Krugman, Ya Bum!

Julian Sanchez | June 4, 2005

Here's the gist of Tom Friedman's New York Times column yesterday:

The fact that a top German politician has resorted to attacking capitalism to win votes tells you just how explosive the next decade in Western Europe could be, as some of these aging, inflexible economies - which have grown used to six-week vacations and unemployment insurance that is almost as good as having a job - become more intimately integrated with Eastern Europe, India and China in a flattening world....Yes, this is a bad time for France and friends to lose their appetite for hard work - just when India, China and Poland are rediscovering theirs.

Part of me want to believe it's not just coincidence that at the end of all that, we're informed:

Paul Krugman is on vacation.

Comments

Adam|6.4.05 @ 12:27PM|#

Krugman's been taking a pretty bad beating from the New York Times' outgoing "public editor" Dan Okrent, and Donald Luskin is having a blast with the situation. If I were Krugman, I'd be on vacation, too.

|6.4.05 @ 12:32PM|#

Gee ... wonder what we'll ever do if china decides to stop subsidizing our debt?

Xmas|6.4.05 @ 12:57PM|#

Gee ... wonder what we'll ever do if china decides to stop subsidizing our debt?

I thought China was buying up all of our cash not our debt.

Actually, I'm pretty sure of it. They're buying up greenbacks to keep their currency artificially low. China is nowhere near the largest holder of US debt. Japan is:

http://www.treas.gov/tic/mfh.txt

|6.4.05 @ 2:19PM|#

All civilizations must rise and fall, in this century democratic controlled governments will undoubtedly fall behind... imo

|6.4.05 @ 2:46PM|#

I can't think of a more outrageous example of the whining coming from the big government statism of Western Europe than the complaining of the French and German governments that the tax rates is Eastern Europe are to low! They said that these lower rates made goods coming from Eastern Europe unfairly competitive and called for a normalization of higher tax rates throughout the continent.

Perhaps with the EU constitution's demise, they won't be able to force their higher rates on the people of the east.

|6.4.05 @ 3:50PM|#

...make that: "too low!"

Ron Hardin|6.4.05 @ 5:20PM|#

I think Thomas Friedman picked up his column persona from Mr. Wizard (``Next week, Timmy, we'll learn to make battery acid.''). Unfortunately he doesn't know enough astrology to do politics.

I myself predict the earth will go beyond flat to concave upwards.

|6.4.05 @ 5:42PM|#

"China is nowhere near the largest holder of US debt. Japan is"

Uh, yes, but China's share is expanding rapidly as the very chart you quoted shows. The ratio of Japanese to Chinese holdings went from 4.15 to 1 in June 2004 to 3.04 to 1 in March 2005. I can't find exact numbers right now, but I recall an American Conservative article that noted China's purchases of *new* American debt exceed Japan's by something like 2 to 1.

|6.4.05 @ 6:26PM|#

I read Krugman from time to time and really don't have a clue what he supports other than the destruction of Bush. Too bad such a bright man chose to waste his skills on something so unproductive.

Ron Hardin|6.4.05 @ 6:29PM|#

The only thing you can do with dollars is spend them in America. If they're holding debt, they're returning them to our economy. If they spend them themselves, they're returning them to our economy. Those are the two choices.

Well, actually they could burn the dollars, but then the Fed notices that the economy needs more money and buys back debt itself with money it prints up new, and the Fed holds the debt instead, and the money returns to the economy.

So, in short, it doesn't mean anything if foreigners hold US debt

|6.4.05 @ 6:48PM|#

Krugman is ... yeah, you guessed it, an Eli.

Yale delenda est

And, no, I never do tire of pointing out how horrible Yale is.

|6.4.05 @ 7:03PM|#

I'm more concerned about what Japanese housewives do when their investments roll over at the post office, but if they don't roll over into U.S. debt, it won't just be because of inflation in the U.S. economy. It'll also a function of confidence in the Japanese economy.

The real control we have is on domestic spending right here in the U.S. Sure, part of the reason inflation stayed so low in the '90s was because of the Asian (Russian and South American) Currency Crisis, but it was Newt holdin' Clinton's feet to the fire that kept inflation nailed down.

...Anyway, in spite people starting to call President Bush a lame duck and all the pressure that must bring on the President to break his campaign promise never to veto a spending bill...

