ALEX GOLDMARK, BYLINE: Ten years ago, in early September 2008, we still had no idea how bad it would get. The housing crisis was picking up steam, but Lehman Brothers hadn't collapsed yet. The financial panic hadn't spread through the banks, through the whole world economy. And at that moment, that is when PLANET MONEY launched its first episode.
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GOLDMARK: Hello. And welcome to PLANET MONEY. I'm Alex Goldmark. And in honor of our 10th birthday, we are going deep into the archives, so deep that some of the podcast players don't even go back that far. We're going to revisit our very first episode. Some of what we covered back then has changed and in some interesting ways. But a lot of it holds up way more than I expected.
The first episode sounds like an experiment because it was. It's about the trade deficit with China and how exactly the dollars flow back and forth in a giant loop, changing what they pay for at each step.
At the end of today's show, we'll have an update on how the story has changed and about which predictions came true and which didn't. And if you want to listen to other vintage episodes, we've made a list of 10 of our favorites. It is at npr.org/planetmoney10. That's the numeral 10 - npr.org/planetmoney10. All right. After the break, our very first episode.
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ADAM DAVIDSON, HOST:
I'm pretty sure you've heard this idea that China and the U.S. are in a crazy kind of co-dependent relationship. We keep buying stuff from China with our dollars. Then China turns around and lends those dollars right back to us so we can then buy some more stuff from China. They lend some more money to us on and on. But what you might not know - and I didn't know until very recently is that Fannie Mae and Freddie Mac - those two companies you've heard a lot about lately - they are central. They are crucial to that whole recycling of money process. They make it happen or at least they help make it happen.
I'm going to explain in a second. But first, let me tell you. I am Adam Davidson, international economics correspondent for National Public Radio. And I'm just starting to run something new here at NPR. We're calling it PLANET MONEY. And our goal is to take the big, complex, global economic issues, the kind of thing I think most people feel like they really should know a lot about and understand but they don't and they get really confused. Well, our job here, what we're trying to do is to make this all easier for you.
We're working really hard. And hopefully we'll succeed, at least most of the time, to help you understand how the world economy works and how it affects your life. And right now, this right here is our first-ever podcast. (Singing) Dun-da-dun (ph).
All right. So today, I'm going to talk to Brad Setser. He's with the Council on Foreign Relations. He's an economist. He used to work in the Treasury Department. And you should be glad I'm talking to Brad because he knows this financial interdependent relationship between the U.S. and China better than anyone I can think of. Over the years, he has really helped me understand how the U.S. and China financial system works. And let me just give you the basic idea before we get to Brad.
So you buy a DVD player or T-shirt, something made in China, you give your dollars to the store. They take those dollars and give them to some importer who brought the thing into the country. The importer takes some of that money and sends a check to China to the factory that made whatever it is you bought. So think of it from the factory owner's perspective. He's in China. He's getting all these dollars. But he has employees. He has electric bills. He has all this stuff in China. So he doesn't want dollars. He wants the Chinese currency, renminbi. So what the factory owner does is he takes those dollars and he brings them to his local bank. There are lots of banks in China. And he says, here's a bunch of dollars. I want renminbi.
Now the bank has dollars. But they don't really want dollars because all their customers want renminbi. So every day - this happens every day, every business day - all the local banks in China at around 4 or 5 in the afternoon, they send a message. They call or email the central bank, the People's Bank of China. And they say, we've got a lot more dollars in today, and we don't want them. We want renminbi. The central bank says, all right. That's fine. Give us your dollars. And we'll send you some renminbi. And so every day, the People's Bank of China gets a huge pile of new dollars that they have to do something with.
And Brad is going to tell us in a minute how many dollars. It's a lot. So People's Bank of China don't want to just hold on to dollars. Dollars don't earn interest. They want some kind of investment. But they don't want any investment. They don't want some speculative tech stock or some hedge fund because they're a central bank. They need to keep this money. They need to know it's safe. So the No. 1 thing they want is U.S. government debt, Treasury bonds.
