What the U.S. owes China
by Chris 9 comments Leave a comment January 17th, 2008 
Although the Chinese government keeps the exact data secret, it’s reasonable to believe that the United States now owes communist China $1.5 trillion. That’s an average of $6,000 owed per American.
James Fallows, of the Atlantic, manages to make the Chinese debt issue more understandable in a recent article (which you should definitely read in full [economics can be fascinating {seriously}]).
Some highlights:
Through the quarter-century in which China has been opening to world trade, Chinese leaders have deliberately held down living standards for their own people and propped them up in the United States. This is the real meaning of the vast trade surplus—$1.4 trillion and counting, going up by about $1 billion per day—that the Chinese government has mostly parked in U.S. Treasury notes. In effect, every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People’s Republic of China. Like so many imbalances in economics, this one can’t go on indefinitely, and therefore won’t. But the way it ends—suddenly versus gradually, for predictable reasons versus during a panic—will make an enormous difference to the U.S. and Chinese economies over the next few years, to say nothing of bystanders in Europe and elsewhere.
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Neither government likes to draw attention to this arrangement, because it has been so convenient on both sides. For China, it has helped the regime guide development in the way it would like—and keep the domestic economy’s growth rate from crossing the thin line that separates “unbelievably fast” from “uncontrollably inflationary.” For America, it has meant cheaper iPods, lower interest rates, reduced mortgage payments, a lighter tax burden. But because of political tensions in both countries, and because of the huge and growing size of the imbalance, the arrangement now shows signs of cracking apart.
Fallows writes that China is willing to slow it’s own growth in order to control the already growing tensions between the rich and the poor:
The Chinese will live better year by year, though not as well as they could. And they’ll be protected from the risk of potentially catastrophic hyperinflation, which might undo what the nation’s decades of growth have built.
This has a few consequences for Americans. As our biggest investors, we will have to afford the Chinese government their due influence. Like any investor, they will want to protect and manage their investment. That’s the bargain we’re in. That’s not necessarily a bad thing, but the Chinese communist government is notoriously secretive. Being secretive has have historically led to economic instability. Think back to the waves the enigmatic Fed chief Alan Greenspan could make just by scheduling a public address.
The theory behind why the current situation will endure is that the Chinese would be crazy to do anything that would weaken the dollar because it would hurt them grievously, since most of their investments are in dollars. The problem, according to Fallows, is that any number of situations could unsettle this balance: a flareup over Taiwan, a bad investment that could piss off enough Chinese people, a Dubai ports type scandal that could piss off the Chinese government. There are a lot of frightening possible.
My friend Dylan likes to say that these sorts of economic entanglements help preserve the peace. I think there is a lot of truth to that notion. Logical people/nations are unlikely to cripple themselves economically just to settle a grudge. However, we can’t let ourselves be quite so vulnerable to slight economic mishaps — absent of malice — that Fallows warns about.
More importantly, this situation absolutely can’t go on forever. We could conceivably remain in debt in perpetuity, but the debt has to remain managable. The debt should shrink in times of economic strength and grow in times of weakness, not grow constantly. Getting the situation under control means we have to be willing to trade short term economic gain, currently at China’s expense, for long-term economic viability. This means controlling government spending and making our economy more efficient so our exports are competitive. I think trading the costs of the Iraq war for universal health care would be a good start.
January 18th, 2008 at 10:38 am
I think you’re forgetting that, unlike household debt, national debt has many more tools available to it to become manageable. So there’s really nothing to lose sleep over here as long as we’re responsible about it — and I’ve yet to read anything that suggests we’re not and makes a good case of it.
Just as an example, a common complaint people have is our trade deficit with China (and in general). A trade deficit is a sign of a *healthy* economy. Think about it. Which would you rather have? A pile of money or a pile of stuff money bought you? If you picked the pile of money — which is only so much kindling or 1’s and 0’s in its various forms — then you’re a mercantilist and need to go take an economic history class.
But yeah. I think it’s very interesting and very relevant to world events, but I don’t think this is anything bad.
January 18th, 2008 at 11:50 am
@ Cameron
I think my final paragraph speaks to your comment. Our debt should shrink during good economic times, so that we can better weather the bad cycles. America hasn’t done that for about 20 years, if I recall correctly.
Also, what’s your opinion on the shrinking value of the dollar? Are these issues related in your mind?
January 19th, 2008 at 6:04 pm
The exchange rate sucks because I like to travel a lot. But you have to remember that a strong or weak dollar are both good for some parts of the economy and bad for others. A weak dollar is bad for importing things from other countries. It’s great for selling American goods and services abroad though. Maybe some of those call centers in India will move back here. Ha.
January 19th, 2008 at 8:41 pm
Well, we import an awful lot of things essential to our economy, like cars, oil, computers/computer parts.
January 20th, 2008 at 3:00 am
We only import them because consumers prefer them for either pricing or quality reasons. Cars are a good example — a weak dollar might be a godsend for an American auto industry that inexplicably can’t make a decent car as cheap as the Japanese and Germans. But if those foreign competitors are more expensive?
Meh. Changes have interesting effects and are bad because someone wins and someone loses and it’s arbitrary. But it’s not really bad for our economy as a unit usually. It just shifts more toward domestic production and sometimes lowered levels of consumption as foreign products become more expensive and domestic ones keep their current prices. Hell, the boom in tourism is a good example. NYC has been selling oodles of things to European tourists lately, but not importing as much in the way of fancy European stuff.
January 22nd, 2008 at 2:04 pm
I thought that the majority of foreign brand cars sold in the US were also manufactured here in the US. I could be wrong, but I thought that to be the case. European cars are another thing, but I think Honda, Toyota, and their respective luxury lines Acura and Lexus are made here.
Likewise with computers Chris. Intel is an American company, as is Motorola. If those companies have moved their means of production overseas, it is only because that allows them to produce their chips cheaper over there. And regardless, computer chips themselves are pretty cheap to manufacture. The extra cost you pay is for electronic packaging and for the R&D. The majority of computer chips sold today are not Pentiums or high end chips, but instead smaller, simpler, cheaper chips that are more general in their utility.
But lets be honest here, the most important things are not cars and computers. Both of those could be seen as luxury items for most people. What is important is food, clothing, shelter, and infrastructure. Lots of foods are imported, including much of what you see in your produce section. Its not just wine and cheese. I think we are generally OK with clothing seeing how the southeast is a major producer of cotton. Cashmere sweaters may go up in price but oh well. I honestly can’t say how much of our building materials are imported. Infrastructure is a big problem I think. Oil is a major import and I think there is plenty of discussion about that around. Transportation of all goods is affected by oil prices.
The sky isn’t falling to be sure, but its not exactly clear and blue.
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