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|