OP-ED: "China's Dollar Trap," by Paul Krugman, New York Times, 3 April 2009.
OP-ED: "Greed and Stupidity," by David Brooks, New York Times, 3 April 2009.
Brooks, in his weaker moments, is given to superficial reasoning dressed up as deep social analysis with philosophical undertones. Reducing the current financial crisis to greed and stupidity certainly rings with moral certitude, and nobody goes wrong by bashing big banks right now, but it's not enlightening. And when Brooks is really on, he enlightens better than most.
Krugman, on the other hand, has been so rant-ish for so long that you forget he was ever more than the sum of his many angers, but here he is dead on-target regarding the structural nature of the current global crisis:
In the early years of this decade, China began running large trade surpluses and also began attracting substantial inflows of foreign capital. If China had had a floating exchange rate--like, say, Canada--this would have led to a rise in the value of its currency, which, in turn, would have slowed the growth of China's exports.
But China chose instead to keep the value of the yuan in terms of the dollar more or less fixed. To do this, it had to buy up dollars as they came flooding in. As the years went by, those trade surpluses kept growing--and so did China's hoard of foreign assets . . .
Aside from a late, ill-considered plunge into equities (at the very top of the market), the Chinese mainly accumulated very safe assets, with U.S. Treasury bills--T-bills, for short--making up a large part of the total.
Now China is stuck with these low-yield but safe investments and you'd think that holding all that money would give them a lot of influence over the U.S., but the old joke about owing so much to a bank that it's the bank's problem and not yours really holds here. China cannot threaten much in terms of a sell-off, because it would devalue the ace in the hole (foreign reserves) and China cannot move in the direction it should (encouraging the rise of a balancing Asian currency based on the yuan [China], won [SK], and yen [Japan]), because to do so would require China's yuan to be truly convertible, denying the Chinese leadership that powerful tool in its continuing export-driven growth (not so much a manipulation of the currency's value as prevention of its change by market forces--passive aggressive at best).
If China truly wants more say in global economic affairs, it must do so on the basis on demand power, not supply power, but that can't happen until China convinces its public to save less and spend more, and that won't happen so long as China's government doesn't deliver on the two items--pensions and healthcare--that drive ordinary Chinese into hyper-saving mode.
Krugman is right: China's call for a new global currency based on the IMF's Esperanto-like "currency" (really just an accounting measure) is a sign of weakness, not strength. Actually, it's a pathetic concept, revealing how powerless Beijing feels over the situation it's gotten itself into.