« Why Canadians should be grateful that Joe Clark lost the 1980 election | Main | Location, location, location: Canadian house prices by city »


Feed You can follow this conversation by subscribing to the comment feed for this post.

Why have economics bloggers, US and Keynesian economics bloggers in particular, remained almost silent on this issue?

It's my understanding that the Illuminati are behind this enforced silence. :-)

Most "Keynesians" in America are about advancing "their team" -- i.e. the Democrat Party and the left. That really is their concern them more than anything you'll find in Keynes. If you'll notice, most of them really don't know their Keynes, and couldn't care less that much of what they advocate is very different from what Keynes argued for. See Mario Rizzo's article on this:


So don't be surprised by all of these "contradictions". They're supporting their team, which can be a contradictory thing.

Nick, I think the reason that few are willing to comment is that most economists know shockingly little about China, "open your mouth and remove all doubt", etc.

Mankiw has a point about that contradiction, but a lot of his article is wrong. It's not as if China floods the forex market with yuan. Anyone here ever tried to invest in Yuan??? Obviously not Greg Mankiw.

The State Administration of Foreign Exchange essentially floods the global market with Chinese goods, not Chinese yuan, and goes to great lengths to minimize the amount of RMB that is allowed out of the country. AFAIK the forex market for RMB is in its infancy, and is completely dominated by the Chinese state. I don't think retail investors are even allowed. Within China companies just became allowed to hold FX in the form of swaps managed by the Chinese government very recently:


A lot of people like Mankiw are making points that make sense in relation to a standard western economy, but rely on models that ignore key differences in the way that China does things. They may be capitalist, but they are very very far from being free market. On an economic map China would still be labelled "here be dragons"

When you start grafting western free market assumptions onto Chinese data you end up with some really weird concepts ie. the Chinese "saver". As if malnourished factory workers being paid subsistence wages are saving 40% of their incomes, because they are worried about a lack of safety net. Yeah right. People don't tend to save money when the vast vast majority are dirt poor in real terms, and have a family that is stuck subsistence farming on terrible arid land. They've never had access to those "savings" or they would have been spent on bringing up living standards. IMO the underlying view lurking underneath all of this is the old concept of the 'coolie' as some sort of Kipling-esque character who is somehow fine with being drastically underpaid and living a spartan existence. As far as I can tell, they have never been given a choice and are not particularly happy about how their savings are being managed for them:


I think the question should be rephrased. Is it good policy...for whom?

The US government and Federal Reserve is selling Treasuries and buying other assets. Why would we want China to do the opposite?

Someone has to do the opposite! Otherwise who will you sell them to?

Perhaps the marginal propensity to consume American goods is higher for Americans than for the Chinese government. Therefore, better that private funds in America are not used up in buying Treasuries but remain available for consumption or private investment.

Perhaps also, the long-term policy is different to the short-term. Reduction of the trade deficit and corresponding capital account balance is a good future goal, but do we want it all to adjust at once?

I don't have a strong opinion on this myself, but you can make an argument for Hillary's policy. Then again, the question was why the bloggers are silent. That I don't know. Perhaps my economics zeitgeist word cloud next week will show us something new. Look out for Hillary's name in it.

The US government and Federal Reserve is selling Treasuries and buying other assets. Why would we want China to do the opposite?

Momentum. (possibly following Mandos who may see the stew: policy and political expedience)

It is in the short term interests of both China and the US to view "assets" and "tbills" as each other's "comparative advantage". In the longer term this sacks the US economy and shifts economic and political power to China...so mindlessly Roachian of me. [I cannot be expected to B inquisitive full time!]
This view suffers a little from ignoring the transnationals who exploit the workers using fx manipulations of those somewhat peggable currencies...not to get lost with the national interests.

Touching that "bloggers" and not certified economists are the subject of your attack, Nick.
Sometimes you just lead the pack...it's the "dunno"s, I just knows it.


If you're interested in a close to the source voice on this one, just ask Brad Setser for his opinion.

Apart from being the go to blogger on international capital flows, he used to work for both Summers and Geithner.

