Debt Hawks Wrong Yet Again

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Dan Drezner passes along yet another prediction from the VSPs that Paul Krugman can throw onto his bonfire of contempt for the Fox News interpretation of the economy. It turns out that all those warnings about China getting tired of propping up U.S. bond purchases because of our profligate ways were just so much hot air. Seeking Alpha explains:

China has actually decreased its short term U.S. bond holdings by 5.1%. China holds $US 3.7 billion short term U.S. paper. On June 2011 China held $US 4.9 billion of short term U.S. paper. So basically all the debt that China holds are long term treasuries now. Interesting to know, China had $US 200 billion in short term U.S. debt in May 2009. So they divested all short term paper to long term paper.

Drezner comments:

In other words, contrary to the fears of debt hawks in 2009 — including, it should be noted, Hillary Clinton — China has not exercised an iota of influence over the United States via its debt holdings. Indeed, the shifting pattern of their debt purchases strongly suggests that the Chinese have recognized the futility of such an approach.

While Beijing has recognized this truth, certain Very Serious People who write Very Serious Columns persist in being afraid of China’s mythical debt leverage. So, on occasion, as a public service, this blog will continue to remind its readers that U.S. remains clothed in immense financial power.

Rising U.S. debt hasn’t caused inflation. It hasn’t sent interest rates skyrocketing. It hasn’t reduced Chinese demand for American bonds. It hasn’t reduced demand for long-dated bonds. Really, it hasn’t done any of the things that conservatives have been predicting with apocalyptic fervor for the past four years.

And yet, we continue to take them seriously.

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