THE ASIAN CAPER Part II "The Golden Trap"
THE ASIAN CAPER Part II
"The Golden Trap"
Paul Krugman’s Op-Ed piece “China’s Dollar Trap,” (NY Times, April 2, 2009[1]) reveals a common, dangerous misconception about China’s, and more broadly, Asia’s present position in the world. Krugman leads with: “China now owns so many dollars that it can't sell them off without driving the dollar down and triggering the very capital loss its leaders fear.” -- a teaser so succinct it sparkles. About the Chairman of China’s central bank, Krugman adds: “Mr. Zhou’s speech [proposing a super-currency to replace the dollar] was actually an admission of weakness. In effect, he was saying that China had driven itself into a dollar trap, and that it can neither get itself out nor change the policies that put it in that trap in the first place.” Buying into this view can cause both policymakers and investors to commit serious mistakes.
Krugman turns uncharacteristically myopic when connecting the dots, mistakenly assuming China’s only choice is between continuing to hold Treasurys or selling them to buy some other currency – presumably yuan (if it wants to repatriate the money for domestic consumption and investment), or yen, pounds or euros (if it wants to continue to warehouse it abroad).
Krugman completely misses the third option for China: sell a major chunk of their present hundreds of billions in U.S. Treasurys and use the money to buy controlling interests in the best companies in America. Those Treasurys Krugman thinks China is trapped in can be sold without driving down the dollar by simply reinvesting the proceeds in bargain-priced U.S. stocks. Some trap.
I mean, why not? In addition to its short-term Treasurys, China has invested heavily in long-term U.S. Government bonds, which have appreciated handsomely in recent years as interest rates have fallen. So their bonds are high while stocks everywhere are selling for bargain-basement prices. It’s pretty much a no-brainer.
The Asian Caper, Part II "The Golden Trap" is required reading for anyone interested in learning
1) How America can best emerge from the current crisis, and
2) How to deploy personal and corporate assets to avoid loss and capture gains in a treacherous and potentially highly profitable financial environment.
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[1] http://www.nytimes.com/2009/04/03/opinion/03krugman.html?scp=4&sq=krugman&st=cse