Monday, August 28, 2006

It's Krugman's old anti-Semitic friend Mahathir

My blogfather Don Luskin never missed a chance to expose Paul Krugman's chummy relationship with Malaysia's ex-Prime Minister (and notorious anti-Semite) Mahathir Mohammad. Via Little Green Footballs, you can see a video of Mahathir's new bunk against both Israel and the United States. But let's ignore his sabre-rattling; I have an economic perspective that, without checking around the blogosphere, I believe is unique.

Like his buddy Paul, Mahathir lives in economic fantasyland. First, let's be clear about who owns U.S. debt. The United States government doesn't owe $14 trillion to anyone; Mahathir's claim isn't even true if we count all the Americans who hold Treasury bonds as part of "the world." As of August 24th, U.S. federal government debt is $8.5 trillion, and much of it we owe to ourselves. Only $2 trillion of U.S. debt is held by foreigners, led by Japan ($635 billion), China ($328 billion), the UK ($201 billion), Korea ($69 billion), Taiwan ($67 billion), and Caribbean banks ($60 billion). "Oil exporters" collectively hold $101 billion, which is a mere 4.8% of foreign-held U.S. debt, and not quite 1.2% of total U.S. debt. So Mahathir's claim is true that they hold "some" of U.S. debt, but his insinuation that they're significant holdings is a laughable one (as are most of the things he says anyway).

Per the Federal Reserve's flow of funds tables, Americans collectively owe about $27 trillion in debt, but again much of that is to ourselves, and meanwhile Americans own $66 trillion in assets as of Q1 2006. Some assets are in stock markets, some are in real estate, but remember that the values are because someone is willing to pay a certain price for them and has the money to pay. Let's say Peter and Paul are the only two members of an economy. Adjusting for inflation, if they collectively have $200 in assets, and $300 one year later, it shows how much wealthier they have become, that they're willing and able to pay more money. If this is bankruptcy, then give me more of it! By the way, Brad DeLong's lackeys can claim GWB has destroyed wealth (based on a stupid misunderstanding of what exchange rates mean), but the Fed's FoF analyses are a good measure of how well Americans have fared under George W. Bush's tax cut policies. And this expansion is far more sustainable than the 1990s' tech bubble. Instead of being based on generational phenomena, it's based on the time-honored principle that lower tax rates is an incentive for people to produce more.

Mahathir's next claim, that the U.S. is financing the war in Iraq "through the money that is lent...by rich countries, some of which are Muslim countries," is particularly idiotic. It would be accurate to say that the U.S. federal government borrows some money to finances all of its expenditures, including military operations in Iraq. Even so, assuming that John Murtha's figure of $8 billion a month is correct, $100 billion a year (I rounded up) is only 0.77% of the ~$13 trillion American economy. Putting aside the issues of whether we should have gone into Iraq and whether the federal government should borrow only for purely defensive wars, the U.S. is hardly dependent on foreign borrowing. It borrows because, for good or for ill (I say more for ill because it means Congress has more money to waste), foreigners are more than willing to lend the money at pretty low interest rates. We can have our cake and eat it too.

Many doomsayers from Krugman to Austrian economists warn about "when, not if" foreigners shift from dollars and stop buying U.S. Treasury bonds. But major U.S. debt holders don't want that: when Microsoft stock goes down, does Bill Gates sell off all his shares in an effort to preserve his net worth? For the same reason he wouldn't help push the share prices down even more, China especially won't allow the dollar to decline: its banking infrastructure depends on U.S. debt instruments as collateral, so it needs its U.S. debt holdings to retain value. And what about the threat of oil being sold in euros or anything but dollars? Well, Saddam tried that; didn't work. Iran threatened that; its market didn't even see opening day.

People like Soj at DailyKos don't understand that when no country has a commodity-backed economy (which isn't completely desirable since your economy then waxes and wanes with the commodity's production), the confidence of consumers and investors is the only factor. The American economy is the only major one that is expanding steadily and sustainably, thanks (or despite) its somewhat screwed-up free market system and rule of law. For whatever reason, foreigners know that the United States is the place to invest. I point to American workers' productivity surge, a factor transcending mere commodities, which Econopundit Steve Antler thinks is "the most important economic news of the decade."

It would be disaster for Europe and Asia if the dollar lost half its value. The French in particular have suffered in good part from a strong euro (although Italian wine exports aren't having that problem). The Bank of Japan is always selling yen for dollars to keep the yen weak, because Japan is heavily dependent on exports (the U.S. actually exports more as a percentage of GDP, but Japan needs exports because its domestic economy is still shaky). China's central bank similarly manipulates the yuan to keep it from gaining strength from natural trade forces (which would make Chinese exports less attractive), but also to buy the aforementioned U.S. Treasury bonds as collateral to keep China's banking infrastructure and currency from collapsing. None of them want the dollar getting any weaker, and China certainly would like a much stronger dollar. Since it pegs the yuan to the dollar, a stronger dollar and hence a stronger yuan would make dollar-denominated commodities (crude oil, most importantly) more affordable for the Chinese.

Economics as a weapon can be powerful, but the U.S. embargo against Cuba proves that it works only if most everyone else joins you. Furthermore, as the Hawley-Smoot Tariff and the resulting retaliatory tariffs showed, a nation tends to hurt itself at least as much as the target. For all these reasons, any nation following Mahathir's "vision" would find itself quite alone, and likely quite ruined. And after all history's warnings, it doesn't matter whether any Muslim leaders have "the will to change currency": besides the fact that the princes need American customers' dollars to live extravagantly, Muslim nations by themselves don't have the clout anyway. They're not major holders of U.S. debt, their oil sales aren't enough of the global economy to make them serious players, and they'd only hurt themselves in the process. The idea that they could seriously harm the United States, with its Strategic Petroleum Reserve and untapped reserves (a big supply shock like the 1970s would push Congress into opening up ANWR), goes hand-in-hand with their delusion of installing a caliphate in Washington, D.C.: they might hit us hard, but they'll knock themselves out with their own blow.

Thank God that Mahathir isn't anyone's chief economic advisor, otherwise he could bring a country to shambles as Robert Mugabe has done with Zimbabwe. If Krugman is correct that Mahathir is "as forward-looking a Muslim leader as we're likely to find," then there's no hope at all for the Muslim world.

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