situation for builders or borrowers accessing such capital markets.
Stores of value are quite difficult to find and those that will logically look secure get bid up to speculative sorts of levels that price in a years of a continuation of such a cycle. Variable expenses in many investments such as real estate tend to get underestimated....the roof windows do wear out, and insurance and taxes might go up with inflation even as the value of the property itself has already priced the future inflation in.
There are externalities similar to Chinese incineration of profits, but the alternative...less people working for years in the short term of more conservative economics, the value of that stream of fallow labor also might total trillions of miss investment.
The alternative to not playing along might be far worse. The markets will eventually balance out either by multi billionaire Chinese moving to the US and repatriating the money, by surpluses shrinking as they pay us for health care services received here or something, or perhaps other economies start buying more Chinese goods and out "value" we provide to them won't be needed and their prices will rise, the inflation that happened will be behind us be quickly real, and yields will increase as treasuries are dumped.
But if the new sucker becomes the "private social security accounts" the sham game might go on for quite some time.
Posted by: Tom Norian at January 10, 2005 02:37 PM
Heh. I think this piece is even dumber than Brad does: it makes sense only if you somehow overlook the existence of debt. Amazing.
Posted by: hilzoy at January 10, 2005 03:18 PM
Jim M --
China right now does not really have to require Chinese exporters to give up dollars for renminbi. Chinese exporters can read the tea leaves as well an anyone. They are happy to trade a likely to depreciate dollar for a likely to appreciate renminbi (or yuan). They are the lucky few who get to make this trade. Lots of others would like too, but China's capital controls prevent lots of folks from buying renminbi debt, or opening a renminbi back account, with foreign currency. China in effect rations the supply of cheap renminbi it makes available, and chinese exporters have dibs.
The losses come from the eventual appreciation of the renminbi. Suppose China sterilizes, and issues sterlization bonds equal to its increase in dollar reserves. It ends up with $100 in reserves say, and 828 renminbi in sterlization bonds on its balance sheet. Now suppose the renminbi is revalued at 5:1. China's $100 in reserves are now worth 500 renminbi, but the bank issued 828 renminbi in bonds to finance the purchase of its dollar reserves. To make the PBOC's balance sheet whole, the government would have to issue a 328 renminbi recapitalization bond, and chinese taxpayers would have to pay interest on that bond for a long time ...
that is the cost of China's current implicit export subsidy.
Posted by: bsetser at January 10, 2005 04:02 PM
Perhaps NRO expects a return to Japan in the 80s: that China will use its surplus to buy US properties at overinflated prices, and then lose their shirts. Well, it IS a strategy of some sort!
Posted by: paulo at January 10, 2005 04:03 PM
Incidentally, Bush has named a new economic advisor. A fundraising flunky he met at Harvard. Who runs some negligible business interests in Indiana.
Posted by: Jon H at January 10, 2005 04:04 PM
"One must ask whether it is worth trading away our capacity to consume in the future in order to consumer even more right now"
It doesn't matter, Jeebus is coming soon and I'll be raptured while you'll are wailing and gnashing your teeth.
Posted by: Fundo the Clown at January 10, 2005 04:25 PM
I think I lost 10 IQ points reading that NRO analysis.
Posted by: Unstable Isotope at January 10, 2005 04:43 PM
>I think a person really could make an argument that we are providing a service to the Chinese would the 140 billion deficit a year.
Who says it's a service? It could be a tangible good - Tawian on layaway* is a good deal for a couple of hundred billion a year!
*Since this is an all-too-sophisticated crowd and even contains some furriners, layaway is when a retailer sets aside a particular piece of merchandise for a customer and the customer makes payments until the purchase price is met. Having never availed of it myself, I dunno the details of it but supposedly there is no interest as the retailer keeps possession until the full sum is paid.
It was in much greater favor, in fact a pretty common way to make large household purchases when I was a kid. At the risk of sounding like a whiny geezer, it's because things really, really were different then:
1)Economically it was an inflationary period so customers had a desire to lock-in a price, sometimes a sale (discounted) price was also a motivator.
2)People just didn't use credit cards, and the lines of credit weren't very high in any case.
3)Social mores were way different, the wonders of instant gratification was not being drilled into the populace 24/7 yet. Hell, we only had 4 TV channels and some of them went off the air at night, so Madison Avenue had a hard time getting us the message as to how much our lives sucked, so we were woefully underinformed in that area.
Posted by: a different chris at January 10, 2005 04:49 PM
[For the past some thirty years or more, American businesses have drooled over developing markets. “America’s future was in exports to developing nations,” we heard. “Billions and billions to be made.” Daily, the Port of Oakland sees one behemoth after another off-load one thousand plus loaded containers from China and on-load one thousand plus empty containers for their return. What’s the net? Shoes made in China for three, four, five? dollars cost eighty dollars in stores here. Same price as they did when they were made in the US. Take your pick. A shirt that cost less than three dollars to make in Bangladesh perhaps using child labor costs the American consumer thirty dollars at the Mall. Levi’s made in Mexico cost the same as they did when they were made in the US. The GAP asks twenty-five dollars for a belt made in a sweat shop. And, within less than a year of any name brand product being made in China, a knockoff is available in US stores. What’s the net? Meanwhile, on TV, David Brooks says the economy has improved ever since Reagan’s first term. David Brooks is an uninformed idiot. I wonder if David Brooks or Allen Greenspan know the average household debt? Average net worth? Suppose they think the average American can afford to buy their way into the investor class?]
