Tuesday, September 4, 2012

Made in the USA, financed by China

“China manipulates its currency giving it an unfair trade advantage. So why doesn’t the president do something about it?” Portman asked. “I’ll tell you one reason – President Obama could not run up his record trillion dollar deficits if the Chinese did not buy our bonds to finance them…This will end under Mitt Romney.”

One would like to think that a high-school student with basic macro-knowledge or even someone who just reads the newspaper would laugh at the absurdity of such a statement. But here's what's intriguing: there are a whole host of respected economists supporting the GOP agenda this election - Mankiw, Taylor, Hubbard, Feldstein, Lazear

As DeLong angrily states, what on earth [in more polite language] do they think they are doing? Why won't a single one of them have the temerity to say, "Portman's statement was flavorful and hyped rhetoric and not based on fact by any stretch of imagination?"

Krugman is a lot more methodical, preferring to focus on what's behind the financing and concluding kindly that Portman is simply misinformed.

Here's why they should do it. First, recall the current account-capital flows relationship and then look at the consequence of financing the deficit. 

This, according to MGI research sourced from the Federal Reserve flow of funds, is the private sector deleveraging post 2008:



And here's the current account deficit, as a percentage of nominal GDP (adjusted seasonally) which peaked in 2006:



Corporations stop investing + consumers stop spending and start paying of debt = massive private sector surplus. 

The US could still run up record deficits even if China did not "buy bonds to finance them". It just wouldn't be an exciting story to hear if you narrated it that way.

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