What do you mean he never made that promise?

|6.4.05 @ 7:08PM|#

At the next State of the Union, when the Sergeant-at-Arms introduces the President, rather than saying, "Ladies and Gentlemen, the President of the Untied States", he should just holler, "SuuuueeEee------ey!"

|6.4.05 @ 8:30PM|#

Ron writes:"So, in short, it doesn't mean anything if foreigners hold US debt"

No, it's not a problem if they buy/hold debt. The problem is if they stop, and we're still running deficits.

If big Asian buyers stop buying, the Fed will have to raise interest rates until they start buying again.

|6.4.05 @ 8:59PM|#

"If big Asian buyers stop buying, the Fed will have to raise interest rates until they start buying again."

...the Fed would have to follow the market. Auctions wouldn't go well. Cats and Dogs living together, etc.

|6.4.05 @ 9:00PM|#

Friedman has an appetite for "hard" work.
The Hit and Run ad man keeps dry-humping the carpet.
Krugman is on vacation.

Stop the woild. I want to get off.

Ron Hardin|6.4.05 @ 9:35PM|#

Ron writes: "So, in short, it doesn't mean anything if foreigners hold US debt"

No, it's not a problem if they buy/hold debt. The problem is if they stop, and we're still running deficits.

If big Asian buyers stop buying, the Fed will have to raise interest rates until they start buying again.

If they stop buying debt, then they have a pile of dollars. That's what happens to you when you don't roll the debt over. So where will those dollars go? They still can be used for exactly one thing, telling the US economy what to do next. Either they spend it in the US economy, or they invest in the US economy. There's no alternative for them.

The thing is, money is not wealth. It's a ticket in line to say what the economy does next. In the case of dollars, that's the US economy. The Fed creates and annihilates dollars by selling and buying back debt, so that there's always the right number of tickets in line for the US economy. The leverage of a holder of debt is zero.

The Fed by the way does not raise interest rates. It buys or sells debt, using the interest rate as an indicator of whether it's tightened or loosened relative to the economy's needs for dollars. It has no idea how many dollars there are, or how many are needed, only that it's too tight or too loose at the moment, and it wants to loosen or tighten a little, so it buys or sells debt until the overnight interest rate falls or rises a tiny bit from where it was. It doesn't really care what the interest rate itself is - it's just using it to see what it's doing.

Long term interest rates may well move the opposite way

|6.4.05 @ 9:54PM|#

So Krugman is the bad guy why? Because he was an effective advocate in getting Democrats to sign onto free trade and open market policies in the 90s? For criticizing one of the most fiscally irresponsible, pro-spending US governments in recent history? For daring to disagree in print with the Bush administration? Even when he's wrong it's nice to see one columnist in the MSM who has a little integrity and willingness to mix things up. Otherwise you're stuck with wet mush like Friedman and Brooks, guys who seem to live in mortal fear of offending anyone powerful.

Xmas|6.4.05 @ 11:09PM|#

Vanya,

Krugman is villified because he cannot say anything positive about the US economy while Bush is president.

That's why righties are so hard on him. He's an economist who probably has a lot of interesting analysis on current economic data. However his column has simply become a pedestal from which he screams nothing but the most negative spin on any economic news and a constant hatred for Bush.

|6.5.05 @ 1:32AM|#

So, in short, it doesn't mean anything if foreigners hold US debt.

What school of finance did you go to?? As the past week has shown us, there really isn't much holding the US econmomy together right now, apart from the real estate value of the US. Should foreigners stop subsidizing our debts by purchasing the 10 year bond, interest rates will skyrocket as Greenspan lusts for. Real estate will collapse, values will drop, and the vast numbers of overextended homeowners in this country will be screwed. Translated large, the last crutch keeping the US of A going economically will be removed.

|6.5.05 @ 1:40AM|#

Long term interest rates may well move the opposite way.

Not bloody likely. The Fed didn't contemplate bringing back the Long Bond because they thought debt would be easier to manage, nor is there one shred of evidence to support the idea that long term interest rates will decline. It's pretty much a foregone conclusion in finance circles that the Fed will start auctioning off 30 Year Bonds again this summer, as a result of Bush's fiscal policies.

|6.5.05 @ 3:37AM|#

Most of this is way over my head, I just read it to oneday understand what y'all are talking about.

