Be Careful What you Wish For

Declining Chinese trade surpluses mean a reduced demand for U.S. Treasuries as a place to park the proceeds. That will make refunding operations more difficult and expensive, at precisely the time that they are ramping up to cover the costs of repeated bailouts of the financial services sector, the fiscal stimulus package required by the general economy, and the expansion of the federal balance sheet to substitute for contract private leverage.

For the last few years, loud complaints about currency manipulation, foreign purchases of U.S. Treasuries and a flood of cheap imports have been endless. The facts offered enough support for the arguments so that, even though the analysis and policy prescriptions were ludicrously flawed, the braying never ceased.

It would now appear that we may have to live in a world where the Chinese appetite for our debt is not endless, the flood of cheap imports turns to a trickle, and the currency manipulation argument is a dim memory. Of course, to entice purchases of U.S. debt, the coupons will have to rise, life without the cheap imports will be poorer and more frugal, and a stronger yuan will buffer Chinese consumers from higher energy prices just when they are biting Americans all the harder. Oh, and we get to live through all this with house values down in nominal and real terms. In the U.S., the next ten years may feel a lot like Buffalo, Cleveland and Pittsburg, 1970-80.

Be careful what you wish for.