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The NYT Misrepresents China's Options and Accounting Identities Print
Saturday, 06 August 2011 08:07

The NYT told readers that:

"Beijing has few options other than to continue to purchase United States Treasury bonds, Chinese officials are clearly concerned that China’s substantial holdings of American debt, worth at least $1.1 trillion, is being devalued."

Both parts of this statement are wrong. Beijing has the option to stop buying dollars from its exporters. The reason that the government accumulates dollars and other foreign currencies is that it buys the currency from the companies who are exporting to the United States and other countries.

It has the option not to buy the currency. This would force the exporters to sell their dollars in international currency markets which would lower the value of the dollar. The lower valued dollar would help to correct the trade imbalance between the United States and the rest of the world. This is the adjustment process that is supposed to take place in a system of flexible exchange rates.

The second part of the statement, that "Chinese officials are clearly concerned that China’s substantial holdings of American debt ... is being devalued," is almost certainly wrong because Chinese officials should know with absolute certainty that it will be devalued. The only plausible route through which the trade deficit in the United States will be brought into balance is through a large reduction in the value of the dollar. Everyone who has taken an intro econ class knows this, so presumably China's top economic officials understand this fact. They presumably have made the judgement that maintaining their export market in the United States is worth the expected loss on their dollar holdings.

Finally, as a matter of accounting identities, the existence of the large U.S. trade deficit means that it will be a net international borrower. In other words, the headline of this article that "China Tells U.S. It Must 'Cure Addiction to Debt'" is absurd. China's decision to prop up the dollar against the yuan is the main cause of the trade deficit that makes the U.S. a net borrower. In other words, it is China's own actions that lead to the U.S. borrowing that it is complaining about.

 
Credit Rating Agency that Rated Subprime MBS Investment Grade, Downgrades U.S. Print
Saturday, 06 August 2011 07:58

This would have been an appropriate heading for this article on S&P's decision to downgrade U.S. government debt. S&P gave investment grade rating to hundreds of billions of dollars of mortgage backed securities. They received tens of millions of dollars from the investment banks for these ratings.

It would have also been worth asking what S&P thinks it means by this downgrade. U.S. government debt is payable in dollars. The U.S. government issues dollars. What does it mean that S&P thinks that at some point the government will not have the dollars needed to pay interest and principle and its outstanding debt. Does S&P think the U.S. government will forget how to print dollars?

If that is not what the downgrade means then it would be helpful to explain what it does mean. Readers of this article would likely be confused since there is no obvious meaning that could be attached to this downgrade.

 
Trichet Did Allow the Housing Bubbles to Grow Unchecked Print
Friday, 05 August 2011 20:27

The NYT did a pseudo-retrospective on Jean-Claude Trichet as he approaches the end of his 8-year tenture as head of the European Central Bank. Remarkably, the piece never once mentions the fact that he allowed housing bubbles to grow unchecked in Spain, Ireland and elsewhere in the euro zone. These bubbles created huge imbalances that could not be easily corrected, as we are seeing now.

It was 100 percent predictable that these bubbles would burst and lead to a severe downturn. It is hard to imagine a more serious mistake by a central bank president. This is like a school bus driver coming to the job drunk, driving into oncoming traffic, and getting all the students killed.

It would have been worth mentioning a mistake of such magnitude in this article.

 
Steven Pearlstein Says There is Little We Can Do About Unemployment Print
Friday, 05 August 2011 19:44

Pearlstein says it's really too bad but there is just not much the government can do to get the economy back on track:

"we shouldn’t kid ourselves about how much government can do. Only markets can right-size companies and industries, find the market-clearing price for houses and shopping centers or bring wages in line with global competitive realities. Only markets can wring the speculative premium out of the price of stocks and commodities. And only markets can move workers from where they live to where they are needed, and create a match between the skills workers offer and the skills that companies require."

Of course Pearlstein provides zero evidence for any of these assertions, because Fox on 15th Street is not a newspaper that cares about evidence. For example, the wages in the U.S. that are most out of line with "global competitive realities" are the wages of people like Steve Pearlstein, professionals who get paid way more than their counterparts in other wealthy countries. These imbalances can persist because these professionals have the power to sustain barriers that largely protect them from international competition unlike people like steelworkers and auto workers who have been deliberately subjected to international competition.

If there was a serious problem of mismatch between skills and jobs, as Pearlstein asserts, then we should be able to identify sectors of the economy where there are large numbers of job openings, wages are rising rapidly, and average hours are increasing. No such sector exists. In other words, this skills mismatch exists only in Pearlstein's head and in the pages of the Washington Post.

If we needed any further proof about how unseriously Pearlstein and the Post take his column we have this comment:

"To spur private investment in equipment and research, the government could immediately allow companies of all sizes to deduct 100 percent of such expenses made in the next three years, rather than “depreciating” them over many years. That incentive to invest now will increase the deficit in the short run but have little or no impact on the long-term deficit."

President Obama and Congress agreed on a full expensing provision as part of last year's tax deal. In other words, we already did this. Oh well.

The reality is that there is much that we can do to get the unemployed back to work, but Pearlstein and the Post are willing to say things that are not true to dissaude others from acting.

 
German Exports Are Slowing Print
Friday, 05 August 2011 05:34

This one is almost too painful to write about. The Post tells us that:

"Even some of the recent bright spots in the global economy are starting to dull. German economic growth, for example, appears to be slowing. Germany exports heavily to the European nations that are experiencing a debt crisis."

