Home > Uncategorized > Fear-of-China Syndrome – NYTimes.com

Fear-of-China Syndrome – NYTimes.com

How is it possible that we’re borrowing much less from foreigners when the government deficit has gone up so much? The answer is that the private sector is deleveraging, having moved into massive surplus as consumers try to pay down debt and corporations hold back on investment in the face of weak consumer demand. All those government deficits have only partly offset this move, so that overall national borrowing from overseas is down, not up.

But what would happen if the private sector stopped deleveraging? The answer is, we’d have a strong economic recovery, which would among other things greatly reduce the budget deficit. A side implication of this point, of course, is that for the time being that deficit is a good thing, helping to support the economy while the private sector unwinds its excessive leverage.

So who’s actually financing the US budget deficit? The US private sector. We don’t need Chinese bond purchases, and if anything we’re the ones with the power, since we don’t need their money and they have a lot to lose. In fact, we don’t want them to buy our bonds; better to have a weaker dollar (a point that the Japanese actually get.)

To make excuses for Portman, lots of people keep getting this wrong, even after all these years. But really, truly, the last thing we need to worry about is whether the Chinese love our bonds.

via Fear-of-China Syndrome – NYTimes.com.

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