What Do the Chinese Buy?

…when they purchase U. S. Treasuries? Economist Mom draws attention to this CNN interview with Barack Obama, noting that President-Elect Obama recognizes that the U. S. economy has a short-term problem and a long-term problem and that the policy strategies of each pull in opposite directions. From the linked transcript:

We’ve got distinguish between short term and long term. Short term, the most important thing is to put people back to work, all those folks that you had breakfast with. If they’re working, that means they’re paying taxes. That means that they’re buying goods and services. And the economy, instead of being on a downward spiral, starts back up on an upward spiral.

But what we also have to recognize is, is that the deficit levels that I’m inheriting, over $1 trillion coming out of last year, that that is unsustainable. At a certain point, other countries stop buying our debt. At a certain point, we’d end up having to raise interest rates and it would end up creating more economic chaos and potentially inflation.

Actually, I think that the Chinese buy several things when they purchase U. S. Treasuries or other forms of U. S. government debt. First, they buy insurance, bolstered by comments like PE Obama’s, that the U. S. Congress won’t get too upset about how China values the yuan. That promotes Chinese exporters at the expense of U. S. manufacturers. Second, they buy insurance that U. S. consumers will continue to buy stuff that’s made in all those Chinese factories employing Chinese workers. Although U. S. consumption has fallen off a cliff and a lot of those workers are unemployed, the strategy continues to make sense as evinced by China’s continuing to buy U. S. Treasuries even though you’d think the U. S. was a much bigger credit risk now than it’s been in the past.

Importantly, one of the reasons the Chinese authorities will continue to put their money into U. S. debt is that it continues to be more secure there than in other sorts of instruments, particularly the notoriously opaque Chinese securities and equities. And although they’ve come a long way Chinese state banks continue to be at least partially policy oriented rather than profit oriented.

As to the short-term/long-term dichotomy, since it certainly looks as though we’re all Keynesians now, it might be nice to recall Lord Keynes’s most famous witticism: in the long term we are all dead.

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Dave Schuler
About Dave Schuler
Over the years Dave Schuler has worked as a martial arts instructor, a handyman, a musician, a cook, and a translator. He's owned his own company for the last thirty years and has a post-graduate degree in his field. He comes from a family of politicians, teachers, and vaudeville entertainers. All-in-all a pretty good preparation for blogging. He has contributed to OTB since November 2006 but mostly writes at his own blog, The Glittering Eye, which he started in March 2004.

Comments

  1. Drew says:

    “Actually, I think that the Chinese buy several things when they purchase U. S. Treasuries or other forms of U. S. government debt…”

    Flat, damned………correct. Which is why we need to stop wringing our hands over China stopping the flow of funds……unless:

    Obama and his populist rhetoric, and God forbid, real policy, would poisen this symbiotic relationship – China exports goods, and investment, to the US. So a populist trade war would be a real big problem.

    Let’s hope Obama’s advisors share that view.

  2. tom p says:

    “Actually, I think that the Chinese buy several things when they purchase U. S. Treasuries or other forms of U. S. government debt…”

    Flat, damned………correct. Which is why we need to stop wringing our hands over China stopping the flow of funds……unless:

    Some years ago, I had a lefty friend (even of me) express a worry about the US and China going to war… It was 5 mins before I could get the words out between gasps for air between peels of laughter about the very ludicrousness of such a scenario.

    But Drew:

    Obama and his populist rhetoric, and God forbid, real policy, would poisen this symbiotic relationship – China exports goods, and investment, to the US.

    It might be a fine line, but there is a BIG difference between “symbiotic” and “parasitic”…

    I have yet to read an economist who thinks the trade imbalance between the US and China is “much ado about nothing”.

  3. tom p says:

    ps: I like the ad for yet another “Chinese export” to the left of the screen…. She has… HUGE tracts of land (monty python, for the humor impaired).

  4. Rick DeMent says:

    The Chinese have become Economic Hit Men … Taeget US.