Yuan-a Laugh?
Krugman has no grasp of what's really going on with China's currency.


Donald L. Luskin

China’s announcement last week that it was abandoning its decade-old fixed exchange rate between the Chinese yuan and the U.S. dollar was world-shaking economic news. But for Paul Krugman — America’s most dangerous liberal pundit — it’s only an occasion for more of his usual left-wing economic doomsaying, leavened with crude humor based on ethnic stereotypes.

Krugman began his New York Times column Friday saying,

Thursday’s statement from the People’s Bank of China, announcing that the yuan is no longer pegged to the dollar, was terse and uninformative — you might say inscrutable.

One assumes that if the nation in question had been an African one, the guardians of politically correct speech at the Times would have been more alert. Surely they would never have allowed Krugman to say the announcement had, “you might say, natural rhythm”?

Krugman stoops to cheap attempts at humor because he has no grasp of what’s really going on with China’s currency. His characterization of China’s currency policies is simply:

To keep China’s currency from rising, the Chinese government has been buying up huge quantities of dollars and investing the proceeds in U.S. bonds.

Krugman offers no explanation for why China’s currency should rise in the absence of their preventing it from doing so — he treats it as a foregone conclusion. And what he calls China’s “buying up” dollars is exactly the opposite of what’s been happening for the last decade — dollars have been raining in on China from foreign investors eager to set up business there and needing yuan to do so.

China has simply accepted those dollars and issued yuan in exchange for them — at a constant rate of exchange designed not to “keep China’s currency from rising” but rather to guarantee its value. For a decade, China has pegged the yuan to the dollar at an official exchange rate of about 8.28 yuan per dollar. Pegging the currency to the dollar has set an objective standard of value for it — just as a peg to gold once set such a standard for the dollar itself.

And about “investing the proceeds in U.S. bonds”? No explanation. For Krugman, that’s the “inscrutable” Chinese acting “strangely”:

China, which is still a poor country, is devoting a lot of resources to the accumulation of a basically useless pile of dollars instead of to higher living standards.

A “useless pile of dollars”? Hardly. The reserves of China’s central bank are acting as collateral against all the yuan that the bank has issued to fund China’s development. If the government had just spent the money on vast public works or social welfare programs of the kind Krugman favors, foreign investors would not have been so eager to invest in an immature and risky economy. It’s those foreign investments that have led to China’s “higher living standards,” and it’s that “useless pile of dollars” that have made those investments possible.

Krugman’s left-wing catastrophist narrative goes on to state that China’s holding of U.S. bonds proves that “America is a superpower living on credit.” Krugman wonders, portentously, “What will happen to our stature if and when China takes away our credit card?”

What Krugman won’t see is that China has chosen to hold U.S. bonds as collateral because they are the highest-quality and lowest-risk securities in the world. That’s why they make such excellent collateral. The fact that China chooses to hold our bonds is proof of our strength and their need to hang on to a piece of it. Yet Krugman acts as though it’s evidence of our weakness and dependency.

It’s hard to believe that the American Economic Association awarded Krugman its prestigious John Bates Clark Medal in 1991 for his path-breaking work on international trade and currency relationships. With this column on China, Krugman Truth Squad member Roland Patrick was moved to ask, on his Let’s Fly Under the Bridge blog, “just how many elementary errors in economics does it take to have a John Bates Clark Medal revoked?”

One needn’t go halfway around the world to see Krugman’s economic blunders on display. In another Times column last week, Krugman promoted his doomsaying economic narrative in the face of a drop in the unemployment rate to 5 percent by claiming, “adjusted for inflation, average weekly earnings have been flat for the past five years.” But just visit the website of the Department of Labor, the official source of such statistics, and you’ll see that, in fact, they are up half a percent — not “flat.” Or visit the website of the Department of Commerce, which shows that a comparable figures — per capita disposable income — is up 9.6 percent, again not “flat.”

It’s all just another case of what former New York Times “public editor” Dan Okrent called a “disturbing habit of shaping, slicing and selectively citing numbers.” I wrote to Byron Calame — the new “public editor” — to demand a correction of Krugman’s error about “flat” wages. His associate Joe Plambeck told me that Krugman was not “factually incorrect. Had he said ‘remained the same,’ he would have been in error.”

Later, Plambeck told me that Krugman’s boss — editorial page editor Gail Collins — agreed with him that “no correction is necessary” because “you and Mr. Krugman are emphasizing different things.”

I suppose that’s right. I was emphasizing accurate reporting of economic news. Krugman was emphasizing left-wing spin designed to trash-talk a booming economy. Those are different things.

– Donald Luskin is chief investment officer of Trend Macrolytics LLC, an independent economics and investment-research firm. He welcomes your visit to his blog and your comments at [email protected].