China Holds Lots of U.S. Dollars. Thanks, China!


Should we be worried about "foreigners" holding large amounts of American dollars? Don Boudreaux says no. The worriers ask: What if foreign investors collectively wake up one morning and decide to dump dollars–either for economic reasons, or for sinister political motives (I'm looking at you China)–to the ruin of the U.S. economy.

But Boudreaux explains that if Beijing has been buying dollars in order to sabotage us at some point in the future–well, the joke's on them:

Suppose that an evil businessman seeks to disrupt the economic future of innocent Ms. Jones. This businessman reasons that if Ms. Jones unexpectedly is fired from her job, she will suffer. And she will suffer even more grievously if any new job that she finds pays her less than the job she lost. So Evil Businessman hires Ms. Jones at a salary well above her true market value. For several years Evil Businessman keeps paying Ms. Jones a salary much higher than she would command on a market not poisoned by the uneconomic motive of Evil Businessman.

And then one day, suddenly and unexpectedly, bam! Evil Businessman fires Ms. Jones, who then discovers that the best new job that she can get pays her an annual salary that is $100,000 less than she "earned" while employed by Evil Businessman.

Without doubting the disappointment and inconvenience Ms. Jones suffers when she is suddenly fired, we can nevertheless doubt that Evil Businessman really hurt Ms. Jones on net. During all the time that he employed her she earned more than she would otherwise have earned. And during this same time, Evil Businessman was paying the price for the later privilege of disrupting Ms. Jones' economic life by firing her.

More on China and the U.S. economy here and here.