Is there anything in the world that was more predictable? Why on earth didn't the people making policy at the ECB see this?

 
David Wessell Is Seriously Wrong, There Is Much More That the Fed Could Do Print
Friday, 05 August 2011 05:18

David Wessel, the Wall Street Journal's economics editor, badly misled NPR listeners this morning when he told them that there is little that the Fed could do to boost the economy. This is not true.

The Fed could do another round of quantitative easing, although this is likely to have a limited impact. It could also target a long-term interest rate, for example putting a 1.0 percent interest rate target on 5-year Treasury bonds.

Alternatively, the Fed could pursue a path that Bernanke himself had advocated for Japan when he was still a Princeton professor. It could target a higher rate of inflation, for example 4 percent. This would have the effect of reducing real interest rates. It would also lower the debt burden of homeowners, which could allow them to spend more money.

This policy has also been advocated by Paul Krugman and Olivier Blanchard, the chief economist at the IMF. It would be amazing if Wessel was unaware of this policy proposal.

 
Arghhhhhh! China's Desire to Slow Growth is Good News for the U.S., Not Bad Print
Friday, 05 August 2011 05:02

Ezra Klein is one of the more knowledgeable columnists writing on economic policy today. He puts the rest of the Washington Post team to shame. But he gets it wrong in a really huge way in his front page column today.

He says that China's desire to slow its economy means that there will be no engine for economic growth in the world. This is 180 degrees wrong. If China wants to slow its economy because it is worried about inflation, then the simple textbook method would be to raise the value of its currency against the dollar.

This has two effects. First, it makes imported goods cheaper for people living in China. That will slow inflation. Second, a higher valued yuan will lead China to import more from countries like the United States and to export less. This will reduce demand in its economy and slow growth.

And the flip side of this story is -- that's right, the U.S. exports more to China and reduces its imports, leading to an improvement in our trade balance and a boost to growth. In other words, the fact China wants to slow growth means that they should be very happy to increase imports from the United States. We should be worried if the opposite were true; if China, like the U.S., Japan, and Europe desperately needed to increase demand, then we would face more of a problem.

(I am going to ignore the fact that Ezra called me "no one.")

 
NPR Still Doesn't Know About the Housing Bubble Print
Friday, 05 August 2011 04:42

Morning Edition had a segment on the current turmoil in financial markets in which it asserted that the United States still has not recovered from the effects of the financial crisis. This is not true.

The economy is not in any obvious way suffering from the effects of the financial crisis. Potential homebuyers have little difficulty getting mortgages. We know this because the Mortgage Banker Association's mortgage application index has not been rising. This index measures applications, not mortgages. If otherwise qualified buyers were being turned down by banks, they would have to put in multiple applications to get a single mortgage. This is not happening.

The real and nominal interest rates on corporate bonds are at extraordinarily low levels indicating that larger firms have no difficulty getting capital. The National Association of Independent Businesses, which consists of smaller businesses, has fielding a monthly survey for more than a quarter century that asks its members what are its biggest problems. Very few cite the availability or cost of finance, indicating that small business does not finance as a problem either.

The economy's weakness is easily explained by the collapse of the housing bubble. The overbuilding of the bubble years led to enormous oversupply of housing and most type of non-residential structures. Therefore construction is hugely depressed. Similarly, the loss of close to $8 trillion in housing wealth is leading to predictable drop in consumption. The bubble wealth pushed the saving rate close to zero. It is now rising back to its normal level of close to 8 percent.

In short, the fallout from the collapse of the bubble easily explains the economy's weakness. It is not clear why NPR is telling its listeners that the problem is the financial crisis.

 
National Public Radio Insults the Washington Policy Community Print
Friday, 05 August 2011 03:03

National Public Radio showed either its ignorance of the policy community in Washington or its bias in supporting Peter Peterson's efforts to cut Social Security and Medicare in a news story on the deficit and taxes. It described Maya MacGuineas, the head of the Committee for a Responsible Federal Budget, as:

"about as close to an independent voice on tax policy as you'll find in the nation's capital."

While Ms. MacGuineas has been critical of both political parties, this is true of many of the people working on budget policy in Washington. It is remarkable if NPR is somehow unaware of this fact. 

Ms. MacGuineas has consistently taken positions that are consistent with those supported by Peter Peterson (whose foundation supports her work). Her organization has not shown in interest in proposals that focus on reducing the deficit by taxes on Wall Street speculation or reforming the U.S. health care system, the primary driver of the long-term deficit.

NPR's comment is inaccurate and misleading to listeners, as well as insult to dozens of people doing policy work on budget issues in Washington. 

 
The Military Is Projected to Spend $7.8 Trillion Over the Next Decade Print
Thursday, 04 August 2011 04:56

The Washington Post is trying to win yet another Pulitzer for bad reporting. Today's entry is a page 4 story discussing the impact of potential cuts to the military budget. The Post told readers that the Pentagon could face $600 billion in cuts over the next decade.

That is supposed to sound really really big. But is it? It would have been helpful if the Post had bothered to tell readers the baseline level of spending. The Congressional Budget Office baseline is $7.8 trillion over the decade, putting the proposed cuts at a bit under 8 percent of projected spending.

Another useful benchmark is the pre-2001 level of spending. If spending were the same as a share of GDP as the pre 9-11 level, we would spend approximately $5.4 trillion on the military over the next decade.

 
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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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