I was thinking about some of the horrible implications for the US that would arise if Donald Trump were elected president. You might have noticed.
One possibility that crossed my mind just today was that the United States might become the butt of jokes, just as the UK has been since the Brexit vote, but more so. I didn’t really come to a conclusion on that. People might laugh at the US. They might get angry. They might not pay much attention. They might initially confuse the situation. Or they might even be a bit scared, which Trump claims he would actually welcome.
But it got me thinking about that story from June 2009, when then Treasury Secretary Tim Geither was openly mocked by Chinese students for insisting that dollar assets were safe for Chinese investors.
This was supposed to be such a low point for US prestige, as you may recall. Always-wrong Larry Kudlow, for example, got all riled up about the US losing its “reserve currency status,” I think mostly because that allowed him to say “reserve currency status,” globaldeegook that communicates worldly sophistication.
In my view, the main points to emphasize about that experience are, first, that China is not naturally an ally of the United States, and second, that Tim Geithner should not have been in China in the first place. His stated reason for being there was to secure continued inflows of capital from China to prevent the dollar going down and Treasury yields going up.
What Paul Krugman mockingly calls Very Serious People were quite concerned about that risk. Which of course made no sense when the US was in liquidity trap, the US would have benefited dramatically from a weaker dollar, and the Fed had QE teed up on the hopes that a flow-driven mispricing in the bond market might have presented a target.
In the event, there was no mispricing after early 2009, so QE was pointless beyond its role as an interest rate signal. But I remember mentioning that a flow-driven rise in US Treasury yields would have given QE something to work on. That was not the environment to worry about a slowdown of capital inflows, which is why the likes of Larry Kudlow were all over it.
But just for fun, how were those jovial Chinese students at predicting US capital market trends? Well, since the burst of laughter, the US equity market has tripled, while the China market has gone sideways. The RMB/USD exchange rate has been unchanged on balance. Ten-year Treasury yields have been cut in half. And US inflation has averaged just 1.5%, although there is double counting in mentioning both that and the exchange rate.
So brain-washed youngsters with no understanding of how capital markets work had no unique insight to bring, which is hardly a shocker. In fact, they were a wonderful contrary indicator. I don’t recall anybody mentioning that at the time. Just as I have never seen a proper follow-up on that experience which was so widely supposed to be such an embarrassment to the United States.
This post is meant to correct that, I guess, not because the point is super important, but just because my little brain briefly landed on the subject. And until the election, I got nothing serious (besides the election) to write about.