There'a an alternative explanation here:

Niall Ferguson:
“It's very interesting that the Chinese in the last week were saying such soothing things around the [Secretary of State Hillary] Clinton visit. This was only days after Treasury Secretary Tim Geithner used the dreaded ‘m' word – currency manipulation.

Heather Scoffield:
Why would the U.S. administration poke a stick in China's eye like that?

Niall Ferguson:
“You obviously have to recognize that Democrats have been more hawkish on China for some time, than the Republicans ... But I think Tim Geithner is smart enough to know that this is a very dangerous game to play and I would be very surprised if you heard that word again pass his lips.”

Heather Scoffield:
Did the Clinton visit improve the China-U.S. relationship?

Niall Ferguson:
It looks like it....The line is very clear from China. They've consistently made their position clear. They want the status quo. They do not want this thing to break down. They were kind of appalled when Geithner said the ‘m' word. And they took full advantage of Hillary Clinton's visit to smooth ruffled feathers and restate their commitment. It's a very good bilateral relation. That bilateral will is important here. The Chinese believe in Chimerica maybe even more than Americans do.

“They have nowhere else to go. They have no other strategy that they can adopt in time to cushion the blow. Their exports are contracting at a terrifying speed. They want at all costs to avoid any kind of big shift in policy. They want to keep, as far as possible, the U.S. importing Chinese goods. They want to keep currencies stable. They are still buying dollars … At least officially, Chimerica is intact. But I stress ‘officially' because there's considerable public disquiet.”

“This is a crisis of globalizaiton that is destroying global trade. This poses the biggest challenge that the Chinese administration has faced since they embarked on reforms 30 years ago.

Nick wrote:
I'm not really interested in whether there's a contradiction in US policy. Governments (like people) contradict themselves, change their minds, respond to changing circumstances, whatever. Stuff happens. It's not important.

My previous post is an answer to the only question you're not asking.

I think this is part of a wider failure to integrate the failures of our 'free trade' system into a comprehensive analysis of current conditions. It's a badge of shame to be identified with questioning this system in any way, among economists. It's a pity, because the current system is unsustainable, and in fact is breaking down, given the fact of declining global trade. Failure to think through the consequences of all this may help deliver the next catastrophe.

This may be one of the reasons why bloggers aren't really touching on the issue.


You kind of have to read between the lines. The monitoring has tightened up considerably.

BNN reported Buffet has increased his position in Swiss currency a few weeks ago. That was telling.

I mean, you're asking this in a world where US policymakers are attempting to prop up a zombie banking system and avoiding even temporary nationalization. Chinese and US policymakers want the trade status quo to continue if for no other reason than it is the status quo. (If you're not willing to draw any larger political links.)

I liked Niall Ferguson's article, except that I think he's a little shortsighted about Chimerica. China wants to disengage from the USA---just on its own schedule. This is too soon. But the USA may be forced to take a policy that disengages it if for nothing than that the political chickens on the redistribution front will be coming home to roost.

I believe the fear is that if China disengages suddenly, there will be a panic run on the US dollar.

Radically chopping real US wealth could have all sorts of negative consequences in spheres that economists often overlook, e.g., national security.

A sudden devaluation of the US dollar could severely aggravate the coordination burden the global economy already faces.

maybe noone believes she will make a jot of difference to what the Chinese decide to do.

I'm assuming that every major government has a detailed computer model of their national economy that they use to simulate the impacts of various supply and demand shocks, policy chances, financial crises, etc...

Do the different governments of the world cooperate to simulate interaction effects, for example, how does a policy in one country affect other countries, and then boomerangs back to the original country?

The Great Depression and Keynesian economics taught us that the macroeconomy is more than the sum all individuals' and firms' and governments' microeconomies. Do economists realise that the world economy is more than the sum of all the national economies?

What we need is a G-20 meeting of the world's top econometricians.

