Krugman Takes on China. We Must Blame Them for the Collapse of our Economy.

Abstract: Paul Krugman addresses the problem of China. The China Syndrome is Success and we have lost our economic and business power. But, China has our money so we need to force them to buy our exports to their disadvantage. Our economy is being wrecked by wild Marxian spending patterns such as ‘affordable housing’ and the new Obamacare, which will cost trillions. Obama wants to spend about 9 trillion more to push up our debt from 14 trillion past 20 trillion in a few years. Either we cut spending and drop phony social programs or our dollar will inflate and become worthless, the usual mechanism by which governments steal the assets of their citizens [kleptocracy]. Our government will not cut spending so down we go. Buy gold.

The political question of ‘equality,’ and this is only a political essay as there is clearly no equality in the world, ushers forth numerous ‘solutions’ to social problems the most important being the redistribution of wealth. Of course, equality is a myth.[1] This redistribution process is an ongoing project as people cannot seem to ‘share’ their assets in the manner deemed egalitarian by the Fabians and their followers thus defaulting according to the aforementioned definition which changes monthly anyway. Much of this is driven by the mathematical inspection that half of all of us must be below average and this result is not acceptable. Thus, a host of measures including wars, taxes, kleptocratic manipulations with currencies and various social programs are implemented in a quest for other people’s money to buy votes with. This means that the demand for higher taxes and other forms of wealth attachments including theft are the major ongoing project in the political world. They don’t have enough money so they need more and more and must get it from their citizens or, in this case, from abroad.  Borrow, steal or put in punitive tariffs. This quest extends to successful sovereign nations solely because they have the money and all other known governments need all they can get. China, with its massive reserves is thus the culprit by definition and needs to pay up.

As is tautologically universal in the Paul Krugman essays[2] his propaganda pieces frequently begin with a conundrum and broadcast the urgent need for the expedition for the ‘facts’ so the guilty can readily be identified. The solutions, as always, depend on higher taxes and more government and this harangue habitually pacifies the local left liberal to the point of boredom for the reason that they are already part of the game and know the score. But, the topic today is China. At this writing, there is no way to tax China directly from the U.S., California[3][4][5] [the best example of how not to run a government outside of Cuba or a few spots in Africa] or another pitiful sister such as New York or numerous other states that need the money and can’t seem to beg enough from our powerful federal government. Here, the usual chum-chucking and pestering of the politicians is of little use as those in charge of the world’s most powerful economy [China] are immune to the rants and cajoling processes currently employed  by the New York Times and the persistent iridescent lights that still radiate from their infamous Pulitzer Prize winner Walter Duranty.[6] So, what do we do? We consult an ‘economist’ for the answers: Paul Krugman.

The Problem has been identified and it is China [read capitalism here]

“Tensions are rising over Chinese economic policy, and rightly so: China’s policy of keeping its currency, the renminbi, undervalued has become a significant drag on global economic recovery. Something must be done.”[7]--Taking On China By Paul Krugman Op-Ed Columnist

Published: March 14, 2010  [Emphasis is mine in all quotes.]

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[I offer extensive quotes in this blog so that the reader can view the exact language and can be confident that nothing was taken out of context or that nobody was misquoted. The easiest way to take in the salient points is to read the emphatic points in the quotes and then peruse my comments. Comments on my comments are always welcome: ryckki@gmail.com.]

Here the alarm is sounded and all eyes are upon our leader as he instructs us how to deal with China! Since most currencies float [since Nixon threw the Bretton Woods Agreement[8] into the latrines], we should all wonder who determines what the proper value of a given currency might be and who would set it right for the world.

Penalties [or Rewards] from an Undervalued Currency:

“To give you a sense of the problem: Widespread complaints that China was manipulating its currency — selling renminbi and buying foreign currencies, so as to keep the renminbi weak and China’s exports artificially competitive — began around 2003… the trade balance — of $46 billion. Today, China is adding more than $30 billion a month to its $2.4 trillion hoard of reserves. The International Monetary Fund expects China to have a 2010 current surplus of more than $450 billion — 10 times the 2003 figure. This is the most distortionary exchange rate policy any major nation has ever followed.”-- Taking On China By Paul Krugman

China refutes this notion[9]  but:

“The yuan was tied to the dollar until 2005 when it was allowed to rise in value by about 20%.

