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.

Comments

[Taktix?]

Great. Taking complex foreign market and economic issues and oversimplifying them for mass consumption.

Looks like a Scaife-propaganda/newspaper to me!

[parse]

If Ms. Jones made comittments based on the salary she was receiving from Evil Businessman, what consolation would it be to her that she’d been overpaid, and the Evil Businessman was suffering as well from his plan to ruin her? At the very least, the end of her years of overpayment would require an adjustment on her part–again, the knowledge that Evil Businessman had been spending unwisely for years wouldn’t change the genuine effect of the situation on Ms. Jones.

[joe]

I’m not exactly bulding a bunker in my yard to fight off the PLA, but this argument seems to be lacking in something – the understanding that disruptions hurt.

If Mrs. Jones had a mortgage and credit card debt commensurate with her salary, she’s going to be screwed – far more screwed than if she’d held an ordinary job with an ordinary salary.

[Dave Woycechowsky]

Say Evil Businessman loans Ms. Sudan money for years. Then, one day, he calls in for payment on all the loans. Ms. Sudan defaults. Is she worse off than if she never got the loans?

[robc]

joe,

credit card debt commensurate with her salary

Zero?

Technically, that is the cc debt commensurate with everyone’s salary, but especially so for someone making 6 figures.

Re: The mortgage – Screwed how? Sell the house, buy a new one at the appropriate level. Yes, there will be some transactional costs, but when you are making that much its easy to build up a nice little emergency fund. Mrs. Jones has 30-40k sitting in a money market for just this possibility, right?

[Taktix?]

The Tribune-Review is a rag of the lowest order (minus libertarian-leaning columist Bill Steigerwald).

I worked for a sister paper of theirs, and had several friends who interned with them. They had a higher turnover than Fred Thompson staffers.

Basically, if you didn’t fall in line with editorial staff’s ideology (namely, the extreme right answer to the Post-Gazette), you were run out of the newsroom pretty quickly.

Not that it really matters, anyway. Both Pittsburgh papers are in dire straits, and run mostly AP wire in their print editions.

[Elemenope]

Joe, exactly. Mrs. Jones (i.e. America) after having been borrowing and financing (one imagines house, car, furniture, etc.) at a level consummate with the ability to repay based on her salary, would be properly fucked if the actual level of her income dropped far below her projected level.

China (and Japan and a few others) have financed American debt at a level that should make sane people panic. Just as Mrs. Jones’ hypothetical “economic system” (her checkbook and debts) would collapse as a result of a “readjustment”, so would the larger picture issue of American financing and credit, in the worst case scenario.

[joe]

robc,

And then jump on her flying pony.

Sold any houses lately?

[robc]

joe,

October count as lately?

[joe]

If our debt situation – that of the government, and that of the public – were comparable to the happy-happy-world situation robc laid out (does she chew each bite 32 times, too?), I wouldn’t care if the Chinese owned 100% of that debt.

But, you see, we’re talking about the United States in the first decade of the 21st century.

[Ken Shultz]

There are lots of other ways to talk about the relationship between the dollar and our trading partners. When it comes to debunking conspiracy theories, I’m becoming increasingly fond of ridicule as a primary strategy–responding rationally lends these arguments the illusion of respectability, at least in the minds of the easily manipulated.

…oh, and there’s plenty cause for us to be worried about our currency, no conspiracy theory necessary. …and in terms of things that should be ridiculed rather than reasoned with, the second runner up is the suggestion that there’s nothing to worry about because governments will ultimately act in their own best-interest.

[Reinmoose]

can anyone just fathom for a second the stupidity with which our federal leaders would attempt to deal with such a situation?

What would they even do? I don’t want to know.

[Chucklehead]

I’m willing to be hired for $100k/yr for a few years before being fired.

[Benjamin]

The real problem with the “China’s evil plot” scenario is that any collapse in America’s economy at this stage would be felt double in China. America’s appitite for spending drives Chinese economic growth and a trade war would do far more to harm China in the long run. Give the sitituation 15-20 years and things may be different, but by then China may have made the transition to a true market economy…or collapsed in civil upheavel caused by the massive dissparity in wealth distribution.

