Friday, October 9, 2015

Krugman Notices the Chinese Selling of Treasury Debt

This one goes in the "Paul Krugman for Future Use" file.

He has noticed the recent selling of US Treasury securities by the Chinese:
Remember the dire threat posed by our financial dependence on China? A few years ago it was all over the media, generally stated not as a hypothesis but as a fact. Obviously, terrible things would happen if China stopped buying our debt, or worse yet, started to sell off its holdings. Interest rates would soar and the U.S economy would plunge, right? Indeed, that great monetary expert Admiral Mullen was widely quoted as declaring that debt was our biggest security threat. Anyone who suggested that we didn’t actually need to worry about a China selloff was considered weird and irresponsible.

Well, don’t tell anyone, but the much-feared event is happening now. As China tries to prop up the yuan in the face of capital flight, it’s selling lots of U.S. debt; so are other emerging markets. And the effect on U.S. interest rates so far has been … nothing.

Who could have predicted such a thing? Well, me. 

In other words, Krugman once again reveals that he doesn't understand markets. Just because Chinese selling of Treasury securities hasn't put major downward pressure on bonds yet, doesn't mean it won't happen in the future. As I pointed out today in the EPJ Daily Alert, the Chinese might be able to get away with some selling without rattling the markets, but that doesn't mean a saturation point won't be eventually hit, and at that point anything can happen.

GLS Shackle, who judging by the way he wrote did understand markets, once explained:
It will be a kaleidic society, interspersing its moments or intervals of order assurance and beauty with sudden disintegration and a cascade into a new pattern. 
This is especially true in a world where you have governments acting at the macro level. Things can appear orderly for a period, when the government is establishing a new trend, but that doesn't mean, at all, that a sudden disintegration and a cascade into a new pattern won't eventually occur.

China sold  $43.3 billion in currency reserves last month, undoubtedly mostly US Treasury securities. But that doesn't mean China is anywhere near the end of its selling. China remains the biggest foreign owner of Treasury securities. It owned $1.241 trillion Treasury debt at the end of July, the latest period for which data is available.

Is there a saturation point? Is there a point where the kaleidoscope turns, to make Krugman's current confidence that China's debt selling won't eventually result in strong upward pressure on US interest rates, look silly? Very likely.



  1. Krugman is trying to use empirical data to prove or disprove economic theory (as he is wont to do).

    This is reminiscent of his view that because we have not seen significant price inflation yet, Austrian theory is wrong (even though, Austrian theory never says there will necessarily be nominal price inflation ... only that certain prices would be higher than they otherwise would be).

    Krugman will be correct ... until he isn't. Of course, at that point, he can point to some other factor and say it had absolutely nothing to do with the Chinese dumping bonds. Instead the bond market was wrecked by winter or speculators or whatever.

  2. I'm not in the Krugman camp, and without a doubt, we don't know what will happen in the future. But if we go solely on what has happened over the last five years, hasn't Krugman been pretty much on the money?

  3. Yeah, he has been pretty much on the money if you live in a world of deflation where your rent has dropped in price as well as your food.