But believe it or not, however big our debt is - and it is big - there aren't enough Treasury bonds to satisfy China's hunger. So the People's Bank of China buys the next best thing, which it turns out is Fannie Mae and Freddie Mac bonds. Those bonds, as it happen, are made up of bundles of U.S. home mortgages - probably your mortgage maybe - put all together in a package and then sold as bonds.
Now, China doesn't particularly care that these were bonds backed by home mortgages. They just like that these bonds were considered really safe and that they gave some return. Now, we in America or many of us - we love this process because what effectively is happening is every dollar we send to China goes through this chain of people and then comes back to us in the form of mortgages.
Then Americans use those mortgages to obviously - to buy houses. Then they own their houses. They take out loans against the houses, home equity lines of credit. And they buy a lot more Chinese-made stuff. You see how this cycle works. And hopefully, now you see how Fannie Mae and Freddie Mac are central to this whole cycle.
And the person who knows how all of this works better than anybody is Brad Setser. Well, probably, it's some guy in the People's Bank of China. But that guy - I don't know who it is and what he - probably wouldn't talk to us anyway. So we're very happy to have Brad. I started out by asking him, how big is this whole thing? How much money are we talking about?
BRAD SETSER: I think it is reasonable to think that China's buying over the - bought - over the last 12 months roughly $400 billion in U.S. debt. That's a lot.
DAVIDSON: Over a year?
SETSER: Over a year.
DAVIDSON: So that's - I'm just doing the math. Is that per business day? So is that...
SETSER: Per business day, it's about, you know, $2 billion a day.
DAVIDSON: That sounds like a lot to me.
SETSER: It is a lot. Four-hundred billion dollars is ballpark the same size as the U.S. fiscal deficit. It is ballpark the same size as the U.S. oil import bill. It is a larger right now than the non-oil trade deficit. It is a phenomenal sum of money.
DAVIDSON: I think of you as the leading guy studying how much U.S. money China has.
SETSER: I think that's a very polite way of saying I've been obsessed with this question for the last five years.
DAVIDSON: It's the main thing you write about. You have - was it China reserve watcher?
SETSER: Yeah, no. I spent a lot of time trying to figure out just how much - how large China's purchases of U.S. bonds were and are.
DAVIDSON: Why - is that - isn't just knowable? I mean, the U.S. government's selling it to them. It's a big Chinese government buying them. Can't you just look it up somewhere?
SETSER: If only the world were that simple. No, you actually can't. They're - the U.S. government doesn't actually sell the bond directly to China's central bank. The U.S. government sells a lot of bonds to the broker dealer community, the primary dealers who buy up treasuries. So that...
SETSER: Big banks.
SETSER: Think big banks, big investment banks.
DAVIDSON: Those big investment...
SETSER: Like a Goldman Sachs...
DAVIDSON: Goldman Sachs.
SETSER: ...Citi, JP Morgan - you name it - household names, the really big - the core of the U.S. financial system. So they buy up a lot of bonds, and then they sell them to a bank in London. And then the bank in London sells the bond to China's central bank.
The U.S. can track the amount of debt that it issues. And it can track the sale of bonds to foreigners. But in the first instance, it thinks that it sold the bond to a private financial institution in London. And it has no way of knowing then where that bond - if that financial institution then sells the bond to China's central bank.
DAVIDSON: Is that by design? Does China not want us to know?
SETSER: I don't think they're get hiding. I think it's just time zones. A lot of it's just time zones.
DAVIDSON: There's - like, is there a building full of guys or a floor full of guys in Beijing who are just on the phone to London all the time saying, hey, we need another...
SETSER: Well, this is how someone explained it to me in China, that, at the end of every day, the reserve manager in China - it's an institution with a great name, the State Administration of Foreign Exchange.