The peg was reinstated in 2008 when the global economic crisis cut demand for Chinese products and factories began closing.”[10]-- China denies currency undervalued Chinese Premier Wen Jiabao has rejected criticism that China is keeping its currency undervalued.

Of course they are holding the yuan low for export reasons. Everybody knows that. What people don’t know is that the exact amount of the reserves is a state secret like the Greek military spending.[11] But, China and Japan are buying fewer US treasuries since January.[12] This is because they fear that the US will kleptocratically[13] debase their currency using the common mechanism of inflation.[14] These are all well known facts so what will Krugman recommend we do?

“And it’s a policy that seriously damages the rest of the world. Most of the world’s large economies are stuck in a liquidity trap — deeply depressed, but unable to generate a recovery by cutting interest rates because the relevant rates are already near zero. China, by engineering an unwarranted trade surplus, is in effect imposing an anti-stimulus on these economies, which they can’t offset.”-- Taking On China By Paul Krugman

This is all factual except for the part where the world is not recovering although this is true it is not in Obama’s best political interests to call attention to this salient point. Christine Roemer signaled a recovery months ago. But, the statement oozes a bit further into the slime pits as the ‘rest of the world’ does not include the spendthrift types who fomented asset bubbles and frothed over and obliterated real-estate equity. China, India, Australia, Canada and Brazil, for example, are not in this mess and are not wildly printing money to keep their sorry politicians jobs in order. More asset bubbles are brewing in many states.[15]

Since there is no actual reference point for any currency because the gold standard excluded we cannot fix a price on the Renminbi without referencing other currencies.  Thus the trade ‘imbalance’ forces capital to flow into China and India and their economies surge at the expense of those who print money. Why invest in the USA with its punitive business atmosphere? Krugman knows this since he claims to be a economist. China is being accused of ‘unwarranted’ trade surpluses only because they are successful. Other countries, like Mexico, that cheat on trade rules are exempt because [and only because] they didn’t achieve international trade successes and this is probably only because their narcotics business profits are not well documented.

Now, he recites law for us:

“Twice a year, by law, Treasury must issue a report identifying nations that “manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.””--Taking On China By Paul Krugman

Krugman now cycles his What-If scenarios for our benefit predicting, in his way, the outcome of each particular choice China might make and the effect on our currency and economy:

“If Treasury does find Chinese currency manipulation, then what? Here, we have to get past a common misunderstanding: the view that the Chinese have us over a barrel, because we don’t dare provoke China into dumping its dollar assets.

What you have to ask is, What would happen if China tried to sell a large share of its U.S. assets? Would interest rates soar? Short-term U.S. interest rates wouldn’t change: they’re being kept near zero by the Fed, which won’t raise rates until the unemployment rate comes down. Long-term rates might rise slightly, but they’re mainly determined by market expectations of future short-term rates. Also, the Fed could offset any interest-rate impact of a Chinese pullback by expanding its own purchases of long-term bonds.

It’s true that if China dumped its U.S. assets the value of the dollar would fall against other major currencies, such as the euro. But that would be a good thing for the United States, since it would make our goods more competitive and reduce our trade deficit. On the other hand, it would be a bad thing for China, which would suffer large losses on its dollar holdings. In short, right now America has China over a barrel, not the other way around.”-- Taking On China By Paul Krugman [Emphasis is mine in all quotes.]

There are some serious errors here. Krugman substitutes political policy for economics here.

[1] If China even quits buying our worthless dollars then somebody must buy up our massive and infective debt and who will that be? We can find buyers IF we raise interest rates to Greek levels say 5-7%. That hikes our massive debt service costs to the very dizzying heights that our economy cannot stand. China and Japan now shun the dollar and it is not reasonable that India and the Eurozone will buy dollars. They are not that stupid.

If we cannot find buyers we will just start printing dollars and monetize the debt, a known rabid ‘solution’ to financial crises. Note there is no hint of spending cuts that would strengthen our dollar and make it more attractive to hold as an investment. There are no hints of business tax cuts that would attract business to our shores. Only tax hikes everywhere.

