Beat the Press

Dean Baker's commentary on economic reporting


Xenophobia at the New York Times

The New York Times editorial page went a bit overboard in its anti-Bush tirade on the budget deficit. The basic point, that the Bush administration deficits are too large, is on the mark. (By the way, they could better make this point using the gross deficit [4.0 percent of GDP], which includes the money borrowed from Social Security, or better yet, just report the change in the ratio of gross debt to GDP.)

If the Times had left the issue there, all of us econ types could happily applaud this push for fiscal responsibility. But our intrepid Times editorial writers felt the need to push further. They tell us that the debt is especially troublesome because 43 percent is in foreign hands and “debt owed to bankers in Beijing, Tokyo and elsewhere could destabilize the dollar and from there, drive up interest rates and prices.” Huh?

Okay, let’s check the bases here. Most foreigners hold government debt for the same reason that investors in the U.S. hold debt, they value its safety, and also expect a decent return. Is there a set of events that will cause bankers in Beijing, Tokyo, and elsewhere to dump their U.S. government debt, which will not also cause bankers in New York, San Francisco and Chicago to dump their debt? Is the Times promoting the image of the patriot banker who holds onto their U.S. government bonds, even as their price falls through the floor? In the interest of the environment, the NYT should save a few trees and not print such nonsense.

Of course not all foreigners hold bonds for their safety and return. Foreign central banks (most importantly the Chinese and Japanese central banks) have bought up vast amounts of U.S. government debt in order to keep the dollar high. Their reason is that a high dollar makes their exports cheap to people in the United States, and export growth was helping to drive their economies.

These central banks will stop buying, and possibly start selling, U.S. debt when it fits their economic strategy. This can be destabilizing for the U.S. economy – leading to higher interest rates and higher prices, as the NYT editorial suggests – but this has nothing to with Bush’s budget deficits. The problem here is simply that the U.S. allowed the dollar to get overvalued.

The main villain here is Robert “strong dollar” Rubin. He was the one who initiated the high dollar policy back in the mid-nineties. Politically, this is great policy. It allows for substantial short-term gains (low inflation and higher living standards for those protected from import competition), at a cost of substantial long-term pain. Bush of course is complicit in this high dollar policy, since he did not move aggressively to bring the dollar down to a sustainable level.

Anyhow, we will pay a large price, possibly in the near future, for this short-sighted high dollar policy. But, the fault here lies primarily with Rubin and Clinton, not the current occupant of the White House.


  • At 12:29 PM, Blogger knzn said…

    “Is there a set of events that will cause bankers in Beijing, Tokyo, and elsewhere to dump their U.S. government debt, which will not also cause bankers in New York, San Francisco and Chicago to dump their debt?”

    I can think of one right off the bat, and I’m sure there are others. A dramatic drop in the price of oil (as in 1986) would make dollar-denominated assets more valuable to domestic holders, because it would reduce the likelihood of inflation and the need for the Fed to tighten to avert that inflation. However, it would make dollar-denominated assets less valuable to foreign holders, because it would reduce the surpluses of OPEC nations that typically invest those surpluses in the US. The burden of adjustment to the reduced international demand for dollar-denominated assets would fall entirely on the value of the dollar and not at all on the dollar price of those assets (just like 1986).

    In any case, you’ve asked the wrong question. The question is, does the fact that so much of the debt is being held abroad reduce the overall stability of the system? I’d say the answer is still yes. It’s a lot easier for me to think of examples (like the one above) of unstable scenarios that could happen in the forex markets than unstable scenarios that might happen in the US bond market in the absence of wide foreign ownership. Overall, foreign holders face a much greater risk of de facto partial default than do domestic holders. Defaulting on the foreign holders requires only a drop in the exchange value of the dollar, which can be accomplished quickly; defaulting on domestic holders requires maintaining a high inflation rate for a substantial period of time. Moreover, central banks – as you hint at – can change their strategy, and many are advising the central banks of China and Saudi Arabia to do so already, while Japan way have reason to change if its economy improves; there is no comparable wild card in the domestic bond market.

  • At 1:00 PM, Blogger Dean Baker said…


    Please give me the names of any domestic bankers/investors who will hold dollars and/or dollar denominated assets even when they expect the dollar to depreciate substantially aginst other currencies. I'm going to make LOTS of money.

  • At 5:28 PM, Blogger knzn said…

    Any risk-averse domestic banker, trading for her own account, will hold dollar-denominated assets if she expects the dollar to depreciate but recognizes a sufficiently strong possibility that her expectation is in the wrong direction (and bankers don’t get to be successful in the first place by being overconfident). A risk-averse foreign banker will do the opposite. You use the phrase “to depreciate substantially,” but of course, if, at any particular time, most people expected the dollar to depreciate by a considerable amount, it would already have done so (except for the few minutes it takes traders to react to a change in the general opinion).

