2009 May 16 Saturday
China US Treasury Buys Contributed To Housing Bubble

Economics writer David Leonhardt of the New York Times admits something our elite media should have been focusing on years ago before so much damage was done: China's buying of US treasury bonds contributed to the housing bubble and financial crisis.

Over the past decade, China and the United States have developed a deeply symbiotic, and dangerous, relationship. China discovered that an economy built on cheap exports would allow it to grow faster than it ever had and to create enough jobs to mollify its impoverished population. American consumers snapped up these cheap exports ó shoes, toys, electronics and the like ó and China soon found itself owning a huge pile of American dollars. Governments donít like to hold too much cash, because it pays no return, so the Chinese bought many, many Treasury bonds with their dollars. This additional demand for Treasuries was one big reason (though not the only reason) that interest rates fell so low in recent years. Thanks to those low interest rates, Americans were able to go on a shopping spree and buy some things, like houses, they couldnít really afford. China kept lending and exporting, and we kept borrowing and consuming. It all worked very nicely, until it didnít.

It all worked very nicely? So then as American factories shut down and got moved to China that worked well? What about the laid off workers left behind? What about the loss of future American productive capacity that happened as we hollowed out? What about the accumulating debt? For some of us the damage being done was apparent years ago. In 2003 Warren Buffett wrote an article Squanderville vs Thriftville calling for policy changes to balance trade.

If one tracks fundamentals and if one measures one's well being by the fundamentals it is easy to see when things are going poorly even if some of damaging effects won't become evident for some years. Is it really too much to ask of economists and economics writers to think about the long term?

Leonhardt admits the Chinese debt purchasing was a cause of the current crisis.

It has already helped create the global economic crisis, by splashing cheap money around the world and enabling American indebtedness and overconsumption. This country is now suffering through its worst recession since the early 1980s, one that could ultimately become the worst since the Great Depression.

Chinese purchases of US debt raised the value of the dollar, decreased US exports, increased US imports, reduced domestic investment in manufacturing industries, contributed to the housing bubble, and increased public and private indebtedness.

Foreign buying of US sovereign debt was one of the two biggest contributors to our on going financial crisis. The other big contributor was the political class's response to immigration: elite support for a huge increase in housing lending to non-Asian (read "poor") minorities. Where did the housing disaster hit hardest? "the immigrant share of the county population is the one that emerges as the most important correlate with the foreclosure rate." The US government's attempts to promote home ownership among the downtrodden has a long disastrous history.

Getting back to China: We need to consume less and make more stuff. The Chinese need to consume more and buy some of our stuff. Can our financial elite manage the transition back to a balance of trade without causing a depression? We are going to find out.

Share |      By Randall Parker at 2009 May 16 10:31 AM  Economics Trade

Stephen said at May 16, 2009 6:18 PM:

"...and enabling American indebtedness and overconsumption."

Funny how its always someone else's fault. Whatever happened to "the buck stops here"?

A.Prole said at May 17, 2009 6:38 AM:

Aha.....but that 'clever man in 'The Economist' keeps on telling me that we are on the sure-fire path to unbounded prosperity - the more 'global trade', the 'greater the prosperity'.
What's with it with you Randall and your antediluvian 'mercantilist' tendencies?
- Don't you realise that you uphold 'an obvious fallacy' and those wise Oxford chaps at 'The Economist' (whose posteriors over-awed American power-people just *love* to kiss), know-it-all and have all the answers.
- Effortless superiority of breeding, my dear chap!

AMac said at May 17, 2009 7:29 AM:

Let's hope that the writing of economics reporter David Leonhardt isn't affected by the acumen of his colleagues, like Edmund L. Andrews. Per the more recent ParaPundit post on reputations in the auto industry, the New York Times seems to be positioning itself as the Chrysler of newspapers.

Randall Parker said at May 17, 2009 8:35 AM:

A.Prole, Regards my antediluvian 'mercantilist' tendencies: Yes, I just do not get the obvious truth. Ricardo showed we should lower our trade barriers. That is all we need to know. Economists have assured me this is the case.

Randall Parker said at May 17, 2009 8:43 AM:


When governments intervene in markets they distort behavior. The Chinese government has intervened and suppressed consumption growth in China while increasing investment. Their intervention caused the opposite effect in the US.

Are you telling me every American citizen should have been thinking "I'm going to resist what the market signals are telling me to do" and just plain decide not to react to the distortions in the market signals that the Chinese government caused in the US?

Anonymous said at May 17, 2009 11:32 AM:

By having everything made in China, this allows the Left to destroy the schools. The Left can use the schools as a playground for their theories. Instead of turning out educated workers, the schools turn out semi-illiterates who know all about Harriet Tubman. Corporations are largely "fronts", with well pain "window dressing" NAM employees (think Michelle). All the real work is done in Asia.

The Left is not going to give this up easily.

Post a comment
Name (not anon or anonymous):
Email Address:
Remember info?

Web parapundit.com
Go Read More Posts On ParaPundit
Site Traffic Info
The contents of this site are copyright ©