If China were to decide to spend less of its earnings from exports to the U.S. buying our debt and more buying our goods, interest rates would not go up--remember, the Federal Reserve is pegging short-term safe nominal interest rates at zero--but production and employment would.
Paging Rob Portman to the white courtesy phone, please.
The fact that Republican High Politicians do not get briefings teaching them basic income-expenditure macroeconomics is one of many, many, many reasons not to vote Republican. And it is a reason to ask senior Republican economists--I'm looking at you, Glenn Hubbard, Greg Mankiw, John Taylor, Marty Feldstein, Eddie Lazear--what the f*&$ they think they are doing.
Paul Krugman tries, once again, to teach the lesson:
Fear-of-China Syndrome: Rob Portman… offered a nice break from all the lies in Tampa… offered us some good old-fashioned bad macroeconomics… castigated the Obama administration for not taking a tougher line on China--which is actually something I’ve complained about too--then offered a completely wrong explanation. Obama won’t take on China, Portman said, because
Obama could not run up his record trillion dollar deficits if the Chinese did not buy our bonds to finance them
OK, let’s ask the question: how much overseas financing does the United States as a whole need? The answer is… an accounting identity: capital inflows = current account deficit…. So what has happened to the current account deficit as a share of GDP in the Obama era? Um, it’s way down…. How is it possible that we’re borrowing much less from foreigners when the government deficit has gone up so much? The answer is that the private sector is deleveraging…. So who’s actually financing the US budget deficit? The US private sector. We don’t need Chinese bond purchases….
To make excuses for Portman, lots of people keep getting this wrong, even after all these years. But really, truly, the last thing we need to worry about is whether the Chinese love our bonds.