The Post again pushed the line that the United States needs China to keep buying up dollars to hold down the value of the yuan. This is the exactly the policy that the Obama administration and the Bush administration had publicly been pushing China to stop under the guise that it was "manipulating" its currency. The issue is that China is buying up U.S. dollars in the form of U.S. government debt. The Post tells readers that the country is dependent on these purchases of debt. This is the Post's invention. If China stopped buying debt, the dollar would fall relative to the yuan (and other currencies) making imports more expensive and our exports cheaper to other countries. The result would be a boost to U.S. exports and growth. While there could be some rise in interest rates, the Fed could opt to offset this by buying more bonds directly, if it chose. Of course, since the rise in import prices would lead to somewhat higher inflation, this could offset the impact of any increase in interest rates, possibly leaving the real interest rate unchanged. In addition, as Greg Mankiw and other economists have argued, modest inflation will help to relieve that huge debt burdens of consumers and homeowners. So, if the Post's bad scenario came true, and China stopped buying up U.S. government debt, it would likely be very good news for the economy, although a lower dollar may diminish Wall Street's role in the world.
--Dean Baker
