Tuesday, January 10, 2012

Romney displays his complete ignorance about the global economy

I recently ran across a few headlines and news stories which claimed Romney had promised to stop borrowing from China. I had to read them a few times and then a few times again because, as I remembered, Romney claimed to know a little bit about economics and this was an egregiously incorrect statement, showing either a complete ignorance about the most basic aspects of the global economy, or a wish to exploit the fears of the Republican masses. Since I'd like to think he's not a total scum-bag, I'm going to assume it's the first.

The problem with this claim is that it claims that the US is dependent on the benevolence of Chinese creditors to fund its fiscal deficit. That's simply not true. Firstly, the accumulation of US obligations in Chinese balance sheets is a function of the Balance of Payments, not the US' fiscal balance. I'll quote Professor Michael Pettis here, as his explanation is more concise than mine,
...foreigners do not fund fiscal deficits. They fund current account deficits, and as an accounting requirement the size of the current account deficit is exactly equal to the net foreign funding. Capital account inflows must exactly match current account outflows.
...
The direction of causality can go either way. If investment in the US is so high, for example, that it is impossible for US savings to supply the full demand (as occurred during much of the 19th Century), then the US must import foreign capital to make up the shortfall.
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Suppose foreign central banks have decided for domestic reasons (for example in order to generate domestic employment) to accumulate hoards of US government obligations and so run a trade surplus. This will cause a surge of net capital inflow into the US. In that case the US must run a current account deficit equal to the net inflow.
As is obvious to anyone following the developments of the global economy over the last 10 years, the obvious scenario is the latter. The US Treasury doesn't need China's money, China needs US Treasuries as a way to warehouse its FX reserves in order to maintain its current account surplus. In fact, China reducing its holdings of US Treasuries would be net stimulative to the American economy as the US trade deficit with China means that, along with knicknacks and iPods, the US is also importing Chinese unemployment.

Unless the US Treasury starts emitting dim sums (borrowing in CNY or CNH), the US is not borrowing from China. This is not subject to discussion.

2 comments:

  1. There's no truth to the allegations. Even the conspiracy won't merit at all.

    ReplyDelete
  2. He needs to come up with appropriate decisions. This holds true for refinance mortgage rates as well.

    ReplyDelete

Do the right thing.