So while I am attempting to learn;

What would happen if the US dollar were tied to gold or if it represendted a certain amount of gold? As I believe was a platform of Dole's to be VP, Jack Kemp.

What if gold was our currency? Would that be a good thing or a bad thing?

BTW, this is neither here not there, but one of the moslem fundamentalist platforms is that gold be the currency. (presumably to take the power away from Jewish controlled banks, or whatever)

|6.5.05 @ 3:45AM|#

Ron: Well said. What is popularly thought of as "foreign debt" is concurrently foreign investment. USA continues to be the growth and stability leader among global economies. Somehow that excellence is viewed as a liability. China (and Japanese housefraus) will stop buying US bonds if and and when a better investment appears.

Even the importance of the government's annual budget in persistent deficit is commonly overstated. Money is the ability to tell the economy what to do next, and the more those directing decisions are made by government, the less effcient the choices tend to be. As government spending rises, USA softens the competitve advantage it has in creating the things people are willing to buy, in other words reducing growth and the attractiveness of USA as an investment. As deficits accumulate into debt, the productive capacity of the nation will rise sufficiently to redeem the debt, unless the government, through its annual spending strangles the free choices which sustain it.

Look at state spending as a percentage of GDP, and you'll see why USA has plenty of time to correct itself before it becomes western Europe.

|6.5.05 @ 4:10AM|#

kwais: On a gold standard it is more difficult for money to be created-- we can't just print more, as each note must be able to be redeemed into some weight of gold. That potentially slows the rate of growth in an economy, as it is harder to pay for each transaction. Imagine if the only currency was nickels, no paper money, no checks or vouchers, and you'll get maybe an intuitive idea of the problem although not logically accurate description.

Since it is hard to create money, it is hard to interefere in the free choices of the market. The government loses it major lever to influence borrowing, calm speculation, and stimulate during stagnation. The market may be less stable, which many find undesirable. The lack of stability would tend to represent the "real" situation, not masked by fiscal policy, and the corrective forces (invisible hand) could more quickly and appropriately act upon the various leading and lagging regions and sectors in an economy.

I'm not ready to take a side on whether the efficiency of the gold standard would prevail over the distorting lubrication of fiat currency to produce more aggregate and overall growth. Morally, I like gold, but it may not be the most efficient way.

Ron Hardin|6.5.05 @ 9:28AM|#

China (and Japanese housefraus) will stop buying US bonds if and and when a better investment appears.

No doubt true, but it overstates the influence of current holders of US debt.

If they stop buying US debt, they wind up with dollars that they can only buy US debt with, or US goods, or US stocks.

Dollars invoke the US economy, not the German economy, or the Japanese economy, of the Chinese economy. They made that choice when they accepted dollars, and can't get out of it later.

They can of course swap foreigners, transferring ownership of the dollars to another foreigner, but that's a wash as far as the US economy is concerned.


As far as influencing the US economy, the Fed counteracts anything that they do, so as to keep the right number of dollars at work in the US economy. If they hoard dollars, the Fed replaces them. If they go on a great buying spree, the Fed soaks up dollars

|6.5.05 @ 11:21AM|#

Increasing levels of national debt are only beneficial to the extent they represent investment in national infrastructure that will boost long-term economic growth. That's not what the American government has been doing, however. US government debt rarely represents an investment in the equivalent of capital, but instead is more akin to a corporation selling bonds for the sake of making its payroll each month. If ever increasing levels of national debt were always a good thing, then the Democratic Republic of the Congo would be friggin' Switzerland.

|6.5.05 @ 11:39AM|#

I saw Krugman a few weeks back on one of those Sunday morning political talking head shows (I can't remember which, maybe "Face The Nation"). Joe Klein was on there too. They started discussing Social Security and Klein (who is no Republican or a consevative of any sort) actually looked like a "moderate" compared to Krugman.

I wonder if some of the leftist media types keep people like Krugman around for just such a purpose. That's always been my theory on Senator Barbara Boxer...That they keep her around because she makes Diane Feinstein seem like a moderate in comparison.

|6.5.05 @ 12:00PM|#

On the subject of European style ("less free/more equal") versus American style ("more free/less equal") economies...I saw this book at the bookstore yesterday...