    If you ask who would do the speculative selling, you’re asking the wrong question (or perhaps you’re just taking the Times too literally). The point is about the long-term positions that people will hold. Americans are taking little risk by holding dollar-denominated assets. (It’s mostly the same sort of “risk” people face by waiting to buy Google next month instead of today. It could go up, and you would miss it, but it could go down, too.) Foreigners are taking a big risk by holding dollar-denominated assets (even if they don’t think that a decline in the dollar is the most likely scenario). If a large portion of the assets are held by foreigners, and if they suddenly become more risk-averse, there will be a destabilizing decline in retail demand for dollar-denominated assets. If Americans suddenly become more risk-averse, nothing happens: they fly to quality by trading their Treasury bonds for Treasury bonds.

  • At 10:54 PM, Blogger Dean Baker said…


    the vast majority of assets controlled by doemstic bankers are not for their own account. Furthermore, insofar as they have substantial assets for their own account (multi-billion) there is little reason that they have any special expectation of spending their money in the U.S.

    Also, there is no magic to U.S. government debt in this story. If foreigners are wary of the U.S. for any reason, they can dump any financial asset. In other words, even if Bush had been paying off the government debt over the last six year, but foreigner has been buying up private bonds and stock 9as in the days of Rubin-Clinton), the country would be equally vulnerable to a sell-off of assets by foreigners.

    Sorry, this one doesn't pass the the laugh test. Like I said before, the NYT should have saved the lives of a the trees that went to print this one.

  • At 11:06 PM, Anonymous Anonymous said…

    The title is:
    "Xenophobia at the New York Times"

    But their own columnist and international trade expert, Paul Krugman, wrote the following last year:

    "If it were up to me, I'd block the Chinese bid for Unocal."

    "So it was predictable that, sooner or later, the Chinese would stop buying so many dollar bonds. Either they would stop buying American I.O.U.'s altogether, causing a plunge in the dollar, or they would stop being satisfied with the role of passive financiers, and demand the power that comes with ownership.

    "Yet there are two reasons that Chinese investment in America seems different from Japanese investment 15 years ago.

    One difference is that, judging from early indications, the Chinese won't squander their money as badly as the Japanese did."

    What does that mean??

    I don't think Krugman is normally a xenophobe, but that is a harsh slam against both China and Japan without explanation.

  • At 12:43 AM, Blogger Buce said…

    I had that your view is that the NYT on matters of trade restraint is not xenophobic enough.

  • At 8:21 AM, Blogger knzn said…

    In the days of Rubin-Clinton we didn’t have to worry so much about foreign investors because they had fundamental reasons for being confident in US assets: the US was accumulating domestic productive assets much faster than it was accumulating net foreign debt. Today we are asking them to accept ever-increasing quantities of US financial assets mostly on trust (including trust in the policies of central banks whose objectives may reasonably be expected to change over time). It’s like the difference between stocks that sell for 15 times earnings and stocks that sell for 50 times earnings. You can dispute whether “bankers” are literally the ones we should be worried about, but can you really deny that the situation is more potentially unstable?

    BTW your link for the editorial just seems to link back to this same post.

  • At 10:32 AM, Blogger Northern VA said…

    The US has enjoyed its position as the worlds reserve currency which makes foreign central banks willing to gobble up our debts. There is some risk that an event may occur that would cause foreign central banks to diversify away from the dollar and hold the Euro or Yen instead but an all out dollar crisis is unlikely unless a catatrophic event occurs.

    Foreign central banks have been buying dollars to devalue their own currency and keep the dollar high. I doubt that foreign central bankers get a big bonus when their portfolio of foreign bonds does well. These aren't hedge fund guys taking 20%. These are fiat currency barons motivated by politics.

    US Bankers/Pension Funds etc. buy US denominated assets because their liabilities are in US assets. They have no motivation to add currency risk of foreign denominated investments when they are trying to balance thier assets against these liabilities.

    Dollar crisis scenarios:

    Housing bust: 60+% of bank assets are now mortgages or mortgage backed securities. A housing crash may cause a liquidity crunch forcing Bernanke to throw dollars out of a helicopter to rescue the failing banks. A fed bailout of Fannie or Freddie also could be accomplished by printing another trillion $ or so.

    Caldera Super Volcano: Yellowstone erupts covering half the US in a few inches of ash. The temperature across the US drops 25 degrees below averages. Food/Water/Electricity become scarce and US GDP is instantly cut by 60%.

    Unless there is a calamity like those mentioned above I think we will have an orderly devaluing of the dollar over many years.

