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Home Publications Blogs Beat the Press A Heaping Dose of Economic Nonsense from Thomas Friedman on China

A Heaping Dose of Economic Nonsense from Thomas Friedman on China

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Sunday, 04 May 2014 08:25

No one expects to get serious insights on the economy from reading Thomas Friedman, but he really went off the deep end in today's column. The piece is a diatribe about how our economic weakness is preventing the United States from acting like a real superpower.

At one point Friedman tells readers:

"We need to counterbalance China in the Asia-Pacific region, but that is not easy when we owe Beijing nearly $1.3 trillion, because of our credit-fueled profligacy."

Presumably Friedman is referring to the amount of government debt that China owns, but it is hard to tell since the statement makes no sense at almost any level.

Let's assume that Friedman is referring to government debt. And this poses a threat to the U.S. exactly how? Yes, China could dump the debt. If they tried to sell it all Monday morning, it would probably drive down the price a little bit and raise interest rates some, but there is not exactly a shortage of people willing to buy U.S. debt right now.

Friedman may not have access to the business section of his paper, but the current interest rate on 10-year Treasury bonds is under 2.6 percent. If China dumps its bonds then maybe it would rise to 2.7 percent, 2.8 percent? Maybe it will go back to the 3.0 percent level we saw in December. A lower interest rate is better than a higher interest rate right now, but I don't recall anyone saying that high interest rates were suffocating the economy five months ago. (in more normal times, 10-year Treasury bonds carry a yield of 5-6 percent.)

Of course the story doesn't end with interest rates. The Obama administration has been publicly committed to a policy of forcing China to raise the value of its currency against the dollar. Many accuse China of "manipulating" the value of its currency, deliberately keeping it low against the dollar to make its products cheaper in U.S. markets.

The way China keeps the value of its currency down is through purchasing hundreds of billions of dollars of assets in the United States, primarily government bonds. If China were to dump its bonds, then it would send down the value of the dollar against the Chinese yuan. This is ostensibly exactly what the Obama administration has been asking China to do.

The result is that we will be able to export more goods and services to China and other countries and domestically produced items will replace imports. This will lower our trade deficit and potentially create millions of new jobs, many of which will be relatively high-paying jobs in manufacturing. Are you scared yet?

But wait, there's more. Friedman is badly confused about the relationship of "our credit-fueled profligacy" and the debt to China. Suppose that we had been running balanced budgets for the last decade, but China had the same policy of trying to prop up the dollar to boost its exports. It could have bought the exact same amount of government debt that was already outstanding. Alternatively, it could have bought up debt of private corporations or bought equity in them. In these cases, the United States would be just as much indebted to China as it is today, even though the government will not have been profligate by Friedman's standard.

In other words, our indebtedness to China is due to the conscious decision of the Chinese government to lend money to the United States, not any need by the U.S. government to borrow. It is probably also worth mentioning that the government has not been in any way particularly profligate in any normal meaning of the word. The deficits were just over 1.0 percent of GDP and the debt-to-GDP ratio was falling before the collapse of the housing bubble threw the economy into a recession.

If we had run smaller deficits over the last six years the main effect would have been to raise the unemployment rate. Friedman may be willing to throw millions of people out of work and weaken the bargaining power of tens of millions of others in the interest of his confused great power ambitions for the United States, but much of the public likely does not share his priorities.

 

Note: Corrections made.

 

Comments (16)Add Comment
typo
written by peg dash fab, May 04, 2014 10:13
you mean "the government has NOT been in any way profligate" in the penultimate paragraph.
The M.O.U.?
written by ifthethunderdontgetya™³²®©, May 04, 2014 10:15
.
No one expects to get serious insights on the economy from reading Thomas Friedman

Or anything else, for that matter. The Mustache Of Understanding is a joke.
~
What a unit.
written by Scott Supak, May 04, 2014 10:41
I keep thinking that if Tom just read Dean's columns for six more months, he'd get better at this stuff. But the longer it goes on, the more I think he just cannot learn.
...
written by Last Mover, May 04, 2014 12:33

Friedman pushed the right bait buttons on this one to put himself squarely in loser liberal territory - two failed wars by Bush with a failed tax cut as well, topped off by "It's not about Obama", etc.

That left the debt monster looming high over other issues as their irrefutable root cause, not unlike Friedman himself peering out at the world from on high, as a Very Serious Person lecuring the masses once again on the virtues of austerianism and nation building at home.
........
written by djb, May 04, 2014 1:25
typo?

should it say?