"Cowboy Capitalism" by Olaf Gersemann



It's written by a European and he comes to the conclusion that the American system achieves all of those things that the Europeans want far better than their own economic systems. I haven't read it (or even purchased it) yet since my current reading list is several months out...Maybe by the end of Summer or Fall...

|6.5.05 @ 1:08PM|#

The Federal government's debt has little in common with a corporation selling bonds. It can be a very useful tool in managing the economy. George Bush cutting taxes when he first came into the office went a long way toward preventing a melt-down in demand which would have led to a serious recession.

Now that things have been turning around it is time to cut spending and/or raise taxes but I doubt that will happen.

|6.5.05 @ 1:13PM|#

Asians Holding Government Debt

I think, along with many others, that the Asian countries holding so many US Dollars means that the US Dollar will eventually have to decline a great deal.

Suppose the alternative is a serious recession brought on by higher interest rates but I don't think we would go that route.

Borrowing a $1 and paying back $.5 isn't such a bad deal. Let the Asian's subsidize our standard of living if they want to do that.

|6.5.05 @ 4:33PM|#

It's written by a European and he comes to the conclusion that the American system achieves all of those things that the Europeans want far better than their own economic systems.

[French Accent]Mon Duei! A filthy capitalist colaborator! Get le rope! Equality! Fraternity! Sitting on our asses, collecting ze welfare check!

|6.6.05 @ 9:37AM|#

Borrowing a $1 and paying back $.5 isn't such a bad deal. Let the Asian's subsidize our standard of living if they want to do that.

That's what Japan did, it hurt their economy although that wasn't so much Japanese government buying the debt and Japanese corporations. And many of them also invested in infrastructure on US shores, so they aren't so bad. The killer for Japan was buying up US companies (in whole or in part) that were not worth what they paid.

China spends $1 and gets back $.50, but they also get back more than $.50 from the goods they sell in the US. They buy debt to secure access to US markets, but they are not investing in US infrastructure like Japanese, German, and South Korean companies did (and still do).

|6.6.05 @ 1:06PM|#

I love it when people like Friedman, who make a living out of traveling and appearing on tv, get riled up about workers vacation time.

gaius marius|6.6.05 @ 1:21PM|#

China (and Japanese housefraus) will stop buying US bonds if and and when a better investment appears.

mr dynamist/mr hardin: i can't help but be baffled. i wish i could be so sanguine. the better investment is EVERYWHERE -- and they already know it, on all sides. what is maintaining investment is what larry sumners called "the financial balance of terror".

don't make the mistake of assuming the markets are rational, or that china and japan can't dump us debt and dollars. they can. they aren't compelled in the least to return american dollars to america. they can overwhelm the forex markets with unwanted money, effectively destroying it. mr jeff is exactly right:

the Asian countries holding so many US Dollars means that the US Dollar will eventually have to decline a great deal.

china reaps dollars with the american trade deficit. they then currently decide to reinvest those dollars in us debt because the alternative is to allow their home currencies to strengthen -- the market force that should restore a balance of trade by making their exports unaffordable to american consumers.

they don't have to do that. they can allow their currencies to strengthen, kill the dollar and spark runaway inflation and radical interest rate increases in the us (with devastating consequences). they CHOOSE not to now because they'd be sitting on ruinous forex losses and a crushed export sector if they did. but it would hurt us here FAR more than them.

while this has worked for years now, circumstances will not always allow them to be able to choose so. this imbalance grows and grows thanks to this growing terror in realization, which is so massive as to be really paralyzing -- no one on either side can so much as breathe at the regime, for fear of upsetting it -- but it cannot go on indefinitely. sooner or later, an accident or incident (i'll guess hedge fund) will upset it, and the imbalances will correct with devastating force and speed.

and have no faith in the fed to save us. what china and japan do is beyond their purview, and they will be stuck under such circumstances with fighting a persistent hyperinflation as trillions in dollar instruments are liquidated and sunk into non-dollar assets. very little a central bank can do to alleviate that kind of suffering.

theoretical esoteria like "competitive advantage" barely plays a role in all this, as none of this goes anywhere near efficient-market religion -- it is a systemic defect of keynesian economic management on all sides.

gaius marius|6.6.05 @ 1:57PM|#

On a gold standard it is more difficult for money to be created-- we can't just print more, as each note must be able to be redeemed into some weight of gold. That potentially slows the rate of growth in an economy, as it is harder to pay for each transaction. Imagine if the only currency was nickels, no paper money, no checks or vouchers, and you'll get maybe an intuitive idea of the problem although not logically accurate description.