  • At 11:13 AM, Blogger Dean Baker said…

    hmmmmm, Krugman's xenophobia ... I don't remember that particular column. In terms of the bad investments by the Japanese, they managed to make several high profile real estate buys on Manhattan just before the collapse of the commercial real estate bubble there. It doesn't seem likely that the Chinese will exercise equally bad judgement.

    Comparing the Clinton years to Bush, we did have somewhat higher domestic non-residential investment in the Clinton years (@ 12% in the late 90s, compared to @11% in the most recent quarter), but the biggest difference was the trade deficit was much smaller in the Clinton years. But, the trade deficit grew because of the high dollar policy. Again, Bush deserves blame for not reversing the policy (he's been sitting there for 5 1/2 years now), but it was the Clinton-Rubin policy that needed to be reversed. Just to say it again for the 1000th time, people in the U.S. buy imported goods because the dollar is high, not because the government is running a budget deficit.

    As far as Northern Virgina's orderly dollar decline -- maybe, but history does not have many examples. The basic problem is that if everyone expects the dollar to decline then you demand a large interest rate premium to hold dollar assets. (if the dollar will fall 3 percent against the euro over the next year and I can get 4% interest on euro bonds, then I would need 7 percent interest on dollar bonds to leave me as well off.) The high interest rates implied by this scenario would imply a very weak economy, even if the orderly decline could be sustained.

  • At 12:32 PM, Anonymous Anonymous said…

    Why does Krugman or anyone care if the Chinese or Japanese investors make money in the US?

    Does their loss help us?

  • At 9:38 AM, Anonymous Anonymous said…


    Great post. You've mentioned the strong dollar policy of Rubin a lot of times (and perhaps Summers and the like), and such a policy is of course deeply irresponsible because of the balance of payments problems it causes, lowering possibilities for consumption in the future and ruining manufacturing and every industry that competes internationally.
    However, can you explain how such a policy was (or can be) pursued? I cannot see any way treasury can do such a thing on its own. If it controlled the Fed, it would be easy, but it doesn't. Perhaps a treasury secretary can talk up the value of the dollar, but why would markets let themselves be talked up, knowing that the secretary doesn't have any instruments with which to pursue its policy?
    Perhaps i'm missing something, but reading your work, talk about this policy always makes me pause.


  • At 1:24 PM, Blogger Dean Baker said…

    Thanks Magnus,

    as far as what Rubin could do about the value of the dollar, as a first thing there is talk. I do believe that talk can have an impact, especially if there is an implication that it could be backed up by action (which it can -- I'll get to that). Rubin made a point of talking the dollar up from the time he took over as Treasury Secretary (his predecessor, Loyd Bentson, was content to see the dollar drift lower).

    Rubin has made a big point of emphasizing how the Treasury's secretary's statements can move markets and in fact in his book discusses an instance when he, Summers and Greenspan consciously tried to talk up the stock market. So, when it's convenient, they clearly belief that talk has a lot of influence. For my money, My bet is that a Treasury secretary who repeatedly says that the dollar is 30 percent over-valued and that he/she is prepared to bring it down to its proper level can have considerable impact.

    The second point is that the Treasury secretary does have the authority to buy foreign currencies and sell dollars. This has been exercised in the past. The Plaza accords in the mid 80s involved the U.S. treasury selling dollars and buying foreign currencies. In the late 70s, there was a dollar resuce package in which the U.S. treasury did the opposite.

    The third point is that in principle the Fed can be brought on board. It's of course possible that rubin asked Greenspan to help in weakening the dollar and that Greenspan just blew him off, but I doubt this happened. The Treasury cannot just dictate to the Fed, but they usually do coordinate, and my guess is that if Rubin had pushed hard for a lower dollar policy, that Greenspan could have been persuaded/pressured into going along. Certainly, you would not reappont a Fed chair who disagreed on such a fundamental policy.

  • At 8:06 AM, Blogger Per Kurowski said…

    In relation to this issue you might find illuminating the following extraction from “Mangos and Bananas”, that appears in my, and it says:

    I have made my own empirical observations about the evolution of global warming. Every Carnival weekend, for example, I stroll out to my beach in Margarita, the tropical Venezuelan island in the Caribbean Sea, and take note of the width of the shore from the water line to the roadway. Even when I had terrible difficulty in finding a spot in which to anchor beach umbrella, I never really worried about it. I simply attributed this difficulty to the increased popularity of the island and not to an invasion by the oceans.

    Today, however, I harbor serious doubts as to the validity of my method of measurement since wherever I look I find much new and more concrete evidence of a very advanced state of global warming.

    How else, other than by assuming a certain displacement toward the north of the parallel of the Banana Republics, can we explain the current enormous fiscal and commercial deficits that currently thrive in the United States.

  • At 2:38 PM, Anonymous Anonymous said…

    If the Euro was $.90 8 years ago and it is $1.22 now, please tell me how much weaker the dollar should be.

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