Answering these comments in reverse order:

Alex: answering each of your paragraphs in turn: Yes. No, I don't think so, it's too hard. Yes (or they ought to). God no! They would all just get drunk, or into a big fight over obscure points in methodology!

reason: Maybe. But economists, and econ-blogger especially, normally love to point out someone's economics mistake, even when that person doesn't have any policy impact (like journalists, for example).

westslope and Mandos: maybe it's all about the speed of change. But then there seems to be a bit of a contradiction between wanting China to do a big quick fiscal stimulus, and wanting China to slowly stop buying treasuries.

Dee: that was a really interesting link, about China's internal policy divisions. But I don't see how it relates to US policy towards China. Maybe there's something between the lines I'm missing.

lark: I dunno. If there's any failure to think things through, I think it's more a failure to link international finance with finance and macro/money. Each is hard. Putting all 3 together is very hard. Trade is simple: I produce apples; you produce bananas; we swap some.

Mercure: yes, but interesting, nevertheless.

JKH: I posted a related comment on Brad Setser's latest post about China's buying treasuries. No response from him yet.

calmo: but I think both China and the US (and the rest of the world) primarily want to increase aggregate demand right now.

Leigh: "Someone has to do the opposite! Otherwise who will you sell them to?" This is where I disagree. In a closed economy (for simplicity), this is the Krugman/DeLong vs Fama/Cochrane point. If an increased supply of bonds, at existing prices, interest rates, and incomes, were met with an increased demand for bonds, we get Ricardian Equivalence. Bond-financed tax cuts, for example, have no effect. For fiscal policy to work, we WANT the increased supply of bonds to create a disequilibrium (an excess supply of bonds), so that the disequilibrium causes changes elsewhere, especially to income.

You know, even though I disagree with your comment the most, it has also helped me the most. My head is now clearer. Dammit! The Hillary fallacy is exactly the same as the Fama/Cochrane fallacy, only in an international context. And neither DeLong or Krugman spotted it!

You might be on to something with the MPC comment though. I can't get my head clear on it.

Mandos: good question. I wasn't clear enough. "Good policy" for the US, firstly, but also for the world.

bob: I learned a lot about China's savings from your (and Brad Setser's) comments on that earlier post of mine (about Greenspan and his critics?). I used to think about China's savings as individual Chinese savings. Now, thanks to you, I see it as government savings, conducted via the central bank, and the flip-side of the exchange rate policy. That was the model at the back of my mind when I wrote the Hillary post. I think my Hillary posts are compatible with your view of China. Am I still wrong?

Greg: maybe. But I do see some at least mildly critical posts on Obama policy by e.g. Paul Krugman. On the bank policy recently, for example.

Robert: I will set the illuminati on you!

Universally desirable, this "increasing global aggregate demand", now that the US consumer is in retreat, (a euphemism? Absolutely!) [ "Absolutely", a euphemistic enhancement?] (Crushingly!!!) opposed only by the environmentalists and the Purple Sheets who insist on spiritual enlightenment, not material armament, enburdenment, encumberment, enclobberment.
Who more than the transnationals, stand to gain from this grasping?
The marginal utility gained from 1 more cordless drill (this one has a clothes line attachment that sends my glorious undies out with the touch of my finger) is infinitesimal compared to the millions sold, generating profits for the co-venturers...who have piles and wouldn't know what a clothes line was if it stretched across their throats.

Ideas take time to displace other ideas (see if you can condense Kuhn faster than this) and the large part of this tardiness resides with the vested interests, vested in the old ideas that got them their comfortable (management of difficult people like you) places and no views of clothes lines.

"bob: I learned a lot about China's savings from your (and Brad Setser's) comments on that earlier post of mine (about Greenspan and his critics?). I used to think about China's savings as individual Chinese savings. Now, thanks to you, I see it as government savings, conducted via the central bank, and the flip-side of the exchange rate policy. That was the model at the back of my mind when I wrote the Hillary post. I think my Hillary posts are compatible with your view of China. Am I still wrong?"

