China learns what fiat currency is the hard way

You need to feel at least a little sorry for the Chinese. They build up a powerhouse economy, host a killer Olympics, and frugally save save save. And now they ask that the US won't trash all those dollars that the Chinese worked so hard to accumulate.

Sovereign debt has no default risk, but it does have very real inflation risk. China, like most people, thinks that it is better to export than to import. They are wrong. China also thinks that the Government should run surpluses, but they are wrong there too -- the Government should run "Goldilocks" deficits -- deficits just large enough to satisfy the demand for private savings. China thinks they are in the drivers seat because they "finance" the US deficit. But the US can print all the money it wants, and does not need anybody to finance anything. The US has funded China's demand to save, nothing more.

But look at nonsense headlines like these: "U.S. Jan. budget deficit $84.0 bln vs $17.8 surplus yr-ago". It was the budget surpluses, under Clinton and Rubin, that sapped private savings and brought us to this current crises. A larger deficit is a sign that things are getting better, not worse, as the private sector gets the money it needs to net save and stops reducing aggregate demand. What's being termed a budget "shortfall" is nothing more than the Government funding private savings demand. A balanced budget means no private sector savings -- a total disaster. The Federal budget needs to get much larger, much more quickly, with the savings that increase funds being channeled to households who drive aggregate demand, and not to banks who are pro-cyclical and will not help the economy until the cycle turns.

Savings Nazis like Paul Krugman are making things worse, increasing unemployment and prolonging the cycle. Maybe Krugman will be the Mellon of the 21st Century?