Krugman: Remember when the fear was of China dumping US debt. It's happening.

[pampango]

Remember the dire threat posed by our financial dependence on China? A few years ago it was all over the media, generally stated not as a hypothesis but as a fact. Obviously, terrible things would happen if China stopped buying our debt, or worse yet, started to sell off its holdings. Interest rates would soar and the U.S economy would plunge, right? Indeed, that great monetary expert Admiral Mullen was widely quoted as declaring that debt was our biggest security threat. Anyone who suggested that we didn’t actually need to worry about a China selloff was considered weird and irresponsible.

Well, don’t tell anyone, but the much-feared event is happening now. As China tries to prop up the yuan in the face of capital flight, it’s selling lots of U.S. debt; so are other emerging markets. And the effect on U.S. interest rates so far has been … nothing.

Who could have predicted such a thing? Well, me. And not just me: anyone who seriously thought through the economics of the situation, with the world awash in excess saving and the U.S. in a liquidity trap, quickly realized that the whole China-debt scare story was nonsense. But as I said, this wasn’t even reported as a debate; the threat of Chinese debt holdings was reported as fact.

And of course those who got this completely wrong have learned nothing from the experience.

http://krugman.blogs.nytimes.com/2015/10/08/the-china-debt-fizzle/

And those who "got this completely wrong" were almost all republican deficit hawks and they will, of course, "learn nothing from experience".

[Warpy]

1. Dunno, I took a cyber lashing here a few weeks ago

when their stock markets started to collapse and I said they'd have to dump their US debt if it kept up.

Most US debt is owed to the Boomers and Xers in the form of stolen Social Security premiums, so this is going to hurt but isn't likely to throw the nation into default. Yet.

Taxes will have to go up and if they try more regressive taxes, expect full on rebellion.

[yeoman6987]

3. When our economy is in the crapper already, it doesn't have to move.

[pscot]

5. Actually, we'll just print more dollars

and buy up the debt at a discount. If it hurts too badly we might have to quit buying plastic trash from them.

[truebluegreen]

9. "default"?

We can't be "thrown" into default unless the pukes refuse to pay (iow raise the debt ceiling).

[Warpy]

10. Exactly my point

Having the Chinese dump US debt won't do it.

[roamer65]

16. The Fed will just monetize it and we will all pay for it through the "hidden tax".

The hidden tax is inflation and 10 years from now we will sit and wonder why a box of cereal costs us $25.

[sulphurdunn]

20. If a box of cereal goes to $25,

my debts will inflate away. Inflation hurts the very rich and the very poor. The former because they own the debt and the latter because they have to eat.

[roamer65]

23. The rich are the least impacted by high inflation.

Most of them have already left the currency in question well before it hyperinflates. Most impacted are the ones who are stuck holding the devaluing currency and that is your poor and middle class. They are the ones who take the brunt of the decrease in the standard of living.

Trust me, the banks will not allow your debts to be inflated away. That is not in their interest and they will use their influence over lawmakers to make it so.

[Octafish]

2. Don't worry, Krugman. The rich will be OK.

As for the rest of us, we are so screwed. Wish the turds in Washington woke up to the fact that robots don't buy cars or anything. I'd say that robots can't vote, but that's something paperless e-voting can fix.

[Rex]

6. There is no awaking event. This was part of the agenda from day one.

Now the owners have to figure out how to keep all their stolen wealth AND not end up getting piked. No doubt they will since America is run by the DC Bubble crowd that is so delusional, they believe 250k is a middle class salary. They are the most clueless people on the planet...by design.

[leveymg]

4. The Saudis have also dumped tens of billions in US bonds.

Inevitably, the false calm and plunge control that the Fed and Big Banks have imposed on this will break. Then, the deluge.

[questionseverything]

31. you should write more on this subject

will the deluge be hyper inflation?