[2] A Falling dollar only appears to help our exports as massive debts and massive debt service puts us in the same spot Greece is in now: Disaster. The Fed may not be able to hold interest rates to certain levels because of the massive global markets we are in. With Moody’s and Fitch rating services  placing a firm floor of 10% deficit to GDP ratios for a AAA rating it is not reasonable that our deficit spending could be held at that point when California, New York, New Jersey, Illinois, Maryland and some other states floundering in deficits themselves. Our US Treasury bonds could sink to junk level as California has.

[3] The 30 year Long Bond would have to be priced to accommodate inflation before the international set would buy and how high might that be? 10% 20% 30%? We doubled our money supply M2 since Sept of 2007 and much of that is somewhere on the secret Fed off-balance sheet accounts. So much for transparency.

[4] The 10-year bond reflects the price of capital so it would raise too thus making business expansion more costly and temp businesses to expand overseas as they have done for 20 years successfully.

[5] The only option Krugman misses is the threat to default on the Chinese debt and that would be an interesting choice.

Krugman then asks himself the question for which he already knows the answer:

 “So we have no reason to fear China. But what should we do?”-- Taking On China By Paul Krugman

Why let’s start a trade war! Let us do the same thing FDR did in the 30s with our agricultural products that was so criticized by Krugman and his Keynesians.

“But if sweet reason won’t work, what’s the alternative? In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, it’s hard to see China changing its policies unless faced with the threat of similar action — except that this time the surcharge would have to be much larger, say 25 percent.”--Taking On China By Paul Krugman

“I don’t propose this turn to policy hardball lightly. But Chinese currency policy is adding materially to the world’s economic problems at a time when those problems are already very severe. It’s time to take a stand.”-- Taking On China By Paul Krugman [Emphasis is mine in all quotes.]

The problem here is that there is no effort to make the dollar acceptable to the world as a reserve currency because of the massive US social spending. Our Obamacare is a joke and an expensive one and Social Security and Medicare are clearly broke.[16]If we were running a surplus then the problem would not be so critical and we would not have to crawl around the globe to find suckers to buy our inflating dollars. We are debasing the dollar no matter what China does but if China and India and Japan internalize their markets they can shut out the cheap US crap from their economies by cutting imports and trading internally and just let us sink. Five more years of 8-10% growth by India and China can allow them to form an Asian Common Market or Asia Zone that we might be shut out of because our currency is rotting away. There is nothing standing against their circling their own wagons and putting a 25 or 50% tariff on all US products. Where is the argument against reciprocity here from Dr. Krugman?

Here is a little message from China that Krugman would rather forget:

“Mr Luo, whose English tends toward the colloquial, added: “We hate you guys. Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn] . . .we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.””[17]—wild rant by Luo Ping, a director-general at the China Banking Regulatory Commission [Emphasis is mine in all quotes.]

So we keep right on spending because Paul Krugman sees little wrong with debt service rising to 3.5% of GDP, some 500 billion dollars.[18] Then, if the interest rates rise……………….

The big message here is that the US has restructured its economy to allow half-baked, cognitively disnimble persons [e.g., many of which are derived from  gratuitous government jobs offered to token-grade minorities] to snarl our economy with bloated government. These creatures are steered in the proper Marxist direction by 60s radicals whose hatred of American is the prime mover of their politics.

Our 14 trillion dollar debt will balloon to 20 trillion very soon and our currency will be essentially worthless by then and the radical left can announce that ‘Capitalism has Failed” and take over our assets. This kind of thing has happened in Third World before and we are joining that select set of economic losers.

Here is the Krugman view from one of his previous blurbs:

“But there’s no reason to panic about budget prospects for the next few years, or even for the next decade. Consider, for example, what the latest budget proposal from the Obama administration says about interest payments on federal debt; according to the projections, a decade from now they’ll have risen to 3.5 percent of G.D.P. How scary is that? It’s about the same as interest costs under the first President Bush.

Why, then, all the hysteria? The answer is politics.”[19]--Fiscal Scare Tactics [Emphasis is mine in all quotes.]

This guy receives only 1 point on this propaganda piece today: a point for “The answer is politics.” That is all he has as his economics is bankrupt.

Either we quit sending and dump this phony ‘affordable housing[20]’ mantra and forget socialized medicine or we will go broke. Social Security may break us before the Chinese do.

rycK

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