But what do Hillary and Obama think about trade with China?

That's a joke, people.

I read that article the other day. It scared me silly.

I'm totally one of those "China is plotting to take over the world" people.

I read a criticism of this article that seemed convincing, probably somewhere untrustworthy like in Dean Baker's comment section. I should go try to dig it up.

The same is not true, I suspect, for the United States, which might have chosen a very different path: less reliance on China's subsidies, more reliance on paying as we go. But it's a little late for those thoughts now. What's left is to prepare for what we find at the end of the path we have taken.

One of the things about the fiscal disaster Bush has planned is that the costs have been backloaded. Nothing much comes due while Bush is in office. That's been pretty explicit, and to my knowledge no one big in the media has called him on it, nor have the Democratic leaders.

He's accurateas far as he goes, but IMO incorrectly presents a weaker dollar as uniformly alarming. A weaker dollar will mean fewer imports and more domestic production, bad for Americans as consumers, but good for Americans as workers. It will also mean that US stuff looks cheap to foreigners, so someone else will overpay for a movie studio or a famous building, as Japanese did in the 80s.

For us non-worker consumers, it's bad, though.

5 gets it right. I try to point this out to people at the same time I'm pointing out that air travel will have to be eliminated in order to have any chance of saving the planet. I believe we had the discussion recently of how hard it is to be convincing without being alarmist. These are cases where the media contributes to destroying the country/economy/planet by creating the conventional wisdom in which such things are unthinkable.

I am in the process of communicating from beyond the grave, via a ouija board, with the staff of Crooked Timber, to give my views on this subject. Suffice to say that the article is highly alarmist on the subject of a weaker currency - fundamentally, if you have contracted a debt for a fixed nominal sum in dollars, does a reduction in the value of the dollar make that debt more, or less, of a burden? And also quite facile about China's motivation. China is an actual foreign country - they are not just short Americans with funny-looking eyes. And "socialism with Chinese characteristics" is an actual political and economic system - they do not necessarily behave as they would if all they'd known was Mankiw, Varian and Chicago.

Thanks for the link, Becks. Before I read the article, I'll say that I'm firmly convinced that China's ascent is part of the decline of Amerian world power, and I'm really okay with that. Except, of course, for the selfish concern about how *my* economic security will be affected, what with my being an American and all.

Ben H thinks that "the way the US will satisfy the build-up of net foreign liabilities is via the infliction of capital losses." I don't know what that means. Maybe someone can explain.

Taxes, maybe? Prices? Race war?

Foreigners will either lose money in the stock market or discover that what they bought (eg Sony pictures, Rockefeller center) is worth less in present income than they thought when they agreed on a price. This is what happened with the Japanese in the 80s.

Yeah maybe listen to lw instead of me.

lw has it in 13. As my man Ben H put it: "when people in the 80s said that the Japanese were buying America's heritage, it really mean that they were buying into a long American history of carnival hucksterism, scams, and legerdemain."

Although, as he notes elsewhere "This time around, I feared that doing so might entail greater collateral damage than in prior cases in view of the fact that the Chinese (among others) were using their dollars to buy Treasuries." He's right on that front, I suspect.

Saudi Arabia, China, and a few other government holders of US government securities will have enormous leverage with the U.S. government whenever a serious international dispute arises. One way or another, because of fiscal weakening and because of the irregularities and unsuccess of the Iraq War, the U.S. has lost a lot of influence in the last 7+ years. And perhaps that's a good thing, except that the hawks seem to want to use military force all by itself to replace the other stuff. We're still able to pulverize anyone who stands in out way.

Maybe. The Saudis have oil leverage, the treasuries do not give them much extra strength. The Chinese could then refuse to sell us alarm clocks and can openers for six months, leaving a drastically reduced population, since we couldn't wake up or feed ourselves. I don't know that the treasuries give China much extra power either. But it sure doesn't help.

"Saudi Arabia, China, and a few other government holders of US government securities will have enormous leverage with the U.S.

And people think we are leaving Iraq. Ww are not leaving Iraq. Obama will be given his orders when he needs to know.

Why wouldn't a threat to quit buying and start selling US bonds have an effect?

It would, but it is an effect that could be equally well achieved through trade shenanigans, so the treasuries held change relations in degree rather than in kind. In any case, I'm not sure that Beijing is especially interested in harming us-- China wants Taiwan, maybe Indonesian oil fields and a free hand in Nigeria. Direct conflict is expensive and unprofitable.

