Krugman on the "Chinese Threat"

Paul Krugman has posted a very interesting comment on his NY Times blog. Here are the key bits:

Dean Baker gets upset by this line in today’s very useful Keith Bradsher article:

China is the biggest buyer of Treasury bonds at a time when the United States has record budget deficits and needs China to keep buying those bonds to finance American debt.

As I said, this was a very good article about China; the debt line was probably inserted because it’s considered obligatory to say this in any article about US-China relations. As it happens, however, while it’s part of what everyone knows, it’s also completely false.

Why don’t people get this? Part of the answer is that it’s really hard for non-economists — and many economists, too! — to wrap their minds around the Alice-through-the-looking-glass nature of economics when you’re in a liquidity trap. Even if they’ve heard of the paradox of thrift, they don’t get the extent to which we’re living in a world where more savings — including savings supplied to your economy from outside — are a bad thing.

Also, and I think harder to forgive, is the way many commentators seem oblivious to how we got here. Yes, we have large budget deficits — but those deficits have arisen mainly as the flip side of a collapse in private spending and borrowing. ...

The US private sector has gone from being a huge net borrower to being a net lender; meanwhile, government borrowing has surged, but not enough to offset the private plunge. As a nation, our dependence on foreign loans is way down; the surging deficit is, in effect, being domestically financed.

The bottom line in all this is that we don’t need the Chinese to keep interest rates down. ...

As Dean nicely puts it, “China has an unloaded water pistol pointed at our heads.” ...

Over many years Krugman has worked very hard to educate the general reader (and politicians who read his NY Times articles). But it is pretty clear that most people simply don't absorb the message. It is just "too hard" for them to give up their "folk economics" (the analog of "folk physics") and understand the serious science of economics. This is a tragedy because it means millions suffer unemployment unnecessarily, the economy will take many years longer to recovery, and the lost production will never be regained. The world will be a poorer place because many people -- especially key decision makers -- simply don't understand the science.