I have noticed a disturbing trend of rhetoric lately that seeks to place blame for America’s financial woes on the Chinese.
This is a grave and dangerous mistake. The Chinese have essentially been acting against the better interests of their own people. They have been lending us huge sums of money while knowing all the while they face an enormous risk of default on that debt. They have absorbed a huge amount of our inflation buy purchasing our bonds.
The Chinese have supplied us with vast sums of cheap, if somewhat shoddy, products that have enriched the daily lives of countless Americans. Without Chinese industry, Wal Mart prices would look like Neiman Marcus. The Chinese have provided us these products while we have provided them next to nothing in return.
We bought those products with debt.
In a normal sane rational economy, our huge amount of hard-good purchases from China would have to be repaid in kind. The Chinese deserve to be paid back in real goods and services, instead we are paying them back with worthless paper currency.
We must understand what causes trade imbalances before we assign any blame to the Chinese. As far as I am concerned, the Chinese are basically faultless.
When our government began expanding the money supply through issuing debt, Americans ultimately did not have to produce their own consumer goods. America basically had a massive collective credit card with the world, and we used all that funny money to buy cheap foreign products without having to actually produce any ourselves.
Printing money to buy products is far easier than having to actually produce them yourself, and the trade imbalances with China are a direct result of this money printing. America is a welfare case hooked on cheap credit to fund our lifestyles without having to work for it. The effect of our debt issuing is no different than a bum who uses a credit card to fund his lifestyle while living in a McMansion that he can’t afford!
When China purchases our bonds, they get an IOU, while at the same time Americans basically get free money to purchase goods with from around the globe since, as of right now, the dollar is accepted practically everywhere. At the same time the amount of Renminbi in circulation decreases, causing the value of their currency to rise and their interest rates to fall.
In a normal sane rational economy, this massive increase in debt would cause US interest rates to rise. The rise in rates would force us to stop buying foreign consumer products and domestic houses with debt and shift the structure of production back to domestic consumer goods production and away from long term goods like housing.
Further, the massive increase in debt (which equates to a massive increase in the money supply), means the value of the Dollar should fall in comparison to the Renminbi. This means American products would become cheaper for the Chinese to purchase from us, while their products would become relatively more expensive for us to purchase from them. Obviously this would encourage US exports.
But guess who is not allowing those rates to rise by running the printing press? Here’s a hint – it’s not China. Further, blaming the Chinese for buying our bonds is like blaming the bank for issuing a credit card. Ultimately, the blame falls on the bum for racking up the debt, not the bank for issuing the credit. Irresponsible borrowers are to blame for their own downfall, not the lenders who were dumb enough to give him the credit.
So we must consider this from the stance of the Chinese. They are currently in the position of getting paid back by the bum in counterfeit money! If they weren’t so gracious, this is the kind of thing wars get started over. When the Fed buys our own bonds, we are simply running a printing press.
Now some might say that China is intentionally devaluing their currency to keep the exports flowing , if they are, this is only damaging to the Chinese people, not to the Americans! They would be effectively preventing their own people from being able to buy their own goods!
We get to reap the continued rewards of having a stronger currency if this is the case. It is the US interest rates that determine what OUR structure of production is. It is entirely possible for the US to have a strong currency AND have a strong manufacturing economy. America’s industrial revolution should make this abundantly clear.
The trade in types of goods is governed by comparative advantage, not the value of a currency!
When countries trade good for good, comparative advantage is all that matters. China gives us goods that they are great at producing, while in return, we give China goods that we are great at producing. The value of the currency is simply a measure of how much of a country’s currency is in circulation! The thing is, we aren’t giving China jack-squat except funny money!
It is the INTEREST RATES (along with taxes, government spending, and obscene regulations) that alter the types of goods an economy produces and the types of goods they import/export.
Low interest rates cause all manner of speculation, especially in real estate and equities, and are what direct investors into building homes or inflating the markets. Since an economy can only do so many things at one time, consumer goods production decreases as resources are diverted into the production of long term goods like houses or stock speculation due to the low interest rates.
Since we dumped our collective wad on real estate and stock speculation, we were basically forced into buying everything else we consume from abroad. I would also like to point out that government spending, which amounts to 40% of our GDP, took up the rest of our productive capacity building tanks, planes, bombs, bullets, and other crap that has no value to consumers. All of this means we threw our manufacturing capacity for consumers goods into the trash bin.
ALL OF THIS IS OUR OWN GOVERNMENT’S FAULT