Since it is hard to create money, it is hard to interefere in the free choices of the market. The government loses it major lever to influence borrowing, calm speculation, and stimulate during stagnation. The market may be less stable, which many find undesirable. The lack of stability would tend to represent the "real" situation, not masked by fiscal policy, and the corrective forces (invisible hand) could more quickly and appropriately act upon the various leading and lagging regions and sectors in an economy.

mr kwais/mr dynamist -- this is exactly true, and does much to explain the current predicament. capitalist (ie. unmanaged) economic cycles are punctuated by regular depressions -- starvation, strife, suffering which force deflation and debt liquidation. people don't like that, regardless of how good the boom times were. but it prevents high levels of systemic debt from accumulating.

the great depression followed by the vietnam war ended fiscal discipline in america -- the government needed money, first to enact economic fascism to counter deflation, then to pay for an extended war, and so decided to print it rather than belay their plans.

that lack of discipline allows them now to manage the economy by managing the money supply. unfortunately, it's become politically expedient to print ever-more dollars to give the economy the appearance of prosperity.

however, printing dollars has negative effects. importantly, it encourages debt, as future payments are made with more-common and therefore less-valuable dollars, as lending institutions have to employ excess liquidity. years of inflation have done much put us where we are today -- under mountains of debt.

those mountains can be made smaller by -- yep, printing more dollars. and so we do. which encourages more debt. so you print more dollars. etcetera. and the more debt you have, the greater incentive you have to print dollars.

in the above case -- where foreign selling of us debt (or even just insufficient purchases) raise us rates significantly -- the fed would be faced with a lending contraction with asset price declines at home. they would, as keynesians do, print money to counter the recession by pushing liquidity into the system.

alas, what once saved the system from recessions has now become the very thing that causes the recession. the dollar becomes worth less, sparking more foreign selling, which forces more liquidity to be injected -- and the cycle has started. soon dollar holders are dumping bucks onto the forex market, swamping the system with liquidity in a runaway inflation and forcing all foreign holders out of american investments of any kind. the fed would like to sop up the liquidity at this point -- but can't, because it does so by selling debt through the fomc, and the debt now crashing and has no market.

inflation helped the debt to build up by allowing us to be undisciplined; that lack of discipline ultimately bites you in the ass. that's why the gold standard is returned to again and again after every one of these fiat currency disasters (and there have been many).

|6.6.05 @ 2:00PM|#

Balance of Terror

I'd be really interested in hearing how you think things will ultimately shake out.

My guess is that America will come out of it pretty well simply because our economy adjusts so well. Interest rates will certainly be higher, housing prices might decline, consumption will certainly decline and maybe just a bit more inflation. The economy will adjust and we will begin to export more to Asia.

That said, it could go on for a very long time because I really do think that the average Asian household would decide to save a $1 today even if they know they will only get back half of that someday. Until they build consumer driven economies of their own that is the reality.

Will be interesting to see.

gaius marius|6.6.05 @ 2:06PM|#

My guess is that America will come out of it pretty well simply because our economy adjusts so well.

fallacy of complacency, mr jeff. sorry i didn't post that 1:57 thing a bit faster -- that's how it may very well shake out.

this kind of thing (fiat currency, that is) has been tried many times before -- notably the mississippi scheme fostered by john law. it ends unexpectedly, swiftly and disastrously in every incidence. i expect our situation to be not only no different but markedly worse due to the sheer scale of the imbalances involved.

|6.6.05 @ 2:06PM|#

Gold Standard

Believe it was Milton Friedman who said "You might as well base the currency on pork bellys."

Ultimately, the wealth of a nation comes down to what it produces. Keynsian economics has allowed us to avoid the wild swings in economic activity but it has certainly allowed imbalances and huge asset price inflation.

What else could the Fed do???

|6.6.05 @ 2:12PM|#

the mississippi scheme fostered by john law. it ends unexpectedly, swiftly and disastrously in every incidence

Gaius, Can you suggest some reading on the Mississippi scheme??? I'm not familiar with it.