America the world's policemen?

No, Blackwater to the world since 1991. It's all we got to sell at comparative advantage, our bloodthirst and passivity of our middleclass, our tolerance for the huge military budgets. It is obviously a huge advantage.

Ezra Klein loooove for Obama's rhetoric of demilitarization without links to actual defense cuts in an Obama platform is an example of why I have no respect for Ezra anymore. Show me the money, Ezra.

20: Well, supposing the Chinese have something they want, they'll presumably get it. That's all I meant. I'm not thinking of WWIII, a Chinese invasion, a Chinese-engineered depression, or anything like that. Just a succession of miscellaneous things like Taiwan.

I'm not sure I'd trust you with the money, Bob.

Here's an example:

"Obama talks about "the politics of fear" quite frequently. Most Americans probably don't know quite what he's referring to. That's a political failing on his part, and it would be nice if he'd tether his answers to earth a bit more often. But over time, it's become clear that Obama is referring to a discussion space that lets war policy stand in for foreign policy, that elevates only questions of troops, and dismisses soft power, negotiations, multilateralism, rules, cooperation, and most every other tenet of a progressive foreign policy approach.

From the early arguments over negotiating without preconditions to his more recent statement that "I don't want to just end the war, but I want to end the mindset that got us into war in the first place," Obama is previewing an aggressive stance against the fundamental sicknesses in our polity that led to the war in Iraq, and will lead to future, equally ill-considered invasions" ...Ezra Klein

That is all mind-reading, wishful thinking and koolaid drinking. Ezra is no good to me for policy analysis anymore, and won't be trustworthy in an Obama Presidency. If Clinton gets elected, the bitterness will probably bias his work.

Sad. The kid had potential. And this is another thing I hold against Obama. He made irrationalism a positive good.

Ezra Klein here's the link for 24

Why wouldn't a threat to quit buying and start selling US bonds have an effect?

What effect would it have? The US would have to pay higher interest rates to borrow money, and the Chinese would lose money by selling their Treasuries at a loss. If the US economy collapses or at least stops buying tons of crap from China, a bunch of Chinese people lose their jobs in factories, pick up pitchforks and torches, and march on Beijing.

All right, I'll risk the old-time story. I was a college freshling during the 1992 election, and remember not a single bit of excitement from the Dem primary. How did the swoon over Clinton compare to the Obamania today? From reading old Doonesburys, it seems comparable, but that's my only source.

26:wm, the people with the real money are historically short-sighted about the pitchforks. A 50 percent drop in the S & P is something to be avoided at high cost, and not because of the social unrest.

All these optimistic stories about China assume that the Chinese will never be willing to makeany economic sacrifices at all for political gains, and also that they won't even be able to make a plausible threat. George Soros wreaked a lot of havoc with a lot less leverage than China has.

29: To put it differently, what is the worst-case scenario given a Chinese government that wants to fuck with the U.S. government?

29, 30: And given the likelihood that the shit will hit the U.S. fan anyway in the next decade or two (as many say that it will), what are the chances that the Chinese will be able to capitalize on it, or protect themselves from the worst effects in a way that harms the U.S.?

George Soros wreaked a lot of havoc with a lot less leverage than China has.

Yeah, but it's not like the Chinese are... you know. They're Confucian, or something. So I think we're in the clear on that one.

Am I wrong in thinking that we have essentially recreated MAD with China, but using T-Bills and exports instead of ICBMs?

John, you can't dump a trillion dollars of bonds in a day. Nobody buys falling assets. Very few people can even design scenarios for how it would work.

We are probably already in the worst case scenario, called globalization. The money elites and oligarchs of the world are cooperating in a spirit of peace and love never known in the world before.

The Chinese don't need to fuck with the US Gov't. There is only one gov't. One Capital, One Labour. One world. One military to keep the peace. Some local police forces.

The point of a lot of stuff a lot of people have been saying for something like fifteen years is that our luck could run out and that we shouldn't count on it continuting. We've had a couple fair-size shocks (the so-called high-tech bubble + the so-called subprime bubble), but as far as I know none of the effects of Bush's deficits have hit yet. It's always seemed to me that it's been a national or global, fairly high-risk, gamble on continuous growth, with not much fail-safe built in.

33:You are correct. It is even MAD to the degree that not even one little nuke could be used. China cannot even hint at dumping bonds, and must be careful about investment. The US must keep consumption up, even at the cost of hyperinflation.
No side can gain even a small advanatage over the other.

