2008 December 27 Saturday
Ben Bernanke Sees China As Cause Of Lack Of US Savings

Enforced savings by the Chinese government causes a lack of savings in the US. It also causes financial distortions that lead to bubbles.

WASHINGTON In March 2005, a low-key Princeton economist who had become a Federal Reserve governor coined a novel theory to explain the growing tendency of Americans to borrow from foreigners, particularly the Chinese, to finance their heavy spending.

The problem, he said, was not that Americans spend too much, but that foreigners save too much. The Chinese have piled up so much excess savings that they lend money to the United States at low rates, underwriting American consumption.

I've been complaining about this for years. Can the head of the US Federal Reserve get people to take this problem seriously?

Here's how it works: Americans buy something from Chinese exporters. The exporters get dollars and are required by the Chinese government to deposit them in a Chinese bank at a fixed exchange rate. Then the Chinese bank (which is really part of the Chinese government) takes those dollars and buys US Treasury bonds. One effect of doing this is to keep the US dollar strong against the Chinese currency. This cuts US sales to China by making US goods more expensive in China while simultaneously making Chinese goods cheaper in the US.

How does this cause a financial bubble in the US? Easy enough. The Fed sees that US companies aren't generating enough economic activity in the US (what with lots of factories shifted over to China and engineering as well). It expands the money supply to try to generate more economic activity here. Normally an over-expansionary money supply should cause inflation in the US. But the Chinese are keeping goods prices low with cheap imports.

The Chinese purchases of US Treasuries inject money into the US financial system and lower interest rates while also making imported goods cheap at the same time. Since consumer goods inflation is prevented by the cheap Chinese goods the monetary expansion causes inflation in the prices of real estate and financial assets instead. The inflation has to pop up somewhere.

The lower interest rates cause potential investments to look more attractive than a non-distorted money supply would cause them to look. The result was an excessive investment in the financial industry and in real estate. This caused excessive spending in industries that supply construction materials and in luxury goods as well. Eventually the bubble burst. We all see the results.

Other factors contributed to the real estate binge. Foolish deregulation of government-insured banks and really dumb policies aimed at boosting home ownership of non-Asian minorities (NAMs) both played roles in causing the unfolding financial disaster. But this one big monetary distortion caused by mostly East Asian countries played an important role in creating the mess we are in.

Share |      By Randall Parker at 2008 December 27 08:56 AM  Economics Trade

averros said at December 28, 2008 12:16 AM:

Chinese? No, the real problem is Martians irradiating America with the rays of stupidity. Bernanke seems to be right in the focus.

Blaming Chinese is just as stupid as blaming Martians.

A Prole said at December 28, 2008 6:22 AM:

The real blame must be laid at the door of the prevailing 'liberalisation' and 'globalisation' band-wagons that started rolling in the early 80s (with Thatcher and Reagan)and the shrill braying of the Wall Street Journal and Economist magazine (those cunts have a lot to answer for) who were the cheerleaders and of course our old friends the 'smart Harvard economists'.
Didn't all these shit-cunts tell us day after day that the 'market' had all the answers and was the road to unparalleled wealth - isn't interfering with 'market' allocations of savings, investment and consumption against the 'globalist' orthodoxy that Bernanke and his chums preached?

Big Bill said at December 28, 2008 2:01 PM:

Come the revolution, Prole, come the revolution.

averros said at December 29, 2008 3:15 AM:

A Prole - one must be truly ignorant of how markets work to confuse the snake oil the Harvard economists (and Bernanke, too) peddle with free markets.

Randall Parker said at December 29, 2008 9:39 AM:


The libertarian ideologues who peddle Panglossian stories about markets shouldn't go around calling other people ignorant. They should also consider being less rude if they want to enjoy more success converting other people to their faith.

Audacious Epigone said at January 2, 2009 4:59 AM:

Spending too much is a consequence of the Chinese spending too little, yet the 'solution' is to get US consumers to spend even more with another stimulus package twice the size of the first. It really is stupidity for us to do nationally the exact opposite of what prudent individuals do when times get economically tough.

Dragon Horse said at January 2, 2009 7:57 AM:

Uhm...not really....The holes are that in spite of everything looks like 'made in China', China only accounts for 1/5 of America's trade deficit and 1/5 of foreign debts and the things America imported from China is not made in America a long time ago.
The countries and regions that have most trade imbalance to America is Canada, European Union and Japan.
The countries that hold most American foreign debts are China, Japan, Saudi Arabia and other oil countries.

I've noticed there is an increasing trend in American media to blame the current mess on China. I've been worrying about this since beginning of the financial crisis. In every crisis, a scape goat is needed, and China is an easy and obvious target for this one.

