Sunday, August 14, 2011

Journamalism - Fareed Zakaria Edition

Zakaria tends to make a lot of mistakes whenever he deigns to write about financial and economic matters. A lot. But I have to admit that he's not totally incapable of learning. I've seen prior Zakaria editorials that have more fallacies and platitudes. However, he makes a huge mistake in his piece today.

The basic gist of today's piece is that China has been complaining about the downgrade and threatening to stop buying US Treasuries. Zakaria believes these threats are hollow--and he's probably right about that. But what he gets colossally wrong is believing that the "threats" are actually threats, rather than being "nice things China might do to help our economy". Which means Zakaria has basically written a Monty Python sketch in which China says:
"Listen up you fat American capitalist pigs... if you don't do what we want, we're going to come over there and poke you with the soft cushions!!!"
That's still a great sketch, by the way, and I've embedded it below. Anyway, moving on... Zakaria's reasons for believing China's threats are actually threats, is because he believes that if China stops buying US Treasuries it will result in "mutually assured destruction". Yikes. There is just so much wrong with that sentiment... here is the relevant passage:
"Imagine that China were to sell off those 1.2 trillion dollars of U.S. Treasury bonds... let's play out the disastrous chain of events that would happen... it would trigger panic selling of the dollar. That would in turn hurt the U.S. economy..."
Okay, let's "imagine" this scenario and play it out. Here are the steps: China sells its Treasury hoard, then stops buying new Treasuries, which means the dollar devalues and gets cheaper relative to foreign currencies. So far, nothing incorrect here (although "selling" rather than "panic selling" would have been more accurate). Where he goes off the rails is in saying that all of this "would in turn hurt the U.S. economy." Um, no. Not in our current situation. In fact, NO PART of any of this is bad for us.

The US is a net debtor nation--meaning domestic consumption hasn't matched exports for quite some time. Correcting that imbalance would go a long way toward mending the economy. And a cheaper dollar would go a long way to making US exports more competitive. So when Zakaria baldly states that panic selling of the dollar would hurt the economy, but doesn't provide a single reason why, you can be sure he's wrong.

It's a widespread mistake that the US needs capital inflows from China to sustain our "addiction to debt" but first I'll let Krugman (and Keynes) explain why needing foreign capital inflows is currently wrong:
"... inflows of capital from other nations simply add to the already excessive supply of U.S. savings relative to investment demand. These inflows [create] a trade deficit that makes America worse off, not better off; if the Chinese, in a huff, stopped buying Treasuries they would be doing us a favor... the fact that... officials and highly regarded economists don't get this, 75 years after [Keynes'] General Theory, represents a sad case of intellectual regression."
So to recap: Zakaria says China's threats to stop buying Treasuries are hollow. But the reality is that China's threats to stop buying Treasuries aren't threats. They're this:

Ahhh journamalism. 

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