The implications of a reduction of Chinese holdings of US government debt

Dear Readers,

Below is my response to a reader of my blog, who asked about the implications of China reducing its holdings of US treasury debt.

Pat Barron

Dear Lawrence,

I think that in the simplest terms, China is exiting the market for US Treasuries, which means that the US government must offer a larger yield in order to entice buyers who are still in the market to make up for the loss of Chinese demand. That means that US interest rates would have to rise, because the T Bill is the base upon which all other rates are set. Why would someone buy a corporate bond at a lower yield when he can buy a T Bill, which has less risk, for the same or even higher yield? Alternatively, the Fed could monetize the debt, which would cause US prices to rise (eventually) due to the increase in the money supply.

I have contended for some time that this event would lead to a crisis. When the world market eschews T Bills, the government is left with difficult choices. It can raise taxes to pay off the debt that it can't roll over. It can cut spending to decrease the amount of debt that is required to fund all the government's programs. It can increase interest rates to suck more money out of the private economy and into government bonds. Or it can monetize the whole thing. Of course, it could do a combination of all these things. My least favorite option is that the government monetizes the debt; i. e., prints more money. My favorite option is for government to drastically reduce its expenditures, but this is probably the most politically difficult option.

Pat

My letter to the Financial Times, London re: The FT sides with counterfeiters and confiscators

Re: The case for retiring another barbarous relic

Dear Sirs:

I was appalled at your supposed "case" for eliminating cash, which you yourselves describe as the peoples' "go-to safe asset". And what IS your case?

One, "cash...limits the central banks' ability to stimulate a depressed economy." Really? Although I am not in favor of debasing money as a path to prosperity, I see no limit to the central banks' ability to hit the "enter" key on their computer screens in order to manufacture out of thin air as much money as they dare. Two, banks cannot impose a negative interest rate--what we common folk call stealing--on the cash in one's pocket. Your preposterous goobledygook that a negative interest rate is required by central banks in order to have sufficient "ammunition" when tightening from a "lower band" is as vacuous a statement, although often heard, that one can imagine. Three, that unlike electronic money, cash cannot be tracked...to which I answer "so what?" and "thank God for that!" Four, that former chief economist of the International Monetary Fund, Kenneth Rogoff, thinks eliminating cash is a wonderful idea. Let's set the record straight. The IMF gets its money from sovereign states, who tax their people against their will in order to give the money to the IMF to squander and give bad advice around the world. Any self-respecting economist would try to hide the fact that he had anything to do with such an institution; therefore, I find little comfort in Mr. Rogoff's endorsement of the cash-confiscation scheme. Four, the state can more easily levy a Value added tax in order to make tax collection easy. Oh, how nice! Here...let me put my cash in the bank in order to make it easier for government to tax it away. Ah, but then you conclude your support of the cashless society with the caveat that we minions might, just might, be allowed to carry some cash...but at a cost. Our cash could carry an expiration date, for example. As you state: "The benefits of cash are significant--but they need not be offered for free." A more Orwellian statement would be hard to find.

My letter to The Times, London re: Legal tender laws protect unsound money

Dear Sirs:

I will not take the time required to refute point-by-point Mr. Ed Conway's latest attack upon a gold-backed currency. It is obvious that he is completely ignorant of monetary theory and history. Rather, I will ask Mr. Conway why governments must erect legal tenders laws around their fiat currencies, using the police power of the state to force citizens to use their currencies? The answer is obvious: were it not for legal tender laws, sounder private monies would drive governments' fiat monies out of the market. I do not advocate a gold-backed, government currency, because I know that all governments will suspend specie redemption for any myriad of reasons, all of which can be placed into two general categories: fund wars or buy votes with welfare payments. Only private monies can be trusted, because they would be subject to the rule of law. Money issuers who did not surrender specie upon demand would be declared bankrupt and thrown in jail. When governments do the same thing, they are lionized as patriots and philanthropists of the public purse. I repeat--if Mr. Conway believes in the superiority of government issued fiat money, then abolishing legal tender laws would have no effect upon the pubic's demand to use government money. I dare Mr. Conway to recommend such a policy.

Oh, the horror of cheaper Chinese goods!

Re: Cheaper Chinese Currency Has Global Impact

China's money dictators have decided to put all Chinese exports on sale, allowing people in foreign countries to buy more Chinese goods for the same amount of local currency or invest in any manner of other financial transactions that will increase their quality of life including (dare I say the name?) saving! Oh, the horror of it all.American politicians are fretting that prices actually may fall, benefiting everyone from the unemployed to the rich. This, my friends, is a situation that cannot be tolerated, for the politicians' supporters in industry do not wish to allow their fellow Americans to enjoy a higher standard of living. Oh, no. We Americans must pay higher prices for fewer American goods of lower quality. This is the path to prosperity. If you cannot understand this logic, then it is obvious that you do not have a degree in economics from a large American university.