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China's Ben Bernanke

The next round of quantitative easing will probably see an arm of the American government purchasing Treasury bonds in order to lower interest rates. In recent years, the main mechanism China has used to hold its currency down has been ... purchasing Treasury bonds. Which has, as any economist will tell you, done a lot to lower our interest rates.

So in a simplified way, China's been practicing quantitative easing on the United States for some time now: By purchasing our bonds, they've kept interest rates artificially low, which is part of why it was so easy for us to have a credit bubble. And we hate them for it.

That's partially because it's not a perfect analogy. Remember that there are two sides to the Fed's quantitative easing: The creation of new dollars and then the purchase of bonds. China, by contrast, has been purchasing bonds with their money. That means China's purchases have kept the yuan weak and the dollar strong. It also hasn't had the inflationary effect that the Federal Reserve is hoping to have by creating hundreds of billions of dollars out of thin air. And it was, from our perspective, poorly timed: They were doing it during an expansion, which helped fuel a bubble.

Nevertheless, it's part of the reason that quantitative easing on its own isn't likely to do much unless we're willing to get into huge numbers (Paul Krugman has mention $8 trillion to $10 trillion). There are already players -- and not just China -- buying our bonds to keep our interest rates from rising.

By Ezra Klein  | October 22, 2010; 10:28 AM ET
Categories:  Federal Reserve  
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Comments

they can't buy our bonds with their money, right? they have to buy our bonds with our money, so there's an intermediate step of changing their money into dollars (selling yuan, buying dollars). that's where the "keeping the yuan weak" comes from -- buying Treasuries is what they do with the dollars (they must figure it's a safe investment, right?)

Posted by: gagkk | October 22, 2010 10:40 AM | Report abuse

"By purchasing our bonds, they've kept interest rates artificially low, which is part of why it was so easy for us to have a credit bubble."

Christ that is wrong. The Fed controls rates, full stop. China buys bonds to keep their peg. They do this with their excess dollars from the trade surplus. The Fed could have raised rates at any time.

Posted by: endaround | October 22, 2010 10:56 AM | Report abuse

"Nevertheless, it's part of the reason that quantitative easing on its own isn't likely to do much unless we're willing to get into huge numbers (Paul Krugman has mention $8 trillion to $10 trillion). There are already players -- and not just China -- buying our bonds to keep our interest rates from rising."

Successful QE means sharply higher interest rates. Near zero rates suggest a recent bout of tight money.

http://www.hoover.org/publications/hoover-digest/article/6549

Posted by: justin84 | October 22, 2010 11:10 AM | Report abuse

"it's part of the reason that quantitative easing on its own isn't likely to do much unless we're willing to get into huge numbers (Paul Krugman has mention $8 trillion to $10 trillion)"

Correct. It is obvious that our Political Class is unaware off or intentionally ignoring the magnitude of debt to be issued if Fed were to do the job. Needless to say, they are nowhere near to tell this reality to our Public. Because when any sane person tries to explain that, the conversation quickly goes to then what other means do we have to address our recession if Fed QE means are not feasible? If not Fiscal Measures (and that is what GOP Congress will do, for them the template is Cameron UK); then what other outcome can be there than a version of Great Depression?

Which Politician is ready to tell this reality to Americans, especially 'growing our ways via Tax Cuts' myth is just a myth?

Or are we destined to learn 'this myth' hard way via destitute to millions?

Meanwhile, then as the first commenter pointed China doing its part of QE possible only if they get Trade Surplus denominated in Dollar; is Currency War the solution? WWII took us out of Great Depression which again started by Trade Wars. Are we on the way to repeat that, now that Geithnier proposals are falling flatly as expected in G20?

Answers please, Ezra, answers.

Posted by: umesh409 | October 22, 2010 11:24 AM | Report abuse

The Great Depression was not started by trade wars.

Posted by: endaround | October 22, 2010 11:36 AM | Report abuse

"So in a simplified way, China's been practicing quantitative easing on the United States for some time now: By purchasing our bonds, they've kept interest rates artificially low, which is part of why it was so easy for us to have a credit bubble. And we hate them for it."

