Paul Krugman:
Drezner also mentions that his own most influential publication was one making the obvious point that China’s ownership of a bunch of US bonds doesn’t give it leverage over America; a point people like Dean Baker and yours truly have also made. When you try to make this point to Beltway types, however, you encounter not so much disagreement as incredulity — “everyone” knows that China has immense power over us, “nobody” disagrees. Indeed, if you go to the link you’ll see that Dean was reacting to a news article that stated the Chinese power thing not as a dubious hypothesis but as simple fact.
I've made that point for about 13 years (after I taught Money and Capital Markets at UNCW ... at 8 am with a brand new baby after teaching a night class [what sort of sadist gives a guy that sort of schedule?]). How does China have power over us by holding our bonds? What are they going to do, sell them? Then the price of bonds goes down, interest rates spike, we have a recession and demand for Chinese exports fall. Also, they're holding our bonds so they can keep the value of their currency artificially low.
What am I missing?
