After a decade or so of rampant American consumerism and deficit spending, while relying on the Chinese to bankroll it. The stale reality of what it costs just maybe coming home to roost here in the United States.
The problem has been very simple, America has engaged in a gluttony of buying cheap Chinese manufactured products. Thus generating a huge profit return for the Chinese government. Then in turn, they would finance the US government's deficit spending, using manufacturing profits, by buying up billions worth of government bonds and government mortgage backed securities. (Total invested by China so far, $1,000,000,000,000.) This massive investment allowed interest rates to be lowered to such a point to fuel the aggressive housing purchases which led up to the mortgage crisis.
From the New York Times article,Chinese Savings Helped Inflate American Bubble ,
NYTimes-Chinese leaders chose to park the bulk of that in safe securities backed by the American government, including Treasury bonds and the debt of Fannie Mae and Freddie Mac, which had implicit government backing.The Chinese were able to keep their products at all time lows by refusing to allow the value of their currency to be affected by the market. There was no moderation of their manufacturing potential, which allowed them to horde their profits. Americans, in the meantime, were exercising their right to spend. Americans were buying up every product with "Made in China" stamped on the back of it, funding the Chinese loans to US government in the form of profits. Simply put, frugality versus consumption.
NYTimes-China tied itself even more tightly to the United States than did Japan. In 1995, it devalued its currency and set a firm exchange rate of roughly 8.3 to the dollar, a level that remained fixed for a decade.Now that we are in the process of spending $700 billion TARP fund and getting ready to acquire almost $ 1 trillion more debt for an Obama stimulus package. Guess who is waiting in the wings to loan us the capital?
However, as Americans are revisiting the "old-fashion" ideas of frugality and spend-thriftiness the demand for foreign products are slowing. Taking into account China's own addiction and dependency on American consumption, the result for them may be as equally harmful.
NYTimes-The Treasury is conducting more auctions than ever to finance its $700 billion bailout of the banks. Still more will be needed to pay for the incoming Obama administration’s stimulus package. The United States, economists say, will depend on the Chinese to keep buying that debt, perpetuating the American habit.
Bloomberg.com-The world’s fourth-largest economy grew at the slowest pace in five years in the third quarter as a global recession cut demand for exports and companies reduced output. Overcapacity in almost all industries and “unprecedented” drops in some commodity prices may hurt profits further, Li Yizhong, head of the nation’s industry regulator, said this month.This recession is a unprecedented opportunity for America to let the free-market work in its favor. By re-industrializing, the United States can return to its own reliance on Stateside profits to finance its needs. Also, enticing some foreign investment back into the country, however, creating an environment in which there is equitable trade between partners, not rivals.
Michael Elliot, Friday, December 26, 2008