World's Craziest Fools: PRC Buying Treasuries

♠ Posted by Emmanuel in ,, at 8/08/2011 12:03:00 AM

While flipping TV channels recently, I came across "World's Craziest Fools" on BBC3 hosted by Mr. T of A-Team and Rocky III fame. Basically, the show is a more sadistic version of "America's Funniest Home Videos" (do they still show that?) featuring CCTV footage and suchlike. A purported example is the 911 emergency call above from some, er, crazy fool who claims to have been assaulted by a deer he ran into and gave a ride in his backseat. It's a very weird story--play the clip and see for yourselves. (The sheer hilarity does make me wonder if it was scripted.) By fortuitous coincidence, I too was accosted by some pretty crazy fools online making ludicrous stories. You see, while browsing Yahoo News! recently, I was presented with 4 out of 10 stories dealing with how *incensed* the Chinese were by American sovereign debt being downgraded by S&P. Let me expand on this bit that I've begun to expound on in the previous post.

China's official news agency, Xinhua, has concocted a convoluted story that rivals the one in "Joe vs The Deer" above: While China's sense of urgency is evident, I'm afraid that their comic talents match those of the rather potty-mouthed "Joe." A theme I've harped on a lot is that China has no one but itself to blame for the United States' incredible debt accumulating run as its largest creditor. To make a drug culture reference, the pusher generously indulging the user in his debt fixes has no one else to blame for the latter's erratic behaviour.

However, the Chinese seem to twist this narrative thusly: By virtue of owing so much debt to the PRC, the US is supposed to be more responsive to Chinese pleas to moderate America's torrid pace of debt issuance as continuing to do so may impair Uncle Sam's ability to honour its obligations. This argument is inane for a number of reasons. First, alike holding debt rather than equity in corporations, China does not have an "ownership stake" in the United States. This has arguably been deliberate since it's politically more palatable to have China own (degraded) official IOUs instead of American firms that offer profits and technical know-how. Second, China is usually the first country to invoke principles of non-interference and non-intervention when criticized for its handling of human rights, coddling of various unsavoury regimes abroad and so on. Conversely, shouldn't the US be free to run massive deficits as it sees fit? It's only fair despite the obviously negative consequences for those suck--I mean, valued customers of Treasuries.

Here now are some choice quotes fro the Xinhua article. While many points made have borderline common sense, these had me scratching my head based on what I've mentioned:
China, the largest creditor of the world's sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China's dollar assets...

S&P has already indicated that more credit downgrades may still follow. Thus, if no substantial cuts were made to the U.S. gigantic military expenditure and bloated social welfare costs, the downgrade would prove to be only a prelude to more devastating credit rating cuts, which will further roil the global financial markets all along the way...

International supervision over the issue of U.S. dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country.
Once more, China has no formal input whatsoever in US economic policy. While the US may be running itself into the ground, that's its sole prerogative. What can China really do? Let's return to Albert Hirschman's landmark 1970 book Exit, Voice & Loyalty. Even Wikipedia offers a nice summary of its thesis:
The basic concept is as follows: members of an organization, whether a business, a nation or any other form of human grouping, have essentially two possible responses when they perceive that the organization is demonstrating a decrease in quality or benefit to the member: they can exit (withdraw from the relationship); or, they can voice (attempt to repair or improve the relationship through communication of the complaint, grievance or proposal for change)...

However, the interplay of loyalty can affect the cost-benefit analysis of whether to use exit or voice.

By virtue of owning the most US Treasuries, my belief is that China has a misplaced sense of stakeholder loyalty partly derived from the hackneyed argument of there not being another asset class substantial enough to accommodate its still-burgeoning reserves, last seen at a previously unfathomable $3 trillion and counting. Yes, China has tried to diversify into owning US corporate equity, but its activities have often been blocked on specious "national security" grounds. Although it does voice pleas for fiscal discipline every now and then, they obviously fall on deaf ears and undermined anyway by continued Chinese purchase of Treasuries regardless.

For largely the same reasons, "international supervision" of US dollar issuance is rather far-fetched. While US monetary policy does affect many countries--especially China which has effectively pegged its currency to the dollar for better or worse--the real question is why it continues to do so given its divergent pressures at home of higher domestic inflation and whatnot. We've heard much about rebalancing towards a more consumption-driven Chinese economy, but it hasn't really happened yet, and one does have to wonder why China puts itself in a position of having to accumulate so much in reserves if such a change were indeed wished for.

I've mentioned this before, but the question remains the same: Who's the bigger fool, the free-spending fool or the other fool who indulges such foolish behaviour? If Mr. T were into IPE, I'd wager he'd choose the latter. Inspired by the unhelpful (and potty-mouthed) suggestions made in the above clip, China would probably get its mother----ing message across more clearly by threatening and keeping good on a threat of selling some of its stash of Treasuries this mother----ing time. Obviously, it should stop accumulating this stuff ASAP lest its sanity be questioned (and PRC officials be invited to future episodes of "World's Craziest Fools").

While I pity da fools in the PRC--or at least their official media as opposed to particular ministries--I wish they'd cane America for a change to show that this foolish behaviour has its limits. Sammy the fool hasn't sobered up via others' persuasion, so publicly selling off a few billion worth of Treasuries should be more of an eye-opener. Otherwise, subprime globalization will continue apace. Fool.

UPDATE: For another perspective, read Joseph Nye.