And if any part fails, it all collapses.

34: Suppose the Chinese run an experiment?

Am I to assume that there is no risk here and that China's U.S. bond holdings give them no significant leverage over the U.S. government?

"Dumpng a trillion dollars of bonds in a single day" is not a McManus-style straw man, in my opinion. Some other straw man builder has colonized his brain.

To rephrase it yet another time: When CLinton took office he found that his main job was to keep the bond market happy. Are there any additional factors, beyond the overall need to keep the whole bondmarket happy, deriving from the fact that foreign states (e.g. Saudi Arabia and China) are among the major bondholders? Will these additional factors cramp U.S. foreign and/or domestic policy?

I figure China looked at Ronald Reagan trying to bankrupt the Soviets, and said:"Oh, that is the game you wanna play. Okay"

Putin is a great example. He is all fucked up trying to keep political and nationalistic control in a world of multinational finance. Sorry, Vlad. You don't matter anymore.

How did the swoon over Clinton compare to the Obamania today?

I'd say it's much broader and deeper, though then, as now, the feeling that "omigod we're going to get rid of those mf-ing Republicans!" was a big part of the excitement.

The only thing I remember being excited about in 1992 was that I was going to get to vote for a winning candidate for the first time, but neither I nor my insular world of leftist peeps were particularly excited about him. (Though there were a couple of things I was psyched about, including that he went out of his way to court and make public commitments to gay organizations & voters. That didn't last.)

37:John. the Chinese maybe have a trillion dollars on dollar-assets. I don't think they could move 10 billion of the trillion to euros or hard assets without attracting attention, and devaluing just a little, their SWF. And "just a little" like 1% when you are talking about 1 trillion is real money.

10 billion is a pretty big treasuries play.

38:Yes.

If I'm not mistaken, a major looming problem is if the Euro becomes the new petrodollar - how can China buy oil with its decreasingly-valuable dollars?

Which argues that our interests are interlocked. Except that it's probably best for the US for a dollar devaluation - it's the only way to get the trade deficit in any kind of check, plus it raises the price of oil, plus it resuscitates manufacturing.

Maybe this is all in the Fallows - I only read one (long) excerpt.

41: See, 38 was what I was talking about. I wasn't talking about some apocalyptic war of total fiscal destruction. My point has been that the U.S. has no leverage at all any more over the Saudis or the Chinese. We may have leverage with the weaker third world nations and the smaller developed nations, but with those guys we're, at best, locked in a partnership.

I've been telling my Free Tibet friends for some time now that Tibert is absolutely doomed. Tibet will be predominantly Chinese (Han) in fifty years ago, not just part of Chinese territory. And the neighboring nations might as well cut deals sooner rather than later.

And China seems to have opted for the worst sort of authoritarian capitalism.

When will the Chinese government formally control Siberia?

And I guess Part II is that we're the weaker partner, compared to the Chinese at least, because we're the debtors. I can't believe that that won't be a factor at all. And the Chinese repressive mechanism is better than ours, though Clinton and Bush have been catching things up, and most Americans are unable to imagine a standard of living decrease.

Gee, do you fellows have man cards in good standing? You seem awfully exciteable. This is not a good topic for alarm. The US public debt to GDP ratio is below 0.5. Japan's is 0.8, Italy's about 1. Budget deficit for the EU must be better than 6%, gets waived occasionally, US is less than 5%. Not good, but not terrible.

Putin is a good topic for alarm; he has effective control of Gazprom and Norilsk (roughly speaking, Siberian oil and metal mining, which China will never control) as well as what's left of Russia's arms works, still a profitable export industry, as well as a newfound sense of rugged media-mastery.

The balance is changing, but the US blocked China's perfectly legal attempt to control Indonesian oil last year without any repercussion at all. Can China block sales of arms or ant-submarine radar to Taiwan? Have they? This will be the first place that new strength would be noticeable.

If you want alarm for China, try demographics or pollution. Or the persistent rumors that Hu Jintao (another ex-cheerleader like GWB) is on the down-low.

Worst case? Chinese troops storming ashore in Cali.

44:When and if their people demand it, which is about as likely as Americans needing political control of the Mexican border region because we have a lot of multinationals there.

Italy isn't usually used as an example of financial solvency, and Japan recently has been used as an worst-case example of stagnation.

The more I'm reassure that everything's OK, the less I believe it.

How did the swoon over Clinton compare to the Obamania today?

There wasn't much swooning that I recall. The true believers were voting for Paul Tsongas and Jerry Brown.