SETSER: SAFE - they - the guy gets a call from the People's Bank of China who says, you know, this - today, we ended - We bought $2 billion in the market. so you have another $2 billion that you need to put to work. And then he knows, OK, well, I have these bonds which are expiring because I already hold, you know, 1.8 trillion in reserves. So a certain amount of that is, you know, going to come. You know, I'm going to get paid on some of the loans and bonds that I bought. I'm going to have a little bit more money to put to work.
And since at the end of the business day in China, the U.S. is asleep, the natural thing to do is get on the phone and call London. So he gets on the phone and calls London and says, you know, hey. How many bonds can you sell me? And that process goes on day after day after day.
There's another problem - you know, OK. So we know it's hard to track it from the U.S. side by looking at the U.S. data. Then you have to go to the Chinese side and look at the Chinese data and try to figure out how much China's foreign assets have gone up. Well, China's central bank is actually really slow in releasing its reserves. Most central banks release their reserves data once a month. China only does it once a quarter. Sometimes...
DAVIDSON: And by release it, you just mean they publish how much...
SETSER: Publish on their website how much they hold.
SETSER: And I don't want to go into the details about how many obscure websites that you need to visit in order to try to get a good estimate of how much money the state banks have. I don't speak Mandarin. I have a friend who does, and that's the only way you can possibly find some data series that might give you some basis for doing the estimate.
DAVIDSON: Wait. Is that what you're doing all the time?
SETSER: Calling up a friend and begging them to go on the Mandarin-language PBOC's website? Sometimes, yeah.
DAVIDSON: And other - I mean, so there's dozens of weird Chinese - you know, the Chinese agricultural investment fund.
SETSER: It's actually not - I mean, it's the data on the foreign exchange holdings of the state banking system, which is just a little bit hard to find...
DAVIDSON: Yeah, right.
SETSER: ...In the central bank's website.
SETSER: But the hard part is you never quite know where the increase is going to show up - in what data series? And sometimes, it changes around. And it's a little bit of guessting (ph).
DAVIDSON: Why are you so obsessed with this? Why not - why do you want to know so badly?
SETSER: Because to me, there's been a sort of a deep puzzle about the global economy that - for the past several years. You can think of that puzzle a lot of different ways. One is that a relatively poor country - China is still a relatively poor country - is financing a relatively rich country. You might normally think that the money would flow the other way around.
DAVIDSON: And historically, that's the way it works.
SETSER: The rich countries fund the poor countries.
DAVIDSON: ...Fund the poor countries.
DAVIDSON: Just like rich banks fund poor people (laughter).
SETSER: Yeah, exactly.
DAVIDSON: If you found out...
SETSER: No, sometimes rich banks fund rich people, as well.
DAVIDSON: Right. But if you found out that Citibank was - you know, some guy named Frank in Queens was funding Citibank, you'd say, that's weird.
SETSER: Yeah, you'd be a little bit - you kind of want to know where Frank was getting his money, right?
DAVIDSON: (Laughter) Right.
SETSER: But it's also a very fast-growing economy which is financing a slow-growing economy. Which is also perhaps not the way things normally work.
DAVIDSON: I mean, I'm hearing this as an intellectual curiosity. Like, you could do crossword puzzles. Instead, you're trying to figure out how much U.S. debt the Chinese government has. It's not that you wake up every morning going, oh, my God, will my standard of living collapse and will the U.S. economy fall apart? It's, wow, this is really weird. I want to understand this.
SETSER: Well, I think the initial motivation was also a little based on a concern on - the concern was, well, maybe this can't go on forever. And then, the more time you spend looking at it, and then, you know, I'd actually written a paper saying that it couldn't go on forever. And when you make a public prediction that something isn't going to go on forever, and then it seems to keep going on long past the point where you said it wouldn't, you kind of get interested in it. It's - it becomes, you know, the crossword puzzle that you want to solve on a daily basis.
DAVIDSON: Can it go on forever?
SETSER: I don't think it can. China cannot reduce the amount of financing that it provides the United States without inducing a slowdown in the U.S. economy, a slowdown or a fall in U.S. purchases of Chinese goods, fewer Chinese exports. And I think that is a very important consideration that weighs very heavily on Chinese policymaking. So China isn't providing all this financing to the U.S. just because, you know, it loves the United States.
