Observing in his latest New York Times op-ed entitled "When China Stumbles" that the global implications of China's economic problems are "really scary," and noting that George Soros is comparing the situation to 2008, Paul Krugman nevertheless does not believe that a "catastrophe" is imminent. Krugman writes:
"China is a big economy, accounting in particular for about a quarter of world manufacturing, so what happens there has implications for all of us. And China buys more than $2 trillion worth of goods and services from the rest of the world each year. But it’s a big world, with a total gross domestic product excluding China of more than $60 trillion. Even a drastic fall in Chinese imports would be only a modest hit to world spending."
However, hedging his bet, Krugman also makes reference to "psychological contagion: Good or bad news in one major economy affects animal spirits in others." Expanding on this worst case scenario, Krugman concludes:
"And while fiscal policy — essentially, spending more to offset the effects of China spending less — would surely work, how many people believe that Republicans would be receptive to a new Obama stimulus plan, or that German politicians would look kindly on a proposal for bigger deficits in Europe?
Now, my best guess is still that things won’t be that bad — nasty in China, but just a bit of turbulence elsewhere. And I really, really hope that guess is right, because we don’t seem to have a plan B anywhere in sight."
Question for Paul: How do you write an opinion piece concerning Chinese economic woes and the effect they could have on the US without making reference to the fact that the US is in debt to China to the tune of $1.4 trillion. And although China, for the first time since 2001, is reducing its exposure to American debt, this has been counterbalanced by American mutual funds buying record amounts of Treasuries. However the question arises whether domestic demand could be overwhelmed by a Chinese fire sale of US debt, particularly if Obama were to announce a new stimulus plan, adding to America's unsustainable national debt now totaling some $19 trillion.
Short-term, I agree with Krugman: the concern over China is overblown. Long-term, unless American debt is reined in by the next administration, look out below!