Nope not at all. Your recent posts have been fantastic. Some people intuitively sense that the "Chimerica" system is bad economics, and Brad Setser has been digging up a lot of info on what is actually going on, but it's great to see a solid macro guy like yourself really breaking down the issues and applying first principles in a clear and rigorous way. Reminds me of Krugman at his best:)

I just reread my earlier post and I see how you might have gotten that impression. Sorry, I was really just talking about economists in general, not you (shouldn't have used "you" in the general sense in my first post, it reads a bit ambiguous), and the chinese savers thing was just an example of a common mistake.

In terms of the original question, I think that those of use who have actually been following the chimerica issues for a while have "contradiction fatigue". At least now it's Geithner and Hillary contradicting each other, rather than Hank Paulson simply contradicting himself over and over and over. In Chinese-American relations actions speak a lot louder than words. The actions up until the last year demonstrated that there was a fundamental consensus between China and America that Geithner is right, and Hillary is wrong. Unfortunately the appreciation has halted in the last year. I'm far more worried about that than whatever the politicians say day-to-day.

Further complicating the discourse around chimerica is that "manipulation", aka the m-word that Geithner said, triggers santions under the WTO. To me, this raises the issue of how on earth China was allowed to enter the WTO while still in flagrant violation of multiple fundamental WTO principles. I can only imagine how that one was pushed through, 6 days after 9/11. Thanks Bush Admin. Also, Hillary sat on the board of Walmart, the greatest beneficiary of the chimerica status quo, so that might have some influence on her public statements. The politics involved in Chinese-American trade get really messy, so I don't put much stock in the political statements.

Thanks bob! Again, that clears up a lot of things.

Nick's oversimplified version of bob's answer to Nick's original question ("What the silence of the bloggers?")

Answer: half the bloggers don't understand China and macro; and those who do understand China and macro just don't want to speak up, because they are unsurprised by all the policy contradictions, and it's just too damned messy to get right into it.

I find that a reasonably satisfying answer.

True enough about Krugman.

But note that a lot of what Krugman does is produce rhetoric designed to push Obama and the country further left.

"Greg: maybe. But I do see some at least mildly critical posts on Obama policy by e.g. Paul Krugman. On the bank policy recently, for example."

Nick Rowe,

I'm still bothered by Tim Duy's remark:

"If the Chinese don’t cooperate, a portion of any US stimulus is lost to higher imports – always remember that the US doesn't’t have much excess productive capacity in tradable goods. The excess capacity exists in China. And Congress would be less than happy to see US tax dollars supporting Chinese jobs."--Tim Duy

Granted he was talking about the stimulus plan, but his reminder that it's China with excess capacity in durable goods is just a fact.

It's a fact that bothers me when I hear we're going to export our way out of foreign debt. It won't be because of our exports to China. Let me count the ways it won't happen.

1. Maybe I lack imagination or knowledge, but I have a hard time thinking up things that China would want from us. Besides jet planes and some heavy construction equipment. The things I can think of are easily pirated.

2. Support and supplies for things produced in a country gravitate to that country. All the basic durable goods that I use are increasingly made in China.

3. Even if China does allow its currency to appreciate it won't do us any good if we have nothing to export to them. Perhaps an appreciated yuan will make America a more attractive place to invest, but not during a recession. Perhaps more expensive Chinese goods, while hurting the consumer, will at least cause American businesses that are labor intensive to stay home. The chance of that appears to me to be a race between the cost of labor and the cost of transportation. I'm betting against myself and that a dollar an hour labor wins.

4. We're a democracy with a new government that seems to take the right of association seriously. As labor gains more power to negotiate the conditions of its employment, I don't want a dollar an hour workers in chains undermining the use of that right.

5. International trade--which includes finance--should be regulated by international law. (That seems the logical and effective way to do things) That can't work unless the countries that are being regulated have the wherewithal and values to enforce those laws. Call me old fashion, but I what these laws to enhance my rights. Without the wherewithal to enforce the laws and and values to respect them my rights are more likely to be dumbed down than enhanced. China doesn't fit.

In conclusion the situation is past the point where an appreciated yuan can help us. China is killing our political economy while we are whistling past the grave yard.

