wealth is the mental health of the state

Patrick Chovanec on China and the S&P downgrade:

That sure sounds a lot like China’s official response to the S&P downgrade, which you can read about here. As I’ve said many times, though, this is a lot of sound and fury signifying nothing. The only plausible, long-term solution to China’s frustrations over holding U.S. debt is to cease accumulating official reserves (which it does by choice, in order to keep its currency low) and allow the dollars that it does earn to be used to buy U.S. goods and services and invest abroad, rather than financing U.S. fiscal deficits.

China’s economic history certainly isn’t my thing, but I’ve often wondered whether there’s more to its huge piles of money than economic utility. It would be understandable though more than a bit premature if China proposed the yuan to replace the dollar as global reserve currenty. But what it’s doing is calling for the invention of a new currency in order to have somewhere to put its huge reserves. This points to something a bit more involved than ordinary economic policy.

Well, China goes on about its national humiliation in the 19th century a lot, and part of that involved state poverty. One of the most damaging aspects of the opium trade was the fact that it caused the country to run constant crippling defecits, with the fact that it was forced to do so adding humiliation to injury. Beijing spends a huge amount of money on pretty much everything but I wonder if that disguises a kind of miser complex, a sense that policymakers in Beijing find it in some way psychologically necessary to maintain huge reserves.

Comments

[JamesP]

Mao's determination to pay off foreign debts to the USSR (at a rate much faster than that demanded by the Russians) was a major cause of the Great Leap Forward. So, yes, there's a pride thing going on here.

[ejh]

Ceaucescu paid of his debts a year early, as I recall.

Some other debts got paid off shortly afterwards.