So Simon Rabinovitch in the Financial Times goes with the drug dealer/addict analogy as a vehicle for explaining why China’s hands are not completely taint free on the whole U.S. debt situation.
Yeah, I don’t see it. I’m actually getting a bit tired of the whole blame game here. It reminds me of 2008 and the debate over the Bernanke savings glut theory, which I was rather fond of. Was the U.S. to blame for all those crappy mortgages or was Asia to blame for lending Americans all that money, driving down interest rates? (Rabinovitch actually rehashes that briefly in his article, although Mr. Bernanke’s name goes unmentioned.)
Look, at the heart of this are a whole lot of bonds. The US sold ’em, and China agreed to buy ’em. To the extent that China is worried that the US will not live up to its end of the deal, they are perfectly justified in getting nervous, given recent shenanigans in D.C. The hyperbolic language coming out of Beijing is a bit much, though, and the government is starting to give off a vibe reminiscent of Gloria Swanson in Sunset Boulevard.
All the talk about the US not living within its means goes a bit far, and this is where the drug dealer/addict analogy doesn’t work for me. For the analogy to hold up, the “drug” is U.S. government spending. Republicans in Washington are fond of saying that the government is addicted to spending, but what does that mean? Nothing by itself. You have to look at what the money is being spent on.
It would be more accurate to say that in the past decade, the U.S. has been addicted to war, cutting taxes for rich folks, and passing unfunded entitlement programs. That all happened during the two Bush administrations, and most of it has been continued by Obama.
One could certainly criticise those policies, although that would put China in the position of meddling in the domestic affairs of a sovereign nation, something it professes to loathe.
Moreover, as I mentioned yesterday, the bulk of the additional spending under the Obama administration has been in counter-cyclical payments (automatic stabilizers in the form of unemployment benefits, food stamps, etc.) and stimulus funds. China had its own massive stimulus program a few years ago and has yet to face the debt problems that resulted.
And what about China as the drug dealer, pushing product to make a profit? Well, it almost works. China bought bonds, and does expect a return. But I think that despite the negative connotation of the drug dealer analogy (no one likes drug dealers, after all), it sort of lets China off the hook. Hey, they were purposely lending the US money, so they shouldn’t criticise so loudly when the US borrows too much.
Meh. China isn’t a drug dealer. China bought dollar assets because its exchange rate system includes a peg to the US dollar. As Rabinovitch explains:
China’s bottomless appetite for US debt is a direct result of its own distorted currency regime, whereby it buys much of the foreign exchange streaming into the country in order to hold down the value of the renminbi and, in turn, invests that foreign cash in US government bonds.
This point has been made many times before, but it bears repeating that a more market-driven renminbi would have produced a different outcome: China’s Forex reserves would certainly have grown more slowly and it is conceivable that the US trade deficit would have been smaller.
Exactly. China didn’t really have that many options as long as that Forex regime was in place. Drug dealers, on the other hand, can always quit and take up the life of a pimp, or a bookie, or a political consultant. I’m not sure why Rabinovitch doesn’t see that this shoots a hole in the drug dealer/addict theory.
This analogy doesn’t work for me. Anyone have a better one?
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