Essay 'Whence' can be viewed in its entirety at:
Posted by: ken melvin at January 10, 2005 05:06 PM
Hilzoy is right: The article is written with no awareness that if we're not trading goods for goods we're trading goods for assets. That's pretty much the definition of a current accounts deficit.
Posted by: Walt Pohl at January 10, 2005 05:13 PM
I'm not sure Kling is arguing that trade deficits do not exist. It seems that he's saying they are not as important as some think.
Posted by: Brian at January 10, 2005 05:22 PM
"I'm not sure Kling is arguing that trade deficits do not exist. It seems that he's saying they are not as important as some think."
Of course they're not important. Jeebus is coming soon. That's why we don't need to worry about the environment either.
Posted by: Fundo the Clown at January 10, 2005 07:37 PM
The thing I wonder about is whether this whole bizarre situation with an international game of chicken being played on the basis of manipulated currency values is not precisely the upshot of the neo-liberal "Washington consensus". It's not that this is the way it was supposed to work or was theoretically intended, but that, by issuing and "enforcing" a supposed universal decree for export-led growth, it effectively invited players who did not really conform to all its tenets to piggy-back on to it for their own purposes. It is noteworthy that the lion's share of the growth in the developing world has gone to China and India, countries that did not abolish capital controls and allow for an unchecked flow of financial capital. By declaring that "free markets" must do their work without political interference, such economic theory failed to take into account the weight and strength of political factors and left open the opportunity for various political actors to manipulate the currency markets in their own perceived interest, rather than allowing for their "natural" equilibriation.
Posted by: john c. halasz at January 10, 2005 07:46 PM
>> Perhaps NRO expects a return to Japan in the 80s: that China will use its surplus to buy US properties at overinflated prices, and then lose their shirts. Well, it IS a strategy of some sort! <<
Lenovo, meet IBM.
Posted by: Admiral Tirpitz at January 10, 2005 08:50 PM
No, Patrick Sullivan: we DO think that treasury bonds are real assets -- for the people buying them. For the people SELLING them, they're liabilities.
As for Kling... never trust anything from TechCentralStation. They're professional corporate shills, who pretend to have a loosely right-libertarian ideology as an excuse for their corporate shilling. There are honest right-libertarians out there, and I don't think any of them work for TCS.
Posted by: Julian Elson at January 11, 2005 04:50 AM
"The NRO is saying that there's nothing weird about a market in which two big governments are the major players and are manipulating prices."
No it isn't. It ignores that aspect.
If there IS 'something weird' about that, it is all to China's detriment, not the U.S. If a 'correction' takes place that devalues the U.S. dollar, then China has been giving us free stuff, as they'll discover when they redeem their T-bonds.
[There *is* the question of how quickly we will have to move 8 million workers from making investment goods and building things to making export and import-competing goods. If financial markets make us do it rapidly, it will be bad. If adjustment is gradual, we'll be fine. But Patrick is right: it's our currency, but it's mostly their problem.]
Posted by: Patrick R. Sullivan at January 11, 2005 08:22 AM
You may just want to simplify the issue, but I still think it is important to get the facts right.
[Bilateral! Bilateral! Bilateral!--the Chinese government's net purchases of dollar assets look to have been roughly equal to its bilateral trade surplus with the U.S.]
(1) China did not have $140 Billion trade surplus in 2004 -- we don't have the data yet, but China was running an overall trade DEFICIT in the first six months of the year. It might have $140B surplus with US for the whole year, but likely had a $100+B deficit with the rest of the world.
(2) Last time I check, China had about $600B foreign reserves, only about $180B of it was in US Treasuries. Japan, however, had about $800B in US Treasuries.
Posted by: pat at January 11, 2005 10:18 AM
Thanks to Brad D and Brad S on the question of the cost to the Chinese (or Japanese) taxpayers. It seems that it's a cost contingent not only on exchange losses from renminbi (or yen) revaluations against the dollar but also on each central bank's decision about how much to sterilize. Looking at the PBOC data from 2003 and 2004, it looks like China's annual M2 growth has averaged about 3.4 trillion yuan (~= $400b) over those two years. It is reasonable to suppose that the PBOC might not sterilize to the full extent of their dollar accumulation?
Posted by: Jim M at January 11, 2005 11:26 AM
Illusory trade balance just got bigger:
"The U.S. trade deficit widened unexpectedly in November to a record $60.3 billion, propelled by the highest-ever oil import bill and a drop in exports, a government report showed on Wednesday.
The trade gap topped $60 billion for the first time and defied Wall Street expectations that it would narrow to $54 billion in November. October's deficit was revised up to a $56.0 billion gap from the originally reported $55.5 billion.
The deficit has continued to balloon despite a 50 percent drop in the value of the dollar against the euro over the past three years, which has been expected to gradually narrow the gap.
The trade shortfall for the first 11 months of 2004 was $561.3 billion, well past the record of $496.5 billion set for all of 2003."
I'm glad this doesn't really represent a debt, 'cause these be pretty big numbers.
Posted by: knobboy at January 12, 2005 06:13 AM
Posted by: jlb at January 13, 2005 09:55 PM