Should China cut US Treasury Holdings?  Yuhua Zhang writes;  In February, China cut US treasury securities holdings by $15.4 billion to $1223.7 billion, which is the sixth consecutive month that China has reduced US treasuries and falls to the lowest US debt holdings since January 2013. Although China is no longer US largest creditor, the further cut in US treasury holdings would still be a wise strategy to China.

In all, cutting US treasury securities holdings is a reasonable choice for China during the period of economic reform because China will encounter economic slowdown for its “new normal” and diversifying its economy.

However, some economists are anxious that the strategy may bring negative effect on US economy.

On the one hand, in comparison with US treasury securities holdlings by top foreign creditors during the past year, the amount of treasuries sold by China is not large enough to disturb the market, and some other top US foreign creditors such as Japan are still willing to increase their holdings. In other words, it is quite limited effect on US treasury market for China (or some other governments’ authorities) to pursue diversification out of US treasury securities.

Instead of facing problems, the US dollar strength and current yield advantage still guarantee high attractiveness and liquidity for US treasury securities market, which positive trend is expected to continue in the future.

Nouriel Roubini writes: In a world of weak domestic demand in many advanced economies and emerging markets, policymakers have been tempted to boost economic growth and employment by going for export led-growth. This requires a weak currency and conventional and unconventional monetary policies to bring about the required depreciation.

Since the beginning of the year, more than 20 central banks around the world have eased monetary policy, following the lead of the European Central Bank and the Bank of Japan. In the eurozone, countries on the periphery needed currency weakness to reduce their external deficits and jump-start growth.

In Japan, quantitative easing was the first “arrow” of “Abenomics,” Prime Minister Shinzo Abe’s reform program. Its launch has sharply weakened the yen and is now leading to rising trade surpluses.

The upward pressure on the US dollar from the embrace of quantitative easing by the ECB and the BOJ has been sharp. The dollar has also strengthened against the currencies of advanced-country commodity exporters, like Australia and Canada, and those of many emerging markets. For these countries, falling oil and commodity prices have triggered currency depreciations that are helping to shield growth and jobs from the effects of lower exports.

The dollar has also risen relative to currencies of emerging markets with economic and financial fragilities: twin fiscal and current-account deficits, rising inflation and slowing growth, large stocks of domestic and foreign debt, and political instability. Even China briefly allowed its currency to weaken against the dollar last year, and slowing output growth may tempt the government to let the renminbi weaken even more.

Things look different today, and US officials’ exchange-rate jitters are becoming increasingly pronounced. The dollar appreciated much faster than anyone expected; and, as data for the first quarter of 2015 suggest, the impact on net exports, inflation, and growth has been larger and more rapid than that implied by policymakers’ statistical models. Moreover, strong domestic demand has failed to materialize; consumption growth was weak in the first quarter, and capital spending and residential investment were even weaker.

As a result, the US has effectively joined the “currency war” to prevent further dollar appreciation.

Currency frictions can lead eventually to trade frictions, and currency wars can lead to trade wars. And that could spell trouble for the US as it tries to conclude the mega-regional Trans-Pacific Partnership. Uncertainty about whether the Obama administration can marshal enough votes in Congress to ratify the TPP has now been compounded by proposed legislation that would impose tariff duties on countries that engage in “currency manipulation.” If such a link between trade and currency policy were forced into the TPP, the Asian participants would refuse to join.

The world would be better off if most governments pursued policies that boosted growth through domestic demand, rather than beggar-thy-neighbor export measures. But that would require them to rely less on monetary policy and more on appropriate fiscal policies (such as higher spending on productive infrastructure). Even income policies that lift wages, and hence labor income and consumption, are a better source of domestic growth than currency depreciations (which depress real wages).

The sum of all trade balances in the world is equal to zero, which means that not all countries can be net exporters – and that currency wars end up being zero-sum games. That is why America’s entry into the fray was only a matter of time.

J. Bradford DeLong writes: For the past 25 years, a debate has raged among some of the world’s leading economists. At issue has been whether the nature of the business cycle underwent a fundamental change after the end of the “30 glorious years” that followed World War II, when the economy was characterized by rapid growth, full employment, and a bias toward moderate inflation. Three positions have been staked out.

First out of the gate, in 1991, was Larry Summers, with his seminal paper, “How Should Long-Term Monetary Policy Be Determined?” Summers was unconvinced that the underlying economic reality had changed, so his focus was technical – an attempt to guard against a repetition of the inflationary disturbances of the 1970s that marked the end of the glory years. His prescription was to strengthen the technocratic independence of central banks.

