The dual dilemma with China is that we need them to follow two different policies at the same time. as we increase out budget deficit, we would like more buying of Treasuries to keep interest rates low. Low rates from foreign buying and we will not have to monetize the debt. Except we will become more dependent on China and further the savings imbalance. The continued problem of Chimerica.
We would also like the Chinese to expand domestic spending which is o say that we want them to stop buying Treasuries and use the money to boost domestic expenditure and help the world economy.
The Chinese cannot do both as discussed on Jeff Frankels blog. So what do we want more? With savings up, there is greater demand for Treasuries but the crowding out effect looks real. Chinese spending could very very stimulative in the short-run but we may still need the Bank of China to be a big buyer.
We would also like the Chinese to expand domestic spending which is o say that we want them to stop buying Treasuries and use the money to boost domestic expenditure and help the world economy.
The Chinese cannot do both as discussed on Jeff Frankels blog. So what do we want more? With savings up, there is greater demand for Treasuries but the crowding out effect looks real. Chinese spending could very very stimulative in the short-run but we may still need the Bank of China to be a big buyer.
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