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Stiglitz: China better off even if the U.S. says 'Sorry, those bonds that you own are worthless.'

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Published on May 1, 2012

Nobel prize-winning (2001) economist Joseph Stiglitz
http://www.youtube.com/watch?v=ZXACh7...

Learning, Growth and Development: A Lecture in Honor of Sir Partha Dasgupta, Joseph E. Stiglitz, ABCDE, Stockholm, June, 2010
http://whr.tn/1xrWil7 (pdf)
https://mgmt.wharton.upenn.edu/files/...
http://siteresources.worldbank.org/DE...

"But, at least in China, there is another growing concern: to keep the value of their currency low, they have bought dollars, which yield a low return. Worse, dollars are depreciating relative to the RMB, implying that they are experiencing a (paper) capital loss.

Industrial policies can intervene in relative prices in ways which avoid these costs (and which can in fact be more targeted than lowering the [real] exchange rate), e.g., by sectoral subsidies (including subsidized interest rates) or infant-industry protection. But, as we noted earlier, international trade agreements restrict the use of industrial policies. The only instrument left may be the exchange rate. Our earlier discussion showed that the benefits of expanding exports are sufficiently great that it may be possible that optimal policy requires the country to build up reserves forever, never to use them (essentially like throwing money away). The benefits of learning exceed the costs of the “forced saving” required to ensure that the exchange rate remains competitive."

- Joseph Stiglitz, Creating a Learning Society (2014)

David Graeber:
Actually, most of those countries that own all those T-bonds know they are losing money by sitting on them (the yields are less than inflation), and they'll never get all their money back. But most of them -- Japan, South Korea, the Gulf States -- are regimes under US military protection, in fact, with huge US military bases sitting right on top of them, so really we're talking about protection money—in whatever sense of the term.

Obviously, China is a different story. Their behavior is a little harder to explain, since they are effectively shipping enormous amounts of consumer goods to us on credit and must know they're never going to get paid back. But here I think you have to remember two things. First, China has two thousand years of experience flooding potential rival powers with riches, so as to make them spoiled and dependent. If it worked on the steppe nomads, why not the US- which they probably see as just as scary, violent barbarians?

Second, the Chinese leadership might be running a quasi-capitalist state but these guys were all trained as Marxists. They probably still see all this high finance as so much mumbo jumbo -- "ideological superstructure" as the Marxists like to put it -- it isn't really real.

What's real is highways, factories, and technology. And they are getting more and more of that, and we're getting less. So they're perfectly happy with arrangements as they stand.

I suspect there's a kind of tacit deal, here, whether explicitly stated or not: the Chinese government periodically pretends to get all worked up over the US debt, even though they don't care, and in exchange, the US only pretends to get worked up over their constant pirating of intellectual property rights and technology transfers, but in fact, lets them get away with it. The result: we get Walmart, and they get nanotechnology, superfast trains, and a space program. So what do they care if we never "pay the debt?"
http://inthearena.blogs.cnn.com/2011/...

Thomas Palley: A Keynesian Theory of Hegemonic Currencies -- Or Why the World Pays Dollar Tribute http://yaleglobal.yale.edu/content/wh...

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