Benjamin

[Episiarch]

I know very little about economics but for some reason this doesn’t worry me one bit. Probably because I assume that China would have to fuck themselves royally to hurt us, and they’re just not going to do that. They have some more growing to do before they can go toe-to-toe with us (a lot more growing, really) and until then, they’re going to enjoy the fantastic rate of growth they are experiencing due to peace and good relations.

[wayne]

“I’m willing to be hired for $100k/yr for a few years before being fired.”

Better learn Chinese.

[Chucklehead]

Better learn Chinese.

“I’ll have L12 with pork fried rice and an egg roll.”

[some fed]

The French and the EU hate the cheap dollar.

Hyper-Pr?sident Sarko will save us by inciting the European Central Bank to lower interest rates and destroy the Euro!

[Beatrix Potter\'s Ghost]

Wouldn’t Evil Businessman realize that Mrs Jones has a family of mildly retarded, violent, spagetti monster believing children? And if Mrs. Jones was sent to debtors prison, one of those unstable children would take control of the family and burn down Evil Businessman’s house in nuclear fire, even if their own house burned down as well?

I think Evil Businessman would need to get rid of all of the Jones family’s matches before he screwed her economically.

[drawnasunder]

So the alternative is what?

How do we keep the Chicoms’ dirty hands off our money without screwing ourselves?

Anyhow – how would hurting a huge buyer of Chinese exports help China?

[Cesar]

You always hear about China (and in the 80s it was Japan) owning so much of our debt, but you never hear how the British and Dutch do also. I call “yellow peril” scare-mongering. Why aren’t we scared about the British or Dutch manipulating us?

[Reinmoose]

some fed –
I’m guessing that Hyper should be pronouced “Eee-pair”, as in Eee-pair ceuuuuuuuuuuul

[Chris S.]

This is an absolutely terrible article, but the conclusion remains true. If China suddenly dropped all of its dollar assets, it would experience enormous economic pain. Its foreign reserves would suddenly collapse due to currency devaluation, and it would experience a serious export and employment shocks, which would threaten its stability. All told, China would probably suffer more from this maneuver than the U.S., which would likely remain fairly stable despite suffering moderate credit and import problems.

[joe]

Reinmoose | November 30, 2007, 10:03am | #

can anyone just fathom for a second the stupidity with which our federal leaders would attempt to deal with such a situation?

Egg rolls -> Freedom Cylinders

Lo Mein -> Freedom Noodles

[Chris S.]

You always hear about China (and in the 80s it was Japan) owning so much of our debt, but you never hear how the British and Dutch do also. I call “yellow peril” scare-mongering. Why aren’t we scared about the British or Dutch manipulating us?

I don’t support panicking about this, but European reserves of dollar denominated assets are absolutely nothing compared to Chinese, Japanese and Korean dollar reserves.

[Cesar]

I don’t support panicking about this, but European reserves of dollar denominated assets are absolutely nothing compared to Chinese, Japanese and Korean dollar reserves.

The fact remain China is not the single biggest holder of our debt, nor is Japan. Its Great Britain. But the only person worried about nefarious BritishLinks is Lyndon LaRouche.

[Reinmoose]

Egg rolls -> Freedom Cylinders

Lo Mein -> Freedom Noodles

awesome!

Maybe Fortune Cookies -> Psalm Cookies, containing phrases from the bible.

[Episiarch]

The fact remain China is not the single biggest holder of our debt, nor is Japan. Its Great Britain.

Fucking limeys! It’s 1812 all over again!!!

[joe]

Cesar,

Why aren’t we scared about the British or Dutch manipulating us? Britain and the Netherlands are our democratic allies. China? Not so much.

[Cesar]

Britain and the Netherlands are our democratic allies. China? Not so much.

That would make sense except for the fact folks panicked over Japan holding a lot of our national debt in the 80s (Japan Inc, etc). But Japan is a democratic ally. Why no panic over Britain?

