China has given us a ton of stuff in exchange for t-bills. If they
expropriate US or other rich country FDI, the US cancels their claim to
the t-bills and we get the stuff for free. That is to say, China’s huge
reserve holding of dollars is just collateral against any appropriation
of the FDI being done there.
Here is more.
One reason we can issue so many t-bills is that the buyers believe we will repay. If there is any real doubt, for example the buyers fear we may expropriate their holdings, then we don’t get as many buyers, rates, rise, etc.
And then, after all the claims have been cancelled, the Chinese end up with thousands of spanking new state-of-art factories and infrastructure, while we end up with billions of of furry toys and Ipods. Good deal!
Erik: whilst not disagreeing with you, I think you should take some of your own advice and “think one step further”. Imagine China’s leadership faced with a major economic crisis – let’s say the state-owned banking system collapsed. This far-from-unlikely scenario would have dire political consequences for a government that derives its legitimacy to rule from an (assumed) ability to deliver improved living standards to its people.
What would the Chinese government do to stay in power under such circumstances?
The ability to expropriate and make it stick depends, in part, on two elements: the specificty of the assets in question (mines and steel plants versus software shops) and the relative power of the sovereign doing the expropriating, that is to say, its international autonomy, in this case, significant if the leadership is capable of a domestic crackdown.
Erik, you misundertood what I said. Tyler just made reference to an idea from a paper written by three known macroeconomists and my idea of a chain reaction was just to show how ridicule the idea of these three macroeconomists was. The problem here is why to pay attention to what macroeconomists are saying. This is a field of economics where no new ideas have been produced in the past 25 years (fyi, I used to teach macro for graduate students in the 1970s and early 80s).
There’s a practical problem with canceling China’s dollar assets: The enormous secondary market in T-bills means that China can easily sell them to some third party who could redeem them at face value. I can’t think of any way to close this loophole without effectively shutting down all trade in T-bills, which has enormous negative consequences for the U.S.
Ammianus — Aren’t the T-bills numbered in some way? The specific issuance time and such..
Chris — it’s their central bank that’s buying them.
Continue to borrow huge sums of money from the Chinese; at some point in the future, China goes militarily for Taiwan. Make them forgive all of the debt as the cost of looking the other way about it.
Does anyone actually believe that China will ever (save for the DPP going REAL nuts) militarily invade Taiwan? It’s far more likely that they’ll just make a deal, like HK. What’s the point of invasion? You’ll blow up all the stuff you want to own and make all sorts of enemies.
My guess is that this post would seem really insightful, whether or not I agree with it, if only I knew what the author meant by “FDI”.
fustercluck, it doesn’t count as government intervention if it benefits rich people
Who is “us?” You keep missing the point.
Intel isn’t “us.” Intel is a multinational corporation. Why should the American government get involved?
Libertarians in theory want less government involvement in trade issues. Do you, or don’t you?
Who would be dumb enough to carry out nationalization of foreign assets and actually openly call it that?
Why, Hugo Chavez, of course!
It’s like the adage about banks: If you owe the bank $100, it’s your problem. If you owe the bank $1,000,000, it’s the bank’s problem.
Basically, the more money China lends us to buy their stuff, the more they risk that we simply void their loan if they do something (like attacking Taiwan) we’re very much against them doing. I’d be happier about it if the stuff we were getting from China was being used to invest in future growth, but the consumption’s helped keep the economy on track, so even that’s ok.
Assuming China doesn’t do anything stupid, it will have been a very good deal for them, but if we were to simply decide not to pay them back, I have no doubt that the US economy would fare far better than that of China in the ensuing global meltdown.
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