Hack Yglesias on Dr. No

Matt Yglesias sums up his views on Ron Paul:

After looking at his positions and statements, the most remarkable thing is that if it weren’t for his loud fanbase of self-proclaimed libertarians you wouldn’t really think this is the platform of a libertarian. He’s loudly trumpeting his plan to impose criminal penalties on women who terminate their pregnancies and he makes it clear that his interest in freedom doesn’t extend to the freedom of anyone unfortunate enough to have been born in a foreign country. His campaign slogan of “RESTORE AMERICA NOW” is strongly suggestive of conservative impulses and nostalgia for the much-less-free America John Boehner grew up in. The mainstay of his economic thinking is the ridiculous proposition that “[t]here is no greater threat to the security and prosperity of the United States today than the out-of-control, secretive Federal Reserve.” Not only is Paul’s goldbuggery nutty on the merits, like his affection for forced pregnancy and severe restrictions on human freedom of movement it’s difficult to see what it has to do with freedom. The freedom of the government to set a fixed dollar price of gold? America’s current monetary policy—a fiat currency that’s freely exchangeable for other currencies and commodities—is the free market position.

Unless I'm misunderstanding something, I'd consider this rare hackery from Yglesias. Ron Paul’s opinions on the Fed and the gold standard may be unorthodox, but they are not “ridiculous” or “nutty” simply because Matt Yglesias asserts that they are.

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Putting the Dollar on Steroids: Chinese Currency Intervention

Composite of Images by RightIndex from flckr CC

When China passed Japan to become the world’s second largest economy this summer,[i] the United States seemed resigned to its fate as a global also-ran.  While China has only one-tenth of the U.S. GDP per capita, the U.S. unemployment rate (9.6%) hovers just below China’s GDP growth rate (10.3%), making the future of U.S. global leadership seem bleak.  Not surprisingly, a plurality of U.S. respondents to a 2009 Pew Research poll named China the top economic power in the world.[ii]  In reality, China’s rise is far from accomplished; the U.S. has more to gain, than fear, from a wealthy China.  While Americans hold many misconceptions about Chinese policy – from debt to trade – the economic reality is more complex than it appears.

That China holds a massive amount of U.S. government debt has become a source of popular outrage for American politicians of every stripe.  What is less well understood, is exactly why  China keeps buying so much U.S. Debt.  In fact, China must purchase U.S. Treasury bonds, even though it often takes a loss in the process.  A complicated cycle has developed due to tight Chinese controls on currency outflows.  Chinese exporters must convert the dollars they earn into Chinese renminbi, leaving the central government with dollars and the Chinese economy with freshly printed currency.  To prevent inflation as the economy absorbs hundreds of billions of dollars worth of the new currency, the Chinese government sells domestic bonds to remove money from circulation, a process known as “sterilization”[iii].  Meanwhile, the dollars confiscated at the border are spent on the only good capable of absorbing that much money: U.S. Treasury bonds.  The gap between the low rate of return on Treasury bonds, and the bond rate, in a fast growing and poor country like China often entails negative arbitrage, the difference between the rate of return on two investments, for the People’s Bank of China.  To minimize their losses, China makes low rates on domestic bonds palatable by instituting price controls on necessities and banning certain types of speculative lending.  This process has led China to accumulate foreign reserves amounting to almost 50% of GDP[iv] which is a staggering 4% of global GDP.   This Rube Goldberg-style economic policy is not sustainable, but breaking it will involve a period of difficult transition to increased economic openness and increased Chinese domestic consumption as a component of GDP[v]. 

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A Rumination on Deflation and Savings

This is the second part of a two-part series.  For the first part, please click here.

People have started saving recently, after years of taking on debt. However, the fact that the savings rate has increased recently seems inevitable: from zero, there's nowhere to go but up.It is often suggested that deflation encourages savings over investment or consumption.  This is because as the value of currency rises, or, as people notice the value of currency rising, they forego unnecessary purchases like new automobiles and that extra Christmas present, and instead save, that is, do not invest and do not consume.  This analysis makes sense logically, however, the impact of deflation largely depends on the decisions of individuals relative to an awareness of persistent deflation.  If individuals were rational in an aggregate sense, they might hold on to their money, but most people are too excited about ten-dollar DVDs and supermarket sales to wait for prices to get even lower.  Plus, if there is 0.18% deflation now in the U.S., is that really enough to reverse 75 years of persistent inflation? 

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A Rumination on Deflation

Recently, the Japanese media has been obsessed with defure, or deflation.  The September annualized rate of deflation for Japan was 2.24%, compared to September annualized deflation rates of 0.18% in the U.S. and 0.80% in China.  Canada, the U.K., Australia, and the European Union had very low rates of annualized inflation in September.  However, it is inconsistent for the media to panic about anomalous low-single-digit deflation while ignoring the well-documented effects of seventy-five years of chronic inflation.  The rationale for the panic is that deflation can lead to a liquidity crisis (government stimulus is rendered impotent) and/or a deflationary spiral (hyperdeflation); yet, in apparent blindness to the lessons of history, inflation is near universally considered a necessary evil, and the idea that inflation could lead to an inflationary spiril is underserved. 

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