July 19, 2011
The NYT decided that it did not like the efforts of the government to sustain demand and used a news story to describe this policy as “America’s own fiscally dubious habits.” While one can argue with the NYT’s view that it would be better for the United States to have slower growth and higher unemployment than run a deficit, the more fundamental issue is that such comments are usually reserved for editorial pages.
This is not the only peculiar item in this piece. The article tells readers that China is concerned about losing money on its dollar holdings. This is difficult to believe since it is almost inconceivable that China’s government did not expect to lose money on these holdings. There are no other buyers who will be willing to hold dollars at the price that China paid and in fact the dollar already has declined substantially since its peak at the start of the last decade.
Presumably China’s government did not mind losing money on its dollar holdings, seeing this loss as the necessary price of maintaining its export market in the United States. In effect, China’s government was paying people in the United States to buy its stuff.
The article also includes this bizarre paragraph:
“Most of those reserves are held in dollars, and recycled back to the United States through investments in Treasury bonds and other dollar-denominated securities — even stocks. And while some of China’s foreign exchange reserves are plowed into European and Japanese debt, those bond markets are not big or liquid enough to absorb the bulk of China’s ever-larger foreign holdings.”
China is under no obligation to accumulate foreign exchange holdings. It can allow Chinese corporations and citizens to simply sell their foreign exchange holdings on international currency markets. China has accumulated foreign exchange holdings only because it made a conscious decision to accumulate these holdings. This is part of its effort to keep down the value of its currency to sustain its exports.
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