He apparently has no appreciation of the fact that the most recent financial crisis began in, and was caused by, the US. He simply refers to it as the effects of 'a burst housing bubble and the financial crisis that followed'.
But that's not what it was. It was a US housing bubble that burst, one that almost destroyed the US financial system. The only reason other countries were caught in it was that some banks - the UK notably, but some others - became just as greedy as their brothers in the US and jumped onto the CDO bandwagon just in time for the crash.
But many countries were not particularly affected. China, for example, and Canada, who have sensible banking regulations, did not take part and suffered damage only by being a bit too close to the explosion. But Dr. Krugman posits that 'we', meaning the entire Western world, are suffering from some act of god and must work together to solve the problem.
And of course the problem is - wait for it - China.
The US banks, in a fit of unparalleled greed and aided by free money and easy credit, created a financial monster that grew out of control. It bankrupted Fannie Mae and Freddie Mac and countless other banks including Lehman Brothers. It also bankrupted many of the big names in US finance including Goldman Sachs, Citibank, Bank of America, AIG and Merril Lynch - all of whom needed more than a trillion dollars to bail them out.
It seems to have escaped Dr. Krugman's notice that China was not involved in any part of that. But according to him, China is all of the solution because the RMB is undervalued. In his article, Dr. Krugman tells us that China's arguments in self-defence are both "implausible and wildly inconsistent". However, my reading is that it is he whose arguments are implausible, inconsistent and wild.
We would note in passing that this particular economist is quickly building an international reputation for wild and inconsistent economic reasoning.|
For e.g. on the one hand Dr. Krugman condemns state-sponsored inflation, and then gleefully observes that the US inflated itself out of debt after the Second War. And, with QE2, is pretty much doing the same again now. And then he laments that (poor) Greece can't do the same today because they're in the Euro.
I guess it's not nice when people are laughing at you on 6 continents, but Dr. Krugman will no doubt tell you this is China's fault too.
For readers who have short memories, this isn't the first time the US has precipitated a worldwide financial crisis and then (1) blamed everyone else for their troubles, and (2) passed the pain on to the rest of the world. From the Great Depression to the 1971 trashing of the Bretton Woods Agreement to the 1984 Recession to 2008. Always the same story: our currency, our actions, but your fault.
The very same blaming happened to Japan in the 1980s. They were too successful, challenging US supremacy in many fields, right on the cusp of yet another financial disaster that was 100% made in the US - the severe economic worldwide contraction that followed the 10 years of ruinous inflation impressed onto the world when the US reneged on the Bretton Woods agreement.
The US was the entire cause of the collapse of that agreement and the worldwide financial difficulties that followed. But according to the Americans it was all Japan's fault because the Yen was too low. The Japanese currency had already appreciated from 360:1, up to 240:1. But the US applied extreme pressure on Japan to agree with a revaluation and the Yen doubled in three years to 120:1 as a result. That increase of course destroyed Japan's economy, and without helping the US, but hey, that's what friends are for.
In fact, the immediate result was that the US trade deficits with Japan and other countries increased, but Japan was crippled and that was after all the primary purpose. In a competitive world it is only the relative position that matters. Whether I rise or you fall, the effect is the same.
And of all people, Dr. Krugman should have the good sense to know that the standard US policy is to always blame someone else for its troubles, and he shouldn't participate in that nonsense. There is no reason that China should take the medicine when the US is sick. US financial problems were created in the US by long-term deindustrialisation, an unregulated banking system and a lot of greed. There are serious structural problems that cannot be addressed through exchange rates, and Dr. Krugman knows that better than most people, so the attitude in his article is wholly unjustified and is really not honest.
It will only be when the US is able to face itself in the mirror and stop blaming everyone else for their troubles, that their economy will be able to right itself. But that's unlikely, and the more difficult the troubles the more likely the US is not only to blame, but to invade. That's the American style, after all.
In his article, Dr. Krugman wrote: "Major advanced economies are still reeling from the effects of a burst housing bubble and the financial crisis that followed."
No, Dr. Krugman, the US is still reeling, and not from 'a' housing bubble and ensuing crisis, but from 'your' bubble and crisis. It happened in your country; you created it at home and then tried to send it far and wide, but you caused it and you are suffering the most from it. It is your unemployment that is high. It is your Ohio where over 30% of all homes are owned by the banks. It is your country where one in six are below the poverty line, where it takes a year or more to find a job. Admit that you caused it; it's your problem; fix it yourself.
It is absolutely dishonest to suggest that what happens in the US is also what's happening in 'the world', because the only purpose of this approach is to create an 'us against them' scenario - the whole (good) world against (bad) China.
The US is trying to slow down the growth of other countries, especially China, by pressing them to raise the exchange rates of their currencies and lower their rates of investment. This is what the US did to Japan in the 1970s and 1980s.
Dr. Krugman tells us that a higher RMB would permit Chinese to more easily buy Western goods. Well, since when is that a national policy objective, in any country? Does the US say, "Hey, let's double the value of our dollar and make it really easy for Americans to buy BMWs?" What nonsense.
And in any case, the Chinese are now buying Western goods in increasingly large volumes. China is already the world's biggest market for fine French wines, high-end cosmetics, German cars, many things. But with this increasing consumer power, the Chinese are not turning to the US - for the simple reason that the US doesn't make anything anybody wants to buy.
It is especially bizarre for Americans to demand that China revalue the RMB at this sensitive time. They are in fact saying to China, "Your prices are too low. I want you to raise your prices and charge me 50% more. That'll teach you." Yeah, Right.