DAVIDSON: Do they want us to have - to live beyond our means? Is that an explicit goal? Do they want interest rates low in America so that I spend more on my credit card and I buy more Chinese stuff?
SETSER: (Laughter) You know, if you ask China's leaders - do they want the U.S. to live beyond its means? - I think they would say no - that China is building up dollars. It has to lend those dollars out. And if you're - you need someone who needs to borrow. In other words, there needs to be someone in the U.S. who's living beyond their means in order to keep current demand for Chinese goods going. So in that sense, the indirect effect of China's policy has been to encourage the U.S. to live beyond its means. So I think you can say that while it's not the stated goal, it is certainly the byproduct.
DAVIDSON: And it's good for them. It's good for China.
SETSER: Well, it's good for them - it's neither good for them or good for us. There are different interests inside China just as there are different interests inside the U.S. It is good for the U.S. Treasury if China buys a ton of Treasury bonds and keeps interest rates low. It is bad for workers in Ohio who are producing goods that compete with Chinese goods if China is holding its currency down and taking market share away from U.S. factories.
Same thing works in the opposite way inside China. It's good for China's exporters. It's good for workers in the export sector. But it isn't good for China's taxpayers because they're going to be taking a loss. It arguably isn't good for the workers who could be employed building schools in China, which China could build more of if it borrowed more money at the government level, and rather than lending it to the U.S., it used that borrowing to buy - to build more schools domestically.
So there are choices. And those choices have different effects on different groups within each economy. And I think it's very hard to sort of say, one side wins, the other side loses. I think it's more accurate to say different parts of the two economies are impacted in different ways.
DAVIDSON: So China elects a new leader tomorrow. He doesn't care about financial stability. He doesn't care about his own economy. He's just hell-bent on using whatever power he can to destroy America. Now, if Robert Mugabe decided that, I think it's safe to assume Zimbabwe does not have the ability to destroy the U.S. economy.
DAVIDSON: You know, Hugo Chavez could cause a lot of disruption but couldn't destroy it. What would China do? Let's just say they hired you, said Brad, can you destroy the U.S. economy for us?
SETSER: I can't destroy the U.S. economy. I can cause a lot of damage to the U.S. financial system. And I would say, you have a very simple option if you want to cause a great deal of disruption to the U.S. financial system, to the U.S. government bond market and, by implication, to the U.S. economy. You just have to stop buying a single new U.S. government or U.S. agency bond.
DAVIDSON: If this stops - if the unsustainable is no longer sustained, if China stops buying U.S. debt - total collapse of capitalism, Great Depression, a late-'70s kind of slowdown malaise, early-2000 brief recession that doesn't hurt? I mean, where...
SETSER: On that continuum, more late '70s than collapse of capitalism or Great Depression.
DAVIDSON: Unemployment goes up.
SETSER: Unemployment's already going up. Unemployment goes up by a lot more. And America feels poor. America has to live within its means. We're used to living beyond our means. We borrow less. Housing prices go down. Our dollars don't buy as much abroad.
DAVIDSON: There's fewer new cool things like iPods. And...
SETSER: Well, I think there's not fewer new cool things.
DAVIDSON: I get to buy fewer new cool things (laughter).
SETSER: You get to buy fewer new things. And those cool new things cost a little bit more. Right? The iPod may not be manufactured in China. I mean, you know, it's designed in California, manufactured in China - famously. Well, maybe it'll be designed in California, manufactured half in Mexico, half in California and cost twice as much - you know, to exaggerate a little bit. But so there will be...
DAVIDSON: So some people will benefit. Some - there'll be - certain kinds of jobs will grow in the U.S., maybe.
SETSER: Absolutely. I mean...
DAVIDSON: As you said before, the people who are hurt now will no longer be hurt.
SETSER: And the people who win - have won - won't win. But it's the shift between the two that takes time, it takes effort. You know, a factory doesn't just spring up magically.
