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Tuesday, October 14, 2008

China, Puppetmaster

Long time friend and former colleague Mike Pool recently raised the "China, puppetmaster" spectre. I think it's overblown. A fiction from the right and left, as follows: China's tentacles into the American economy are a pending catastrophe. Perhaps. But respected financial market strategist David Smick, in his recent book "The World is Curved", recounts a discussion with a senior official at the New York Federal Reserve, regarding what would happen to the US economy if China suddenly stopped buying US Treasury securities. The official's response? Interest rates would skyrocket. Maybe 35 basis points! Maybe even 50! (Smick was expecting 300-400 bp). That's hardly a meltdown. Investors in US bonds are a huge and pretty diversified pool. That said, I'm more worried about the "drip, drip, drip" of gradual decline than a China catastrophe...

2 comments:

mijopo said...

Well, my main worry was the claim that the bailout may have been passed at the behest of China. If true, there's no need to do any counterfactual reasoning about actions regarding T-bills, as a matter of fact, China is indeed dictating U.S. policy, they're the puppetmasters now.

In terms of potential threat, I'm not an economist and happily defer to them about immediate effects of China changing their policy. Still, I can't help but worry about a domino effect. China's such a big buyer that if they loses confidence, doesn't that cause everyone else to question their confidence in the U.S. economy and dollar? And who knows where the ripples go? I know, I'm not supposed to worry about China doing anything to undermine global confidence in the USD, because they'd lose a lot in the subsequent drop in value, but that feels like saying that I shouldn't worry about the guy holding the gun to my head because he's really sensitive to gunpowder burns.

Erik said...

I'm not an economist either... mainly I regurgitate economists' views, especially when they agree with my prior assumptions... But it's interesting in a very general sense how much China-panic has taken hold... they have huge domestic issues and in some sense are ill-posed to become the next top economic superpower. For just some rag tag examples, they have very little consumption domestically, since an alarming proportion of their population is aging (and thus not consuming like young folks do), have a large standing army for mostly domestic purposes (to prevent, by rule of force, the massive rural population from swamping their urban centers), and in general have a political head that keeps most of the world from having confidence in their body... lacking transparency and strict accounting standards, they have a kind of "communist" glass ceiling to truly engaging in the global economy. All that said, who knows what will happen? Some of the greatest economic minds of the 1970s predicted that France would be the preeminent superpower by today...