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Economic Reality: Chinese Savings Helped Inflate American Bubble

by MARK LANDLER

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.

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Comments

Response from anonymous: Not

Response from anonymous:

Not a bad story, but reflects the US style of focusing on the symptoms, not
the problems. The overconsumption is a symptom of a mindset that you can,
and should, buy more. The primary engine gobbling up the cash was getting a
lot of people into houses that they would never be able to afford. With the
inflated market, it wasn't hard to charge up trillions of dollars in bad
mortgage debt, and that is the debt clogging up international markets. That
boom was financed by the money the Chinese made. Once you are deluded into
thinking you deserve and can own a house you can't afford, then you furnish
the house, get the car, and live the lifestyle that goes with it. Hence the
boom. The previous cycle was financed by the Arabs during the oil boom.
They learned, and now aren't buying US debt.

If anything, I think this cycle may in fact reinforce the Chinese-US excess,
because unlike Arab oil, we actually can live without all things Chinese.
They will continue to employ Chinese, preserve peace and "prosperity" in
China, while the US will continue to over consume. This downturn simply
lets the Chinese know that the only workable home for US cash is the US, and
of course, they need the US market to sell their stuff. Of course, they are
developing European markets, but the big over consumer will always be the
US.

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