[leveymg]

34. That is the usual response when public debt suddenly and dramatically becomes more expensive.

Or, the Fed may just continue to bottle it up until . . . just a hint, the risk premium for all institutional investment portfolios is based upon a percentage of holdings of "zero-risk" T-bills. Also, the biggest trading market is the short-term "Repo Market" for T-bills, in which Federal Reserve banks trade among themselves to gain extra value from their federal debt holdings. If the rate were to suddenly spike on those, that blows up everybody's portfolios.

[questionseverything]

35. sorry for being so dense but

about this...

"Repo Market" for T-bills, in which Federal Reserve banks trade among themselves to gain extra value from their federal debt holdings. If the rate were to suddenly spike on those, that blows up everybody's portfolios.////

do you mean by blows up, the bankers make more on the swaps or that average peoples portfolios make better returns or blows up in a bad way?

[leveymg]

36. Blows up in a very bad way when the actual risk greatly exceeds the calculated risk of the portfolio

That immediately devalues (downward) the value of the portfolio by as much as the value was miscalculated (upward). It presumes that T-bills have a near-zero risk and don't suddenly change much, except within a very narrow historical band. A sudden sizable sell-off is supposed to be taken into account by a rise in the rate the Federal Gov't has to pay out to bond buyers.

It's called the Black-Scholes Theorum, a mathematical formula for determining risk value in portfolio analysis. I used to work at the NYSE and have had some articles published in the financial press. But, shhh, that's just between us.

[upaloopa]

7. When you sell debt someone else buys it.

They pay less than you did but get the same return as you were promised.
The effect on us is we owe to someone new.

[Wellstone ruled]

8. China House of Cards is in full

Collapse. Interesting little sidebar,tens of thousands of Chinese folks are coming into the West Coast cities on Tourist Visas and disappearing into the Major City China Towns. Wonder if McCain or Trump want to build that wall to keep the Chinese People out? Oh,that's right,wrong People,my bad.

[pampango]

11. Don't give Trump any ideas about more walls.

Right now he sees Mexicans as deserving both a wall and tariffs, but the Chinese just deserve tariffs. It would not take much convince him that the Chinese deserve a wall too - in the middle of the Pacific or around LAX, SFO and SEA airports? And I am sure he would get them to pay for it since he is such a terrific negotiator.

I have seen reports about thousands of Chinese tourists staying on the West Coast. Can you post links to that information?

[Wellstone ruled]

12. Common point of discusion

among the TSA and others in Homeland Security Agency personnel.

[KamaAina]

15. That would be Jeb!

He's the one who thinks Asians are the "real problem". Which probably got him a peck on the cheek from the Mrs.

[Ikonoklast]

13. Meh. China holds around 20% of U.S. debt that is offshore.

Which is dwarfed by the amnount of debt held domestically.


If the Chinese are selling at fire-sale prices, I am sure that paper is getting snapped up.

The myth that China could sell all the U.S.debt they owned and sink our economy was always that, a myth.

They would end up losing a large fraction of a trillion dollars as they devalued their own holdings and in the process sink their own economy.

[roamer65]

14. Who is buying up the debt? The answer is you.

It is being monetized by the Federal Reserve as it hits the markets. You will pay for it via inflation. If not now, certainly down the road.

[pampango]

18. "You will pay for it via inflation. If not now, certainly down the road." Perhaps but

according to Krugman, that is what republican inflation hawks have been saying since at least 2008 when they argue for budget cuts and deficit reduction rather than economic stimulus.

He sees no sign of inflation risk now or in the future. That may change at some time, of course.

[roamer65]

19. The Federal Reserve of Minneapolis has a wonderful calculator on its website.

Amazing they have it since Minneapolis Fed president Kocherlakota is such a monetary dove.
By their calculator a 2015 dollar is worth 13 cents in 1965 dollars. Question I usually ask is if your wages have kept pace with that devaluation. Answer is usually no.

