Economies are like battleships -- they can't make immediate U-turns. As Martin Wolf observed yesterday, the unwinding of serious macroeconomic imbalances has to start now -- but it can't be done immediately and efforts to do so would be very problematic.
So I started hyperventilating a little bit when I read Keith Bradsher's NYT front-pager:
China has bought more than $1 trillion of American debt, but as the global downturn has intensified, Beijing is starting to keep more of its money at home, a move that could have painful effects for American borrowers.
The declining Chinese appetite for United States debt, apparent in a series of hints from Chinese policy makers over the last two weeks, with official statistics due for release in the next few days, comes at an inconvenient time.
If this was true and persisted for a while, then those trillion-dollar budget deficits would become much more expensive to finance -- plus there would be knock-on effects on the balance of trade. In the short term, declining Chinese demand for the dollar would blunt the effects of a fiscal stimulus.
Fortunately, my first impulse whenever I read this kind of article is to go check what Brad Setser thinks. And, his reaction to the Bradsher article is as reassuring as one can be in the curent economic climate: "the available data from US suggests that China has yet to lose its appetite for either dollars or Treasuries, despite all the talk coming out of China." Rather, it appears that the Chinese government, like its sovereign wealth fund, is shifting its composition of dollar assets from riskier to safer holdings.
So China isn't going on a dollar fast -- they're just switching from one fad diet to another.
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