[gorgonzola\'s foil]

The problem is that after a few years, Ms Jones believes in the kool-aide that her time and effort is worth 100K more than it really is. When Ms Jones gets hit with reality upon fruition of Evil Businessman’s plan and finds her standard of living is not sustainable, is she going to cram down her expectations and pick up her plucky self, or is she going to plagued by self-doubt, have the left arm riot and flail in upset against the central body, and have 70’s style stagflation while spinning her wheels holding out for more, at best?

Also, Evil Businessman is not the only major player here: what about Prince Faud’s gas emporium down the street, where both EB and MJ do a significant amount of shopping? Right now, EB and PF value the type of greenback in MJ’s pocketbook. If EB and PF decide that EB corporate scrip or euros is a better medium of exchange for fuel, how is MJ going to get her hands on those if she’s not a part of EB’s payroll?

[joe]

Cesar,

What panic about Japan?

Is there an article about Japan somewhere?

[some fed]

Oh! And if China were to crash the dollar, Taiwan could afford all the US arms we could sell them.

Boeing is already edging up against Airbus again with the dollar as it is. I hope some reports on the arms trade come soon!

[wayne]

“”I’ll have L12 with pork fried rice and an egg roll.”

Exactly the problem.

[joe]

Cesar,

Did you mean back in the 1980s? I remember Pat Buchanan panicking a little about the trade deficit, but as racist as he is, I have to concede that his argument was derived from a genuine, principled protectionism – regardless of how much fun he thought it was to speak is a silly “Japanese” voice to express it.

[Taktix?]

Britain and the Netherlands are our democratic allies. China? Not so much.

That would make sense except for the fact folks panicked over Japan holding a lot of our national debt in the 80s (Japan Inc, etc). But Japan is a democratic ally. Why no panic over Britain?

I’m going to go out on a limb here and guess that we don’t freak about the U.K. and the Dutch because they’re not of a different race and culture.

For all we, the average Americans, know, China could be conspiring with the anti-christ, cooking up a Pu Pu Platter of pain.

[J sub D]

As I see it, China has sold us a bunch of stuff on credit. So what. Does anybody think they possess the stupidity, much less the means, to foreclose. Yeah, they can disrupt monetary markets buy dumping dollars on the market. I can cut of my nose to spite my face, too. Neither is going to happen.

[joe]

Patting yourself on the back for being better than the “racists” who raise concerns, while not deigning to look at the actual arguments they make?

Is this an Iraq thread from 2003?

[Benjamin]

Well, I have a book from the late 80s – early 90s called The Coming War with Japan. As the Cold War was ending many saw Japan and possibly some of the other Asian Tigers as America’s next strategic challenge. I think this came about because many of the older politicians at the time Bush Sr., Helms, Byrd, Hyde, Thurman well remebered WWII and still harbored suspicions for the Japanese. Of course outright racism can not be ruled out. Now in the post Japanese recession era this all seems quaint. And as a side note Britain has always held the lion’s share of US debt. Many times in the past (early 1800s, mid-1800s, late 1800s) this has caused major political concern but things are different now.

Benjamin

[shecky]

Cesar makes a great point. That China is also full of dirty commies is icing on the hate cake.

[Dave Woycechowsky]

As I see it, China has sold us a bunch of stuff on credit. So what. Does anybody think they possess the stupidity, much less the means, to foreclose. Yeah, they can disrupt monetary markets buy dumping dollars on the market. I can cut of my nose to spite my face, too. Neither is going to happen.

I hope this is correct, but I am not sure it is. I don’t think the old Japan thingee can tell us much about the current China thingee one way or the other.

[J sub D]

What panic about Japan?

Is there an article about Japan somewhere?

Surely you recall the uproar of Japan, Inc. “buying America”. I laughed when the Chrysler building was purchased and it was touted as an omen of financial doom. That’ coupled with Toyota and Honda opening factories here (Omigod! Omigod!), caused ther nervous nellies to shit nickels.