The reason of the big trade deficit of America is a result of the general decline of manufacturing. The reason of the manufacturing decline is because America has been losing ground to German and Japanese manufacturers for a long time not because America is losing factories to China. To compare the economy with the baseball, there are two leagues in the global economy now. The major league consists of the developed countries. America, Japan, German, England, France, Finland, Italy, South Korea, Taiwan are all in this league. In the major league, people have high salaries, better living standard. The compete with each other for, high quality, brand recognition, technological and service innovation. The minor league consists of China, Mexico, India, Vietnam and a long list of other developing countries. In this league people compete only in one thing, lower labor cost. China is a winner but China is a winner in the minor league. Those factories in China are not dismantled and shipped to China from America as American politicians put it. They come from other minor league countries or those used to play in the minor league now playing in Major league countries, like South Korea and Taiwan. If China's labor cost rise, the factories will go to Vietnam or India. They won't go back to any developed countries, because those are what's called labor intensive industries. The wages paid to labor are the major costs.

America's problem now is that America just had a bad season in the major league, now it began to envy China's star status in the minor league. (Well, you can choose to play in the minor league, but you can't play in the minor league while keep a major league salary.) Of all the strange arguments I see in the newspapers today, one thing I never understand is that since when cheap products became a bad thing. If you buy a pair of made-in-china shoes in Walmart for 20 bucks, you made a choice. You choose low price over other priorities. So, dude, quit complaining it's not fashionable or endurable. You can buy Italian shoes. They don't have those problems, but that's 200 bucks. So cheap Chinese products help Americans to save money. The problem is when Americans saved money from Chinese products, they go on to spend it on Toyota or BMW cars, Samsung or Nokia cell phones, French couture or Italian shoes, which are still not made in America. That's why America has so big trade deficit.

Since every major trade partner has a big trade surplus with America, the result is many countries hoarded a large amount of dollars. So they invest those dollars in American treasury bonds because it's considered the safest investment.

Randall Parker said at January 2, 2009 9:14 AM:

Dragon Horse,

I was taught in an economics class in college that currency values adjust to balance trade. Ha ha ha! Those economic theorists are such jokers.

China: In 2004 we ran our bigget trade deficit with China even though it was our 3rd largest trade partner and the deficit with China was twice the deficit with Canada even though our total trade with Canada was far larger.

Envy of China: You mean that our problem with China is just envy? The trade deficit isn't a far bigger problem?

You have cause and effect confused. Countries didn't hoard dollars as a result of their trade surplus with us. The East Asian countries engineer their trade surpluses with us as a matter of government policy. I've previously explained how the Chinese government does it by forcing all exporters to deposit dollar export earnings in Chinese banks so that the Chinese government can take the dollars and buy US bonds.

Dragon Horse said at January 2, 2009 10:38 AM:

China holds such U.S. dollar reserves for a few reasons, one you didn't mention was to stabilize their currency and keep it pegged within a certain range. If they did not do this, it is likely that there would be serious inflation...greater than it has been. The U.S. is not stupid, this has been going on for awhile. The question you should ask is "why is the U.S. government (including the Fed, etc) condoning this situation? Yes some in Congress have longed screamed bloody murder, but they are a minority. So why? Is it just greed? Or is there an economic or political reason they see utility in this?

Our trade deficit with China also has a lot to do with China's own internal problem...developing a domestic market. China has 1.3 billion people but the vast majority are quite poor and although there are a somewhere between 2-300 million "middle class" (by international standards) they are not even close to as wealthy on average as people in Thailand. Think about what we produce in 2008, it is mostly high end manufacturing and high end services. IN China's current situation how much are they going to possibly consume. Then think about how much stuff they make that we would want to consume. I think you can see the natural trade imbalance from jump...this is before any tariff issues, interest groups, etc are in the mix. China is the "world factory" for low end goods and just in the last few years some areas around Beijing and Guangdong are going into higher end manufacturing and technology. Guangdong, I know, has started outsourcing to Vietnam and Cambodia, something China has not done before. Still most of what they make is low end stuff any nation would want because they themselves don't produce it or they can not produce it as cheap. America's goods, for the most part, are not wanted or affordable to everyone anymore. Look at the our top export partners on CIA factbook and then look at China.

Funny thing is there are hardly any internationally known mainland Chinese companies...I can think of two (computer manufacturers: Lenovo and Haier ) that still don't have much market share here. Most of the stuff produced and exported from China are finished goods of American, European, South Korean, and Japanese companies or it is very low in parts, which many nations don't produce because they don't have a competitive advantage.

My point is that I'm not sure what you want to do about this situation, China has a strong competitive advantage due to major economies of scale, cheap labor, fairly educated workforce, low overhead costs...that is not going to change as compared to the U.S. in the near future.

Good point about the trade imbalance, I was mistaken.

I looked it up, and Randall is correct.


Randall Parker said at January 2, 2009 10:51 AM:

Dragon Horse,

China buys US bonds first and foremost to keep their export industries growing via a cheap currency.

Their second motivation is to immunize themselves against regional financial panics. This is a secondary motivation though. Their chief motivation is to enable themselves to run a big trade surplus.

In 2004 China was our 2nd largest source of imports but our 4th or 5th largest buyer of our exports (they were close to tied with Germany).

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