I was about to write WOW, this IS simplistic but of course your column can only be so long. I think you discount the role of the dollar as the wrold's reserve currency in keeping our rates low, a fact that many countries would like to change.

Also, China has a dollar problem, in that they don't want to get caught holding when the inevitable inflation kicks in.

Posted by: 54465446 | October 22, 2010 11:48 AM | Report abuse

So it's now China that controls the interest rate. I haven't had such a good laugh for ages !!

The reason China is forced to buy US Treasuries is because between 2002 - 2006 the dollar devalued by 40%, and from last July up till now the US dollar has devalued a further 10%. If she didn't defend against America's vast dollar devaluation, her currency would climb an equivalent amount against the US dollar -- with a significant loss in her export markets as well as causing a 50% loss or debt abatement on her US Treasury holdings. In order to help keep her own Yuan as low in value, China -- like all the other surplus BRICs was FORCED to buy US Treasuries. Even a first year student in Keynesian economics knows that don't they?

What planet are you on Mr Klein? It's called economic cause and effect. Or have you missed it? How else can America continually roll over its now huge and unpayable Foreign Debt other than by selling US Treasuries? Aren't China and the BRICs therefore doing the US a favor by buying US Treasuries? Next time, stop playing with your audience and tell full story please.

Posted by: slowsmile | October 22, 2010 12:08 PM | Report abuse

...And your wrong about the economy needing only a further $8 to $10 trillion economic stimulus. Yes, you heard me right -- I said only, which should give you a hint.

First, Mr Klein, on what calculations or evidence do you base your assumed belief that the required stimulus needed should be $8 or $10 trillion? Forgive me, I only mention this because you have submitted no reasoning or proof whatsoever.

Recently, Prof Kotlikoff has calculated that, by using direct calculations from a ratio called the Marginal Productivity of Debt(I'm sure you know this one, though all Keynesians tend to avoid using it these days), the US economy would need a debt injection of $25 trillion(only?) for a GDP rise of $1 trillion.

Where are your calculations for your assumed stimulus remedy amounts Mr Klein? You'll have to forgive me here again, as I don't know Prof Krugman's models or proofs -- along with about 99.999 of your readers.

Please, convince me.

Posted by: slowsmile | October 22, 2010 12:28 PM | Report abuse

And the 'endaround' post is quite correct, the FED does control interest rates -- not China, it's in their mandate and it's the way they control prices. So, enough with the propaganda against China, Mr Klein. You're really not helping here.

I guess you're just having a bad day, Mr Klein.

Posted by: slowsmile | October 22, 2010 12:46 PM | Report abuse

"commit refrain from exchange rate policies designed to achieve competitive advantage by either weakening their currency or preventing appreciation of undervalued currency."


That's a pretty funny quote from the letter Geithner has written to the other G-20 nations ahead of this summit. Do you think he needs to be introduced to Mr. Bernanke?

Posted by: 54465446 | October 22, 2010 12:47 PM | Report abuse

A genuine question: if foreigners do not buy up U.S. treasuries, would the Fed be able to set interest rate at whatever rate it wants?

Posted by: ayu123 | October 22, 2010 4:54 PM | Report abuse

I still remain fascinated by Mr Klein's quite individual view that China's Treasury purchases have helped to constantly decimate the US economy. Fascinating.

I guess Mr Klein is completely unaware of the FED's primary written mandate to control pricing and inflation by either buying US Treasures and monetizing or by selling assets.

It also seems that Mr Klein is completely unaware that China, for over the last 12 months or so, has been reducing her exposure to US Treasuries by between $20 - $40 billion per month.

So it would seem that Mr Klein's strange reasoning and excuses for the current US economic troubles would seem to be quivering on very thin ice here.

In this article, everyone and everything else in the world is therefore ruthlessly blamed with visibly deceptive, ambiguous and convenient economic argument -- all, that is, except for US economy policy excesses.

Shame on you, Mr Klein.

Take off your blindfold and try harder.

Posted by: slowsmile | October 25, 2010 6:11 AM | Report abuse

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