[Cesar]

Surely you recall the uproar of Japan, Inc. “buying America”. I laughed when the Chrysler building was purchased and it was touted as an omen of financial doom. That’ coupled with Toyota and Honda opening factories here (Omigod! Omigod!), caused ther nervous nellies to shit nickels.

Thats nothing compared to the reaction of the French when General Motors bought the Eiffel Tower.

[Taktix?]

Yeah, they can disrupt monetary markets buy dumping dollars on the market. I can cut of my nose to spite my face, too. Neither is going to happen.

I seriously doubt China wants to wreck our economy, considering the massive amount of capital they invest in U.S. companies.

People seem to be forgetting the basic principles of economics amidst this “weak dollar” scare.

If a dollar is worth less, it makes foreign investment in the U.S. more profitable.

[Jay D]

Here’s another analogy.

Its like a elephant walking around on the ground, just sitting there minding its own business. China comes along and lifts it 100 feet in the air. China then drops the elephant. The elephant comes to a rest at the same level it started. No worries, right?

[Pro Libertate]

joe,

The Japan frenzy was far, far larger than any worries about China to date. In any case, it’s just competition, and no one is even close to being an actual economic “threat”. China’s whole economy could crash if the U.S. alone entered a serious recession.

[Chucklehead]

Exactly the problem.

No pork fried rice? Dammit, I’ll settle for plain fried rice. But could you throw in a bag of those little crispy noodle things too? Thanks.

[joe]

As I wrote, J sub, I do remember the anti-Japanses fervor of the 1980s. I recall my righty-Republican college roommate telling me, “They think of trade as being another form of war. War, Joe!”

There are a couple of differences, however. For one thing, there actually was an anti-Japanese panic back then. Against one of our democratic allies. Whereas today, despite the fact that Japan does hold a great deal of debt, the concern is really only being targetted, for the most part, at the PRC.

The other major difference is that the panic back then was over the overt, commercial actions of the Japanese – owning and collecting rent on properties, building and selling cars – ordinary business practices. The fear was that they would sell the cars and own the buildings like any other business or property owners, and that these acts themselves were dangerous.

The concern as expressed towards China isn’t “my goodness, they’re going to buy bonds and own investment vehicles, and then collect interest when they mature!” The concern – which I don’t find completely plausible, btw – is that they are going to use their holdings not to succeed and profit in the marketplace, but to actually attack us.

[Chucklehead]

re: Japaranoia,

How could one forget that excellent novel and superb film by Micheal Crichton called “Rising Sun?” The film that launched Wesley Snipes’s action-movie career?

[joe]

That was the worst movie ever made.

There are a lot of Japanese peoople, ok? So, like, at the end, everyone starts kicking each other, ok?

And then there was Sean Connery, who couldn’t actually lift his foot above his knee. They’d set up a shot of Connery starting to lift his leg, then a shot of a Japanese guy flying backwards into a wall, then a shot of Connery putting his foot back down.

[Frobozz]

The Economist has a couple of good articles about this issue on their website now.

[Chris S.]

The fact remain China is not the single biggest holder of our debt, nor is Japan. Its Great Britain. But the only person worried about nefarious BritishLinks is Lyndon LaRouche.

I think we’re talking about different things here. I’m talking about sovereign foreign reserves, not the holdings of private parties. The threat of a “dollar dump” isn’t really that great when it requires concerted action by private parties. Anyway, as I said above, I’m none too concerned about a Chinese dollar dump.

[Rhywun]

I don’t think it’s racist to be suspicious of anything China does. The regime is evil, pure and simple; but we’re too busy playing with all our cheap new toys to care (yes, me too).

[The Great Ape]

If a dollar is worth less, it makes foreign investment in the U.S. more profitable.

Not exactly. It makes new investment more attractive in relative terms. The cash flows from US debt that China holds and has held for several years are becoming worth less and less with each payment, along with the par value of the bonds realtive to those denominated in other currencies. They bought at the top and are getting soaked all the way down. Demand for US paper has declined b/c the dollar is expected to weaken further. The percieved security of US govt paper is still enough such that we don’t have to offer higher rates yet to compensate for our plummeting currency value.