BTW, you are very sharp. One of the great things about the internet is being able to talk to people like you.

Regards,

Jeff

gaius marius|6.6.05 @ 2:17PM|#

What else could the Fed do???

nothing. its power isn't limitless.

it would be up to congress (or, if the political system doesn't survive the crisis, the power-that-be) to break the monetary contract -- the one that reads, "this note is legal tender for all debts, public and private".

gaius marius|6.6.05 @ 2:21PM|#

lol -- thanks mr jeff, but not all that smart.

the classic quick study of law's scheme of central banking is in mackay's "extraordinary popular delusions and the madness of crowds", which is just a great cynical read cover to cover.

|6.6.05 @ 2:51PM|#

gaius: To assert that USA is not the best investment depends upon your belief that markets are crazy and the USA sucks. Basically everybody on earth bitches about USA and still invests their extra wealth in the US economy. If you are wiser than the deluded crowds, where do you keep your wealth?

On gold, remember that growth raises living standards and limits the real depth of any dismcomforting depression. Poverty in the 1970s was way, way, waaaay better than poverty in the 1770s.

On the Mississippi scheme, it burned investors, and people who depended upon their largesse. But it also got people into the Louisiana territory which helped ensure development of the port of New Orleans, which connected the heartland with the world. The Mississippi and Ohio valleys agricultural and industrial development (most of USAs wealth in the 19th and half the 20th century) was in part a result of the mad crowds taking a chance on a Scot's bogus idea.

gaius marius|6.6.05 @ 4:33PM|#

To assert that USA is not the best investment depends upon your belief that markets are crazy and the USA sucks.

not at all, mr dynamist. i'm saying that RoR for foreign investors in the united states after currency depreciation over the last five years has been horrifying -- bonds paying 5% and stocks down 30% with 2% dividend yield while the dollar falls 25%. and the prime driver behind the dollar collapse isn't shrinking; its growing yet larger, in spite of the devaluation!

saying that the us is a shitty place for a global investor to go long-only is just observing the reality -- and does much to explain the boom in emerging market debt in search of some kind of yield.

remember that growth raises living standards and limits the real depth of any dismcomforting depression.

do you think that comes without a price, mr dynamist? systemic debt and an eventual currency implosion are the price to be paid for that smoothing.

in part a result of the mad crowds taking a chance on a Scot's bogus idea.

are you really arguing that the fraud perpetrated on the markets by law was beneficial? have you any idea the colossal extent of the pain and wealth destruction which the collapse of the scheme foisted on europe? that's like saying the dot-com disaster was worth it because we have a more functional internet. it ignores the massive cost of a minor advance -- which is malinvestment defined.

|6.6.05 @ 6:17PM|#

Currency Implosion

So what happens when that takes place?
- Asians savers realize they might as well spend as their alternative is stuffing their cash in a mattress.
- They buy cheap American goods giving Americans jobs.
- Perhaps inflation in America as the dollar doesn't buy nearly as much as it used to.
- Interest rates go up as inflationary expectations increase and Asians stop buying treasuries thus triggering American's once again saving.

Misaligned investment; there is a term I have not heard for a long time. That is a fact of life and because our economy has mechanisms that allow prices to adjust so well I honestly think America will adjust just fine. When the adjustment takes place we will buy fewer goods from China but we will sell them more.

If interest rates go up, maybe I will be able to retire. Those with their money in the stock market won't be able to but the fact is that baby boomers won't be able to retire early like their parents did. Oh well.

|6.6.05 @ 10:27PM|#

gaius: Alas, each investor has different preferences. Five years may not be that long, and even if one selects a period in which USA underperformed some other benchmark, one must also factor in the value of USA's size and stability. The lower return appears to be the risk premium people are willing to pay to participate in our system.

On one hand, the suffering in Europe is nothing for Americans to be concerned of. But I'm not so callous. I merely seek to point out that there are no solutions, just trade-offs, and any assessment of success, failure, or pain depends on how much is included in the study. Fraud, to me, is wrong not because of the results it produces (which may be widely positive), but because the mechanism violates my moral sentiments. At the core of most of my disagreements with joe, I think it is foolish and wrong to manage for results. I say do it right and let the results happen.