Tuesday, May 17, 2005

Silly season at the US Treasury Department

The New York Times reports that the Bush Administration, or more specifically the Treasury Department (although I suspect political input), is now yelling at China for keeping the dollar too strong against the Chinese yuan by buying hundreds of billions of dollars in Treasury securities. Indeed, we are apparently threatening unspecified retaliation.
This is pretty hilarious on several levels. One is that the Chinese are subsidizing us by enabling us to buy their imports more cheaply. But the main one is that the Chinese are contributing enormously to funding our profligate budget policy by gobbling up all those Treasuries. Who knows when the "hard landing" would start if they weren't doing it? Moreover, I would say they are being very unwise from their own financial standpoint. Not only they are probably quite under-diversified, but they are making what strikes me as a very risky bet, given the long-term U.S. budget picture and evident lack of political will to start addressing it seriously.
Imagine if the Chinese saw the error of their ways, or bowed to the threat, by changing their market stance on US Treasuries from buy to sell. The ramifications would be world-wide, but we would probably feel them the most.
How are we planning to retaliate, anyway? Maybe by defaulting on the bonds or printing money to devalue them? That's probably the best threat we have in terms of effects on them, leaving aside the effects on us.
In making these threats, the Bush Administration reminds me of the story about the scorpion that stung the frog that was carrying it across the stream. "Why did you do that?" the frog asked as it started to die and the scorpion started to drown. "It's just my nature," answered the scorpion.

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