"It is probably also worth mentioning that the government has" NOT "been in any way particularly profligate in any normal meaning of the word."
...
written by PeonInChief, May 04, 2014 2:01
Let us all say, in unison:

Thomas Friedman is an idiot.

That will not change.
Really?
written by Jeffrey Stewart, May 04, 2014 2:52
"We [the US ]need to counterbalance China in the Asia-Pacific region..." -T. Friedman


Why?
Laymen question
written by Jonathan , May 04, 2014 2:53
Why would selling US bonds cause a dollar depreciation? How does it affects the amount of dollars on the open market?
Laymen Answer
written by Ian Winograd, May 04, 2014 3:44
Good question. I’m no expert, but when China sells $1.3T of bonds on the open market, it will receive approximately that many dollars. We can then assume that it exchanges those dollars on the FX market for Yuan. So China is selling dollars and buying Yuan, which should “send down the value of the dollar against the Chinese Yuan.”
friedman is a fool but there are valid points
written by tew, May 04, 2014 4:02
Friedman is blabbering as usual, but the U.S. has had a large trade deficit for years and has needed to sell a couple billion dollars in assets per day for a long time. The low U.S. savings rate may not seem like a problem right now, but the need to sell asset at this rate leaves the U.S. vulnerable over the long term.

The issue here isn't China's government's ownership of US Treasuries, it's the change in net investment position - the need to sell off assets to satisfy consumption. US Treasuries with nearly zero real return is a fine deal, but pieces of permanent wealth with more typical returns to capital are another story.
Dean is hopeless
written by joe, May 04, 2014 5:11
You get so close to understanding, yet never quite get there. China buying bonds does not represent lending money to the US govt. Period. China has dollars laying around because they exported stuff to us. They purchase bonds to be able to earn a bit of interest.

China could dump them all, and the fed could buy them all. What is the difference between china holding them or the fed? Operationally, it'd be basically the same as QE.

Due to various historical reasons, we use bonds as an interest rate maintenance tool. I know you know about open market operations. Why can't you connect the dots?
Another question
written by Jonathan, May 04, 2014 6:28
Thank you for the answer Ian. Must US bonds be sold for dollars, or can they be purchased with other currency?
China doesn't have to touch the dollars
written by Dean, May 04, 2014 6:28
Joe and Tew,

There is no reason China's central banks have to touch the dollars their companies accumulate. Then the companies would dump the dollars on currency markets. This drives down the value of the dollar, which will reduce our trade deficit. That is the way a market works.

We don't have to borrow to sustain our trade deficit. The dollar falling corrects the deficit. This is econ 101.
...
written by sherparick, May 04, 2014 9:13
Besides the economic malpractice (per capita GDP in China is still 1/4th U.S. per capita GDP and that China would surpass the U.S. in total size some point in this decade was something bloody Tom Friedman was celebrating 10 years ago), is of course the yearning to send someone else's American kids to go die and kill in foreign lands so as to "make us" serious. 4,300 died in Iraq and 32,000 were grievously wounded, and Tom wants to repeat the experiment. What a rotten, stupid elite we have.
Governments shouldn't borrow.
written by Ralph Musgrave, May 05, 2014 12:20

I agree with Dean’s claim that “We don't have to borrow to sustain our trade deficit.” Milton Friedman advocated a “zero government borrowing regime”, as does Warren Mosler. See Friedman’s paper “A MONETARY AND FISCAL FRAMEWORK FOR ECONOMIC STABILITY” para starting “Under the proposal…”:

http://0055d26.netsolhost.com/friedman/pdfs/aea/AEA-AER.06.01.1948.pdf

And 2nd last para of Mosler’s article:

http://www.huffingtonpost.com/warren-mosler/proposals-for-the-banking_b_432105.html
Another answer
written by Ian Winograd, May 05, 2014 6:44
@Jonathan "Must US bonds be sold for dollars, or can they be purchased with other currency?" As far as I know the foreign currency must be converted into dollars first. Note that I only maintain the dollar will drop vs. the Yuan. For example, if someone wanted to buy the Treasuries with Euros, the buyer would convert the Euros to dollars and then China would convert the dollars to Yuan. In this case the value of the dollar would not drop, only vs the Yuan (and would rise vs the Euro). We don't know enough details about the Chinese dumping of Treasuries to determine the value of the dollar vs. a market basket of currencies.

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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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