The debate continued with Paul Krugman’s 1998 paper, “It’s Baaack: Japan’s Slump and the Return of the Liquidity Trap” and his book The Return of Depression Economics, published the following year. Krugman made the case that central banks had already succeeded in anchoring inflation expectations to low levels, but had nonetheless failed to put the economy back on track.

Then Ken Rogoff entered the fray with a comment on Krugman’s paper. In Rogoff’s view, what Krugman described as a long-term return to “depression economics” was a temporary condition, the consequence of failures to regulate properly and curb debt accumulation.

Today, a degree of consensus has emerged. There is no longer much point in questioning whether the glory days are over. The models and approaches developed to understand the post-war business cycle and its bias toward moderate inflation are worse than useless today. Disagreement among economists nowadays reflects different positions not so much on the state of the economy, but on whether macroeconomic policy can provide an effective cure.

Summers has more or less abandoned his belief that central banks can, will, and perhaps even should attempt to prevent the return of depression economics. Central banks might have been able to attain the technocratic ideal of macroeconomic business-cycle management that Summers hoped for back in 1991, but they failed to do so.  In Summers’s view governments need to assume greater responsibility for risk-bearing, long-term planning, and investment. Indeed, those governments lucky enough to issue the world’s reserve currencies are able to take on this role without overloading future taxpayers with inordinate debt burdens.

Whichever policies – macro or micro – turn out to work best for addressing today’s economic problems, one thing has become abundantly clear: optimism is out of fashion.

Tammy Kim writes:  The TPP aims to establish the world’s largest free-trade zone, affecting an estimated 40 percent of global commerce. Japan and the U.S. are the biggest players in this 12-country agreement, nearly a decade in the works, but their citizens still know little of the agreement’s contents. Now, in the U.S. a fast-track bill moving through the Senate could accelerate the process for making the TPP binding.

All this trade talk can seem an impenetrable thicket of arcane economics and alphabet soup. Here we provide answers to some basic questions: Are accords like the TPP still necessary in our Internet-enabled, globalized world? What makes trade more or less free? And what does it all mean for workaday people in the U.S. and the other TPP nations?  Trans Pacific Trade Deal

Joshka Fischer writes:  One can only feel sorry for Greece. For more than five years, the “troika” (the European Commission, the European Central Bank, and the International Monetary Fund) has made it the object of a failed experiment with austerity that has exacerbated the country’s economic crisis. And now Prime Minister Alexis Tsipras’s government seems hell-bent on plunging Greece into the abyss.

It never had to be this way. By the time Tsipras’s leftist Syriza party came to power in January, a new, more growth-oriented compromise had become possible. Even hardcore German proponents of austerity – and certainly Chancellor Angela Merkel – had begun to reconsider their position, owing to their policy prescriptions’ undeniable adverse consequences for the euro and the stability of the European Union.

The Tsipras government, with some justification, could have presented itself as Europe’s best partner for implementing a far-reaching program of reform and modernization in Greece.

But Tsipras squandered Greece’s opportunity, because he and other Syriza leaders were unable to see beyond the horizon of their party’s origins in radical opposition activism.

Of course, it is precisely the acceptance of necessity that marks the difference between government and opposition. An opposition party may voice aspirations, make promises, and even dream a little; but a government party cannot remain in some imaginary world or theoretical system.

Indeed, Tsipras seems to have forgotten the Marxist tradition’s emphasis on the dialectical unity of theory and practice. If you want to negotiate a change of tack with your creditors, you are unlikely to succeed if you destroy your own credibility and rant and rave about those whose money you need to avoid default.

But Syriza’s inability to escape its radical bubble does not explain why it formed a coalition with the far-right Independent Greeks, when it could have governed with one of the centrist pro-European parties.

Within Europe’s monetary union, a consensus has been established that everything possible must be done to keep Greece inside. But Greece’s government needs to understand that other eurozone members will not be willing to accommodate its demands if it means delegitimizing their own painful reforms.

A disorderly Greek exit from the euro – currently the greatest danger – can be averted only if both sides operate on the assumption that the upcoming negotiations are not about who wins and who loses.

But others in Europe need to abandon their illusions as well. The Greek crisis cannot be used either to weaken European conservatives and change the balance of power within the EU, or to remove the Greek left from office.

The current crisis and the negotiations to resolve it are about only one thing: Greece’s future within Europe and the future of the joint European project.