Red scare

Dean Baker disagrees with Paul Krugman, noting that the Chinese can't suddenly have been "surprised" that they could lose money on the US dollar investments. Baker argues that China saw the value of the dollar plunge a year ago and did nothing to hedge their bets; in fact, the Chinese have long used the dollar to keep their own currency value low and hence keep the prices of Chinese goods for US consumers quite low.

Most importantly, Baker argues that China's "threats" about the US getting its finances in order is being used as the latest cudgel over "entitlements."

Anyhow, the reason why the distinction between the China surprise versus strategy view is important is that the bad guys are already using the China threat as an argument to cut Social Security and Medicare. The argument goes that if we don't get our budget in order (i.e. cut Social Security and Medicare) then the Chinese will pull the plug on us. The Peter Peterson crew have already been vigorously pushing this line.