Economists would expect that China's huge trade surpluses with the U.S. must sooner or later cancel themselves out. It's basic supply and demand.
1) China sells us more than it buys.
2) Therefore China accumulates dollars.
3) Therefore China spends the dollars.
4) Therefore the dollar declines relative to Chinese currency.
5) Therefore Chinese goods become more expensive.
6) Therefore Americans buy less from China and sell more.
7) Therefore the trade surplus ends. It's all beautifully self-regulating.
The trouble with the theory is that in China's case, step 3) does not happen.
To keep China's population working -- and to stop China's population from protesting -- the Chinese government must keep the exports moving. To keep the exports moving, China must keep the currency cheap. To keep the currency cheap, China manipulates its banking system so the accumulated surplus dollars never get spent.
Instead, the Chinese lent the dollars back to us. And because the Chinese had so many dollars, they lent the dollars very, very cheaply.
You got a fabulous deal on your mortgage because China's workers were prevented from spending the money they had earned.
This process accelerated through the 2000s, but it went into hyperdrive in 2005, when China's trade surplus abruptly spiked. Bigger surplus, more dollars, more lending. 2005 was the year the subprime mortgage boom began.
China's lending spree translated into an American debt binge. The debt of the U.S. nongovernmental sector surged after 2005 to levels last seen in -- uh oh -- 1929. And from the top of the roller coaster, it's a long, scary ride back to Earth.
3 comments:
"To keep the currency cheap, China manipulates its banking system so the accumulated surplus dollars never get spent."
And the U.S., by virtue of ZIRP and quantitative easing is doing what, exactly, to *its* banking system?
This is the crux of the issue to me.... it seems profoundly retarded to stand up and yell at the Chinese for doing exactly what we're doing (manipulating the money). It's especially stupid since they're our major creditor. You do *not* want them selling bonds.
This is another reason to hate Bush !!
I don't suppose our own complete addiction to buying things and slavery to thinking material wealth is the road to happiness could have any factor here.
I suppose not. That would imply that we believed that our citizens should have some sort of self-responsibility and accountability for their actions. And clearly that's an UnAmerican thought.
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