There's an interesting story about - I think it was in Businessweek - about an American inventor who'd thought they'd created a better battery for laptops. And they wanted to find - they had some new technology, and they wanted to find a manufacturer in the U.S. to build this new battery because they thought - OK, you know, shipping costs have gone way, way, way up. There's actually not that strong a reason to have this inside a low-cost manufacturing center. It's the kind of thing which could be made in the U.S. But there wasn't any contract manufacturer in the U.S. with expertise building batteries. So it takes a while to build up the skills.
DAVIDSON: Whereas in China, they're a dime a dozen.
SETSER: Whereas in China, they're a dime a dozen. So it's the difficulties - and you know, by contrast, you know, we had specialists here in the U.S. economy who could take a mortgage with really complicated features - you know, reverse amortization, vary - you know, you name it - and package it with other mortgages with very complicated features, combine it into a bond, combine that, split that bond into different parts, combine those parts into another bond and sell it. That took a lot of work and a lot of skill.
DAVIDSON: And it was a brilliant idea.
SETSER: Didn't turn out to be quite as brilliant as people thought.
DAVIDSON: (Laughter) All right.
SETSER: But it was a set of skills which wouldn't be present in China. All right? So there's a - the process of changing the way - what an economy produces takes time. And then there's also the effect that, you know, we kind of would have to stop running up our debt. And while that's probably good in a long-term sense, in a short-term sense, it means that we'd be buying a little bit less.
DAVIDSON: Right. So pretty crappy, not absolute misery - is kind of where we're headed.
SETSER: You know, I'm not on the total doom and gloom side of the spectrum. But at the same time, it is - I would much rather see a process by which there is a gradual reduction in China's reliance on the U.S. and Europe for demand for its products; much more reliance on internal sources of demand to keep China's own economy growing; and a gradual process where the U.S. moves from a world where, in order to keep running a large trade deficit, it has to keep borrowing large sums from other governments, to a world where the trade deficit is smaller and that trade deficit can be financed by selling bonds to private investors. But I want that process to happen gradually, not suddenly, because if it happens suddenly, you kind of - that's unpleasant.
And it's not just unpleasant, it's, in some sense, inefficient because the economy can't shift from manufacturing mortgages to manufacturing laptop batteries overnight. You need this sort of a process to occur on a slow basis so the investment in new factories and other services that can be sold abroad comes online as the sectors that have benefited from strong Chinese demand for debt are shrinking.
DAVIDSON: Thank you for listening to the very first PLANET MONEY podcast. We have a lot more information about Fannie Mae and Freddie Mac and China and everything that we talked about here on our website, including some links to articles by Brad. That's npr.org/economy. Oh, also, please do send us your questions and your comments and your ideas for future podcasts or stories to firstname.lastname@example.org. That's one word, no dots or anything - email@example.com.
One thing - please do let me know how I did in this podcast. Did I make things clear? Did you understand it? Was it interesting? What could I have done better? I really want to make this work for you. So I would genuinely love to know. Hopefully, you'll be reasonably polite. But you can give me real constructive criticism, I hope - firstname.lastname@example.org. I am Adam Davidson, NPR News.
GOLDMARK: Alex here in 2018. Those websites and that email address - they don't work anymore. But we do want your feedback just as much as back then; npr.org/money is the website. And email@example.com is the email address. After the break, an update on what's changed since that first episode.
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GOLDMARK: So here are a few things that are the same since that episode ran. The U.S. still runs a trade deficit. A trade deficit still works the same way. It has to be balanced somehow. A trade deficit still means an investment surplus - someone abroad buying U.S. debt, U.S. bonds, investing in the U.S. Also the same, Brad Setser. He's still studying international economics, still at the Council on Foreign Relations. So I asked him what's changed.
SETSER: The main thing that has changed is that China is not sweeping up dollars at the end of every business day in the way it was in 2008.
GOLDMARK: China is just not buying as much U.S. debt as it used to.
