Krugman on China.

Somehow I don’t actually buy this analysis:

Sensing my surprise, Krugman lays out his argument. "China exports lots of goods and foreign companies are investing heavily there, so it's running a huge trade surplus. But rather than keep all that money, Beijing is using it, overwhelmingly, to buy US government Treasury bills.

"America is very dependent on its housing market right now. Almost everything moving the economy forward relates, directly or indirectly, to our housing boom." That sounds familiar, but how does it link to China?

Krugman then spells out the jaw--dropping extent of China's T-bill purchases: $200bn in 2004 and possibly as much as $300bn this year. Beijing, he says, is "bankrolling America's huge budget deficit", now almost 5 per cent of national income, to the tune of $1bn per day.

"At some point," he says, excited by the power of his logic, "China could well decide to stop this. If so, the dollar falls sharply, US interest rates rise and our housing bubble bursts."

Leave aside the fact that Channel 4’s economics correspondent doesn’t appear to know the difference between T-Bills and T-Bonds for a moment and think about the actual numbers being bandied about. Yes, $200 billion is lots of money. But is it really lots and lots of money, enough to turn the US economy? Outstanding T-Bill (and -Bond) debt is what, $ 6 trillion? $7 trillion? What are the numbers for foreign purchases? Via Mr S&M, the March figures.

Note that top line. Gross purchases by foreigners of US domestic securities are running around the $14 / $15 trillion mark per annum. The abscence or prescence of a $200 billion a year buyer in such a market does have some effect on prices, of course, but it’s pretty minimal. What Krugman’s doing is saying here is China’s gross purchases and I will compare that to the net position of purchases by all foreigners.

Look down a couple of lines and you will see the net position of purchases of T-Bills and -Bonds by foreign governments...around $200 billion. Wow! Oooooh! Scary! China buys $200 billion (gross), foreign governments buy $200 (net) so if China stops buying no one will buy any and we’re all doomed, doomed I tell you!

No, I don’t think that it is all that wonderful an idea that the renmimbi is held down, yes, there do need to be some changes in US budget practices, yes, spending a little less money would do the Federal Govt good but I do think that this hysteria over Chinese bond purchases is a little overdone. We are, after all, talking about $200 billion gross in a market that is worth $15 trillion gross. Or 1.3 % of the market, enough to sway prices but is it really enough to cause major changes?

One further thought. If you look closely at those figures, governments actually did start disinvesting in US Treasuries in March. To the tune of $15 billion, about equal to the Chinese monthly number. And what has happened? Very roughly, US long term interest rates have fallen and the dollar has, err, risen. Yes, there’s many things that influence such prices but it would seem that a foreign government (or all together) not buying $200 billion a year’s worth of Treasuries is not the overwhelming disaster that the dear Professor Krugman is proposing.

I’m also aware that I’m only an amateur playing with these numbers so if anyone can tell me why Krugman is right and I am wrong then I’m all ears.