Ruh Roh

The Chinese are selling US debt.

That’s a big deal because, for the past several years, the Chinese have been selling their own currency and buying dollars (and other foreign currencies). If they start flooding the world with that money, the dollar might start to stumble.

And if the dollar starts to stumble, it might collapse–in the 1970s the dollar went from being the official foundation of the world financial system, exchangeable for gold, to just another currency. But there were a lot of dollars overseas, and America has gone through contortions to keep them there rather than have them come home and cause inflation. Hence, lots of pressure on the oil states to keep selling oil in dollars (so that there’s something a dollar will buy), for instance.

If the Chinese keep selling, it may not be just their dollars but ALL the dollars that have been out there since WWII that come home.

Short term, that would be bad, hence the title. But that’s because in today’s complicated world, almost any conceivable big economic change would be bad in the short term. (Switching, as much as possible, from coal to wind and solar power is a very urgent task, but the initial disruption would be massive and painful).

But really, maybe it’s time to let those dollars come home. First of all, this is about the best time for it–we have deflation right now, not inflation, so more money in people’s pockets would stop the deflation before it started inflation.

And one of the ways we kept the dollar away was to keep our money overvalued, killing our exports. That is, it’s not exactly that the Japanese make a car of a given quality cheaper, it depends on the exchange rate. A Japanese car that costs a million yen is more expensive than an American car that costs $10,000 if the dollar is 99 yen (1,000,000/99  = 10101), and it’s cheaper if the dollar is “weaker” at 101 yen. (1,000,000/101 = 9901). So if the dollar loses value, American products will be cheaper and people will buy them again.

In fact, the reason that China exports so much is not that it makes stuff with less labor, capital, and environmental damage. It’s not that Chinese stuff is better (good lord not). And it’s only partly that Chinese labor is poorly paid. It’s mainly the exchange rate–when Chinese sold their currency and bought dollars, they kept their money cheap and their goods cheap. And the flood of cheap Chinese goods was great for China but not so much for anyone else.

So in the less short term, maybe this is just what we need.

Inflation may be a problem in the longer term, of course, but worrying about it right now is, as Keynes said (I’m paraphrasing) like lecturing a starving man about the dangers of obesity. I would trade the economy of the high-inflation seventies for today in an instant.