I'm amused by assurances that China will "never" this or that, all of which the real-life China has made a habit of proving wrong.

China will "never" control Siberia sounds like another one of these. Chinese settlement of Siberia in fact looks like a good candidate for tilting the political and economic balance of the region away from the steadily-depopulating Russia; in fact it's the largest settlement movement into the region AFAIK since the Russians themselves colonized it.

Any number of times, Western economists assured themselves and the public that China wasn't going to rise as a major economic power (it was too corrupt, too fragile, too communist, too this or too that), and here we are. I'd say the fact that the future of the dollar basically depends on the decisions of the US' major creditor in China is the first place that new strength should be notable. In fact it's the most telling place that new strength should be notable, because the US owes its military supremacy above all to a towering economic supremacy that, on the ground, no longer exists.

Also, Hu Jintao is what on the down-lo?

The historical evidence is that if you are a creditor of a major power, you have a weak hand. According to this table here, China is not the largest holder of Treasuries anyway. Apparently, it's Japan.

The issue is that China has been making it easy for the US to a) borrow cheaply, and b) have cheap imports. The situation cannot last forever, and when it stops, the adjustment will be painful.

China buys Russian jets. China cannot build quiet submarines yet. A jet is quite a bit harder to build than a city center or a factory, you can't get there in 5 years. Who knows what the future will bring, of course, but there are not that many decades of oil left in Siberia. I guess the principal question is how much longer China will sustain rapid growth.

Hu supposedly likes men quite a bit younger than he is, that's what being on the down-low means.

Italy is a member of the EU, has the same currency and thus the same interest rates as the other countries in the monetary union. If you think this is unstable, you can bet against the Euro by holding on to your dollars or some other non-euro currency. Japan's stagnation and demographics have swollen are cause not consequence of its debt.

Japan 580.9; China, Mainland 386.8 (Hong Kong 54.8); United Kingdom 315.6 ; Oil Exporters 127.6 (not just Gulf states -- all oil exporters).

So presumably I needn't worry so much about the Saudis.

Hu supposedly likes men quite a bit younger than he is, that's what being on the down-low means.

I think that's just a subset of the down low.

So the argument now is that debt is not important? That pisses me off too, because Clinton was so fucking proud of controlling domestic spending to balance the budget, and we were led to believe that the bond traders insisted on that.

But Bush could do anything he wanted and that was OK -- though now that Democrats are taking over, I'm pretty sure that debt and deficits will become important again.

52:1) There was general agreement at Angry Bear that China & the Gulf States "launder" some of their treasury buys through cutout banks. Like the UK. Brad Setser spends a lot of detective work trying to determine how much.

2) I am careful to use the term "dollar assets" rather than simply Treasuries. Like CDO's and mortgage securities. That is where my trillion comes from. How important the different forms of "dollar assets" that SWF's buy is a little above my pay grade, but I don't suppose it matters, in a strawman scenario, whether China busts the treasuries market or Citigroup.

52: The historical evidence is that if you are a creditor of a major power, you have a weak hand.

Far as I can tell, the only precedent is Imperial Spain, and the historical evidence is that once a major power becomes a debtor to other powers, its days at the top of the heap are numbered.

Right, China is the second-largest creditor, which is still remarkable. (Note however that the table misleadingly breaks Hong Kong out from mainland China. With that included, China and Japan are much closer.)

53: Hu supposedly likes men quite a bit younger than he is, that's what being on the down-low means.

Ah. Well, bully for him.

Military modernization is low on China's list of priorities, which doesn't say much about whether Siberia will wind up in its orbit. Russia's own military power in any case is hollow and trending downwards.

Oh, I guarantee that come January 08, suddenly everyone is going to rediscover the importance of the deficit.

If China owns large amounts of CDOs and other mortgage securities (which I doubt, but I don't have strong evidence against), then the officials involved better take that secret to their graves, because otherwise they are truly fucked. if the people of China are already pissed off about Blackstone Group, wait until they find out they lent Americans hundreds of billions of dollars to buy houses, and Americans are defaulting.

So the argument now is that debt is not important? That pisses me off too, because Clinton was so fucking proud of controlling domestic spending to balance the budget, and we were led to believe that the bond traders insisted on that.

Debt is important. You spend more money on interest rather than on something directly useful, and it's harder to borrow more money in the future if you happen to need it. The particular person who owns your debt is less important as long as you intend to pay it.

