And Tyler Cowen Makes Another Elementary Error...
Very unusual. Tyler:
Sorted Turkish links — Marginal Revolution: Turkey will prove to be an important test case for whether a rapid influx of foreign capital can be done in a stable manner. It’s funny how a lot of the same economists who distrust a rapid capital influx in an international development context (“the hot money comes and goes”) are entirely happy to trust a rapid influx of capital into U.S. Treasury securities.
As one of "the same economists" let me say that Tyler is simply wrong.
The major reason we distrust rapid capital influxes in international development (and international macro) contexts is when they come in the form of a harder currency than your own. The big danger is that a wave of capital flight produces a collapse in the value of your currency that greatly increases the real value of the debt you owe: that is the principal source of instability that we fear.
With the flow of capital into U.S. Treasury securities that is simply not the case: capital flight does not raise but reduces the real value of the debts we owe. Rather than being a destabilizing shock, a flow of capital out of U.S. Treasuries and out of the U.S. would set in motion economic forces that would not amplify but would damp its impact.
And, no, we are not entirely happy to trust a rapid influx of capital into U.S. Treasury securities. Indeed, Paul Krugman wants a higher renminbi right now precisely to stop the rapid influx of Chinese capital into U.S. Treasury securities. But we have other, bigger, more immediate problems to worry about...