SETSER: The need for China's government to step in and buy dollars has largely gone away. It's gone away, I think, for two reasons. The first is that China is importing a lot more oil and a lot more iron and a whole host of other commodities. So a lot of the dollars that China earns from exporting to the U.S. gets sent through oil exporters who then buy U.S. goods. And then another part is that private Chinese citizens now are a bit less confident in China's currency, China's economic course. And they're more willing to hold a portion of their wealth abroad. So there isn't the same kind of imbalance in the foreign exchange market.
GOLDMARK: And the crisis he was worried about, if China stopped buying the U.S. government debt, it didn't exactly happen. A bigger crisis happened first when, about a week after the interview aired, Lehman Brothers went bankrupt. You probably know the rest.
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GOLDMARK: Since it's our birthday, I'm going to do something we don't usually do. I'm going to ask for a birthday present. The biggest way that you can help us out is to tell a friend to listen to the show. That is how new people find PLANET MONEY. You can even send them our list of 10 favorite episodes from the past 10 years - npr.org/planetmoney10, the numeral 10. Or you can rate and review us on your podcast app. Right now, the top review for us an Apple podcast is from 2008 - network effects. Anyway, how about we try to get a review from 2018 to be at the top? I think that if just 20 or so people go and find a recent review from 2018 and mark it helpful, then that will probably push it to the top. I'm Alex Goldmark. Thanks for listening, and thank you to the staff of PLANET MONEY, who has worked so hard on this podcast over the past 10 years.
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CAITLIN KENNEY, BYLINE: Can we just, like, maybe start the show, play some music and welcome people?
ALEX BLOOMBERG: Absolutely. Hello, and welcome to PLANET MONEY. I'm Alex Bloomberg.
KENNEY: And I'm Caitlin Kenney.
DAVID KESTENBAUM, HOST:
Hello, and welcome to PLANET MONEY. I'm David Kestenbaum.
CHANA JOFFE-WALT, BYLINE: And I'm Chana Joffe-Walt. Today's show - we're going to be making a T-shirt that tells the story of its very making.
JACOB GOLDSTEIN, BYLINE: OK. Let's go around the room and all say our names really fast. I'm Jacob Goldstein.
STACEY VANEK SMITH, BYLINE: I'm Stacey Vanek Smith.
JESS JIANG, BYLINE: I'm Jess Jiang.
ROBERT SMITH, BYLINE: Hello. I'm minor podcast celebrity Robert Smith. And here at PLANET MONEY, we've come up with a miracle answer system. You simply get us your question, and our team will do the Google - the reporting for you.
GOLDSTEIN: We like to start our shows by saying hello, and welcome to PLANET MONEY. Can you say hello, and welcome to PLANET MONEY?
UNIDENTIFIED PERSON #1: Hello, and welcome to PLANET MONEY.
ZOE CHACE, BYLINE: I'm Zoe Chace.
LISA CHOW, BYLINE: And I'm Lisa Chow.
MARIANNE MCCUNE, BYLINE: I'm Marianne McCune.
STEVE HENN, BYLINE: And I'm Steve Henn.
SMITH: Today on the show, we boldly go where no podcast has gone before.
UNIDENTIFIED PERSON #2: Five, four, three, two, one.
KAREN DUFFIN, BYLINE: Hello. I am Karen Duffin. And I am new here at PLANET MONEY.
KENNY MALONE, BYLINE: Hello, and welcome to PLANET MONEY, Karen Duffin.
DUFFIN: They really did say that to me.
MALONE: Oh, we really say that to everybody.
SMITH: Kenny Malone, everyone.
AILSA CHANG, BYLINE: I'm Ailsa Chang.
NOEL KING, BYLINE: And I'm Noel King.
SARAH GONZALEZ, BYLINE: I'm Sarah Gonzalez.
CARDIFF GARCIA, BYLINE: I'm Cardiff Garcia.
GONZALEZ: You could be Cardi G.
GONZALEZ: (Laughter) I think you should think about that. I think that should be a soft no.
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