Dr. Krugman tells us that 'China isn't helping the world' through a natural healing, because China restricts the flow of foreign funds. As if this would make a difference to the US financial mess, or create more US jobs. He knows full well that China has few restrictions on the inflow of foreign funds, except for hot capital. No developing (or developed) country can absorb unlimited amounts of speculative money without serious internal damage, and our (fake) Nobel economist knows that better than anyone.
Dr. Krugman rails constantly about the size of China's foreign exchange reserves, and tells us that China accumulates them by intervening in foreign exchange markets, selling RMB and buying dollars to keep the RMB artificially low. It was so cute of him to suggest that maybe it was the tooth fairy that increased China's foreign reserves but, sadly, it was simply the inflow from exports. China has not been buying dollars on the open market as Krugman suggests, but simply mopping up the excess foreign currency in its own domestic banking system - as every other country does. There is nothing evil or sinister about that, and it's shameful to suggest otherwise.
Dr. Krugman plays very well the role of innocent victim. The US did nothing, according to him, to bring this serious economic disaster upon itself and, since his country is the (miserable and helpless) world's angel of neutrality and harmony, it is the role of all the poor and developing countries to to bring the US out of this mess - by revaluing their currencies, discouraging domestic savings, encouraging a credit-fuelled consumer binge, and killing corporate investment. In fact, Krugman wants countries like China to commit economic suicide - just to be nice.
Well, when, in the past 100 years, did the US angel of mercy ever do anything to help bring any other country out of difficulty or poverty? In fact, when did the US ever even consider the effects of its actions on other countries? When it trashed the Gold Standard, maybe? When it forced the Plaza Accord onto Japan? When it initiated all of its protectionist measures against Europe and Asia? Why is Latin America still poor, after 100 years of American largess and kindness?
There is no hard evidence to suggest that the Chinese RMB is seriously out of line. China runs trade deficits with many countries, many of which have fully convertible currencies.
But there's more. China was paid for its exports with US dollars, many (most) of which it still holds - in US treasury bills. And now the US wants to force China to revalue the RMB by 25% to 50%, and of course that would result in China losing that percentage of the two trillion dollars it holds. Why would any country be foolish enough to agree to such a thing? I pay you in IOUs, then devalue those same IOUs by 50%. Cute trick, if I can get away with it. You don't need a PhD in economics to see that currency debasement is the US' primary tool for getting out of it's self-inflicted injuries.
Moreover, the last time the US had a (small) trade surplus was 1975. Since then the US has consistently run deficits with more than 60 countries, and today the total is more than 90 countries. Is it Dr. Krugman's considered opinion that all 90 countries are cheating on their currencies? What rubbish. The US runs trade deficits because the country no longer makes anything, and has nothing to sell.
Dr. Krugman rails against the Chinese for high savings, but it is those savings that created the platform for all the corporate investment that is powering the country. Pushing for a reduction in savings and an increase in consumer spending will kill the investment and the country's development. That's what the US did to itself, and now wants China to follow. Why should China commit suicide just because the US is screwed up?
Dr. Krugman tells us that punishing China's 'bad behavior' is the best option for tackling US unemployment, a position that is indefensible rubbish. There is no labor competition between the US and China. Toy manufacturing will soon move from China to Thailand; it will never return to the US. Sinking China (which is what this is all about) will not help to float the US.
When the US forced the Plaza Accord onto Japan, the Yen doubled in value in only three years, and yet the US trade deficts increased. China revalued the RMB by almost 25% a few years ago, and the trade deficits only increased. That's because the US can buy, but has nothing to sell.
Even more to the point, why is it that Germany, the highest of the high-cost-manufacturing countries, has no trouble selling huge volumes to China and has an even trade balance with the Chinese. Do you agree that something here doesn't make sense? Why can Germany sell to China, but the US can't? Why isn't Germany crying about the value of the RMB? Why doesn't Germany have a trade deficit with China? The simple answer is that Germany makes things China wants to buy, and so China buys them. And Voila; no trade deficit.
China's Premier Wen rightly pointed out that China's export industry would suffer as a result of RMB appreciation, and any necessary rebalancing would have to be done gradually in order to give affected workers the opportunity to shift to other industries. To do otherwise would cause mass unemployment and serious financial pain for China.
When reading Krugman's thoughts, just as with much of the US Right-Wing, it is impossible to not conclude that the only purpose is to bring China down.
The kind of drastic, short-term, immediate appreciation Krugman calls for, would devastate the Chinese economy and cause untold suffering with at least 40 million unemployed. But clearly that isn't an issue for Dr. Krugman. This man appears able to ignore any reality, but in this case to demand that China revalue its currency as punishment for US sins is politically stupid and diplomatically tone deaf. Dr. Krugman should find another line of work.
In keeping with the reference above to Bretton Woods, Does anyone remember Richard Nixon or John Connally? Do Americans recall when Nixon's administration unilaterally took the US off the gold standard? The European countries complained bitterly to the US about their losses and the resulting currency fluctuations they had to deal with. Does anyone recall then Treasury Secretary Connally’s famous statement? “It’s our currency, but it’s YOUR problem.”
Well, I would offer the same comment to the Americans today.
The first is titled Krugman's Nonsense, on a biased and error-ridden article, published in the NYT, with appropriate critical commentary. Read Here
The next contains many comments Krugman received from readers (in NYT posts) on his incoherent, raving article. Read Here
The third is a scholarly refutation made in response to one of Krugman's Error-Ridden Articles, written by Raghuram G. Rajan, who was foolishly attacked and misquoted by Dr. Krugman in one of his nonsense articles. Read Here
The Structure of the US Economy Today
A brief look at Trade Surpluses and Deficits
Let's have a Financial Crisis