Friday, July 22, 2005

Krugman on China's revaluation of the Yuan

New York Times columnist Paul Krugman starts the ball rolling on China's revaluation of the Yuan. Since I'm more of a history buff than an economist, this paragraph caught my attention:
And what about the strategic effects? Right now America is a superpower living on credit - something I don't think has happened since Philip II ruled Spain. What will happen to our stature if and when China takes away our credit card?
There are few misrepresentations here, although they might be inadvertent.

The first is the suggestion that the United States is financing wars in a similar way to the Hapsburg Empire in the 16th and 17th centuries. In absolute terms, the United States spends more on warfare than the Hapsburg Empire did: inflation tends to produce that kind of effect over time. But in relative terms such as debt to government revenues, if I remember correctly, the Hapsburg Empire was fininacing war on a vastly greater relative scale the United States has ever contemplated. The United States has spent a few hundred billion out of yearly government revenues of a few trillion dollars to depose Saddam Hussein's regime in Iraq. The Hapsburg Empire was blowing their entire American treasure fleet each year on new loans to finance their decades-long attempt to try and take over world.

The second misrepresentation is that credit is somehow a poor way to finance warfare. In reality, loans and deficit spending have been pretty common tools of military strategy, at least for the European powers, for centuries. The United Kingdom's victory over Napolean's France was achieved, in part, by their more mature banking system as well as their financial subsidies to other European powers to help keep armies in the field. And wasn't the American Lend-Lease program one of the ways we helped to keep the United Kingdom in the war against the Nazis?

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