[Chucklehead]

joe, I giggle like a fool whenever I see that end scene. TNT or TBS had it in rotation a few months back and you couldn’t not watch.

[joe]

Seeing that movie in the Union Station theater in Washington, DC was the only time I’ve ever been grateful for the people yelling at the screen.

Other than Rocky Horror, of course.

[Episiarch]

In Crighton’s defense, he supposedly hated the movie and walked off the set when he saw what they were doing to his book. The book is pretty good.

Sean Connery was in Zardoz. He need not do anything else.

[ed]

That China is also full of dirty commies is icing on the hate cake

There’s a “hate cake”?
Is that what gets stolen during a hate crime?
Can you have your cake and hate it too?
Sorry.

[rho]

Ms. Jones was a terrible example. How’s this:

Country C buys up a bunch of Country A’s debt so that Country C is holding a large stock of Country A’s dollars. Of course, they’re not really dollars. There are no piles of bills in a big tower like Scrooge McDuck. They’re bits in a computer somewhere. Country C uses that huge stockpile of pretend dollars like a club to influence Country A. They use their vaporous dollars to buy into Country A’s big financial companies.

Country A, in a brilliant move, figures “Why let Country C push us around? Let’s show them and dump a bunch more pretend money on the world.” Country A drops interest rates, money floods the market and papers over bad investments and floppy financial instruments. Country C gets pissed.

Eventually this house of cards starts to tumble. Country A’s government, in another brilliant move, establishes the Federal Currency Money Magic Holder-Upper with the FCMMHU Act of 2008. This organization does nothing, costs like sin, makes the market act in non-optimal ways, and in 50 years is considered absolutely integral to the nation’s financial footing.

Meanwhile the citizens of Country A wonder why the 99? menu at Wendy’s only has “extra napkin” and “straw” on it.

[MikeP]

The US got actual goods and services from other countries in exchange for a bunch of little green pieces of paper. And now those countries want to give the little pieces of paper back? The bastards!

[Chucklehead]

Episiarch,

I had read that about Crichton regarding the movie too. Agree about the book; a decent read, as is most of his stuff.

Also agree about Zardoz. It’s one of the few DVDs I own.

[J sub D]

The US got actual goods and services from other countries in exchange for a bunch of little green pieces of paper. And now those countries want to give the little pieces of paper back? The bastards!

Yep, that’s the gist of it.

[Aresen]

Jay D | November 30, 2007, 10:51am | #

Here’s another analogy.

Its like a elephant walking around on the ground, just sitting there minding its own business. China comes along and lifts it 100 feet in the air. China then drops the elephant. The elephant comes to a rest at the same level it started. No worries, right?

The obvious lesson is to not walk under unsupported elephants floating 100 feet in the air.

[robc]

unsupported elephants

We need a giant turtle.

[robc]

Oh, oh, Ive got the analogy finally figured out:

Great A’Tuin is the gold standard.

[J sub D]

Its like a elephant walking around on the ground, just sitting there minding its own business. China comes along and lifts it 100 feet in the air. China then drops the elephant. The elephant comes to a rest at the same level it started. No worries, right?

Uh, doesn’t China get crushed when it drops Dumbo?

[MikeP]

Since this dreadful investment surplus “problem” is simply the flip side of the dreadful trade deficit “problem”, I’ll just repost a comment, with minor edits, from a prior thread…

My favorite take on the trade deficit investment surplus comes from looking at what the comparative advantages of the US are. The US has comparative advantages over most of the globe in technology, in research and development, in knowledge.

But the greatest comparative advantage of the US is in productivity itself. The US is the most productive nation on the planet in worker-hours. Not only that, but the American economy is better at turning ideas into sellable goods and services than any other nation.

So if you are a foreigner looking to buy the best product America has to offer, you buy American companies or make other investments in the American economy. It is unfortunate given that people worry about the trade deficit investment surplus that what passes across the national border in this case are a bunch of pieces of paper. Those pieces of paper are not even neutral in the accounting. They are trade deficit investment surplus.