No, debt is important, but US levels are in line with those of other countries, all of whom are racing to devalue their currencies in a controlled way, as we are. You + bob were sounding chicken little about the current state of affairs; it's worse than three years ago, it's not good, but it's also not terrible; sorry if I misread tone.

Setser is really good IMO, I like reading him.

Russia's new jets seem to be quite good. If Khodorkovsky and Berezovsky couldn't keep power from within Russia, how will immigrants do it? Without weapons, how will China do it from outside? China needs Russia quite a bit more than the reverse, consumer goods notwithstanding. Again, I don't know what the future will bring, but looking at GDP and exports of toys is not useful here.

Here ya go walt Asian Times

"China held $414 billion in US Treasury bonds as of April, according to data compiled by Bloomberg. And according to HUD's website, as of June 2006, China held $107.5 billion in MBS, up from $3 billion in 2003 and $100 million in 2002. Jackson was particularly keen to persuade China's central bank to buy more securities from the Government National Mortgage Association (known colloquially as Ginnie Mae), a mortgage association under HUD. (The figures include securities offered by Ginnie Mae, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp, without providing a breakdown of each agency's holdings.)"

Okay maybe not, CDO's. And those are "safer" MBS. But as I said, they use cutouts, and it is a little to hard to follow all the money around.

DS: Right after the Napoleonic wars, British national debt was something like 150% of GDP. (I don't know who held the debt, though.)

China and Japan are such large creditors because they are manipulating their exchange rates against the dollar. Instead of holding large cash reserves, they hold Treasuries, which have a fairly predictable dollar value. They are not investing Treasuries because they are such a good deal. In fact, Treasuries are a shitty deal.

34: There is only one gov't. One Capital, One Labour. One world. One military to keep the peace

One world of Capital, for the rich man and his jewels,
One worldwide Market, the consumers best to fleece,
One world of Labour, for the workers with their tools,
One ruthless Military to maintain a bloody peace,
In the land of Friedman where Obama rules
One Gov't to rule them all, One Gov't to find them,
One Gov't to bring them all and in the darkness bind them,
In the land of Friedman where Charisma rules.

62: If Khodorkovsky and Berezovsky couldn't keep power from within Russia, how will immigrants do it?

Given the scarcity of population in Siberia, the immigrants will potentially be the region. How they "keep power" is the wrong question. The right question is how Russia keeps power over them, in a period of steady military and political decline.

Without weapons, how will China do it from outside?

I doubt it would come down to invasion, but China is not exactly "without weapons." In particular it is not exactly without manpower. Mao's China was able to fight the American military at its peak to a draw on the Korean peninsula.

Russia has vestiges of an arms industry that are still churning out good designs, mostly for sale abroad. This does not change the fact of its military decline. With China trending in the opposite direction, I'd guess (roughly) that China in Siberia is likely to be on the table within the decade. Which is a lot sooner than "never."

63: Right after the Napoleonic wars, British national debt was something like 150% of GDP.

A misleading comparison, since right after the Napoleonic wars the British economy was producing more than it consumed. Hence the old "workshop of the world" phrase, now more applicable to China.

64: Nice.

62: Those are a very very far cry from CDOs. Fannie Mae and Freddie Mac are both Government Sponsored Enterprises, and have implicit government backing (though nothing explicit, admittedly). That's why they typically yield only a couple dozen basis points over the treasuries of the same term.

As for Ginnie Mae, it's actually a government-owned corporation with explicit federal backing. If those loans lose value, I'd be much more worried about the fact that the FDIC guarantee on deposits would also be hollow.

China pretty much just owns government bonds in the US thus far, which is why people seemed to have such a hissy when they tried to legitimately buy some private enterprises. Actually, most foreign investment in the US is just into government debt. If anything, this helps us, because we own foreign private enterprise, which earns much higher returns. And on top of all that, foreign investors have shown terrible investment timing ability in the US (moving investment into stocks just in time for the 2000 crash, etc.), so I don't think we're screwed.

67:Can you guarantee that PBoC hasn't bought any CDO's?

Obviously, Treasuries and Ginniue Mae are very public reported purchases. First in this thread Walt linked to only Treasuries, and said that is what China has, no worry. I added Ginnie Mae, and PMP is saying, ok Treasuries + Ginnie Mae, no worry.

I don't know what China has. Best estimate is a 1.3T SWF.

The US consumes more than it produces because China is subsidizing that consumption. We could produce more than we consumed if we were willing to subsidize it too.