I'm going to be getting a stimulus check, I would like to spend it for the purpose it was intended. I fear that it is going to go toward a new refrigerator that will be made in China. I wouldn't have any objection to this if I thought my actions would be reciprocated by Chinese buying our products. I can't see where that's going to happen if all the excess capacity in durable goods is in China where workers make a dollar an hour.

My bottom line is that I want free trade--the removal of tariffs--done the EU way where the values and the wherewithal to follow laws matter and not the WTO way where they don't. Non democratic countries without the wherewithal to follow international law should be made special cases not full partners in trade.

BTW, It's Keynesian logic not to allow stimulus leakage to go to mercantilist countries. Without reciprocity where is the boost to aggregate world demand. The multiplier effect goes askew. Stimulus is sent to China which saves.

It would be nice if China stopped buying our Treasuries and spent more buying our products. But since increasingly we are sending our manufacturing, our technology, and our jobs to China, what's the point?

Hillary and Obama should stick to their promise to revisit the environmental and labor effects of our free trade agreements and stop trying to postpone the day of reckoning by keeping up a free trade regime that doesn't work for labor or the environment.

wjd123: But, as I understand it, China's (central bank) buying of US treasuries is what keeps the yuan from appreciating.

"I'm assuming that every major government has a detailed computer model of their national economy that they use to simulate the impacts of various supply and demand shocks, policy chances, financial crises, etc..."

This sounds impossible to me even with unlimited computer resources. Computers don't have emotions. Probably only the elite public finance minds even bother to observe historical paradigms.


That's my understanding also. I'm arguing that because our economies have progressed to where they now are that an appreciating yuan can't really do us that much good in the immediate future. However, a devalued yuan can still do us a lot of long term future harm.

My answer isn't to cajole China. We have cajoled long enough. I want to treat currency manipulation as a direct subsidy and raise tariffs accordingly. Instead of going to China and talking about growing sentiment for tariffs, the Hunter-Ryan bill for instance, Hillary goes to China and asks their government to hang in there buying our treasury bonds during these troubled times.

When I heard that I got the same uneasy feeling in my stomach that I got when Obama's economic adviser had his purported secret meeting with the Canadian ambassador to inform him that the talk of renegotiating NAFTA was only political theater. I felt Hillary, with her plea for the Chinese to keep buying our treasuries was giving similar assurances. "Don't worry we will get through this global recession together and then we will fix up our financial sector and everything can go back to normal."

That's not the message I want to hear. That's not the message I was led to expect. I want systemic change. I think we'll need to break some eggs to get it. Either the State Department with its non-egg breaking culture will impose its will on Hillary, or Hillary as Secretary of State will shake up the State Department. I think the State Department is winning. The whole lot of them are going to protect the interests of corporate America and not the interests of Main Street America.

In my understanding, you are suggesting China to do one of the following (or combination of those):

1) China should stop exchange intervention. If they stop it, their dollar reserve will shrink, and that means the decrease of the amount of US treasuries they buy. Simultaneously, Yuan will appreciate, and their net export will also shrink, which means US is buying less goods and services from them and they are buying more of those from US.

2) China should buy less US treasuries and more US corporate securities and real assets. That means China should redirect most if not all of their dollar reserve to SWF.

The problem is, if China stops buying US treasuries, it will send shock wave to already vulnerable financial market. When then Japanese Prime Minister Hashimoto suggested selling US treasuries in 1997, Dow plunged by 192 points - the largest single day point loss for the Dow since the Crash of 1987 (cf. http://www.safehaven.com/article-963.htm ). As you noted, in the end, those US treasuries sold by foreigners will be bought by someone in US and may finally be monetized by FRB, but the process will likely to entail financial turmoil which no one wants to see - especially now. So, if US want to make China stop buying US treasuries, the first thing to do is to find alternative buyers, which won't be easy. Try to find alternative buyers after making China stop buying is not a good idea.

And as for China buying US private assets, see http://www.bloomberg.com/apps/news?pid=20601087&sid=a1pSmmz4lFUY&refer=home . They seem to have learned lessons.