[joe]

The obvious lesson is to not walk under unsupported elephants floating 100 feet in the air.

R-S-N for the win!

Yes, that is the obvious lesson.

Oh, boo hoo, when we run up mountains of debt, something bad might happen! What did we expect to happen?

[Dave Woycechowsky]

but the American economy is better at turning ideas into sellable goods and services than any other nation.

I am not sure what this means.

Making sellable goods is manufacturing, and the US isn’t doing well at that.

Designing new things to manufacture is nice, and I think it is what you mean here, but the problem with supporting yourself with design work is that once the design is made public, then anybody can copy it and cut you out of the money loop. That is true whether you are talking about a dress, a piece of software or a drug. How can America make a living, long term, just by designing things?

[MikeP]

Making sellable goods is manufacturing, and the US isn’t doing well at that.

The US has more of the world doing cheaper manufacturing for it than any other country. Do you actually think that if US companies instead underutilized US workers’ comparative advantage by, say, having them make socks, the US companies would be better investments?

[joe]

A factor that often gets missed is that manufacturing and manufacturing exports are increasing in this country.

It’s manufacturing EMPLOYMENT that’s decreasing, largely as a result of automation.

Now, the continuing loss of the manufacturing employment base is a problem, but it’s a different problem than if the manufacturing sector was actually in decline.

[robc]

joe,

R-S-N for the win!

When someone makes a comment about unsupported elephants in the air and someone else responds with a need for giant turtles, the turle comment gets the win.

Im going off to sulk now.

[reversy]

What if it was “Hard working Business Man” and “Over-spending Mrs. Jones” who threw away her good credit?

[MikeP]

Making sellable goods is manufacturing, and the US isn’t doing well at that.

A recent Cato article that deserves to be read top to bottom expands on joe’s point…

U.S. manufacturing is not in decline; it is thriving. By historic standards and relative to other countries’ manufacturing sectors, U.S. manufacturing is firing on all cylinders. In 2006, the sector achieved record output, record sales, record profits, record profit rates and record return on investment. American manufacturing performance has never been stronger.

Nor was 2006 an aberration. Since the nadir of the manufacturing recession in 2002, all of those indicators have been trending upward. Earlier this month, the Federal Reserve released its monthly report on industrial production, which found that U.S. manufacturing output has continued to rise throughout 2007.

Contrary to the inferences one would be expected to draw from the dishonest political discourse, U.S. factories remain the world’s most prolific, accounting for more than 20 percent of the world’s added manufacturing value. By comparison, Chinese plants account for about 8 percent. Thus, for every dollar of product made in China, U.S. factories produce $2.50 of output.

…and expands on my point…

While misguided (or disingenuous) politicians rail against the rising trade deficit, they fail to comprehend (or acknowledge) that U.S. producers are America’s largest importers. In 2006, 55 percent of all U.S. goods imports were industrial products and components, the kinds of purchases made not by consumers, but by producers.

That statistic supports the strong correlation between manufactured imports and U.S. manufacturing output, which has been observed for decades. Imports and output rise and fall in tandem. Thus, policymakers who seek to restrain imports are effectively advocating a manufacturing recession. If their mercantilist worldview prevails, and imports decline, reports of idled factory equipment will not be far behind.

[Dave Woycechowsky]

The US has more of the world doing cheaper manufacturing for it than any other country. Do you actually think that if US companies instead underutilized US workers’ comparative advantage by, say, having them make socks, the US companies would be better investments?

I am not trying to make a case that the US does or doesn’t have manufacturing or should or shouldn’t have manufacturing.

I was (and still am) just puzzled by your previous comment about ideas and saleable products. I took you to mean, roughly speaking, that the US should do the design work for the world, and let other nations do the manufacturing work for the world. I am still not sure whether, roughly speaking, that is what you were trying to say.

Assuming it is what you were trying to say, the issue I was trying to raise is that manufactured products are inherently “excludable” so when the US made its living off of that, they could be sure to physically withhold the products if customers in other nations did not pay for them.

