I see Paul Krugman was taking cheap shots at my heroes while I was on vacation. Krugman argues that Trump is wrong to claim that China is acting to keep down the value of its currency against the dollar. He points to recent efforts to prop up the value of the yuan by selling foreign exchange as evidence that China is actually doing the opposite of what Trump claims. Krugman should know better.

This is a story of stocks and flows. It’s true that China’s central bank is now selling reserves rather than buying them, but it still holds more than $3 trillion in reserves. The conventional rule of thumb is that reserves should be equal to six months of imports, which would be around $1 trillion in China’s case. This means that China’s stock of reserves is more than $2 trillion above what would be expected if it were just managing its reserves for standard purposes.

We should expect the stock of reserves to put upward pressure on the value of the dollar in international currency markets. This is the same story as with the Fed’s holding of $3 trillion in assets. It is widely argued (including by Paul Krugman) that the Fed’s holding of a large stock of assets reduces interest rates, even if it is not currently adding to that stock. The point is that if the private investors were to hold these assets instead of the Fed, they would carry a lower price and interest rates would be higher.

To take the stock and flow China analogy to the Fed, when the Fed raised the federal funds rate in December, it was trying to put some upward pressure on interest rates. But if we snapped our fingers and imagined that the federal funds rate was still zero, but the Fed’s asset holding were at more normal levels, do we think interest rates would be higher or lower?

In my book, the answer to that question is clearly higher. The same story applies to China and its recent interventions in currency markets. Let’s imagine that China did not sell off foreign exchange last year, but also only held $1 trillion in reserves. Is the yuan higher or lower against the dollar in that story? I vote for much higher.

Of course there would be a very different counter-factual associated with the situation where China had not been accumulating massive amounts of reserves. It would not have run the huge trade surpluses it did in the last decade. This would mean either much slower growth and higher unemployment in China or alternatively a much more inwardly focused path of development which would have meant even more rapid rises in living standards for the Chinese people. I’ll leave it to the China experts to decide which route was the more likely alternative, but clearly the massive trade surpluses were sustained by the deliberate effort by China to keep the yuan from rising.

This doesn’t lead us to the Trumpian conclusion that we need smart trade negotiators who are going to beat up China. First, I would be fairly certain that our trade negotiators are not stupid people. The problem of our trade deficit with China was not an intellectual deficit on the part of our negotiators; the problem was that they had a different agenda.

A large trade deficit with China is a big problem for the millions of workers who lost their jobs and the tens of millions of workers who had lower wages as an indirect result of this job loss, but it is not a problem for everyone in the United States. Major retailers like Walmart are happy to use low cost imports as a way to undercut competitors. The same applies to manufacturers like GE who outsourced much of their production to China and other countries with low cost labor.

Furthermore, the United States has other concerns in its trade negotiations with China. It wants China to do more to protect Pfizer’s patents and Disney and Microsoft’s copyrights. They also want increased access to China’s markets for Goldman Sachs and Citigroup.

Given this conflicting interests, it would not be surprising that our trade negotiators didn’t press China to raise the value of its currency. If Trump wants to beat up someone over the trade deficit with China, he might better direct his anger at Walmart and Goldman Sachs than at China’s government. He will have to first win a fight here over the goals of our trade policy with China before getting to an agreement with China on trade.

There is one more point worth making here that should be obvious. To argue that China should raise the value of its currency against the dollar does not mean that it should necessarily do it right now. China’s is obviously experiencing a difficult period of transition and it doesn’t make sense for the United States to make demands that we know will make the transition even more difficult. (We also know China would not accept such demands.)

The argument is that we should be looking to targets for higher values of the yuan in the near future. As a practical matter, we would not expect a fast-growing developing country like China (even if its growth slows to 6.0 percent or even 5.0 percent, the pace still vastly exceeds the growth rate in the U.S. and Europe) to be running a large trade deficit and exporting capital to slower growing wealthy countries. The direction of capital flows should be in the opposite direction. This is econ 101.

If we want to throw out the textbook economics then there should be a clear argument as to why it is inappropriate (I’m open to it). We shouldn’t be doing ad hoc economics just because it’s politically convenient for the rich and powerful.