Thursday, February 3, 2011

China's Dollars

Matt Yglesias:
Here’s a striking fact from Eichengreen’s Exorbitant Privilege: “Today, in contrast, Chinese holdings of U.S. government and agency securities exceed $1,000 per resident.”

That dramatizes the under-comprehended fact that China’s exchange rate policy is a huge ripoff for the bulk of the Chinese population. At market exchange rates, China’s per capita GDP is under $5,000 per head. Disbursing that horde of dollar-denominated financial assets to the population so that people could obtain additional foreign-made goods would be a boon to Chinese people’s welfare. But it would be bad for the owners of politically influential export factories, so it doesn’t happen.

There's a theory, one that FLG buys into, about China's policy that goes something like this. China's financial system cannot translate savings into investment and by extension growth. It's too inefficient and politically influenced. Therefore, it made sense for China to funnel those funds into the US economy where our financial system was very good at turning savings into economic activity.

Herman Scwartz argues in Subprime Nation that this is because of our housing policy. Money comes in, turns into mortgages, and this stimulates housing demand and economic output. Coincidentally, it also creates demand for Chinese exports to put in those new houses. So, one could think of this as China outsourcing its financial system to the United States.

If you take this into account, the continuing translation of savings into long-term growth, then Matt's policy begins to make less sense because after the one-time disbursement what've'you'got? But then again a lot of Matt's policy prescriptions for China make no sense if you think about anything long-term. Didn't he want them to buy American stuff and simply dump it in the ocean? Even as tongue-in-cheek thought experiment it's still stupid.

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