On the other hand, design work is not inherently excludable. You can copy designs, limited only by what is legal design-copying-wise in the country you are in at the moment. Therefore, my concern is that if the US gets too much of its international economic power by exporting design work, then that will not work long term, as foreign nations find it more and more favorable to copy back on legal restrictions against copying the design work.

Not sure if that makes what I said any more comprehensible, but that is the best I can unpack it right now.

[Dave Woycechowsky Correction]

to copy back on legal restrictions against copying

–to eliminate or fail to enforce restrictions against copying–

[Brandybuck]

A better analogy. The US and China are adrift at sea in a boat, surrounding by sharks. China calling in all of its debts is like punching a hole in the boat. Sure it hurts the US, but it would hurt China just as much. To extend the analogy further, the US also has a hidden inflatable raft, called defaulting on the loans. Defaulting would seriously hurt USA’s credit rating, but the damage would be far less than that to China.

Those strange people who think that China could take over the US simply by calling in their loans are delusional. We’re not talking about a house foreclosure here, we’re talking about a sovereign nation. No waving of paper is going to transfer our sovereignty over to them.

[MikeP]

I was (and still am) just puzzled by your previous comment about ideas and saleable products. I took you to mean, roughly speaking, that the US should do the design work for the world, and let other nations do the manufacturing work for the world. I am still not sure whether, roughly speaking, that is what you were trying to say.

That is not what I was trying to say.

US companies should retain in the US those activities for which the US has the greatest comparative advantage and outsource those activities for which the recipient of the outsourcing has the greatest comparative advantage. That is the path to providing cheaper goods to consumers and higher profits to investors and more wealth for the world.

As to your worries, there is much more to making a sellable product — which could be a manufactured good, but could also be a service, an investment vehicle, etc. — than “design” and “manufacturing”.

Therefore, my concern is that if the US gets too much of its international economic power by exporting design work, then that will not work long term, as foreign nations find it more and more favorable to copy back on legal restrictions against copying the design work.

If this bubbles to the top of your concerns, you lead a charmed life.

How’s about you let the millions of people and their billions of dollars that are threatened by such a scenario more than you are worry about it?

[MikeP]

US companies should retain in the US those activities for which the US has the greatest comparative advantage and outsource those activities for which the recipient of the outsourcing has the greatest comparative advantage.

To avoid any confusion in what I mean by “outsource”, this outsourcing to another country could be within the US company or outside of the company.

[cgee]

robc:

Actually, we need three more elephants to go with the turtle and the first elephant.

Joe is clearly not a Pterry fan.

[ChicagoTom]

If anyone is interested, I came across this article today that talks about many of the same things being talked aboiut on this thread.

The article was authored by Paul Craig Roberts who is described thusly,

Dr. Roberts was Assistant Secretary of the US Treasury for Economic Policy in the Reagan administration. He is credited with curing stagflation and eliminating “Phillips curve” trade-offs between employment and inflation, an achievement now on the verge of being lost by the worst economic mismanagement in US history.

http://www.informationclearinghouse.info/article18787.htm

[rho]

Sure it hurts the US, but it would hurt China just as much. To extend the analogy further, the US also has a hidden inflatable raft, called defaulting on the loans. Defaulting would seriously hurt USA’s credit rating, but the damage would be far less than that to China.

Of course, I don’t think anybody is saying that China can take over the US using T-bills. The idea is to wreak havoc, not conquer.

As for hurting China as much as the US, I don’t see the rationale there. You have to remember that the US dollar is considered a reserve currency. That alone is worth a lot. But if China gives the dollar a good shake, some other currency can maybe take its place. Like the euro. Or the yuan. Who knows?

My major worry isn’t that the Red Chinese are going to rampage through the streets, raping and pillaging and selling me an iPod knockoff. My major worry is that should a currency-based recession hit the US, the government is going to make it much, much worse by trying to help. If not immediately, in the long term certainly. If something unexpected happens, all these bigmouth economists who are assuring us that there is no problem will simply turn around and say “this is a tiny problem that the government can fix”.