Think about though himaginary, what has happened every time there is a shock wave in the financial markets lately? Everyone rushes to buy Treasuries. If there were a panic because China stopped buying treasuries, what would investors shift their money into instead? gold? They're not allowed to buy Yuan, which would be the natural trade.

In that sense it is an ideal time to have the adjustment: non-Chinese demand for treasuries is at an all time high. There is no shortage of people lining up to buy treasuries right now, just look at the yields. It isn't just China that has driven down the yields lately. The difficult adjustment to manage is not the re-financing of American debt with other lenders, but rather keeping the Chinese economy functioning with a drop in exports.

Now here's the solution that kills two birds with one stone: forget about the American stimulus plan, what the world needs more than anything is for China to take on the most massive stimulus project of all time. I think somewhere in the neighborhood of 5-10 trillion would be about right. If this was done in conjunction with the exchange rate adjustment, it would make up for the loss of exports, and rebalance the Chinese economy in a healthy way. I think that this solution would make a rapid adjustment palatable to the Chinese government. The most important thing for the world right now is that China raises domestic demand.

There are two separate functions under consideration: aggregate demand, and choice. You are right on the first -- China buying treasuries just means that the USG nees to sell more to achieve the same level of aggregate demand. But the selection function is a different matter. China buying treasuries, while the US sells them shifts the capital allocation/consumption decision from agents of a foreign power to US political actors. How is it surprising when US political actors agitate for a shift in power (i.e. the detailed allocation of trillions of dollars in investment/consumption) from foreigners to themselves?

"The US government and Federal Reserve is selling Treasuries and buying other assets. Why would we want China to do the opposite?"

Perhaps Hillary is asking the Chinese to buy treasuries to bring down their price, and thus U.S. Treasury interest rates, but not to not buy other U.S. assets, to buy those too?

"The US government is selling Treasuries and buying newly-produced goods (fiscal policy). Why would we want China to do the opposite?"

Same thing, perhaps Hillary is asking China to do both, to buy treasuries and to also buy newly produced U.S. goods?

Richard: I think there may be some typos in your comment. I think you meant to say "bring up the price of Treasuries, and bring down their interest rates"?

If so, then what you say sounds logical, and makes sense. But I don't really believe it, because if that was the underlying message, it didn't get reported very well at all. Who knows?

Yeah, I meant bring up the price of Treasuries, and bring down their interest rates (I woke up in the middle of the night and wrote that).

Actually, I think this issue can get pretty complicated, and I just don't have time now to really compose an analysis for it. There are issues of why doesn't the Fed. just do, or counteract, much of what we want the Chinese to do? What about longer term implications of a loss of confidence in U.S. bonds? There are a lot of relevant questions. In general, why doesn't the fed do more? I asked here:

Krugman, in the post cited above writes:

There’s been a fair bit of buzz about a Goldman Sachs report (no link) suggesting that the Fed’s policy of “unconventional easing” — buying up lots of assets other than the usual Treasury bills — isn’t very effective. Specifically, GS estimates, based on market responses to Fed moves to date, that it would take between $1 trillion and $1.6 trillion of unconventional easing to accomplish as much as the Fed can achieve, in normal times, by cutting the Fed funds rate by 1 percentage point. And since GS’s estimate is that the Fed funds rate “should” be -6 percent, this means that the Fed has a problem.

Allright, but what if they just used more? If they need 6 points and its $1T to $1.6T per point, then why not just do it for $10T worth? Obviously, there are problems with this, but it would be nice to see more discussion of this more exactly and explicitly.

I would love to rely on fiscal stimulus instead spent on high social return investments of the kind the free market will grossly underprovide due to well established in economics free market problems. It would do great good in the long run, and greatly increase growth, for us to shift our spending away from frivolous consumption and towards alternative energy, education, basic scientific and medical research, infrastructure, etc.

But if we can’t get enough of this by the Republicans, maybe we should encourage the Fed to do a lot more.

The comments to this entry are closed.

Search this site

  • Google

Blog powered by Typepad