[pampango]

22. The "Great Inflation" of the mid-60's to mid-80's had a lot to do with that.

The Great Inflation 1965-1984

by Michael Bryan, Federal Reserve Bank of Atlanta

The Great Inflation was the defining macroeconomic event of the second half of the twentieth century. Over the nearly two decades it lasted, the global monetary system established during World War II was abandoned, there were four economic recessions, two severe energy shortages, and the unprecedented peacetime implementation of wage and price controls.

http://www.federalreservehistory.org/Events/DetailView/64

I doubt that Krugman would disagree with the fact - since it is a fact - that a 2015 dollar is worth 13 cents of a 1965 dollar. Much of that decline occurred in the first 20 years of that 50-year period but the end result is exactly what you stated. He just thinks that circumstances today are such that there is little inflationary pressure compared to the danger of stagnant economy brought on or perpetuated by tight money and 'austerity' budgets.

[roamer65]

24. Krugman tends to avoid the real issue by advocating monetary expansion.

The real issue is that tax rates are WAY too low on the wealthy class and the result is literally wealth is being hoarded by the 1 percenters. This shows up in the ever decreasing velocity of money figures they publish.
Money creation does nothing to stop the hoarding and eventually just undermines confidence in a currency, which leads to currency crises.
What we need is a return to 1950's tax rates on the wealthy and job programs from that tax revenue. That is how to get the velocity of money figures in the right direction. Is it redistribution of wealth? You bet your per sweet bippy it is and it does work.
Robert Reich speaks to this issue very well, IMO. I would vote for Robert Reich for president in a heartbeat. He's one smart cookie.

[pampango]

27. Krugman has posted many times that tax rates are way to low on the wealthy class.

Money creation does nothing to stop the hoarding and eventually just undermines confidence in a currency, which leads to currency crises.

Agreed. But 'austerity budgets' don't stop hoarding either. My reading of Krugman is not that he is pro-inflation or unaware of the dangers that inflation has caused historically and may cause in the future.

He simply thinks that right now there is little danger of inflation so that deficit hawks do more damage to the economy than is warranted by the current risk of inflation. At times in our history and perhaps in our future, he would be very concerned about the risk of inflation if economic conditions at the time warranted that concern. He just not a perpetually in fear of inflation regardless of economic conditions.

What we need is a return to 1950's tax rates on the wealthy and job programs from that tax revenue.

I agree and I think Krugman does, too.

Robert Reich speaks to this issue very well, IMO. I would vote for Robert Reich for president in a heartbeat.

So would I.

[haikugal]

30. I'm hoping Reich is in the Sanders admin.

[JDPriestly]

17. We went through something a little like this with the Japanese way back when.

Can anyone explain to me the difference between that situation and this one.

The Chinese have bought real estate in the US, at least some on the West Coast as well as some in Eastern cities -- he Waldorf I think Thom Hartmann said.

Are they selling their interests in those properties?

[dae]

21. Krugman has been right on what, 90% or so of his "predictions?"

And Obama did not listen to him any more than Repubs.

[hifiguy]

25. This.

I would hope that President Sanders would have the Good Professor, along with Joe Stiglitz and Jamie Galbraith, on his Council of Economic Advisers. And have Thomas Piketty in some kind of informal advisory role as well.

They've only been right about virtually EVERYTHING for the last ten years.

[dae]

28. I second your emoticon.

[Erich Bloodaxe BSN]

26. Glad to hear it's having no effect.

Cause I actually would have found it plausible that they could have screwed us over by doing so. So again, glad that it's not.

[JEFF9K]

29. It's funny to read letters in the local paper from conservatives disagreeing with Krugman.

It's kind of like reading the Bible and telling God that he's wrong.

[hifiguy]

33. Krugman is not just a theoretician,

he's an observationalist in the best scientific tradition. He pays attention to what actually happens in the real world, and nine times out of ten that completely contradicts the dominant monetarist/trickle-down school. And Krugman can tell them exactly WHY they are wrong, not just that they ARE completely wrong.

But no one ever seems to pay attention no matter how often he is right.

[JEFF9K]

37. Also, he admits his few mistakes.

[fadedrose]

32. Great and difficult topic

And I bet you won't find many solutions in DU.

I can only think of the government restoring the US Paper Bond program that paid for a couple of wars that we did not have to borrow to pay for...but private funds don't like the competition.