[MikeP]

If something unexpected happens, all these bigmouth economists who are assuring us that there is no problem will simply turn around and say “this is a tiny problem that the government can fix”.

I think you are confused about who is on what side of this issue.

It is interventionists who worry about trade deficits and investment surpluses. It is they who will propose the government action that will “make it much, much worse”.

Those who are saying that foreign holdings are not a significant worry are the ones who will want the government to sit back and allow the market to shake out any problem that might happen to arise.

[Brandybuck]

Of course, I don’t think anybody is saying that China can take over the US using T-bills.

Go head on over to the conspiratorial wing of the anti-globalist movement. Some of these wackos are saying that China has US soil as collateral on these loans, and can “evict” the US from North America any time they want.

[Anonymous]

Don’t worry about Mrs. Jones: I’ve her well taken care of.

http://www.youtube.com/watch?v=nExsLVg50zw

[Aresen]

Brandybuck

China has US soil as collateral

True, they do. However, the US did not tell them that they were all “Superfund” sites.

😉

[Paul]

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:

Of course it is. That would be like us investing in European labor productivity.

[Paul]

OH, by the way, everyone was getting a little jiggy with the analogies in the beginning of the thread. It’s really not that complicated. When one invests heavily in a foreign economy, in general, it’s in the interest of the investor that said foreign economy thrive.

I feel that Bordeaux made a tenuous and overly complex analogy.

The Chinese are implicitly recognizing that their communist economy is in decay, and growing in its place is Capitalism.

Let’s put it this way, if my neighbor and I had Molotov cocktails ready to throw at eachothers houses at a moments notice, and then through some arrangement, ended up being invested in eachother’s properties, both of us would be very reluctant to throw that firebomb.

[Matthew]

The statement about “owing a small amount to the bank is the debtors problem, owing a very large amount to the bank is the banks problem” may apply here–I can’t imagine why China would rationally want to call in it’s “debt” from us.

I guess I should be thankful that nation states never, ever act irrationally in political matters.

[Matthew]

Also, Paul, on the value of the dollar, I’m sure it will rebound as it tends to wax and wane in value cyclically.

Hopefully, Euro productivity will grow also.
Maybe Sarkozy is leading the way to a new, invigorated Europe.
Maybe too much coffee.

[Matthew]

tends to wax and wane in value cyclically.
What a pompous phrase; I just meant it changes over time.

[rho]

Brandybuck:
Go head on over to the conspiratorial wing of the anti-globalist movement.

Sorry, I meant nobody here.

MikeP:
It is interventionists who worry about trade deficits and investment surpluses. It is they who will propose the government action that will “make it much, much worse”.

Like the proverb says, the debtor is slave to the lender. It is simply not good policy for the US government to be in hock, long term. One side doesn’t mind the debt so long as it builds roads and schools; the other side doesn’t mind so long as it builds bombs and guns.

[MikeP]

It is simply not good policy for the US government to be in hock, long term.

That is probably true. Nonetheless, the deficit of the US government is not the topic of the thread now, is it. Certainly nothing I said applies to government deficit — only to trade deficit.

[Kolohe]

Let’s put it this way, if my neighbor and I had Molotov cocktails ready to throw at eachothers houses at a moments notice, and then through some arrangement, ended up being invested in eachother’s properties, both of us would be very reluctant to throw that firebomb.

I agree that this is a good analogy and summary of all the arguments presented in this thread.

However, I would also tweak the analogy by saying, “every so often though, I have too much to drink, and at other times, my neighbor’s schizophrenia medication runs out.”

Thinking that a nation-state will act rationally is a good bet, but far from a perfect predictor of behavior.

[MikeP]

Nonetheless, the deficit of the US government is not the topic of the thread now, is it.

Upon rereading the thread, I should be fair to rho: He was responding to the comment that the US government can deal with a run on its outstanding debt by defaulting. Such mutually assured depression is indeed a possible scenario only because the government has a lot of it.

[juris imprudent]

joe sez: What panic about Japan?

Right down the memory hole.

[Birlik Otomasyon]

Thanks for the post
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