Those Damn Chinese Are Going to Buy Our Wheat

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Sunday, 13 March 2011 08:29

The Post really outdid itself in running confused pieces when it ran a column by Lester Brown in its Outlook section warning us that China will start buying our grain in massive quantities. It's common for a column to get 2 or 3 things wrong, but just about every single assertion in this column is mistaken.

To start with, we are supposed to be concerned about China's ability to buy our food based on its holdings of $900 billion in Treasury bonds. Actually, as a country, China's ability to buy our wheat depends on its holding of any U.S. asset. It would have just as much ability to buy U.S. wheat if it did not have a single dollar in Treasury bonds, but instead held $900 billion worth of the stock and bonds of private corporations. (Most estimates put China's holdings of U.S. assets considerably higher than this.)

This distinction is important because U.S. indebtedness to China is a function of the trade deficit not the budget deficit. Many people deliberately promote this confusion in order to use xenophobic fears to promote their deficit reduction agendas. In reality, those who are concerned about indebtedness to China and other countries should want to see the value of the dollar decline. If we eliminated the budget deficit completely, and somehow maintained full employment, we would be borrowing just as much money from China and other countries each year, if we did not lower the value of the dollar. Conversely, if we lowered the value of the dollar to the point where our trade was balanced, the country would not be borrowing a penny from China or anyone else, on net, even if the federal government was still running large deficits.

This logic is also important in the threat that we would supposedly face if we tried to restrict grain sales to China. Brown tells us that China might then boycott our Treasury auctions.

Let's carry this one through for a moment. We have been pushing China to raise the value of its currency relative to the dollar. The way that they keep the value of their currency down is by using the dollars they earn from their trade surplus to buy Treasury bonds instead of just dumping them on international currency markets and allowing the dollar to fall. Of course if the dollar fell, then our trade deficit with China and other countries would shrink. 

So, China will threaten to do exactly what we have been asking them to do -- they will stop propping up the value of the dollar against the yuan. This is supposed to have us scared.

Finally, the real bad news in the picture -- China pushing up the price of wheat -- actually is not scary for people in the United States at all. The U.S. currently produces about 2 billion bushels of wheat a year, roughly half of which is exported. Prices have fluctuated a great deal in recent months, but let's start with a price of $10 a bushel, the higher end of the recent range.

At this price, we spend roughly $10 billion a year on the wheat we consume domestically and get $10 billion a year from the wheat we export. Suppose the buying by the Chinese doubled the price to $20 a bushel. This means that the wheat we consume would cost us another $10 billion a year. Meanwhile the wheat we sell overseas would allow us to buy twice as many imports as it had previously. The $10 billion rise in food prices would come to a bit more than $30 per person per year -- less than 10 cents a day. Are you scared yet?

Even if we said that the price of wheat tripled because of the Chinese and then doubled this impact because of China's buying up of corn, soy beans and other crops, we still only get 40 cents per person per day. In short, higher food prices are not going to be bad news for people in the United States.

Where this column misses the boat is that higher food prices will be a problem for the world's poor who must subsist on just 1-2 dollars a day. Hundreds of millions of people in Sub-Saharan Africa and other poor regions of the world will face serious consequences if world food prices rise substantially. Remarkably, these people did not find their way into this column.