February 22, 2005

All About The Baht

If, like me, you have little to no idea what would actually happen if the baht appreciated against the dollar ("baht?"), you probably find Brad Setser's blog mostly over your head. Still, from time to time he connects the financial markets and their funny ways to topics I do know a bit about, and the results are always illuminating. So I thought I'd highlight a couple of his recent posts that might be of wider interest.

First, we've all heard the conservative argument that financial markets won't mind if we borrow trillions to privatize Social Security, since we're just taking on a bit—well, okay, a lot—of short-term debt now in exchange for lowering our even more massive debt far, far in the future (i.e. our "implicit liabilities"). The markets, bless their hearts, will understand. Bogus, says Mr. Setser:
If the markets care about implicit liabilities, they sure are not showing it. The prescription drug benefit, as Paul Krugman and others (including many conservatives) have pointed out, created a larger "implicit liability" than the current "implicit liability" associated with the Social Security system... I don't think there is much evidence that the markets penalized the US government for the increase it the government's implicit liability.
On the other hand, this is what the markets can expect thanks to privatization: "If you hold a 10 year bond, or even a 30 year bond with a residual maturity of 25 years, the cash flows of the proposed reform are negative until after your bond matures, and the reform would involve a substantial increase in Treasury issuance and the overall stock of Treasuries in the market while the bond you hold is outstanding." Heh. In other words, a big "F— you."

Second, here's his interesting take on what the U.S. current account/trade deficits mean for the grand rivalry between America and China: "Will China want to finance the US government, through the purchases of Treasuries, as US seeks implement a strategy intended to contain China's regional, if not global, ambitions? Or will [China] prefer to step up its own direct investment in the production of the world's oil and other commodities, even if that means investing in places that the US labels pariahs?" It's a good counter to Thomas Barnett's view that more "economic connectivity" will make China and the U.S. cozy bedfellows from now until eternity. (And hey, as a budding realist on great power conflict, I'm obliged to find Setser's scenario "extremely plausible"!)

UPDATE: Slight-but-important edit.
-- Brad Plumer 8:55 PM || ||